Friday, December 4, 2015

Bonds and Gold for 2016

Although I trade often, I always want to keep an eye on the long term moves in play.  As George Soros states, the market trades based on a perception until is proven false.  Right now, the overriding perception is that of a dovish ECB/BOJ and a hawkish Fed.  While the perception about a dovish ECB and BOJ are correct, I believe we will find out in 2016 that the market is wrong about the Fed.

I do not believe that the Fed is hawkish.  Yellen is in fact acting as if the economy is strong in order to commit to their promise of raising rates this year.  After that promise is fulfilled this month, expect your normal dovish Fed talk and actions.  The US economy peaked in 2014 and has been slowly getting weaker.  That is not being fully reflected in Treasuries because of the fear of buying ahead of the Fed tightening cycle.  If the Fed is perceived as being one(not going above 0.50% Fed funds rate) and done, which I believe is the case, there is a LOT of upside in Treasuries.  It is something I see happening in 2016.

That doesn't mean that equities will be weak.  The economy is not weak enough to signficantly affect profits, but it is weak enough to keep the Fed from raising more than once.  And lower bond yields will help corporations, all else being equal.  Also the perception of a one and done Fed will get asset managers excited about equities again.  So after the Fed meeting on December, 16, I expect equities to do very well for the first few months of 2016.  Stock buybacks and cash M&A are still rolling along like a freight train.

If the Fed is indeed one and done, then on December 16, the Fed tightening cycle would officially be over.  That is extremely bullish for bonds, especially the belly, between 5 and 10 years.  It is also bullish for gold, as gold will not have to worry about a hawkish Fed anymore.  It just happens that gold is probably the most hated asset class out there.  Also, gold tends to bottom in December and explode higher at the beginning of the year.  Bonds aren't hated, but they definitely are not liked.  There could be some seriously explosive moves happening in bonds and gold in 2016.

I can picture an S&P at 2200, 10 year yields at 2.00%, and gold at $1150 by February 2016.  Risk parity funds should also be back in style next year.

I will use any weakness in equities, bonds, or gold over the coming days ahead of the Fed meeting to put on long term positions.  The short term trading game just doesn't pay when volatility dies down.

4 comments:

Chris Phelps said...

You are the guy. I look forward to your words of wisdom given how benighted I am.Terminally it seems.

Market Owl said...

I can't short anymore. It just doesn't pay. I have seen the light: just go long.

Anonymous said...

I thoroughly enjoy your insight. I'm curious, when you "buy" gold, do you buy physical?

Market Owl said...

No, I would just buy gold futures or gold miners ETF like NUGT or GDX. Buying physical gold is a headache and you can't really trade it, you are just investing it.