Not So Happy Any More

Inflection points are notoriously difficult for humans to predict, or even to recognize when the signs are all around you. We won’t claim to be any better than anyone else at this, but we think the signs are turning ominous. The rapid shift in interest rates (up swiftly about 100 bps in longer government maturities and more in credit product like corporates), the rapid sinking of gold prices, and most acutely, the huge currency adjustments in the last couple months are dislocating markets around the world. Liquidity in the bond and repo markets is impaired. Stocks are trading sideways. Behind the scenes, “dollar down” trades are unwinding, and emerging countries are experiencing financial tightening foisted upon them from exterior forces. Since emerging markets have powered global growth for some time, a financial squeeze in this arena is not good for anyone.

This a a particularly fragile moment. Many assets have been mispriced for a very long time, obscuring their riskiness.

No one is advocating bonds at this point in the cycle, since bonds have produced pain this year by falling in price. But we think bonds are a good deal after recent rate increases, and for the very short term, that is our favored investment. Exogenous events will likely rock the stock market, so think about selling your most expensive holdings there. Rolling into less risky government or high grade corporate securities may prove profitable if the increasing riskiness does infect stocks.