Badger of Broad Street: when markets feel uncertain on direction, it’s a sure sign something is going to change

There are times when this Old Badger just doesn’t know where markets are going next. What I do know is that when markets feel uncertain on direction, it’s a sure sign something is going to change. The direction of bond, commodity and stock markets depends on answering a simple question: Is the world headed for recovery or a longer recession?

Recent news and data all point to a slowdown. So much for the global recovery of 2015! Even the IMF now says the global economy is likely to remain in slow growth mode for years to come. What will make it change?

Bonds are tight, commodities are crashing, and stocks are up… What does it all mean and what will happen next? From down here in the bowels of Badger’s Holt, I can’t quite make up my mind. To illustrate the challenges each day holds, here’s a download of what was running through my mind this morning:

* Should I be buying bonds because the arthritic pace of global growth looks to be slowing – recent US data has been weaker than expected – central banks are on an easing path, and it very much feels like interest rates are going to remain low for ever and a day? (I am reminded of the old bond market adage that “forever” is a distinct measure of time meaning from 5-8 weeks before a new fear takes hold.)

* Or should I be buying European stocks because the weakening Euro makes European companies more competitive and will therefore trigger global growth?

* Has Janet Yellen put a barrier on the US dollar falling lower by removing the hints of hikes to come?

* Are UK and US stocks fully priced and about to tumble, or is there another leg-up coming if global growth finally takes hold?

* Should I be paying more attention to what members of the US Federal Reserve are saying about the timing of a US interest rate hike?

* Or what Bank of England monetary policy committee members say about a slowing economy and the increasing deflation threat?

* What should I make of what the IMF says about the threats of a long-term global slow growth phase, or the launch of new infrastructure banks in Asia and the “Juncker Plan” to build new roads in Europe?

* How much will new trade routes between Asia and Europe or free-trade agreements between Japan and America contribute to global growth?

* Does the apparent failure of 2-yrs of Japan Abenomics mean QE just won’t work?

* What does the changing pattern of global economic influence mean for the globe? China claims to be on course for global domination, but as it redirects its economy from investment to consumption and its workforce enters middle age, is China going to get old before it gets rich?

* Is the US innovative and inventive enough to regain the clear position as the world’s leading economy?

* Are global commodities in such a downturn just because China has stopped importing some many raw materials – or has the commodities crash been an over-reaction?

* Is India the next economy to boom or is it just too much of a gloopy bureaucratic treacle soup?

* How vulnerable are emerging market economies to a renewed strong dollar? What other asset classes could tumble?

* Will the US economy thrive and demonstrate its innovative streak by setting off a new global growth paradigm?

* Where is oil going? (I’m pretty sure the new top oil price will be around $80 – the marginal cost of production from new US supply, but where is the downside?)

Lots to be thinking about, and then you have to consider how wrong prices might already be. For the last few years the major factor driving prices has been the impact of QE across the globe – central banks buying back government bonds. By putting all this extra cash into the global economy the result has been to drive all asset prices higher – that’s what happens when too much money is chasing too few assets!

For instance, I am deeply suspicious when my head trader tells me Spanish bonds are now at a negative yield. Nothing about the Spanish economy – including its swathes of unemployed youth and whole towns of unsellable property – tells me I should be paying the Spanish government for the pleasure of lending them money. That’s largely the implication of investors’ buying Spanish bonds in the expectation the EBC will buy them for its QE programme.

I wonder just how inflated other asset classes are, and conclude there are plenty of bubble markets out there.

So what is my trade of the week? I hear the Apple Watch is now on sale. People like bright shiny new things so I guess Apple stock going to $1000 is probably on the cards. On the other hand, I’m also thinking I might be better holding cash over assets, but who can really afford to be un-invested in these “interesting” markets…?

Badger