Which Safe Haven Markets Will Dominate in 2019?

So far in 2019, the equity markets have been characterized by very substantial volatility as stocks are entering what I think will be a very significant bear market. With equities heading into dangerous territory, traditional safe havens like U.S. Treasuries, and to a lesser extent gold, have benefitted. As we enter 2019 here are some of the dark clouds hovering over the horizon that I think will likely bode well for these traditional safe havens.

  • The U.S. China trade war.
  • Italian elections in May that raised questions about the future of the European Union (EU)
  • Fears of a hard Brexit lifted credit spreads above those in the S. for the first time in years.
  • China continued its slowdown.
  • In the S., optimism started to fade as interest rates rose, economic data disappointed and oil plunged to less than $50 per barrel amid forecasts of weak demand.
  • S. corporate earnings projections were also reduced as the effects of the recent tax cuts started to decline.
  • The world benchmark S. 10-year Treasury yield, which reached a 7-year high of 3.2% last year, changed gears after the Democrats won control of the House of Representatives in the November mid-term elections. Investors believed that their victory reduces the chances of further tax incentives from President Trump. The 10-yr Treasury yield has been on a continuous slide since, ending 2018 at 2.66%.
  • Global debt reached a whopping 225% of world GDP.

As money has come out of stocks, it has largely flowed into fixed income and primarily into U.S. Treasuries and German Bunds. Only a small dribble has found its way into gold. After all, why should investors seek out gold as a safe haven when the gods of the universe—the central bankers—have proven capable, cycle after cycle, of “saving the dollar centric global monetary system.”

And now with U.S. equities on the verge of a nervy bust, a more dovish milieu is being proclaimed by central bankers. Jay Powell of the Fed, for example, has backed away from three rate hikes in 2019; now it’s just two. And there could be more of a back away from honest money with more economic decline. In fact, markets are actually pricing in zero U.S. rate hikes in 2019 and cuts in rates in 2020.

I’m personally assuming we are in the early days of a major bear market in stocks. If you don’t agree with that view you might not wish to read any further. But believing as I do that we are on the precipice of a major decline in stocks, the question in my mind as we head into 2019 is to what extent U.S. Treasuries will continue to be the main go-to market in the risk-off trade and to what extent might a loss of confidence in the dollar as the world’s reserve currency lead to a rise in the price of gold? As Alasdair Macleod of Goldmoney.com logically concludes, the answer to my question requires an examination of likely flows of money in 2019 and beyond, and those flows are very much determined by the point at which we exist in the current credit cycle.

We are in one of the longest credit cycles on record, with 2018 being the tenth year of expansion. Alasdair quite correctly points out that in the late stages of the credit cycle money flows out of the financial sector into the real economy and with the flow out of financial assets, interest rates begin to rise. And so, as you can see from the 10-Year, U.S. Treasury chart, yields have risen dramatically from 1.385% on July 5, 2016, to 3.227% on October 1, 2018. The 10-year rate has corrected to 2.652% as of this writing, but it is clear that with the real economy doing better, interest rates have risen, which in turn has put downward pressure on stocks. With increased volatility in U.S. equities, the recent decline in rates reflects the safe haven risk off attitude.

But should we take it as a given, as most mainstream analysts do, that a flow out of stocks automatically means the only safety bunker to hide out in when stocks collapse is the U.S. Treasury market? The answer is an unequivocal “NO!” As Alasdair Macleod of Goldmoney.com points out, in the late stages of a credit cycle, Main Street bids the total flows of money away from financial assets. So yes, some money has flowed from stocks to U.S. Treasuries in the latest equity market decline, thus providing the “correction” noted above since October 2018 in the 10-Year Treasury.  But the point remains that in the late stages of the credit cycle, less money flows into financial assets, thus causing their prices to decline. Once a major crash occurs and a new round of QE is administered, a new cycle usually begins. But can we assume that will happen again, especially with the existing credit cycle bubble, which is now the biggest global bubble yet by far?

Given its confidence in the ability of the PhD standard to replace the gold standard, mainstream pundits assume the U.S. Treasury market is better than gold. And the standard answer to my question is a resounding “Yes!” Taylor, can’t you see the performance of geniuses like Greenspan and Bernanke? Well, this 71-year-old author is old enough to remember when the gods of money were not able to hold the system together. During the late 1970s, there was a massive exodus from both stocks and bonds, while at the same time, gold rose from $35 to a momentary $850 price tag.

A Replay of the 1970s?  (continue reading…)

 

(Excerpt from January 4, 2019 weekly message published by J Taylor’s Gold, Energy & Tech Stocks – www.miningstocks.com)