Safe Bonds, Safe Dollars
Pfäffikon SZ, Switzerland – Stocks are dangerous and bonds are safe is the general idea. However, recent shifts in the financial minefield ––created by reckless central bankers–– make painfully clear that bonds can no longer be regarded as safe. This fact was already a concern for some time and was pushed under the carpet by investors. This era definitely came to an end. Meanwhile, bond investors received their first wake up call.
Estimating
Investors try to gauge the consequences of the policy of the U.S. President-Elect Donald Trump. In several cases, a large pre-empts on the future is taken. If this persists is to be seen. One of the most notable changes is the accumulated interest and accrued dollar. Meanwhile, (fiduciary) homeowners try frantically to fix their interest rates for a long period. A logical reaction, but it is about the purchase price of the fiduciary property. This group seems not to have learned much from the years 2005 to 2008.
Rising interest rates
A structural upward interest rate has not occurred in more than thirty years. Complete generations think that money is free; this story is slowly but surely coming to an end. The fair value of debt is grossly underestimated by a large group. In many scenarios, debt will seriously weigh on purchasing power, corporate profits and budgets of weak (European) countries. In addition, the interest rate is almost at a point where it will ––negatively–– affect the stock market. It is not entirely inconceivable that the 10-year U.S. interest rate will increase to approximately 6% towards 2019. On one side a normal interest rate is a blessing, but the stock market has not yet absorbed this information.
Dollar
Another underrated aspect is the strongly increased dollar, which notes at its highest level in 13 years. The dollar is ––rightly–– increasingly seen by investors as risk parameter rather than the VIX. Contrary to the belief of many investors, the rise of the dollar since the victory of Donald Trump should not be seen as a sign of investor confidence, on the contrary! They forget that many companies have borrowed in dollars during the period 2002 – 2014 when the U.S. currency was out of favor. Also, the annual deficit in the U.S. balance of trade is still covering a sloppy 500 billion dollars. A so-called liquidity in the dollar appears not to be the case currently, and that’s a sign on the wall. A widely expected rate hike by the Fed on December 14 will further add fuel to the fire. The sharply increased dollar will shortly be completing its glorious classical role as risk parameter.
Quality
The quality of the recent surge in the stock market raise several questions The increase is more like a combination of a massive short squeeze and a ‘blow off’. A complete crash in the supposed safe bond can not be ruled out. Investors will want to flee suddenly out of this supposedly safe safe asset class that knows little liquidity. Particularly bonds with longer maturities will be punished hard in such a scenario. If this happens, then the stock market will also be hit hard.
Usually, equity investors anticipate a rising interest rate. In any case, 2017 promises to become more volatile, fairer and easier to understand. However, 2016 still can provide an unpleasant Italian surprise.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.
