Advisory Letter: 17th October, 2019
The week is getting started with very high hopes regarding a round 1 settlement in the US-China trade war as well as hopes for a late settlement and orderly exit between the UK and EU. The fireworks started around Oct. 9th with a Trump tweet and the Chinese delegation arriving in Washington. After US stocks at 3.5% higher since then, it turns out that it might not be such a done deal at all, but as they say, hope dies last.
To many of our clients that I have talked with in the past few weeks I have said, that the near term outlook is extremely difficult to grasp, since there is a huge amount of headline risk on either side of the spectrum which makes any outcome very binary. Its like walking a tight rope… you either fall, or make it to the other side. There is no in-between, but nobody knows the outcome…
There are few clear cut opportunities in todays markets given the above. I see bonds & equities in the US range-bound for a while longer. But rates are likely to remain low in the coming 6-9 months, while equities are dependent on which direction we are going to break the range to. The only higher conviction view is on Gold. After the latest pull back to the 1480-1500 area we might see some further correction in the coming weeks as speculative longs could continue to get washed out, but the long term trend is still higher. Beware, that this is a very long term macro view as underlined by the 30 year chart below. This chart puts into perception the relationship between the price of Gold vs. the USD Debt/GDP ratio.
A debt/GDP ratio of above 100% is unbecoming for a global reserve currency. Furthermore it is the political will of the current ruling party to weaken the US Dollar at all costs. A weaker USD combined with further increases in debt to GDP ratio will provide long term support for high Gold and other stores of value prices.
Chart: Gold vs. US Debt/GDP ratio
For a shorter term outlook I still favour Bond & REITS over equities in the current environment for the coming 3-6months, but watch out for economic data turning positive again. I am far from convinced that Trade war is done, and any headline can quickly turn around equities. However, we might still see a continued short term boost once Q3 earnings start to roll in, since US Consumer confidence has been high up until August and the recent retreat may not be fully reflected yet in earnings.
And also for those who missed the first spike in gold, a dip lower towards the low 1400 area shall be seen as a good entry opportunity to increase the allocation in a portfolio.
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