From Topdown Charts, Nov. 21:
What
if I told you there was a bubble but it wasn't in risk assets? What if
I told you that the assets most investors look to for safety and
capital preservation could actually be the biggest source of risk in
portfolios right now?
OK,
if I haven't lost you already, yes that does sounds a bit cheesy and
smacks of the scaremongering that a lot of pundits use to sell their
subscriptions (and why yes, I do have a subscription to sell you, but
that's a matter for a different time!). So I apologize upfront for the
douchey intro.
But
then again, once you check out some of the charts I'm about to show
you, it might actually begin to make a little bit of sense...
On
my metrics the traditionally defensive assets are looking very richly
priced, and I guess you can't blame investors for crowding in. You've
got NIRP/ZIRP all over the world, QE/"not QE", trade wars, political BS
24/7 (to put it euphemistically), scary headlines, crappy data, and
late-cycle lamentations. Simply put, it's easy to explain why you're
overweight bonds, REITs, and gold when the global PMI is below 50 and
the next selloff is only a tweet away.
But what if things change?
What
if the global economy experiences a rebound instead of a recession?
What if all that other crap starts to fade (or heaven forbid, political
risk surprises to the upside)? What happens to defensive assets if we
get a full blown late-cycle-extension?
1. Valuations: defensive assets are extremely expensive
As
I alluded to, based on my proprietary mix of valuation indicators the
average valuations across the defensive assets (treasuries, REITs,
gold) is at the most expensive level on record. Meanwhile the average
across US equities, international equities, and commodities (growth
assets) is still around quite reasonable levels. Simply put: defensive
assets are very expensive, and growth assets are cheap. This is
basically a market-based measure of a profound level of fear,
uncertainty, and pessimism on the economic outlook.
What
to watch for: valuations often have little influence on short-term
timing decisions except for where extremes are reached, but over the
medium-longer term valuations are virtually all that matter (other
things are important too, but valuation is a biggie). So the big open
question here is can defensive assets still "work" or reduce risk when
they are this overvalued?
2. Mass Distraction: policy uncertainty and deflation waves....
....
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