Over the weekend I truly enjoyed speaking at Jyske Global Asset Manager’s seminar in Laguna Beach, California.
During that seminar I shared five reasons why we should expect a pull back in the US stock market now.
One reason is seasonality which we reviewed at this site in April.
Another reason is that we are seeing a shift in the economic cycle.
There are three phases in the economic cycle.
Phase I Recession
Lower Inflation Expected
Interest Rates Come Down
PE Multiples Contract
This phase which we saw in 2007 and 2008 is an ideal time to invest in bonds.
Phase II Recovery
Inverted Yield Curve
Rush for Liquidity
Authorities Relax Money Supply
High Level of Uncertainty
This phase which began in 2009 is an ideal time to invest in shares.
Phase III Boom
Short Rates Pushed Up
Bond Yields Rise
PE Multiples Expand
There are many signs that the economy is transitioning into this phase and this phase is an ideal time to invest in cash and short term investments.
However… when in the boom phase we need to take some extra steps because cash during inflationary times can be a really lousy idea.
Warren Buffet mentioned this problem when he said: Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.
We’ll look at the other three reasons why we can expect equities to falter now… plus ideas on cash substitute investments in upcoming messages.
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