Welcome to the 01-24-2018 update from your Pocono Summit Certified Financial Planner and retirement planner, Mike Savage. Today, Mike discusses a wild week in trading.
If anything, this trading week has not been boring. Just a couple of thoughts as to what I am seeing.
As reported by Gregory Mannarino of TradersChoice.net there has been massive buying in the bond market by an “entity”. My guess is the only “entity” that has the size and scope to do this buying would be a central bank- and most likely the Fed.
While all eyes are firmly trained on the rising global stock markets bond yields are continuing to rise despite the heroic attempts to keep the rates low and keep the party going for a while longer. If interest rates rise enough (nobody probably actually knows what is “enough”) it could imperil the values in stocks, bonds and real estate. Possibly in a meaningful manner.
It also appears that the dollar is losing value in a manner that is picking up steam. It appears to me that in the attempt to keep the stock and bond markets elevated there is not a whole lot of concern about what this perceived “printing” is doing to the dollar.
As a matter of fact, Steve Mnuchin, Treasury Secretary, is in Davos Switzerland praising the lower dollar and how it can help in foreign trade. Be careful what you wish for Mr. Secretary- I don’t feel like paying $50.00 for a happy meal!
It appears that cracks are clearly showing in the central bank’s plans. If they need to “print” unlimited liquidity to keep the stock and bond markets elevated they may have to sacrifice a good portion of the value of the US dollar.
My opinion has been for years that the bond markets had to be protected at any cost- it appears now even to the detriment of our currency.
As it sits right now a weaker dollar is bullish for a rising price of most assets. Stocks, commodities, etc. If, however, rates rise enough and the dollar gets weak enough there could be a reversal in values that will take many by surprise. It could start with a company, bank or other entity that can’t pay their bills because of rising costs for financing or rising input costs for their manufactured products. It could also come about in the form of protectionism in the form of tariffs or trade barriers.
As most are enamored by rising stock markets I would keep a close eye on the dollar index and the 10-year Treasury yield. Both are screaming to me that inflation is a serious threat in our immediate future. Of course, this could all change in an instant which is why I believe that you need to be as diversified as possible.
If you only have stocks for inflation protection you may want to look at other assets- namely commodities for further diversification if you believe inflation is truly a threat. Domestic bonds look like they have more potential for a loss if not held to maturity than a gain at this time. Actually, the way stocks are priced I could say the same. However, a weaker dollar would be more bullish for stocks than bonds in my opinion.
I also believe that in this environment many assets that have lagged- like gold, silver and the companies that mine them are likely to outperform most other assets by a large margin going forward. I believe this to be true whether or not other countries have an agenda to replace the US dollar as the world’s lone reserve currency which certainly appears to be on the agenda.
Don’t get caught in the third boom and bust cycle in the past 20 years. For those who think the “Fed will not let the markets correct”- good luck with that. How did it work in 2000-2002 and 2007-2009?
I suggest you prepare now for an inevitable (at some point) sharp pullback.
Mike Savage, ChFC, Financial Advisor
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