Ray Dalio founder of Bridgewater Associates was in Davos this week. Bridgewater manages about $160 billion of assets under management. He thinks investors should not miss out on the strength of the current market. "With too much money still on the sidelines, investors should dump cash for a diversified stock portfolio", with a little gold on the side.
"Cash is trash" Dalio said. "Get out of cash there is still a lot of money in cash". You have to balance with a certain amount of precious metals in the mix.
Dalio has made the call before. In 2018, he warned that investors would feel pretty stupid if they remained on the sidelines during the market run up. Since then, the Dow and S&P have moved up over 20%, with Nasdaq showing a 40% gain.
U.S. markets hit new highs this month, despite some profit taking during the week. The Dow is set to test the 30,000 level, the S&P and Nasdaq, looking a little over extended.
"Say Goodbye to Old Highs" is the new mantra. The volume of activity suggests markets will push higher as the Senate denies the Democrats an impeachment victory next week. Google joined Apple, Amazon and Microsoft in the $ Trillion dollar club. Next step why not $2 trillion, the question asked. Strange when a PE of 30 is just chump change.
Low interest rates are driving asset prices ever higher. U.S. ten year bond yields slipped 11 basis points this week to close at 1.71. US gilts closed down 6 points to 0.57 per cent. Life on Planet ZIRP is turning into a quarantine of international dimension.
Jamie Dimon, Head of J.P. Morgan Chase warned this week, negative rates are the only thing worrying him in this otherwise "Goldilocks Place". "The only thing I have trepidations about are negative rates and QE. It's one of the great experiments of all time and we still don't know what the ultimate outcome is".
"I would never buy a negative yielding bond" he added "In history, whenever we have seen anything like that, it didn't end well …"
Risk of Great Depression …
Kristalina Georgiva is the new boss of the IMF. Speaking at the Peterson Institute in Washington last week, Georgiva warned the latest IMF research compares the current economy to the "roaring twenties". We know that didn't end well. The Great Crash of '29 led to the Great Depression of the 1930s. The IMF thinks a similar trend is underway!
"If I had to identify a theme at the start of the decade" she added "It would be greater uncertainty". Climate change and increasing trade protectionism would lead to greater social unrest and financial market instability.
The IMF released their forecasts for growth in 2020 which were remarkably upbeat. World growth is expected to increase by 3.3% this year and by 3.4% in 2020. This compares with growth of just 2.9% last year. The U.K. is expected to grow by 2.4%, a higher rate than France and Germany, higher than the EU as a whole.
In Davos, Trump declared the U.S. economy to be the strongest in the world. The IMF forecasts would beg to differ. Growth is expected to slow to just 2% this year and 1.7% next despite the tax cuts and spending plans. The President would like to blame the Federal reserve for raising rates too fast last year. "Without the rate hikes, the U.S. economy would be growing by 4%" Trump said..
Steve Mnuchin, Secretary of State at the Treasury, advised climate activist, Great Thornberg to "go to college and get an economics degree". Mnuchin graduated from Yale in 1985 with an economics degree, as if that helps when working with the Trump administration.
With ballooning internal and external deficits, the U.S. is in danger of becoming a banana republic. The administration is preparing a second round of tax cuts to boost growth. Growth will be self funding and will mitigate the borrowing deficit, Mnuchin explained. The Fed is confused, confronted by fiscal irresponsibility AND financial repression, a heady cocktail for crisis, with the odd trade war on the side.
Trump Tariffs Damaged U.S. growth ...
So what went wrong? Gary Cohn former White House Chief Economic advisor explained on Sunday, how President Trump's tariffs hurt the U.S. economy and undermined the stimulative impact of the massive tax cuts passed in 2017.
Trump's steel and aluminium tariffs "collided" with tax policy. The tariffs increased input costs reducing margins and profits, damaging investment plans and job expansion.
Last week, the Federal Reserve confirmed the U.S. manufacturing sector was in recession. Output fell in 2019, despite the Trump claims to "Make American Manufacturing Great Again".
Cohn, one of the "adults in the room" clashed with the President on the issue of tariffs and protectionism. The former Goldman Sachs President resigned in March 2018.
Trump also faced push back from former State Diplomats over the conflict with China. "President Trump's lack of understanding of China, is to blame for the deteriorating relationship with Beijing" former diplomats explained. Doubts persist about the viability of the Phase One Trade deal with significant tariffs still in place.
With "successful" trade deals concluded with Canada, Mexico, Japan and China, Trump will now turn his attention to Europe and the U.K. The dystopian disaster that is "Trump on Trade" will now inflict further damage on growth in the West.
In the U.K. within days we shall be leaving the EU. The Prime Minister may claim we have crossed the line. Julius Caesar crossed the Rubicon but then became involved in a prolonged civil war.
There is much to be done to understand policies on trade, immigration, investment, infrastructure and fiscal policy. Taking lessons from the Trump playbook on trade negotiations will not help ...
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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