As of last week, the Market Climate for stocks was characterized by strenuously unfavorable valuations, and a syndrome of overvalued, overbought, overbullish, rising-yield conditions that has historically been associated with poor outcomes. As noted above, our present hedged position is not dependent on the expectation of further credit strains. Needless to say, the additional clarity regarding credit risks that we expect in the months ahead will be welcome, regardless of the outcome.
In bonds, the Market Climate remained characterized last week by relatively neutral yield levels and unfavorable yield pressures. Credit spreads have been generally widening in recent weeks, with a somewhat unstable spike in the credit default swap spreads of major banks. I say "unstable" because it may be based on immediate concerns about Greece, rather than more persistent risk concerns. Broader measures of credit risk have ticked up modestly, but not as notably as CDS spreads. My expectation continues to be that inflation pressures will pose a significant challenge to the economy in the second half of this decade, benefiting inflation hedges and TIPS. However, over the shorter term, commodities appear overbought and a bit vunlerable.
The uncertainty about Greece and, by extension, the euro, has been a positive for precious metals recently, and while a default event could generate a "fear" spike in the metals, intermediate concerns about economic consequences and deflation in that event could result in a subsequent period of commodity weakness. In contrast, a near term agreement to provide bridge financing would ease fears and might take some air out of commodities more immediately. In short, the longer term prospects for precious metals and inflation hedges continue to diverge somewhat from near and intermediate term prospects. We closed our small 2% of precious metals exposure from the Strategic Total Return Fund last week on strength, and also have a limited exposure of only about 2% in foreign currencies here. Among currencies, the euro appears somewhat undervalued on our metrics, and possibly for good reason (versus a central value of about $1.49-$1.51 based on our "joint parity" methodology - see Valuing Foreign Currencies), as does the British pound, while the yen appears about fairly valued, and the Canadian dollar appears somewhat rich. I continue to believe that a credit shock would provide the best opportunity to accumulate longer-term positions in commodities, TIPS and certain foreign currencies, but I expect that we'll respond to smaller opportunities - particularly fresh precious metals weakness - to establish more moderate exposures.
Click here to read the complete weekly John Hussman Market Commentary.
In bonds, the Market Climate remained characterized last week by relatively neutral yield levels and unfavorable yield pressures. Credit spreads have been generally widening in recent weeks, with a somewhat unstable spike in the credit default swap spreads of major banks. I say "unstable" because it may be based on immediate concerns about Greece, rather than more persistent risk concerns. Broader measures of credit risk have ticked up modestly, but not as notably as CDS spreads. My expectation continues to be that inflation pressures will pose a significant challenge to the economy in the second half of this decade, benefiting inflation hedges and TIPS. However, over the shorter term, commodities appear overbought and a bit vunlerable.
The uncertainty about Greece and, by extension, the euro, has been a positive for precious metals recently, and while a default event could generate a "fear" spike in the metals, intermediate concerns about economic consequences and deflation in that event could result in a subsequent period of commodity weakness. In contrast, a near term agreement to provide bridge financing would ease fears and might take some air out of commodities more immediately. In short, the longer term prospects for precious metals and inflation hedges continue to diverge somewhat from near and intermediate term prospects. We closed our small 2% of precious metals exposure from the Strategic Total Return Fund last week on strength, and also have a limited exposure of only about 2% in foreign currencies here. Among currencies, the euro appears somewhat undervalued on our metrics, and possibly for good reason (versus a central value of about $1.49-$1.51 based on our "joint parity" methodology - see Valuing Foreign Currencies), as does the British pound, while the yen appears about fairly valued, and the Canadian dollar appears somewhat rich. I continue to believe that a credit shock would provide the best opportunity to accumulate longer-term positions in commodities, TIPS and certain foreign currencies, but I expect that we'll respond to smaller opportunities - particularly fresh precious metals weakness - to establish more moderate exposures.
Click here to read the complete weekly John Hussman Market Commentary.
