Today the FTSE 100 is on track for its longest ever run of positive days, 15 in total if it finishes today with a gain. Is this important? I will return to this short term issue a bit further on.
Right now I want to return to the longer term, the bigger picture considered last week. In particular I looked at the lessons of history presented by Ray Dalio, plus the downside risks as calculated by a variety of independent and thoughtful sources.
Until recent months, even many of the more thoughtful investors would politely acknowledge all of the latter, but somehow feel that it doesn’t have relevance to them. This is dangerous, as Ray explains:
“Most investors base their expectations on what they have experienced in their lifetimes. When we extend our perspective just a few decades further back and look at what happened in different places, we get a shockingly different perspective.”
For example, in the 35 years before 1945 virtually all wealth was destroyed. That is not to say there will be such an outcome in the years ahead. Nobody knows. But a comprehensive historical study, as conducted by Ray in his book, clearly identifies cycles in human progress which continually repeat within a clear structure.
These big cycles, perhaps 75-100 years in duration, have six stages, and from historical precedents stretching back a couple of thousand years it appears that the US is in stage 5 – overwhelming debt, large wealth gaps, increasing internal resentment and polarisation, and international conflict (economic, if not yet physical). The price begins to be paid for a period of prosperity financed by a growing mountain of debt.
He published this book in 2021, and in the last 6 months it has become a template for where the US sits today, and how history informs us to what might happen next. I don’t feel that we have any choice other than to pay careful attention.
As stage 5 progresses, “when reason is abandoned in favour of passion”, the doors begin to close. The US is already pulling up its drawbridge, and as a result there is a capital flight out of the US dollar, the US stock market and US bonds. It is early days, but a point will come, if the precedents hold, when capital controls will be introduced, preventing dollar assets leaving the US. The risk of debt defaults will also rise. These can be selective, for example, defaulting on the Treasuries owned by China, and they are well aware of this risk. Look out for wealth confiscations through taxes or otherwise, whether on foreign-owned assets or just those people or companies who aren’t aligned politically with the prevailing US government.
These are the clear risks if you are prepared to scan a world of which the last 40 years is totally unrepresentative. There is no certainty any of this will happen, but history informs us that the odds do not favour a benign outcome.
On the limitations of our time perspective, there was an insightful reflection from Steve Blumenthal this week:
“It was 1985, and inflation was through the roof. Treasury yields were in the mid-teens. Everyone knew that the only way to make money in the stock market was to trade the trend cycles. No one can make money buying and holding, I was consistently reminded. Everyone was wrong. It was the beginning of the most significant bull market in history. A long-term buy-and-hold bull market.”
In 1985 your experience since the late 1960s was of huge volatility, double digit inflation and interest rates, currency re-structuring, and war. It was vital to take profits when they emerged, otherwise they will soon evaporate. It feels like we are back in that era, and buy and hold is dangerous.
When everyone agrees, it is all too often the case that something else will happen. In the last month or two “everyone” agreed that you must pile into gold. But you should have bought it in 2024 when “everyone” had little or nothing to say about gold. Right now gold is having a breather, and that could persist for a few weeks.
As I have said for many years, the idea that gold is a “safe haven” has always been silly, as was covered off here. It is as volatile as the US stock market, when a true safe haven would surely have negligible volatility. It is also an unreliable inflation hedge. Nonetheless, long term research highlights that in 8 of 11 major US stock market falls the price of gold went up, and in the other 3 it went down less.
Whoopee. Except that you bought gold because it was going up, in the expectation that it would keep going up. There are a number of factors that feed the potential for a huge rise in gold, a blow off as they call out, from a global currency re-structuring to US investors being very underweight. But for now you will need to be patient as gold has a breather, contrary to the excited media coverage of recent weeks.
Let’s turn to China. Trump has massively over-played his hand with China, and has made himself look stupid, shock. There have been indications this week that the US and China are engaging on the tariffs issue. To this point it is totally without fanfare, and very un-Trump like, but it is nonetheless encouraging.
Andy Rothman from Matthews also sent over his notes from a trip to China in recent days. I will share some of his anecdotes in another note, but for now he points out that only 15% of China’s exports go to the US, representing 2.8% of their GDP. In contrast, the US is much more closely intertwined with, and reliant, on China. For example, the majority of light bulbs in the US comes from China, or Mexico with Chinese parts. Americans will have to pay more than twice as much or sit in the dark. Trump is slowly realising that he needs to speak to Xi.
In “What’s Hot? What’s Not?” the winners over the month are an eclectic bunch, with no clear themes. But the duds are totally dominated by the US and China funds suffering from the tariff stand off.
Last but not least, I return to the FTSE 100 being close to a record 15 days of positive returns. It feels like that should be positive, but until the index goes up through 8700, and stays there, our working assumption is that this remains a bear market bounce, the sort which typically engender renewed enthusiasm – that’s why they’re called bear traps. It is the same with the S&P 500. If this is not the case, it should become clearer within the next 1-2 weeks.