It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.
- Charles Dickens, A Tale of Two Cities
We have had a "Dickens" of a time lately. We got the "Trump Bump." We got the "Tax Cut Jump" and now we are experiencing the "Belt and Road Load" and the "Fed Mislead." You see, let me share some experience with you. Many economists, and many people in the Press, like to blame the market going up or down on one thing. Every day you see these kinds of proclamations. They are almost always erroneous.
It is almost never this OR that OR the other thing, that is causing the markets to move. It is almost always this AND that AND the other thing, that is at the root of the movement. In other words, it is a combination of factors and it is also a combination of who is doing what as the major money managers, large insurance companies and the public rush around buying or selling for their own individual and very distinct reasons.
It is also the same thing with "Risk." "Out of the Box" has a large distribution and I speak with many major money managers daily. Most of them approach "Risk" in totally the wrong way. They are always trying to handicap it, and this is almost always the wrong approach. What you do is identify the "Risk" and then you try to gauge how much of it is really there and if there is a lot of the stuff on the table, you exit. This is particularly true in political "Risk" because no one has any real idea what the politicians may or may not do as they are motivated by power and their re-election and generally not by economic considerations.
Pause you who read this, and think for a moment of the long chain of iron or gold, of thorns or flowers, that would never have bound you, but for the formation of the first link on one memorable day.
- Charles Dickens, Great Expectations
Now, in my view, all of the markets are going through some serious machinations. The equity markets are flopping about in earnest and heading down in the process, as exemplified by last Tuesday. The plays for appreciation that worked are probably done for the year, given what is happening in the American economy, and the global economy is even worse. I am not saying that some appreciation plays will not function well in here but I am saying that dividend and yield plays might be better alternatives, the way things are going.
What is happening in the Treasury market is also of interest. Again, it is not one thing OR the other thing but a combination of things that have been driving yields down. I think it is the Fed and are they going to back-off raising rates, and Treasuries as "safe havens" as the machinations in Great Britain, in Italy, and concerns about the Italian banking system continue to mount.
Then there is the widening in the general credit markets, both Investment Grade and High Yield, and the decline in equities that are affecting the price of Treasuries. I also think part of it is short covering as so many people had called for the 10 year yield to be 3.75% to 4.25% by this time of the year.
Clearly a very wrong call!
The most important thing in life is to stop saying 'I wish' and start saying, 'I will.' Consider nothing impossible, then treat possibilities as probabilities.
- Charles Dickens
Navigation in uncharted waters, and the future is always uncharted, is always a difficult task. The key is to choose strategies, in both equities and debt, that may work now as others are failing. "FANG" and high tech have been major drivers in the appreciation play but they are fading, in my humble opinion. I like plays in 5G, plays in the energy sector, when we are at these prices for both equity and debt, and anything that pays monthly and has a stream of cash flows.
I am out of European equities and debt, in general, because of Brexit and Italy and the very real possibility of a spillover, from the Italian banking system. I identify the Italian banking contagion as a real risk for other European banks and, as I stated earlier, when I see real "Risk" on the table then I would rather be invested in other areas that have less "Risk."
"Great Expectations" are fine but "Preservation of Capital" is finer, in my estimation. It is far easier to hang on to what you have than to try to make more. We are at a difficult time in the markets and, once recognized, then new paths must be found. "Up, up and away" has vanished in the smoke of the Fed, the tariffs wars and the problems in Europe.
We changed again, and yet again, and it was now too late and too far to go back, and I went on. And the mists had all solemnly risen now, and the world lay spread before me.
- Charles Dickens, Great Expectations
You see, a "Dickens" of a time now.