Oil and gold are where it’s all at right now.
Brent crude hit US$70 in the US session just gone.
You don’t need me to tell you the reason.
But we can’t ignore the lusty signal from gold, either.
It’s back over AU$2,200 an ounce. Gold stocks are rumbling.
I was writing the very same thing this time last year.
Gold stocks barnstormed their way up in the first half of 2019.
Will they do it again?
I wouldn’t be surprised in the slightest if they do.
Here’s why — and it’s not the Iran mess.
The central banks are flooding the markets with liquidity again…
Fed pump primes the markets (again)
The Wall Street Journal reports that the Federal Reserve added US$76 billion in ‘temporary’ money to the markets on Monday.
Its balance sheet is up over US$400 billion since September.
US stocks are up around all-time highs. Coincidence? Hardly!
US markets remain bullish while this continues.
You might like to think about your exposure here.
You do have some, right?
But today’s article dangles an intriguing notion: is the Fed inadvertently pump-priming the Aussie dollar?
Here’s where I’m going with this.
Currently, the credit creation in the US is running quite hot from both the central bank but also the banking sector.
It’s quite the opposite case in Australia.
Currencies moves in pairs. This implies a weakening US dollar and a stronger Aussie.
We’re also getting further currency tailwinds from strong commodity prices plus the shift to a current account surplus last year (while it lasts anyway).
It’s perfectly possible to have a strong currency and weak domestic economy. Japan has proved that over the years.
The yen is seen as a ‘haven’ for capital regardless of the government’s gigantic debt or its perennial weak growth.
Why am I floating this?
Any ongoing upside pressure on the Aussie pushes the Reserve Bank of Australia further toward implementing unconventional monetary policy.
They could do it for no other reason than to take the wind out of any Aussie dollar rally.
Currency wars are back on the agenda. Donald Trump seems to think along these lines, too.
It’s too early to say yet, but this could be a major theme for 2020. We could get spill over to the ASX if it happens.
The ASX could surge off this alone
You’ll notice, if you read mainstream forecasts, that few seem to think any substantial rally is on the cards for the ASX.
The gist is your standard dividend return plus, perhaps, 5–10% capital growth.
Quite rightly these analysts look at the prospect of earnings growth relative to the multiple on these already.
However, I think their assessments are probably too conservative. Markets could inflate on liquidity alone.
I happened to be reading about the Japanese bubble of the ‘80s last night.
The earnings multiple of the market went from 35–70 on a tidal wave of money.
It was insane. But that doesn’t mean you couldn’t make money surfing it on the way up.
When do you pull out?
At some point the central banks will choose (or be forced) to withdraw their liquidity from the market.
That’s when trouble could hit.
A piece in this week’s Economist sums it up. The risk to hedge right now is a rise in unexpected inflation.
The entire world thinks that inflation and interest rates are stymied under a trio of pressures (demographics, debts and globalisation).
That may be true today. But it’s taken for granted by so many that it’s heavily built into market prices.
$10 trillion in negative yielding debt worldwide is proof of that.
There’s now little profit advantage in investing with such a theme in mind.
A big rise in an asset usually comes from a major shift in expectations.
The big money is going to be found in something that shifts this low interest rates-forever dynamic.
There are only three markets globally big enough that could make this happen: oil, bonds and currencies.
There are enough tensions brewing in oil to make it a possibility.
But we also have the central banks treading faster toward issuing their own digital currencies, too. Currency turmoil can’t be ruled out either.
2020 might be the year we find out. For now, I say stay long stocks.