I believe forward 10-year returns will be in the low single digits and the ride will be bumpy. Speaking of looking forward. Here is Bill Gross from his recent post titled “Culture Clash”:
“Prepare for renewed QE from the Fed. Interest rates will stay low for longer, asset prices will continue to be artificially high. At some point, monetary policy will create inflation and markets will be at risk. Not yet, but be careful in the interim. Be content with low single digit returns.”
On my worry list is the China debt mess (far larger than the subprime bomb that exploded in 2008), a sovereign debt crisis in Europe, political inaction, geopolitical event risk, a coming pension crisis (overpromised, underestimated and significantly underfunded) and negative interest rates across much of the developed world.
On the plus side, the U.S. looks comparatively strong – that favors international capital flows. Picture investors fleeing negative interest rates in Europe and Japan as policy moves, negative interest rates and a probable debt crisis drives capital to U.S. stocks and bonds. A kind of an international flight to safety. More buyers than sellers the story goes. This means that what is overvalued can grow to be even more overvalued. Yet, on the other hand, international panic, despite the positive flows, may not be good for U.S. stocks; though such an event will likely be bullish for U.S. government bonds. Risks… all investing involves risk.”
With that said, there is an interesting statistic out about Japan. You may recall that part of their stimulus (QE) program involves buying ETFs. In April, the Bank of Japan bought $2.7 billion in ETFs. Brace yourself. This brings their ownership up to 59% of all of the ETFs available in Japan. That takes “whatever-it-takes” to a whole new level. Not sure if I feel safe (with Central Bank’s setting a possible downside risk floor) or scared out of my mind.
I think back to Leon Cooperman’s quote, “bull markets are born on pessimism, grow in optimism and die in euphoria.” No clear euphoria just yet. We advisors are told we should know which bet to make. This is an economic experiment of unprecedented proportion. Diversify your set of bets.
Goldman says sell stocks. Druckenmiller says sell stocks and buy gold. El-Erian says put 25% in cash. I find myself in the risk is high camp but we could go 20% higher before we go 50% lower. Thus, I believe it is prudent to own equities but hedged. Reduce exposure. Find non-correlating diversifiers. It’s time to play defense so you can be in the favorable position (with capital largely preserved) to play offense when the getting gets good. And it will get good again.
Why? It is in times of dislocation that leverage (pay attention to the current record high margin debt) quickly unwinds. At such times, “stocks for the long haul” turns quickly into “get me the hell out” and it is that behavior we must mentally prepare for and protect against. It is that behavior that will create our next great buying opportunity. Stay patient until then.
I wrote about and knew that it was going to be bad in 2008. The problem is I started writing about it in 2006. There is a lot that can go wrong on the way to being right and getting the wrong right is not so easy to do. I knew it would be bad, but I never imagined we’d reach the near collapse of our entire financial system.
China’s debt problem is that bad, but will that take down the system? I don’t think so. Mario Draghi’s “whatever it takes.” Politicians stepping up and doing right. Needed structural reform? Not just yet, I’m afraid, so I think recession is likely within the next 18 months and it is recession that the equity markets hate the most. Expect a -30 to -60 percent decline if the past is any guide. The implications, at least to me: Risk management is important, especially when the market is so richly priced.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.