The story so far
So far we have called the highs of the equity markets accurately and have seen the first significant drops which coincide with ratcheting up of US-China tension and the Fed lowering rates in recognition that all is not well with the economy. As such we feel confident that stocks are now on the way down in a very significant bear market that could reach 2008 lows.
Meanwhile, the traditional safe havens have been kicking into play with gold showing life and the more secure bond markets in America and Germany rallying as people make equity to bond switches.
The industrial commodities of copper and iron ore are looking poised to drop out of bed as global demand declines. Last but not least the dollar index looks set to recommence its decline, whilst emerging markets globally look set to take a similar swan song dive.
The anatomy of one financial crisis is never the same as the one preceding it due to the mechanism of alternation of collective behaviour.
Thus in 2008 the strategy of switching to gold and bond and interest rate products from equities was highly profitable.
However, today western interest rates are at an all-time low at the long end of the curves so there is no upside in that strategy. Indeed at some stage as the recession deepens the issue of whether some western governments will default on their debt will mean that bond markets go into a deep bear market that matches the stock markets. A perfect storm with nowhere to hide, much like it was for the Argentines during their crisis as bonds, stocks and their currency all declined together.
Looking at the bond complex the perceived safer assets on the US and Germany may continue to rally, but once they stop going out beware! Meanwhile, the weaker sovereign bonds such as Italy are now in decline. The safe way to apply this divergence would be to belong bunds and short BTPs. Then at some stage take of the long bund leg of the spread once they too turned lower.
Gold also might disappoint in the short term, as a safe haven if it falls below $1540 it could drop to $1100 before it rallies meaningfully to $3000.
So in short, this current crisis is a Western debt crisis and its patterns will most certainly not follow those of 2008 so stay alert!