The World Upside Down

Pfäffikon SZ, Switzerland – The signals issued by the financial market are contradictory. On the one hand, investors flee into expensive bonds while they push in particular the U.S. stock market to new all-time highs. Since 2007, a scenario unfolds that has never been seen and will prove to be not sustainable in the end. The key question is who is right; the bond investor or equity investor?

Experimenting
Monetary experimentation has led to an insane situation on the financial markets. Bond investors are afraid to take risks and pay a high price for it. Particularly pension funds and insurers are sitting with their hands in their pockets. In the hunt for yield ––fed by dirt cheap money–– (to) expensive shares are bought at the same time. It should be noted that the equity investor, in particular, put his money in less volatile stocks; apparently, this category of investors does not trust the current situation entirely. They also realize that the consistent raising of paper holders can lead to major accidents. After all, cheap money will not make you rich. In general, cheap money increases many’s debt ratios, without being aware of the associated risks. Old-fashioned savings is skillfully killed by the ECB’s current policy; It’s the world upside down.

Sidewards
Since 18 months, stocks show a sideways pattern. According to various market researchers, Europe is situated in a prolonged bear market, which is accompanied by substantial incremental price increases. The U.S. still does not seem to care. A much better than expected employment figure gave the U.S. market wings last week. However, this figure was only a correction to the figure of the previous month. The increase is, therefore, striking, radiates little power and is not widely supported.

Deflation
According to legendary investor George Soros, we are ––in the best case–– on the eve of a long period of deflation. In the worst case, the entire global financial system collapses together. Growing inequality regarding income and property would be the cause for a long period of turmoil as we saw in the 30s of last century. The U.S. would not escape this worrying development. Confounding demographic shifts are already visible in the U.S.

The future will prove if Soros is right. The fact is that the most recent developments in the financial markets pose red flags instead of giving a lot of confidence for the near future. Equity investors apparently do not want to lose momentum, but also recognize that the fairy tail certainly might be over. Many (Chinese) economic data confirm a stagnant image at which unexpected currency shifts are obvious.

The financial world is upside down and gives off conflicting signals. Many citizens take too many risks in a financial environment which requires great restraint. No longer it can be excluded that this period of restraint will last longer than many ever thought possible.

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 the above mentioned shares and has no intention of doing so in the next 72 hours.