Market And Economic Trends Intensify
“The Fed can change how things look, but not how things are.”
First of all, thank you to everyone I met last week at the Money Show in Las Vegas. It’s great to be back at a live conference and the quality of the people, conversations, and the organization of the event was first class and I had many memorable discussions. Many thanks to so many of you who dropped by or saw my talk, and thank you for waiting in line for the book. I gave away every book I brought and my luggage will be much lighter on the way home!
A special thank you goes to my son Daniel, who was so extraordinarily helpful this week, and on his 30th birthday too!
I look forward to meeting up again in Orlando in October, I have already reserved a place.
Just a short note this week …
Not much has changed, although the down turn in markets and economic growth data continued to intensify.
As I pointed out in my presentation, the intensity of the downturn may peak in the current quarter, but the projections remain for continued global economic weakness through the first quarter of 2023. I take no pleasure in saying so, but it is my job to report the facts, data, and projections as they are. Capital preservation is a crucial component of asset management and investors need to constantly be prepared in advance.
One of the most important new developments of the current year has been the shift in correlations between stocks and bonds. The chart below shows that the monthly return correlation has shifted back to positive after two decades in negative territory. This requires an important shift in portfolio allocation strategy as bonds have to adjust to inflation and even deeper negative real rates. Higher inflation and higher yields present a new challenge to record equity valuations. Bonds down AND equities down makes sense in this environment.
This has created problems for many investors who have relied on bonds to provide a hedge to equities. The chart above shows that while the correlation has been negative for the last two decades or so, a positive correlation is historically not unusual.
Markets are trying to price in the new inflation and growth dynamics with, in addition, a significant shift in central bank policy.
My presentation at the MoneyShow, and in last week’s Insight, I laid out the challenging predicament the Fed is facing. While a strong rally can happen at any time, it still remains unlikely that the conditions have yet been met for an end to the downcycle.
A number of people asked me for the slide deck of the presentation. All the key charts you can find in my last two blogs: