According to a Goldman Sachs Group’s strategist, investors are flocking to non-US assets. Bloomberg notes that the US has seen outflows of about $5 billion just in the first two weeks of the year, while lower gas prices, a weaker dollar and optimism about China’s economic reopening have spurred inflows into stock funds of Europe, China and other emerging markets.
Bloomberg further notes that, “Elsewhere, strategists including at Citigroup Inc. and Goldman Sachs have turned more bullish on European stocks as economic growth proves resilient.”
I have some sympathy for the view that “European Assets Are Now All the Rage” because they obviously grossly underperformed US assets over the last ten years or so. Therefore, they appear to be relatively inexpensive. Along similar lines I explained last month that there was some evidence that international investors had become more positive about emerging market assets. According to data from the Institute of International Finance (IIF), investors had poured $37.4 billion into developing debt and equities in November 2022 - the largest amount since mid-2021.
I further explained that according to the Institute of International Finance, “most of the fresh cash was invested into emerging markets outside China, a signal that investors have a positive outlook on the broader asset class. The comeback in flows also backs the IIF’s forecast for a ‘renaissance’ period for emerging markets in the year ahead, with Latin America a standout beneficiary of a rebound and further inflows.”
It is evident that in the current market environment, which is mostly momentum driven, FAANG and related stocks including semiconductors are rebounding strongly (within three weeks, Tesla was up 78%). This could also shortly occur for the US dollar, which is now somewhat oversold. However, from a longer-term perspective, it would seem that the US dollar is significantly overvalued against the Japanese Yen and, therefore, also likely overvalued against other Asian currencies.
My bearishness about the US dollar, however, has more to do with the coming end of the dollar based global trade and currency system. In other words, I believe that the days of the US dollar reserve currency status are numbered because more and more countries are interested and willing to exchange goods and services, and to hold their foreign exchange reserves in other currencies than the US dollar.
Dollar strength is symptomatic of tightening global liquidity. Usually, tightening liquidity and US dollar strength is favorable for US equities relative to international equities. Dollar weakness is a symptom that global liquidity is expanding or is expected to expand. Phases of expanding global liquidity (dollar weakness) are extremely favorable for commodity prices, and equities and bonds in emerging economies.
In summary let me make the following brief observations: Over the last three months we saw renewed strength in asset markets but weakness in the US dollar. Caution is now warranted. A US dollar rebound is likely in the near-term.
A rebounding US dollar would likely lead to a correction in equities and in precious metals in February.
Following powerful rebounds from deeply oversold conditions many stocks are now overbought. I would defer buying these stocks (mostly heavily shorted stock which rebounded strongly), and wait for a better entry point.
Investors should distinguish between stocks that have made major lows and which are entering longer-term uptrends (Hong Kong and China, and other emerging markets, precious metal mining companies), and stocks which are rebounding from oversold conditions but which will likely turn down again within their longer-term downtrends (meme stocks, Unicorns, SPACs, etc.).
Nothing new, but let me repeat it: the current economic, financial, social and geopolitical environment (we have just moved a step closer to WWIII) should be favorable for precious metals.
Sadly, let me remind my readers of the words of the historian Barbara Tuchman who opined:
“Mankind, it seems, makes a poorer performance of government than of almost any other human activity.”
With kind regards
Yours sincerely
Marc Faber
Ready to get started?
