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Hedge Clippings | Friday 30 August, 2019
Regular readers of Hedge Clippings would no doubt have noticed that we have been erring on the cautious side for some time, particularly when it comes to prevailing interest rates (which seem set to stay low, for longer, or go lower) and the impact of geo-political issues - or at least of powerful political personalities.
Many investors large and small are lamenting the effect that "unrealistically" low interest rates are having on equity valuations, but should be recognising that low to negative interest rates are the new normal and probably here to stay for the foreseeable future. Equally, given the antics of Xi, Trump and now Boris, it is fair to assume that the political risks which currently abound aren't going to dissipate any time soon.
In this environment the ability for central banks to cushion any market shock - or even do anything but keep reducing rates to try to avoid a recession - seems limited, and therein lies the danger. There's no firepower left to adjust to what might lie ahead. And as pointed out by no lesser hedge fund legend than Ray Dalio of Bridgewater Associates, with central banks considering issuing 50 and 100 year bonds, and with $US16 trillion in negative yielding bonds already on issue, the opportunities are limited.
No one, neither central bankers nor legendary fund managers, and certainly not yours truly, have witnessed this before, and there are no certain models or precedents on which to base the potential outcome.
Hence caution. Cash may well be a safe haven. Even at a negative yield.
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