market views

“Sell Everything!” Say What?

Frank Trotter | February 1, 2016 3 MIN READ

We’re all entitled to form and fashion opinions of our own. We’re also entitled to respectfully dispute or dispel the opinions of others. For me, I take particular issue with the recent doomsday prognostication of Andrew Roberts of The Royal Bank of Scotland, who suggests that we “Sell everything except high quality bonds.” He thinks we should be afraid. That we may be on the verge of a “cataclysmic year.” Well, in my humblest of opinions, a little brake pumping is due here.

Let’s go back a bit. Not way back, but just to the latter part of 2015. I was attending a conference where a number of highly regarded economists were speaking. Were they excited over the direction of the economy? No way. But were they in a doomsday mindset? Absolutely not. Economic sentiments were more along the lines of “There are no imbalances in the economy today,” “Stable but unexciting,” “Generally all is well; no need to worry.”

Since then, we’ve made it through the media firestorm around the Fed’s decision to raise short-term rates for banks by one-quarter-of-one-percent. The decision finally came after months of conjecture among the financial news outlets as to “Will they or won’t they?” There was plenty of back and forth banter on the topic and potential ramifications. I obsessed over it.

During recent years, yes, I too have been accused of seeing the darkness where there is light. Yet today I’m feeling more like our old friend Pollyanna—at least when compared to our friends at the RBS.

Treasury Yields
I’ve previously written about the various messages that are imbedded in interest rates. Buyers of U.S. 10 Year Treasuries, by definition, have to feel that the interest rate they will receive over the next ten years is fair. It has to include a component that will cover their expectations of inflation plus a return on top—and another to compensate for the risk that their guess is incorrect.

As I’m writing this, the U.S. 10 Year Treasury sits at 2.04%, having rested below 2% just a week earlier. This seems to signal loud and clear that the market doesn’t think there will be too much activity during the coming decade.

Commodities
Commodity prices are the hot hand in the financial news right now. Oil prices are balanced near $30 a barrel with a strong bias to head lower. Copper is nearly in a free-fall. Other important inputs to the economy are falling fast. Last we looked, cotton was the only significant winner for 2015, and everything else was down.

Doesn’t feel very positive.

Other Markets
Stock markets took a pause in 2015, and have kicked off the New Year by falling significantly around the world. Many commentators have been warning for months that the market is “over priced,” and perhaps they were right. Big drops in China, Europe, Asia and the U.S. have greeted investors—most can’t bear to see that January month-end statement.

Cataclysmic? The sell off surely could continue.

Looking Ahead

I’ve been arguing for quite some time that things are not as rosy as many sages and the Fed have said. However, I can’t quite make it to the dark side. I’m in no way considering the “sell everything” advice for myself, nor would I suggest it to others. Not in the present state anyway.

I do think that 2016 will be a tougher year than was originally forecast. But will it all come crashing to a halt? I don’t see that in the current forecast. As the saying goes, the cure for low prices is low prices. And with the cost of raw inputs falling through the trap door, which entrepreneurs and large companies are going to view this as an opportunity—to produce the next great thing at an attractive price?

Yes, I do have a warning indicator on my dashboard, but for now I’ll leave it at yellow.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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