Hi Michael, according to your Asset Allocation Traffic Lights, which phase are we currently in? I believe we are in the Speculation phase. I’m not sure if this is an appropriate time to invest in risk assets, and I’m also not sure what the orange color represents. It would be helpful if you could provide a monthly update on this.
Thank you for the article, really helpful. What do you think is the likelihood of a substantial decrease in the price of gold if there is monetary inflation, but investors turn decidedly risk on and start moving money into, for example, aggressive growth stocks?
Given that Powell is guaranteed to be replaced next year, do you think he cares enough about his legacy to prevent a recession or serious financial crisis before he leaves office? I'm trying to understand this situation from an individual perspective, based on the actions Powell has taken throughout his term.
He is definitely 'political'. However, at this stage will he be able to halt slide into recession? I doubt it. He is caught in headlines and stagflation may be his ultimate legacy
Excellent perspective as usual. I'd love to hear your thoughts on the best way to stimulate "growth-focused capital raising activity". Could deregulation and litigation reform have a substantive effect on growth oriented speculation? Seems to me that financialization is an unstoppable force in economies, facilitated in large part by the digital age.
It probably is inevitable since demographics play a big role. A growth based strategy will also emerge if demographics improve. It can also be encouraged by investment in education and via tax breaks. Government can help via infrastructure not welfare hand outs.
What is needed is investment for growth, otherwise the underclass problem in modern economies is likely to get far, far bigger with damming political consequences.
Unquote
Professor Michael Hudson argues this also
Have not seen any indication of USA politicians picking this up
Trump isn’t even reducing tax on wage earners unless making over 400k USD household income
Not many households in that group
Education funding being cut
Another question is can the rest of world ignore the west and go their own way
Michael thank you for your excellent, thought provoking analysis. Could I ask a couple of questions re current year playbook. In my mind we have macro shocks with tariffs, DOGE, wars; we have the refinancing wall in the US and elsewhere, with the prospect of normalising issuance across the curve and so reducing liquidity through less shorter term bill issuances and finally, I think, we have further bond vigilante revolt as the Trump tax cuts are extended, increasing the deficit even more in spite of DOGE AND Tariffs (which end up being more political stunts than substance) against a backdrop of insufficient liquidity.
Two questions:
i) do you agree with these factors and are there others you would add; and
ii) in terms of path to higher liquidity, my fear is we are sleep walking into financial heart attack in the system; and sufficient liquidity will only arrive after it has started and not before to avert the crisis? Does this accord with your views and if so, do you have a sense on timing in terms of the path to higher liquidity? My thought/fear is we have a rally for a few weeks with good news on tariffs, then people realise the forward deficit with tax cuts will not remotely be covered by higher revenues from tariffs and less costs from DOGE, and we have a spike in yields which the fed and treasury can’t just talk their way out of which trump managed to do earlier this month, until they anonounce tangible action.
Yes I share these fears. Bond vigilantes are sufficiently powerful that to get yields down Scott Bessent may have to wish for recession. This complicates the supply of Liquidity because much collateral is private sector-based and will sour in recessions. The Fed seems too laid-back about B/S liquidity provision to front-run increases in liquidity. It is dangerously 'reactive'. My view has been 'money runs out' by September
Could it be that policymakers are deliberately betting on the idea that by persistently keeping short-term interest rates elevated, disinflationary—or even deflationary—forces will be set in motion, ultimately leading to a substantial decline in long-term government bond yields, despite the market's expectations of sustained public debt issuance and rising term premia?
While there is growing consensus of need for investors to hold gold, I don't see practical options. Every 'guide to owining gold' involves a variety of flawed options. Buying physical gold via 'reputable dealers' involves storage charges and questions of how to verify that the gold they say they are holding for you exists.
So it's cash flow negative until you sell, and when you do, at what kind of spread? Holding physical gold yourself involves problems of how you verify that you're getting gold at stated purity, and when you go to sell, where and how do you sell it at low transaction costs, and how does your seller verify purity of the gold?
Paper gold like GLD on stock exchanges is not necessarily backed by actual gold.
Gold Mining stock prices are influenced by far more than gold prices, like operating risks to companies, management risk, overall market risk, etc. In major stock market selloffs, everything gets sold as investor race to pay off margin calls.
There's an online company, Monetary-Metals that allows you to earn a return on your gold, paid in gold via various lending of gold instruments, but there is no clear insurance of that firm against business failure.
You will have to hold some assets to preserve your wealth anyway. If not gold, then residential real estates, which might have negative cash flow as well, and a lot of work on top. Bitcoin might be good but cold storage is not for everyone, and if fiat (usd) collapses, btc will evaporate. Keeping btc on exchange has similar (even higher) risk to “buying gold via reputable dealers”.
LINK TO PART 1?
Hi Michael, according to your Asset Allocation Traffic Lights, which phase are we currently in? I believe we are in the Speculation phase. I’m not sure if this is an appropriate time to invest in risk assets, and I’m also not sure what the orange color represents. It would be helpful if you could provide a monthly update on this.
The chart shows percentage of World markets in each phase
The way we use it is to look for decisive turning points eg Turbulence/ Speculation increasing Rebound/Calm falling. This is happening
Thank you for the article, really helpful. What do you think is the likelihood of a substantial decrease in the price of gold if there is monetary inflation, but investors turn decidedly risk on and start moving money into, for example, aggressive growth stocks?
Over long term = small odds. Short term it does look toppy.
Given that Powell is guaranteed to be replaced next year, do you think he cares enough about his legacy to prevent a recession or serious financial crisis before he leaves office? I'm trying to understand this situation from an individual perspective, based on the actions Powell has taken throughout his term.
He is definitely 'political'. However, at this stage will he be able to halt slide into recession? I doubt it. He is caught in headlines and stagflation may be his ultimate legacy
Log charts would be much appreciated!
Excellent perspective as usual. I'd love to hear your thoughts on the best way to stimulate "growth-focused capital raising activity". Could deregulation and litigation reform have a substantive effect on growth oriented speculation? Seems to me that financialization is an unstoppable force in economies, facilitated in large part by the digital age.
It probably is inevitable since demographics play a big role. A growth based strategy will also emerge if demographics improve. It can also be encouraged by investment in education and via tax breaks. Government can help via infrastructure not welfare hand outs.
Quote
What is needed is investment for growth, otherwise the underclass problem in modern economies is likely to get far, far bigger with damming political consequences.
Unquote
Professor Michael Hudson argues this also
Have not seen any indication of USA politicians picking this up
Trump isn’t even reducing tax on wage earners unless making over 400k USD household income
Not many households in that group
Education funding being cut
Another question is can the rest of world ignore the west and go their own way
Trade among themselves
Basically boycott the west
Another analyst said financial repression not politically possible in USA because public debt is too large relative to GDP
I just hope USD maintains strength against other currencies as I may retire soon in another country
Re financial repression, why not always do it? Problem is markets rule, not governments
Michael thank you for your excellent, thought provoking analysis. Could I ask a couple of questions re current year playbook. In my mind we have macro shocks with tariffs, DOGE, wars; we have the refinancing wall in the US and elsewhere, with the prospect of normalising issuance across the curve and so reducing liquidity through less shorter term bill issuances and finally, I think, we have further bond vigilante revolt as the Trump tax cuts are extended, increasing the deficit even more in spite of DOGE AND Tariffs (which end up being more political stunts than substance) against a backdrop of insufficient liquidity.
Two questions:
i) do you agree with these factors and are there others you would add; and
ii) in terms of path to higher liquidity, my fear is we are sleep walking into financial heart attack in the system; and sufficient liquidity will only arrive after it has started and not before to avert the crisis? Does this accord with your views and if so, do you have a sense on timing in terms of the path to higher liquidity? My thought/fear is we have a rally for a few weeks with good news on tariffs, then people realise the forward deficit with tax cuts will not remotely be covered by higher revenues from tariffs and less costs from DOGE, and we have a spike in yields which the fed and treasury can’t just talk their way out of which trump managed to do earlier this month, until they anonounce tangible action.
Thank you
Yes I share these fears. Bond vigilantes are sufficiently powerful that to get yields down Scott Bessent may have to wish for recession. This complicates the supply of Liquidity because much collateral is private sector-based and will sour in recessions. The Fed seems too laid-back about B/S liquidity provision to front-run increases in liquidity. It is dangerously 'reactive'. My view has been 'money runs out' by September
Could it be that policymakers are deliberately betting on the idea that by persistently keeping short-term interest rates elevated, disinflationary—or even deflationary—forces will be set in motion, ultimately leading to a substantial decline in long-term government bond yields, despite the market's expectations of sustained public debt issuance and rising term premia?
While there is growing consensus of need for investors to hold gold, I don't see practical options. Every 'guide to owining gold' involves a variety of flawed options. Buying physical gold via 'reputable dealers' involves storage charges and questions of how to verify that the gold they say they are holding for you exists.
So it's cash flow negative until you sell, and when you do, at what kind of spread? Holding physical gold yourself involves problems of how you verify that you're getting gold at stated purity, and when you go to sell, where and how do you sell it at low transaction costs, and how does your seller verify purity of the gold?
Paper gold like GLD on stock exchanges is not necessarily backed by actual gold.
Gold Mining stock prices are influenced by far more than gold prices, like operating risks to companies, management risk, overall market risk, etc. In major stock market selloffs, everything gets sold as investor race to pay off margin calls.
There's an online company, Monetary-Metals that allows you to earn a return on your gold, paid in gold via various lending of gold instruments, but there is no clear insurance of that firm against business failure.
I bought two proof gold coins a while back
Have the certificate from mint
Will stop by the coins dealer to see what he offers
You will have to hold some assets to preserve your wealth anyway. If not gold, then residential real estates, which might have negative cash flow as well, and a lot of work on top. Bitcoin might be good but cold storage is not for everyone, and if fiat (usd) collapses, btc will evaporate. Keeping btc on exchange has similar (even higher) risk to “buying gold via reputable dealers”.