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Latest issue of MoneyWeek magazine
Issue 983, 24 January 2020. Subscribers: read the digital edition here
From John Stepek, MoneyWeek's executive editor
As regular readers may know, I’m always on the look-out for contrarian indicators – signs that a belief has become so widespread in markets that even the most extreme outcomes must be “priced in”. Davos – the Switzerland-based talking shop for the great and the good and the grossly overpaid – is usually fertile ground for such indicators and this year has proved no exception. In an interview with Bloomberg this week, Bob Prince, the co-chief investment officer of Bridgewater, the world’s biggest hedge fund, came out with this beauty. Arguing that central banks around the world had learned their lesson from the Federal Reserve’s abortive attempts to raise interest rates in 2018, he said: “... we’ve probably seen the end of the boom-bust cycle”.
Now, as Albert Edwards of Societe Generale pointed out on Twitter in response to this quote, our former prime minister and chancellor Gordon Brown famously claimed to have ended “boom and bust” for the UK economy – right ahead of the financial crisis in 2008. So in terms of tempting fate, it’s quite a claim to make. Admittedly, Prince, unlike Brown, didn’t appear especially happy about boom and bust being scrapped. Hedge funds (in the popular mythology, at least) make money from volatility. If central banks have ended the ups and downs in the economy, that makes his job harder.
However, his feelings are irrelevant. There are two main issues here, one linked to investment markets and the other to economic policies. On the investment side, if everyone believes that interest rates will stay low forever and that there’s no point in “fighting the Fed”, then even the bears will go all in on stocks. Bank of America’s (BoA) latest survey of global fund managers certainly suggests that “capitulation” is coming closer. Fund managers are currently holding less cash than they have at any point since 2013.
On the economic side, if politicians come to believe that boom and bust is over, then there is nothing to stop them from deciding that there are no limits to their spending. US president Donald Trump reportedly told donors at a recent private dinner, “Who the hell cares about the budget?”. That’s no surprise coming from a property man like Trump, but it is a surprise when it’s addressed to supporters of the US political party that’s supposed to be the fiscally responsible one. As Ben Hunt of the Epsilon Theory blog points out: “If you don’t see that every government in the developed world is about to embark on a massive deficit-spending spree... you’re just not paying attention”.
What does this all imply? It rather implies that the race to the bottom – in terms of public finances and monetary policy – continues. It implies that asset prices will continue higher until inflation takes off. It implies that you should probably own gold (which is, in fact, one of the suggestions that Prince agrees with). Oh, and if you’re looking for other contrarian notions from Davos, you should probably own energy stocks. Firstly, according to the BoA survey, fund managers still hate them right now – even worse than they hate cash. Secondly, and hot from Davos, we also had Jamie Dimon – the chief executive of JP Morgan Chase, currently king of the banking sector – arguing for a carbon tax. Just be wary of playing the sector via Russia.