At the start of this month the financial world changed forever. It happened suddenly and without warning. No alarms went off. There was no stunning announcement that triggered it. In fact many private investors won’t even have realised at all.
But one of the world’s most important financial trends – perhaps the most important – changed directions. Where you invest your money needs to change with it.
If it doesn’t, you’re making a huge mistake.
Let me just slow down a second and give you a fair warning: you may not like what I want to share with you today.
I’m going to challenge you about something you’re doing with your money. You may not like the conclusion you come to. In fact, asking yourself a couple of tough questions about how you’re managing your money today could well save (and make) you a lot of money next year. I’ll explain more in a second.
End of the Ice Age?
Societe Generale strategist Albert Edwards is famous for being something of a “perma-bear” on the stockmarket. He’s also noted for his “Ice Age” thesis, in which deflationary pressure sends bond yields through the floor, bond prices through the roof (remember, yields and prices move in opposite directions) and the stockmarket into a major bear market.
He’s yet to be proven right on the stockmarket. But it’s not hard to argue that he’s been right when it comes to bonds. The bond market has been booming for the best part of 35 years. Prices have soared and yields have trended down, culminating in $10 trillion worth of bonds at negative yields over the summer.
It’s hard to overstate the significance of this trend.
The bond market is much, much bigger than the stockmarket. And bond yields on government debt are used to price all sorts of other instruments, as well as acting as a signal for everything from risk appetite to inflation expectations.
So the fact that bond yields have been falling for over three decades is vital. This chart of UK, US and Japanese ten-year bond yields shows just how long that trend has been going on for.
Thirty odd years is a long time
It means that a significant majority of financial professionals have no experience of anything else. As Albert Edwards himself put it:
The bull market in government bonds has provided a familiar backdrop for the entire careers of 99% of people now working in finance.
It has also been an essential part of our 20-year-old Ice Age thesis. The rapid recent sell-off in bonds, and most importantly the cause of the sell-off, is leading many investors to question whether the almost 35-year bond bull market is over.
As Edwards says, there are several key signs that the bond bull market is over. Yields have risen sharply in the last month. If they continue to climb they could “break out” of their downtrend. That would truly be the end of the bull market.
Edwards isn’t the only person to think so, either.
Ray Dalio, a fund manager with $150 billion under management, is another. As he put it:
We think that there’s a significant likelihood that we have made the 30-year top in bond prices. We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation.
We believe that we will have a profound president-led ideological shift that is of a magnitude, and in more ways than one, analogous to Ronald Reagan’s shift to the right.
Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist.
Let’s add all this up
Possibly the most important trend in the financial world is in the early stages of reversing. Very few people have experience of it. And major reversals don’t happen often at all – the bond market tends to move in long, powerful cycles.
And we could be at a turning point in one of those cycles right now.
Or to put it another way, if the most important trend in the world in recent years has been falling yields… the most powerful trend of the next 30 years could be rising rates.
On top of that we have rising inflation expectations and a political environment that is clearly moving in a more inflationary direction.
The ground is shifting beneath your feet. And you need to do something about it.
The world has changed: have you changed with it?
Here’s what you have to ask yourself:
What are you going to do about this? The world is changing around you. Have you got a clear plan of action for what to do about it? Because the things that worked for the last five years may not work this time around.
To be perfectly frank, if you haven’t at least thought about what you’re going to do with your money for this new reality I think you’re making a huge mistake. It’s a mistake that will cost you. And not just in the sense of losing money on your investments – you’ll miss out on chances to make money from the forces now acting on the economy.
So, go on, be honest with yourself. Have you got a plan? Have you given this any thought?
Actually, don’t answer that question just yet
Tomorrow, I’m going to send you something that I think will help you answer it as well as anyone on the planet – and I’m including professional money managers in that.
It’s a deceptively simple way of understanding where the big money will be made as powerful new trends emerge in the financial world. Even better, it’ll show you exactly where you can put your money to take advantage (right down to the ticker symbol).
In my view, it’s vital you understand what’s happening. There’s never been a more important time to have a clear plan for what to do with your money.
Well, not for 35 years, anyway.
Make sure you read tomorrow’s Capital & Conflict. It’s one of the most important I’ll ever send you.
Until tomorrow,
Nick O’Connor
Associate Publisher, Capital & Conflict
Category: Geopolitics