The Coming Shift
Posted on Sunday, July 21st, 2019
Ray Dalio is out with another LinkedIn article on his purview of the current and future investing environment. Dalio touches on the subject of Recency Bias and our human emotional attachment to identifying the future based on the recent past. It is Dalio’s thesis that paradigm shifts happen around decades. His article focuses on the next possible paradigm shift.
The worst thing one can do, especially late in a paradigm, is to build one’s portfolio based on what would have worked well over the prior 10 years, yet that’s typical. – Ray Dalio Bridgewater Associates
The Past
Central banks have been lowering interest rates and doing quantitative easing (i.e., printing money and buying financial assets) in ways that are unsustainable. Easing in these ways has been a strong stimulative force since 2009,…That bolstered asset prices…That form of easing is approaching its limits
The Present
Expected returns and risk premiums of non-cash assets are being driven down toward the cash return, so there is less incentive to buy them, so it will become progressively more difficult to push their prices up.
The Future or Predicting The Paradigm Shift
By looking at who has what assets and liabilities, asking yourself who the central bank needs to help most, and figuring out what they are most likely to do given the tools they have at their disposal, you can get at the most likely monetary policy shifts, which are the main drivers of paradigm shifts.
To me, it seems obvious that they have to help the debtors relative to the creditors… For these reasons, I believe that monetizations of debt and currency depreciations will eventually pick up, which will reduce the value of money and real returns for creditors...
How to Profit
…those (assets) that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally…most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.
We were we were out in front of that one as we anticipated the shift to gold. We saw the pressures building in the marketplace and we fortunate enough to have placed some capital in the area of precious metals. We think Dalio is correct as adding precious metals in this environment will help provide better risk adjusted returns. We will count ourselves lucky and look to add precious metals where we find it advantageous as long as the paradigm holds.
We mentioned last week that one thing had us holding fire on adding more equity exposure and that was the reluctance of small caps and Transports to break out of their relative rut. Both of these market segments tried to break out this week and failed. That could portend further weakness in the coming days.
Central banks are seeing diminishing returns on their loose monetary policy and are running out of bullets. The only thing that can save them now is to let inflation run hotter than normal in order to inflate away the excess debt that has been created. We have said that precious metals had our rapt attention and now our attention is turning to oil. Oil stocks suffered the same fate as Transports and small caps. The tried to break out early in the week but saw no follow through. We could see further weakness in this area as well but geopolitics could have something to say about that. A resurgence of the Iranian crisis would help oil stocks.
Markets are very quiet with volume and volatility at holiday like levels. The FOMC meets again in a week and is widely expected to cut rates. Why? Things look just fine here in the US. It is the rest of the world that has the Fed’s attention and concern. Central banks around the world are cutting rates and that will send the US Dollar higher, hurt trade exports from the US and may pressure emerging markets whose debt is denominated in US Dollars. Lowering rates would help alleviate those issues. All eyes are on the Fed and Trump’s Twitter account -those that aren’t at the beach of course.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.