Hi RonnieI too was on the sidelines for a long time and whilst I...

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    Hi Ronnie

    I too was on the sidelines for a long time and whilst I missed out on large returns during rallies, like yourself I also preserved cash. Ofcourse we all want to make positive returns. I take on board what you say about wanting the macro and micro positives to be aligned before becoming overweight in equities. Regards the yield curve, I think the inversion was a reflection of how fragile our economies had become and how vulnerable they were to a correction, a foreshadowing of a correction/crash, regardless of the trigger.

    The Fed Puts since the GFC have destroyed the 'Invisible hand' that once would have returned us to market equilibrium and has made it very difficult to accurately forecast the effects of macro economic changes on the markets. I think the Fed put has served to distort the time lags between economic indicators and market behaviour and weaken the impact of economic data on the markets. Thus before the Fed Puts, if 1 month of poor employment data would have had an immediate negative impact on markets, now post Fed Puts, it takes 2 months of poor employment data and bigger negative numbers for investors to get spooked.

    The Fed Puts have permanently changed the behaviour of investors/traders. Preventing markets from resetting/crashing without Fed and Government intervention, has increased the duration and size of markets expansion, business cycles and credit bubbles but I believe economic fundamentals still effect the markets, its just that the effects have become diluted. Ofcourse at the same time The Fed Puts have made our economies weaker with prolonged periods of anemic growth.

    I agree that even the bulls are expecting a pull back and there will probably be a correction over the next week or so, otherwise other scenarios which could play out are a sideways move with maybe 5% variation in prices to both the upside and downside until there is a second wave of the infection (even if Trump fights the lockdown, people will self impose lockdowns out of fear) and we see a more significant decline in markets. Alternatively the market moves sideways until the riots have such a significant effect on the economic reopening, that we see a clear deterioration in consumer and business confidence etc and the markets start to take note. Either way I think that June/July will be high risk months, with earnings reports, more relevantly timed economic data and unfortunately spikes in the Covid 19 death rates for the US and Europe now that some international flights are planned. Until then I will be monitoring the VIX, trading volumes and short positions closely over the coming days/weeks to gauge changes in market sentiment and doing my best to devise a strategy that protects my investments and allows them to yield positive returns if there is another large market decline. I havent figured out exactly how I will do this yet but I have some ideas involving buying puts.

    Regards the fixed income market if there is more QE, is it possible that investors simply won't have the appetite to keep buying bonds/taking on loans. I know investors in their 70s who have never owned corporate bonds before and have been allocating more and more of their self managed supers to that market, because they need some form of yield having lost their dividend income from equities and wish to protect their capital fearing a second wave of Covid 19. Whilst I like that they are mostly more stable than equities if chosen wisely, when everyone and anyone enters a market and it becomes saturated in this way, it becomes vulnerable to a correction/crash again. Then there are the government defaults, unlike the GFC the pandemic is serving to effect more economies and all at the same time. During the GFC China had enough growth to temper falls in the SE Asian markets and was supporting demand for resources from Africa Australia and Canada. INdia was also growing at that time and supporting demand for resources. With this pandemic both these countries are struggling, all be it China less than India but enough to withdraw GDP guidance. I simply dont see how a market rally is sustainable when all these factors are taken into consideration.


 
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