Morgan Stanley and other equity analysts across Wall Street are telling investors to be very, very cautious.
If they are right, it is high time to consider your defensive strategy, particularly if your retirement dreams are near. Morgan’s investment research team has been warning investors since January that an earnings recession is on the way soon.
And this week, they doubled down.
The venerated investment bank’s sobering call comes from equity strategist Mike Wilson, who previously correctly predicted the gut-wrenching turmoil that smacked stock markets in the fourth quarter.
Here’s the three pillars of Wilson’s call, showing why investors should be concerned right now:
1) Monetary policy is too tight in the U.S., squeezing growth when we need it most…
Wilson Says: “We believe the higher level of rates is already having an effect on the more interest rate sensitive sectors of the economy,” pointing to housing as one hyper-vulnerable area of the economy already hit by higher borrowing costs.
2) The U.S. economy is bursting at full capacity (watch out inflation hawks!)…
Wilson Says: “The unemployment rate is near historic lows and we know from reading corporate earnings transcripts that labor costs are increasingly on the minds of management teams.”
3) The Chinese government is less committed to stimulus than expected…
Wilson Says: “China’s stimulus is not as large as in 2016 and is more domestically focused,” which means the second-largest economy in the world will still be struggling for a good while.
No wonder Morgan Stanley is telling retirement investors to batten down the hatches!
According to Lance Roberts, analyst with Real Investment Report, today’s economy is strongly similar to the environment prior to the last recession.
“We are looking at the longest expansion cycle in the history of the U.S.,” says Roberts. “[Investors] have forgotten the last time the U.S. entered into such a state of ‘economic bliss.’”
That would be… right before the last big market crash of 2008.
We like to remind our readers that we don’t recommend market timing.
In fact, we recommend the opposite… get prepared for all seasons!
U.S. DOLLAR UNDER THREAT AS RESERVE CURRENCY
According to research from Bank of America Merrill Lynch (BoAML), the U.S. dollar is sadly continuing to lose status around the world. While it still remains the dominant reserve currency, its influence is steadily waning.
“[The dollar’s] market share has declined as the global economy has become less U.S. and USD-centric,” BOML analysts say. “We believe that de-dollarization is an important factor behind the addition of gold to central bank gold reserves.”
Russia and China are leading the de-dollarization trend, but Europe is also jumping on the diversification bandwagon.
“Adjusting to new economic realities, and rising importance of China, the ECB recently swapped €500 million U.S. dollar reserves into CNY-denominated securities,” the analysts said.
Looking at the gold market, BoAML said that gold is becoming an attractive reserve alternative as the U.S. dollar’s influence weakens.
BoAML analysts said that one-fifth of central banks globally are looking to increase their gold holdings this year. At the same time, two-thirds of central banks value gold as a safe-haven asset. 59% of central banks acknowledge gold as an effective portfolio diversifier.
“Beyond those motivations, we believe that de-dollarization could also lead to rising share of gold holdings in gold portfolios,” the analysts said. “Central banks need to find alternative assets to invest in, so the process will in all likelihood be evolving slowly.”
Many analysts are optimistic on gold as the U.S. dollar looks to weaken in 2019 as the nation deals with growing government deficits and looser monetary policy.
CENTRAL BANKS PURCHASE MOST GOLD SINCE 1967
2018 was a big year for central banks to load up on gold to boost their safe haven resources.
Globally, central banks acquired over 650 tonnes of gold in 2017, up from 275 tonnes in 2017. This is the ninth straight year that the banks have been net buyers of gold.
Russia is currently the biggest buyer and China isn’t far behind. Understandably, all the U.S. sanctions have lessened these countries’ appetites for U.S. dollars and American government bonds.
FRANK HOLMES: UP 10% GOLD ALLOCATION IS SOMETHING TO CONSIDER
Lisa Abramowicz, a reporter with Bloomberg Radio/TV says “the pool of negative-yielding debt has risen to a new post-2017 high of $9.2 trillion. Mind boggling at a time when the global economy is supposedly still recovering.”
According to Frank Holmes, CEO of U.S. Global Investors, this indicates that investors fear global economic growth is slowing, which has historically been positive for gold prices. Japan’s 10-year government bond is in negative territory, while Germany’s is just above the water line.
Holmes says physical gold is a proven store of value when other safe haven assets, such as government bonds, stop paying you good yields.
Holmes is currently recommending up to a 10 percent portfolio weighting in gold.
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