I can only assume that he hasn't followed his own advice and been short equities and long gold, since if he has, he'll be feeling a little battered and also a little lighter of wallet.
It does however, beg several questions:
(a) Why have people like Mr. Doomster got it so spectacularly wrong for such a long time,
(b) Does anybody still give any credence to these views, and, more importantly,
(c) What would it take for guys like him to be proven right...?
On (a), Mr. Doomster and his ilk would seem to stubbornly refuse to acknowledge any validity in John Maynard Keynes's alleged observation on being criticised for "flip-flopping" (although it wasn't called that then), "When the facts change, I change my mind. What do you do Sir....?".
Although economic growth remains relatively anaemic, especially in Europe and Japan, actions by central banks around the world since 2008 have certainly staved off the implosion of the financial sector, propped up credit markets, and helped economies to move out of recession more quickly than they would have been able to be able to do on their own.
On (b), It is not to say that it's all been rosy, and this is the reason why the Doomsters are still given a hearing: the radical and unusual measures adopted by global Central Banks have not yet had the widespread effect that were hoped for. The level of government debt is still unconscionably high in many countries, the uncertainties created by ballooning central bank balance sheets have not been dealt with, unemployment levels - especially among the young - are socially and politically toxic, low interest rates have not resulted in companies increasing long-term capital expenditure by any significant measure (so far), and corporate earnings growth still looks fairly thin.
However, it's extremely difficult to extrapolate these difficulties into anything approaching the conceptual melt-down forecast by the Doomsters. A short-term sell-off caused by profit taking after a long run-up? Maybe. A major melt-down, however? For that we think there would have to be a qualitative change in the global economic environment - and that looks very unlikely. The risk is, we think, that the Doomsters' continued focus on the negatives ignores the proverbial elephant in the room.
And what's that?
We are regular reading of Grant Williams' "Things That Make You Go Hmmm..." which is now published by Mauldin Economics. Grant's weekly (see
http://www.mauldineconomics.com/ttmygh/thinker-trader-holder-why) is always worth reading for its thought provoking analysis, even if he does harp on about gold a little. This week however he included a piece from David hay of Evergreen in Seattle, which gave this gem:
"Very recently, though, another piece of the puzzle of where we are in the market and economic
cycles has fallen into place. This involves the exceedingly vital element of credit spreads.
For those who are perplexed whenever they read this term in the financial media, or hear it
bandied about on CNBC, it’s actually a most simple metric. It is merely the difference between
the yield on US treasury bonds and non-government debt of the same maturity."
"Up until the end of July, credit spreads were continuing to tighten as they have done
persistently since March of 2009, with a few hiccups along the way. There is little doubt this
tremendous spread compression has played a crucial role in levitating stock prices and many
other risk-assets as well."
"As I’ve conceded before, I really haven’t given the devil his due in this regard. While I’ve
repeatedly carped that the Fed’s serial QEs have failed to achieve their main goal of lowering
mortgage rates, I’ve failed to emphasize how successfully our central bank has crushed credit
spreads. This process has been a prime catalyst in forcing investors to venture into areas they
would normally avoid, like the gamiest stocks and bonds, in search of higher returns."
It is this issue - credit spreads - that I think Doomsters are wilfully ignoring, and it is this issue which has been the reason why they have managed to get their call on the markets so wrong.
On (c), It is also this factor that will need to change before they have a chance of being proved right.
....and when's that going to be?
Recent commentary from the Fed and the Bank of England are suggesting the the US & UK will be the first to start implementing interest rate increases as their economies continue with steady expansion. In advance of this happening, markets will fret about the effect that such higher rates will have: the last time this happened back in 2011, markets fell by 10% or more in the space of 2 months (before recovering).
Since then, economic growth has been patchy - reasonable in the US, UK and Asia, poor in Japan and generally awful in the Eurozone.
Even in the US, interest rate futures are pointing towards and eventual rate level of just over 3% for Fed Funds. When you compare that with zero, that's a big jump, and if proved right would hit the bond markets hard whilst they adjust to this new paradigm. However, in absolute terms, a rise to the 3% level still seems pretty small. It's also worth noting that this figure would only be reached if central banks felt that growth was strong enough to withstand such gradual increases. The key here is "gradual", which is a word that could almost be engraved onto the Central Banking plinth these days.
Whilst the US and the UK might conceivably start edging rates up later next year, it will be so gradual as to make a snail feel that it's breaking the sound barrier by comparison. Conversely, the Europeans and the Japanese will be resolute in resisting rate increases for some years to come.
The issue of narrow credit spreads therefore means that the choices to investors will remain limited and still driven by the attractiveness of the least worst: equities might have run up a long way and might no longer look particularly cheap, but compared with the alternatives of cash, longer dated bonds, commodities, property etc., equities still look way more preferable.
We don't see that changing for the remainder of this year, and therefore we continue to base our approach - simplistic as it is - on an assumption that the Doomsters will be just as wrong this year as they have been for each of the last 4 or so.
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