Real Wealth Concepts

Something is Broken

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Over the past century, the US has been a great place to invest.

Same is true for the last 40 years.

The experience of the current stock of investment professionals is limited to the last 40 years at the most, with most of that experience limited to US equities. This experience creates a serious bias because during this time it has almost always paid to be long US stocks.

Financial professionals today only know US economic, currency and military hegemony. They’ve never experienced hyperinflation nor deflation. Few have personally experienced a military conflict. None have seen a market go to zero.

This is why it is critical to study financial history and watch for shifting winds.

Regimes change. As the world becomes increasingly multi-polar and the US stretched economically and militarily one cannot rule out major change over the few years.

Even when the US dominated, US equities weren’t always the winning asset class:

There’s no rule that US equities or even the traditional 60/40 balanced portfolio continues to work or even exist. History is littered with the corpses of failed markets. Investors that failed to heed the warnings were wiped out.

What causes regime change or total market collapse? War and hyperinflation. Also, more subtly, institutional breakdown. Not all market failures or regime changes come with chaos and panic. Often, its just a relentless deterioration of living standards.

I believe the US is headed for a reckoning. I don’t know how that plays out, but America is overextended. The first tangible signs of collapse will be when basic infrastructure repairs aren’t made. Perhaps we’re already seeing that.

There will also be signs in the market and economic data. We’re already seeing deficits of 6% during periods of economic ‘boom’ and Treasury yields spiking because there aren’t enough buyers.

One additional potential sign is the breakdown of the negative correlation between gold and real yields.

Historically, if real yields were low the opportunity cost of investing in gold was also low making gold a more attractive asset class. When real yields were high, the opportunity cost of using gold as a safe haven was high. In other words, US Treasuries are a better safe haven than gold when they provide a real positive yield. Gold, of course, provides no yield.

For some reason, today that relationship is broken. Real yields have skyrocketed yet the gold price is approaching it’s all-time-high.

Even at 17-ish year high yields, US Treasuries are still not priced to take attention away from gold. Does this mean that Treasuries yields are still too low? Or perhaps the market expects a return to low/negative real yields soon? Or are other risk factors pushing up the price of gold?

Gold has been rangebound since 2020, but it is about to re-test its previous highs.

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Here’s another market signal that something is broken.

Treasuries today yield more than emerging market bonds. Think about that for a moment. EM debt has always yielded more than Treasuries because they are riskier. What does this change tell you?

Are risk-assets reading into these signals? Between October 2022 and July 2023 the S&P 500 rallied, but didn’t manage to reach it’s previous high. Instead it broke down and is now below it’s 200 day moving average.

Now, I’m not necessarily predicting an imminent meltdown. These market signals are part of a broader mosaic – including geopolitical and biophysical issues – that is emerging. But something is definitely broken.

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