Markets are closed this Monday holiday, so let’s take the opportunity to reassess the outlook. We posted updated Synthetic Systems charts last week and nothing has happened since to change them, and we have a full quarterly update due in a few more days anyway.
Equities are up today overseas and in futures trading. Treasuries and commodities are mildly down, with the exceptions among those I track of platinum and oil.
A few comments on the forecast … the outlook for Bonds and Gold looks pretty attractive. I’m now overweight both. But there is a highly plausible fundamental scenario backing it up as well.
I think the bond market especially is underpricing the policy outlook. The Fed has been very vocal about its determination to quell inflation, and there’s a lot of opinion in the financial arena holding that rates will have to rise much more to get the job done. But here at Financology we have not only SS but the FDI as well, and the latter tells us disinflation is in the pipeline. Likely due to the bond market’s already having done so much heavy lifting on the rates front.
If so bond yields are stretched on the high side and prices on the low side, providing a nice tailwind over the coming months. In addition the belated return to normal rates after years of repression may well unravel some excess leverage and speculation. That could prompt a hasty retreat in rates and a surge in Treasury prices at an unpredictable time.
I don’t tell SS what to think and don’t even have a way to, so when its opinions and mine come into concord, I feel better about both.
“I think the bond market especially is underpricing the policy outlook. The Fed has been very vocal about its determination to quell inflation, and there’s a lot of opinion in the financial arena holding that rates will have to rise much more to get the job done. But here at Financology we have not only SS but the FDI as well, and the latter tells us disinflation is in the pipeline. Likely due to the bond market’s already having done so much heavy lifting on the rates front.
If so bond yields are stretched on the high side and prices on the low side, providing a nice tailwind over the coming months. In addition the belated return to normal rates after years of repression may well unravel some excess leverage and speculation. That could prompt a hasty retreat in rates and a surge in Treasury prices at an unpredictable time.”
Do you have any thoughts at to how the above commentary might apply to Australia? You see I haven’t found a “Finster” yet in Australia; I’m still looking. I found one guy, but he only deals with clients who have a coupled of extra zeroes regarding the size of their portfolio.
Yes, Peter; strictly speaking it’s about US Treasuries. I don’t know much about the Australian government bond market. But broadly speaking governments and central banks tend to move in tandem. There are exceptions, of course, notably China and Japan at the moment, but you can apply your knowledge of Australian fiscal and monetary policy to discern how your sovereigns would differ from their US counterparts. We’ve discussed a similar tack with various physical commodities versus copper.
US Treasuries themselves might be worth considering if you have ready access to efficient vehicles. My understanding is that they’re pretty widely traded around the world. The main issue for those who do their accounting in other currencies is that nominal performance will be different than in US dollars.
But SS isn’t denominated in US dollars. Neither is our fundamental analysis. Throughout Financology, unless otherwise noted, USD is treated as a security in its own right. Regardless of how you do your accounting, the relative performance of the asset classes is what it is. The Stocks plot is the entire world market, the same everywhere. Copper and Gold are the same everywhere. Even US Treasuries are … and their performance relative to the rest is. The only thing we really don’t cover as far as non-US investors are concerned is their own national markets. If you can supplement our analysis with your knowledge of the Australian bond market you should be in good shape to apply what we have here to invest there as well.
Thanks Bill