Not the US Election
More inflation whoever wins...much more
Whoever wins, the only certain outcome is more inflation. The Federal Reserve, aided and abetted by the US Treasury (Janet Yellen) and the Bureau of Labor Statistics ( the BLS – or BS for short) wants us to believe that all is well with the US economy and that inflation is heading towards their 2% target (Why not 0%? -Any level of inflation erodes spending power). Since the flu “episode” inflation has been north of 20% on a cumulative basis. Yer dollar doesn’t by as much stuff.
The 50bps rate cut was all down to the fact that the US interest rate bill is now greater than the amount allocated to defence. Add in the ballooning entitlements program and you’ve got a serious problem. The solution? Cut entitlements? Nope. Cut defence spending? Nope. Let the currency take the strain? Probably but whatever you do don’t let the US Treasury market malfunction for lack of liquidity. So more rate cuts and more QE by whatever acronym they dream up (some version of yield curve control – control sounds like they know what they are doing) to pretend that it isn’t QE. It will be.
The bond markets globally are already signalling that inflation has not been defeated and that yields will be higher for longer. Sovereign debt is no longer investable, they have become “certificates of confiscation”…again. The 60/40 portfolio is a dead duck. What are the alternatives? Firstly, we must look ourselves in the eye and realise that the world has changed fundamentally and not just from an investment perspective.
We must stop acting like closet passive investors hugging benchmarks and embrace a true go anywhere multi asset approach. Markets move as a result of two main factors; the rate of change of growth and the rate of change of inflation and we need to be aware of which sectors and asset classes work best in each of four scenarios; rising growth and falling inflation, rising growth and rising inflation, falling growth and rising inflation and falling growth and falling inflation. Currently we are in the third of those combinations aka stagflation.
Historically the best asset classes tend to be gold, commodities and fixed income. Gold is certainly in the vanguard and commodities are beginning to pick up from a period where we had a deflationary outlook over the summer with falling growth and inflation where they don’t perform so well. Oil is beginning to pick up a bid or two and natural gas is firming up. In the other metals palladium is in short supply. Utilities, Tech, Energy and Industrials are the sectors to watch. Small Caps, Defensives and, I am sorry to say, Value stocks don’t cut it in this environment. We are going to have to get used to having a quite eclectic portfolio. You can’t spend relative performance; in future it will be all about capital preservation.
The outsourcing of much of US manufacturing to China has had its day and the calls form all quarters to reshore industry is gathering pace and this will benefit infrastructure companies and industrials generally, but especially defence industries as the US starts a very long process of catch up to the Chinese and Russian military capabilities.
The latter point highlights the dilemma over global trade settlement and the direction and standing of the dollar. Firstly, it should be pointed out that the BRICS have absolutely no intention of using one of their currencies to replace the dollar. Why do that when gold fits the bill spectacularly well. It has been overlooked in the west that the BRICS are trading oil and commodities in their local currencies and using gold to net settle any trade imbalances. China is actively encouraging a higher gold price. Got gold?