Assets to Own in a Sentiment-Driven Market

Posted on October 19, 2022

Nouriel Roubini, writing for Time, purports that central banks are going to pull back on their hawkish policy and stop with the interest rate hikes. On the International Man, Doug Casey says he expects rates to go higher. The two experienced analysts' opposing views almost paint a picture of the global financial markets right now.

Everyone seems to be guessing. A few things seem to be beyond questioning. One is that we are facing persistent high inflation. For some reason, Roubini doesn't seem to like the idea of deflation and is a "moderate inflationist." But the 2% target that central banks want to maintain, and that Roubini likes too, seems like fruit on a very tall branch. It's a long way from the current inflation rate.

Another thing that seems like a sure bet is disruption. Supply is getting disrupted, with virtually all commodities and goods being affected. We're far beyond the effects of the Covid pandemic on the supply chain, but the high inflation and economic uncertainty have companies across the globe holding their pennies tightly. There is a kind of de-globalization effect where countries no longer want to risk missing out on toilet paper and are re-assessing their supply chains. And certainly, one of the primary suppliers of commodities such as gas, oil and metals deciding to invade a neighboring country is playing a role in this de-globalization of trade. Roubini also puts the blame on an increase in "protectionism" from countries on both sides of the political spectrum. When times are tough, everyone is looking out for number one.

Roubini does mention that inflation has only recently become a buzzword among the general populace, those who aren't economists or adept at following markets. How can it not? When prices of everything jump by more than 40%, people are going to take notice and ask, "WTF?"

They're also going to start wondering where to store their wealth, regardless of how much or how little they may have. Here there is again a little bit of a disagreement, with Casey expecting the U.S. dollar to remain more attractive than Roubini does. It's “strong” right now, compared to other fiat currencies at least, and dozens of emerging markets’ sovereign debt hinges on the dollar, so… Maybe. It's this very strength that has been pushing gold’s dollar-denominated price down and almost makes it look unattractive to Americans.

As he outlines that the 60/40 portfolio has been another losing investment, Roubini nonetheless states:

Investors need to find assets that will hedge them against inflation, political and geopolitical risks, and environmental damage: these include short-term government bonds and inflation-indexed bonds, gold and other precious metals, and real estate that is resilient to environmental damage.

What is real estate that is resilient to environmental damage? Stonehenge? It's called global climate change for a reason. The truth is that not a whole lot of assets other than gold look safe right now. Even silver bullion and platinum group metals have a kind of "what about" dependency on the industrial sector that can come under various stresses. It becomes a question of how much volatility do you want in your portfolio?

In uncertain times, stability caries a premium. That’s because all the people who didn’t buy their safe-haven assets before the next crisis rush in, waving fistfuls of dollars, desperate to buy at any price.

Bond are another recent curiosity. The appetite for bonds has almost sprung out of nowhere and certainly showcases the wild sentiment. Sure, treasuries look better with higher interest rates. But what about when we put a sticker called "$31 trillion sovereign debt" and another with "negative-yielding global bond market" on them? Savvy investors will weigh the potential effects on the value of a dollar with the promised returns of inflation-protected securities. Regardless of your take on deficit spending and debt-to-GDP ratios, personally I’m really uncomfortable holding an IOU from someone who also owns a money-printer. Your mileage may vary.

As we move into what looks like a decade of stagflation, uncertainty and swings in sentiment, Casey has some choice words:

Banks and governments fail, paper currency has always been a joke, and the forthcoming Central Bank Digital Currencies (CBDCs) are criminally dangerous, possibly the worst innovation of all time. Anyone who doesn't have a significant part of his assets in gold coins will be an unhappy camper.

Casey insists gold isn't an investment that is meant to produce wealth, but rather a savings tool. When the value of everything else is dropping, though, simply preserving value is a win. When every asset class is shedding value, sometimes you win by not losing... 

He goes on to remark how he started investing in gold when it was $40 an ounce. We'll let you be the judge of whether that definition holds up. 

Since we don't have a time machine, we're stuck paying today's prices for gold. (If you're interested in what the super-wealthy BullionMax customers are buying, we analyzed billionaires' favorite gold and silver earlier this year.)