Everything is looking fine, with most equity investors enjoying the past week’s rally. However, there is a lot going on beneath the surface that simply cannot be ignored.
We still live in a world where AI investing and flying rockets dominate the landscape. Until those rockets go silent, we have to expect some turbulent times – and, more importantly, prepare for them.
We are already seeing many traders rotating out of AI and into other sectors, including financials, defence and industrials. While I believe building a broader-based portfolio has many merits, as a European – who sees problems such as a war on our border, high energy costs and slow growth – my view is somewhat less optimistic than that of those living in the USA.
Those who are a little younger, especially in the USA, will hardly concern themselves with the current state of affairs in Europe unless it is in the headlines and affecting the markets. But as an Old Man, my experience reaches a long way back, and there are certain things I cannot forget.
Fifty years ago, when I began my investment career, the price of energy in the UK was roughly the same as in the USA. Currently, Europeans are paying four times more than Americans and American industry. Is it any wonder European industry is in decline?
Then we have the problem of statutory minimum wages, which big European governments can afford to impose by simply increasing the tax burden on the middle class. But this minimum-wage legislation, along with a host of other overly burdensome rules and regulations in effect across Europe, is killing jobs and growth while heaping all kinds of problems on the ignored European worker.
As an example, I live in Portugal. The rental cost of an average two-bedroom apartment in Lisbon is now more than 160% of the minimum salary. Add utility bills and other living costs, and so money is hardly circulating. Growth – no matter what the government says – is almost non-existent. A similar situation is developing in many European countries.
Hopefully, there is a solution to the European dilemma coming down the road, but we must be cautious. We must not confuse a healthy stock market with a healthy economy. European markets such as the FTSE are strong, but not because of the UK’s economic outlook. The FTSE is strong because of mining, financial and defence stocks, which do not reflect the overspending and massive accumulation of debt by the British government.
Thankfully, many of us are more interested in short-term speculation and therefore need not take the current increasing divide between Wall Street and the European high street into consideration. Nevertheless, it needs to be watched.
Energy-dependent Europe will benefit from lower costs once the current problems with Iran and, more importantly, Russia reaches a conclusion. But we are going to need more than cheaper energy to reinvigorate Europe – or, more importantly, European job growth – if we are going to slow the increase in our debts. To my mind, we need a completely new economic policy in Europe, and for that, we must completely change the make-up of the current leadership. It is going to happen, but it will take time.
It is for this reason that I am very dubious about the current strength we are seeing in our indices.
For a long time, we have been dragged upwards by AI, and as an “industry”, it represents the future. However, the rotation out of AI and into other sectors suggests that smart money is leaving the overcrowded AI space. That could mean that, if valuations ease further, smart buyers may remain where they are before rushing back in.
That is a risk for any market that becomes overly reliant on a single sector or instrument. I am sure that if you entered the business because of what was happening in the crypto market a few years ago, you will be well aware of the truth in what I am saying.
Bitcoin today, for all the hype it was receiving, is currently little more than a hedging tool – like gold, but considerably more volatile. A couple of months ago, I suggested buying gold below $4,000, which seemed a decent level at which to add to my current holdings. I also mentioned being interested in buying BTC below $55,000. It has not reached that level yet, but I might still go back in, although I would prefer to pick some up nearer the $50,000 level.
As far as FX is concerned, for the past year or so, I have been promoting selling EUR/USD on rallies. To a certain extent, this has proved to be a successful strategy. I still believe this is the way to play it, but I am now looking at what is happening in the Middle East. I feel that if something is not concluded fairly soon, a bad result for the Republicans and President Trump in the midterms could leave him as a lame-duck president during his final years.
This might be what many Americans want, and it is certainly what most current European leaders want. Whether it proves beneficial for the American economy and the US dollar is, IMHO, a different kettle of fish.
As I have discussed in recent reports, this is holiday time, and the markets are likely to remain volatile – perhaps more than usual, considering what is happening in the Strait of Hormuz. So, if you want to “play”, play.
But whatever you do… be careful out there!
Please note the political opinions expressed above are those of the author himself, and do not necessarily reflect the opinions of JP Fund Services AS.
The post Markets Are Rising, Europe Is Sinking – Has the Smart Money Already Rotated? first appeared on JP Fund Services.
The post Markets Are Rising, Europe Is Sinking – Has the Smart Money Already Rotated? first appeared on trademakers.