We regularly tell our clients and anyone else who might listen that all is not necessarily as it may seem. That is because we manage risk first and foremost. So we are always questioning mainstream thinking, looking in the crevices for things that may not look significant, but could blow up to be big issues.
We are not alone, even a voting member of the US Federal Reserve is questioning the stance of his colleagues.
Mainstream thinking, at the moment is that central banks, facing economic growth (and as I mentioned yesterday, most of the data on GDP growth is more than 2 months old now) are erring toward the tightening (or reducing the easing) of monetary policy.
This is being done in the face of a wide variety of potential economic, geo-political and environmental shocks that could completely turn economic growth upside down.
Need I name them all?
In Canada, the housing market has gone pear shaped and the 10% rise in the $C will make exports more expensive and imports cheaper and should work to drive GDP growth lower.
In the U.S. the cycle is in its late stages, employment is close to full, but doesn't appear to have a whole lot of growth momentum (and wages are not growing). The Trump administration is mired in politics (and not getting much of anything accomplished) at the moment and climatically induced hurricanes are ravaging (or about to ravage) its southern coastline. The sabre-rattling with North Korea and Trump's stance on protectionism and anti-immigration policies further cloud the picture.
The wild card, of course, has been the reluctance of inflation and inflationary expectations to take hold, which under normal circumstances should follow economic strength.
But that is not happening.
Central banks (especially the Bank of Canada) are adamant that inflation will re-appear. However, for that to happen, you need to have expectations for inflation increasing and for that to happen, you need to see wage growth. It is not happening in Canada and it is not happening in the US, or anywhere in the world, for that matter.
Bond investors are telling us that by not demanding additional premiums (higher yields) in longer dated maturities, that they are not expecting any major inflation surge either.
We know and are at no loss to tell those who may listen, that bond markets are way bigger than stock markets and lead all other asset classes (in direction):
So have a look at what they are telling us:
Bond yields are falling. Stocks look vulnerable.
Do you fully understand your risk profile? If you are fully invested, 60% equity, you are vulnerable. That's why a more tactical approach works. It helps to reduce risk.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist