Macro trends only seldom play out as beautifully as they have over last few weeks and months. The strength of US economy, fears of Eurozone breakup, apparent stability of Chinese economy, inflation fears in US have all played out to the “T” across the global financial markets. These sentiments have been adequately discounted and in some cases exaggerated by the financial markets. The nature of the beast being what it is, it’s now time for markets to look elsewhere for opportunities which would by definition mean money flowing out of some of the above discounted themes and money going into other asset classes.
Here are the asset classes that we feel will get an increasingly large share of global money over next few quarters and even years. These are also some very large macro trends which were desperately waiting for markets’ attention which has been off late completely monopolized by US. Here they go:
1. Euro: Euro looks like a dream at this stage. There are few parallels in history when a global reserve currency was as undervalued, as discarded and ridiculed, and as horribly under-invested and under-owned as Euro is today. The only parallel which comes to our mind is the USD in late 1970s, Euro in 2001, JPY in late 1990s and USD in 2008. What should unfold in next few years is one of the most glorious currency bull runs that have ever been witnessed in last 100 years or so.
2. US 30 year Treasuries: At 3.02%, this is a mouth watering yield, considering that the actual inflation and fiscal deficits that will happen in US may be only a pale shadow of what the bond bears fascinate themselves with at this juncture.
3.Gold: Gold is an asset which is horribly under owned at this point after being ravaged by a savage bear market that lasted from September 2011 till December 2015. Gold should again be in a bull run that will last for at least another 5 years if not more. Considering that Euro should hold the sway among global currencies for next few years, gold will get a further boost from dollar weakness. However to the extent that the last few weeks of uptrend in gold also discounts some possibility of a Euro zone breakup (which we believe is not going to happen) after French presidential elections, it may tend to underperform Euro over next few months.
The following are the asset classes that seem to be over priced, out of line with their fundamentals and probably headed for a long bear market:
1. US Equities: US equities have witnessed a singular one sided bull run since March 2009. We believe that US equities are massively over priced and over bought and are headed for a long term bear market which may start very soon. The US equity bulls will only be afforded a little comfort from time to time by a sharp fall in US bond yields and falls in US dollar index. However this comfort will only come after very sharp falls that will be triggered very consistently from now on. We believe that Trump will prove to be one of the worst US presidents ever in history. However, he is not the reason why US equities would go down. They would go down any which ways. All he has done is that he has unleashed a wave of optimism about US and its economy and equities which has provided a spectacular climax to an 8 year old bull run. Since markets will soon realize that this was an exaggerated optimism not justified by fundamentals, the downsides would open up and would be sharper and more cataclysmic than they would have been otherwise. However, the popularity ratings of Trump will coincide with US equities’ fall and he will become a symbol of everything that is wrong with US society and economy. The only positive that we see from his presidency is that he would eventually unite the divided country by making “haves” and “have-nots” come together to kick him out of office. This may sound cruel and sadistic but this phenomenon will provide a very exciting landscape for change of economic, political and social mood across US and the rest of the world.
On a different note, it is entirely possible that with US experiment with Trumponomics failing abysmally, the right wing politics across Europe and other parts of the world may suffer a setback and would also strengthen the beleaguered Euro zone and EU, further boosting Euro’s prospects.
2. German Equities: While we are bullish on Germany’s economic prospects for now and it will clearly outperform US as an economy, the equities will suffer because of sympathy with US markets and because of massive appreciation of Euro (which would weaken the competitiveness of German Export industry).
3. Industrial Commodities and Emerging Market Equities: We are also long term bearish on industrial commodities and emerging market equities because of an impending US recession; and also a Chinese economic slowdown and Chinese banking implosion being on the horizon. However, we will not short sell these assets for now. We believe that these asset classes would stand to benefit somewhat from a defocus from US equities and US dollar and are hence not the best proxies for a global economic slowdown. Besides, we are not very sure about how effective Mr. Xi Jinping will be this time around in brushing the economic problems and debt overhang issues under the carpet like he did in early 2016. So at present we believe that shorts on US and German equities are better proxies for the impending global slowdown.
On a very different tangent we are happy to share with you that we have been very fortunate in being able to embark on a deeply spiritual journey. We would welcome your feedback and suggestions on that front as well. For us spirituality is defined not by our faith in super natural existence but is rather focused on the possibilities of unleashing the infinite powers of human mind. We believe in a state of super consciousness which quite miraculously connects a human mind not only with its own consciousness but also with consciousness of fellow humans. We would like to take advantage of this platform to share with you from time to time our beliefs and would greatly welcome your observations and feedback.
"Happiness is a state of mind where one looks forward to nothing in life except for life itself."
Stay blessed and enjoy your journey !