This would be a warning against investing in bonds because the interest rates were simply too low. The risk was too high that the price of the bond would fall as soon as higher interest rates would come. What has happened is that the Fed has raised interest rates to the point where investors can get 2.87% on ten-year Treasuries and 2.49% on two-year Treasuries. With the Fed expected to have at least two more rates rises this year, bringing up the base rate from 1.5 – 1.75% to 2.0-2.5%, bonds have become more interesting.
The stock market had its correction in February and has yet to break out on the upside. This Newsletter was five months too early as it predicted a downturn for October 2017. In any case stocks are still overpriced in many cases, particularly Amazon and the cash-burner Tesla. However, as interest rates are still relatively low, corporations can borrow money to finance stock buybacks. The tipping point has not yet been reached.
Even so, the Fed is going ahead with QT, and this will have serious effects on liquidity as the programme advances through the summer. Analysts are apparently reckoning that the next recession will come in the first half of 2019. This Newsletter is of the view that the liquidity crunch will come sooner as the Fed is still reckoning on at least two interest rate rises in 2018.
Given the uncertainty engendered by the February correction and the failure of the market to regain momentum, it is advisable, as Lance Roberts suggests, having more cash available. Physical gold also becomes more interesting as the Chinese and Russian moves away from the petrodollar towards a gold-based currency indicate. The Iranians have decided to spurn the dollar, but if recent history is any indication, then the US will probably try to do to Iran what was done to Saddam and Gheddafi. Assad is struggling to survive.
That the US dollar remains so strong despite the negative trade balance is due to the huge debt amassed over the last decade. In fact with such debts overhanging the economy, it is to be expected that at some point the stock market will suffer a rude awakening. The market can hardly go higher given the fact that consumer debt is practically at its limit. Coupled with QT and higher interest rates, it is time to take profits and eliminate losers. Cash and gold will help investors protect capital as they begin to increase the amount of fixed income investments (bonds) in their portfolios. Better safe than sorry.
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