Asset allocation update: The ‘everything bubble’ bursts


It is rare that we can cite a single factor determining the performance of all markets. But since the global financial crisis of 2008, that factor has been low interest rates. As soon as the Fed and other central banks cut their key rates to zero and began quantitative easing (QE) in late 2008, it set the stage for one of the biggest stock market rallies in history. . US stocks rose nearly 400% from the end of 2008 until the Fed began raising rates earlier this year (Chart 2). And it wasn’t just stocks. Almost all market values ​​of assets have been inflated, be it bonds, real estate or credit. That’s why we call this era the “everything bubble”. But the “all bubble” is clearly bursting.

August was yet another month that demonstrated this. Global stock markets fell 4%, bitcoin 16%, US bonds 2.5% and even commodities 2.7% (Chart 3). Some markets performed less poorly – emerging market bonds fell only 0.5% and emerging market equities were flat. But the trend is clear and we see more declines to come.

Central banks will continue to walk

The crux of the problem is that central banks can no longer act to stabilize markets and growth. Inflation is just too high. The risk is that they raise rates further to levels not seen since before the global financial crisis. This means the Fed could raise rates to 5.25%, the ECB to 4.25% and the Bank of England to 5.75%.

Such levels may seem high, especially since investors have become accustomed to zero rates and QE. But these are the levels reached in the 2000s when inflation was lower than today and unemployment higher. And they are well below 1970s levels, which is the closest comparison to today’s supply shock.

Governments support markets less

With central banks acting as a brake on asset markets, it will be up to governments to act as a stabilizer. Yet there is no consensus on the right government response to the current macroeconomic environment. The latest US action has been to write off student loan debt, the UK is likely to introduce price controls on energy prices (following much of Europe) and China is trying to revive its real estate market.

More cons

In our view, all of this points to a further decline in asset markets. We continue to overweight cash. This is a defensive position, but it also gives us liquidity and the ability to mop up assets when they reach distress levels. It also saved us from losing money in August. We remain underweight equities and bonds given our view above. On commodities, we are neutral: supply issues suggest strength, but weaker growth suggests weakness, so these forces offset each other.

Finally, on the equity sectors, here are our favorite views: In the US, we like to overweight Energy, Large Cap Values, Semiconductors, Financials, Traditional Infrastructure, Clean Energy and Healthcare . We would be underweight homebuilders, large-cap growth, consumer discretionary and staples, and technology.

Bilal Hafeez is the CEO and Editor-in-Chief of Macro Hive. He spent over twenty years doing research at major banks – JPMorgan, Deutsche Bank and Nomura, where he held various “global head” positions and researched currencies, rates and cross-markets.

(The commentary in the above article does not constitute an offer or solicitation, or a recommendation to implement or liquidate any investment or to engage in any other transaction. It should not be relied upon as the basis for any decision investment or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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