I'm posting from Munich, Germany, where I have been vacationing for the past week. The city is terrific - the people, the culture, of course the beer, but what I love most is actually the bread and the sausages.
Ok to business. I subscribe to John Maudlin's newsletter. He is generally bearish, but usually right on the money. for the record, I am also bearish, because I believe that the Greenspan inflation is just starting to be recognized for what it is, and this will have a very negative impact on asset prices. Tactically, I am moving toward assets with less speculative ("absolute") risk, and toward assets with more consistent investment returns - for stocks this means dividends, and overseas exposure, in the event of a dollar decline.
It turns out, this is what Bill Gross is also recommending. Pay particular attention to his discussions of risk premiums and the danger of indexing in a world without risk premia. In this environment, funds tend to focus on avoiding "benchmark" risk, which means underperforming one's benchmark and watching the herd flee your fund, much like the late 1999s. Managers instead pile into index assets to ensure that they don't get killed.
I believe this trend is the result of the continued highs in the Russell 2000, and the reason that the Nasdaq is outperforming - small caps have had such a run, retail investors are piling in at the worst time, since small caps are bound to be hurt by the more expensive financing that is coming their way. Given that they trade at 40x earnings, and with increasing difficulty increasing leverage, this market is due for a drop, led by the dollar, which will raise commodity prices further, then by further Fed hikes, and then a collapse of small caps earnings.
Right now, it is critical to maintain selectivity, and consider increasing liquidity in anticipation of an asset sale. You may not want to hold those assets in USD, however.
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