Guest Post: Safe Haven - Could U.S. Markets Rally In A Global Decoupling?

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Submitted by Charles Hugh Smith from Of Two Minds

Safe Haven: Could U.S. Markets Rally In A Global Decoupling?

The primary purpose of "safe havens" for "big money" is to preserve capital in relatively low-risk, highly liquid markets. There are few markets that offer both.

Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding).

That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies. For example: China's once-hot economy is turning cold.

On the face of it, "growth"-related sectors such as commodities, stocks and high-risk bonds should decline across the globe as the recessionary reality sinks in, while relatively safe assets such as government bonds in Japan, Germany and the U.S. (the global economies perceived as more stable and thus less at risk) should see inflows.

And indeed, bond yields are falling as money flows into these safe-haven bonds.

Since "big money" tends to move markets, let's put ourselves in the shoes of someone tasked with managing $100 billion. If we understand the world's investment options from this point of view, we might gain some insight into the direction and dynamics of where "big money" will be flowing.

Our prime directive is not to make a lot of money with the $100 billion--it's to preserve this precious capital and keep it liquid so opportunities that arise can be exploited.

The traditional "safe havens" of gold and real estate have served the wealthy well for thousands of years, and they remain attractive capital-preservation safe havens. Moving capital out of inherently risky financial instruments into real assets is a time-honored risk-management strategy ("make it on Wall Street, bury it on Main Street"). We can discern this strategy at work in stories of Beverly Hills, Calif. houses drawing multiple bids for the first time in years and the long-term bull market in gold.

But gold and real estate have their downsides: first, they are relatively illiquid, that is, it's not that easy to "park" $10 billion in either sector and then sell it quickly to move the capital elsewhere. Second, each market has its own risks: the gold market is relatively small and volatile, and it's simply not big enough to move $100 billion in and out. Its role in risk management and capital preservation is important but limited.

Real estate is highly local, and its liquidity and return on investment subject to many dynamics. Various macro-conditions can turn a "hot" market into a cold one, and a "safe" investment can become dead-money or even a losing investment if rising property taxes eat away at the net return from rental income.

As an example of these limitations, Warren Buffett recently observed that he would buy thousands of single-family homes in the U.S. if it were possible to do so on a wholesale basis. Eevn if we discount this sentiment as propaganda aimed at supporting the housing market, it highlights real estate's fundamental limitations as a place to park $100 billion or more.

That leaves financial markets as a necessary part of any serious-money allocation. So where do you park $100 billion? The sums allocated to precious metals and real estate are limited by the conditions noted above, and that leaves a significant percentage to park in capital markets somewhere.

The choices are not unlimited. Europe and the euro: risky, for all the reasons we know; a quick "solution" is essentially impossible. You could wake up and find you've lost 20% just as a reflection of a weakening euro. China: anecdotally, money is leaving China as the boom is over, and all sorts of difficult-to-gauge risks are rearing up. Emerging markets: too small to be liquid, and despite the happy-talk about permanent developing-world booms, they're all linked to the markets in Europe, the U.S., China and Japan. (For example, the Indian rupee is in a free-fall against the U.S. dollar.)

That leaves Japan and the U.S. as the only available large, liquid markets. But Japan's basic dynamic is stagnation and malaise; corporate and government players there are questioning the entire Japan, Inc. model, as it is obviously failing to meet global challenges and spark a new era of growth. Japan's 20-year Keynesian "experiment" is an abysmal failure, having accomplished little while digging the nation a fiscal debt hole.

Even with these difficulties, Japan is perceived as a "safe haven" of stability, and that explains the relative strength of its currency, the yen.

In other words, there are visible limits on the stability of Japan and limited opportunities for growth in that economy.

That leaves the U.S., warts and all. Anyone responsible for $100 billion needs transparency, predictability and good intelligence to manage risk and return. For all its many problems, the U.S. offers relatively plentiful transparency, predictability and market data. Its equity, bond and currency markets are so vast that you can move $100 billion in and out with relative ease.

This "safe haven" status can be discerned in the strengthening U.S. dollar. Despite a central bank (The Federal Reserve) with an avowed goal of weakening the nation's currency (the U.S. dollar), the USD has been in an long-term uptrend for a year--a trend I have noted many times here, starting in April 2011.

That means a bet in the U.S. bond or stock market is a double bet, as these markets are denominated in U.S. dollars. Even if they go nowhere, the capital invested in them will gain purchasing power as the dollar strengthens.

All this suggests a "decoupling" of the U.S. bond and stock markets from the rest of the globe's markets. Put yourself in the shoes of someone responsible for safekeeping $100 billion and keeping much of it liquid in treacherous times, and ask yourself: where can you park this money where it won't blow up the market just from its size? What are the safest, most liquid markets out there?

The answer will very likely point the future direction of global markets.

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Tue, 05/29/2012 - 13:42 | 2472516 Henry Chinaski
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US could be the safe haven for now.  China is a work in progress.

Tue, 05/29/2012 - 13:43 | 2472523 mayhem_korner
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US could be the safe haven for now.


Until "for now" runs out.




Tue, 05/29/2012 - 13:46 | 2472539 DoChenRollingBearing
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Beat me to it, mayhem.  + 1

Yes, for now, maybe.  But, how many times do we have to say this:


GOLD!  THE safe haven, should be at least 10% of what you own (silver OK too).

Tue, 05/29/2012 - 13:53 | 2472562 Henry Chinaski
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The US will outlast Europe in the ongoing global currency catastrophe.  By the looks of things in Europe, for now may not be much longer. 

Tue, 05/29/2012 - 13:59 | 2472588 DoChenRollingBearing
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That would be my GUESS as well, but what would a Bearing know?

Tue, 05/29/2012 - 14:01 | 2472601 mayhem_korner
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if it rains for 40 days and 40 nights, no high ground is safe...

Tue, 05/29/2012 - 14:22 | 2472722 mc_LDN
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Yah. Safe haven before the "fall"

Tue, 05/29/2012 - 14:47 | 2472855 ITrustMyGut
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ya.. Im not really buying the flight to safety bs...Im sure there is some of it, but its not the cause of the race to 1.5 and below..10Y...there is NO safety in UST...

Im more inclined to see yields crashing.. becasue of rate swaps games... Willie mentioned this 5/24. made sense to me.

10Y will become the black hole....  all consuming, collapse vehicle PTB have yerned for... they HAVE lost control of this beast now.. trigger has been pulled...

Tue, 05/29/2012 - 18:28 | 2473619 SheepDog-One
SheepDog-One's picture

Right....wasnt the whole key to US being OK that China would grow and drag us up out of the muk with it? Now Europe and China are heading down....but the U.S. is now okey doeky? An image comes to mind of a big shovel filled with bullshit and a voice saying 'open wide!'

Tue, 05/29/2012 - 14:01 | 2472600 gatorengineer
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Good thing our banks dont have anything Euro-Toxic........  After our banks explode, I am sure the Best Buy, Amazon, GM Car loans will all be fine.


I love Zero Hedge but some of these articles written by obvious morons gotta make ya wonder.......

Tue, 05/29/2012 - 13:42 | 2472519 mayhem_korner
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Yes, all flock to the stick house after the wolf blows down the straw houses.

Tue, 05/29/2012 - 13:47 | 2472530 sunaJ
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It has been discussed for quite some time that most will run to the USD as things continue to spiral.  But it is a station stop on a long rail ride to Insolvency.

Tue, 05/29/2012 - 14:04 | 2472614 Henry Chinaski
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It has been discussed for quite some time that most will run to the USD as things continue to spiral.

Perfect.  If you are TPTB, and you want to maximize the benefit of a dollar devaluation, what do you want everyone holding?

Tue, 05/29/2012 - 15:08 | 2472964 ITrustMyGut
ITrustMyGut's picture

exactly! ( cant +1 ya, the quoted italics say no )

Tue, 05/29/2012 - 15:58 | 2473172 XitSam
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Quoted italics didn't stop me.

Tue, 05/29/2012 - 13:47 | 2472541 Sophist Economicus
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This has been covered by Marty A for years.  Of course it will, as will the US bond market.    The question is will it achieve REAL price appreciation.   The answer, from a historical analysis of markets, is No.

Tue, 05/29/2012 - 13:48 | 2472543 Hondo
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Purchasing power ($ versus Euro) only means something to non-dollar investors.  $ rally doesn't mean markets rise...but it does mean that international companies will be negatively impacted as translation losses cream earnings.

Tue, 05/29/2012 - 14:01 | 2472597 DoChenRollingBearing
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Dollar going up would mean our trip to Italy in September would be cheaper.  If it's still there that is...

Tue, 05/29/2012 - 14:10 | 2472656 ATM
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You may never make it back......

Tue, 05/29/2012 - 13:48 | 2472544 lolmao500
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Europe is on PCP...

European Union countries could be obliged to bail out one another's struggling banks, according to a draft EU law that marks a big step towards greater EU financial integration likely to upset some members, particularly Germany.


Tue, 05/29/2012 - 13:49 | 2472545 razorthin
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No.  Any rally is the selling opportunity of a lifetime.

Tue, 05/29/2012 - 13:49 | 2472547 GOSPLAN HERO
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USSA a safe haven?


Tue, 05/29/2012 - 14:11 | 2472662 ATM
ATM's picture

Perceived safe haven.......

Tue, 05/29/2012 - 15:05 | 2472943 TrainWreck1
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It's all perception.

Has been for years.




Tue, 05/29/2012 - 14:31 | 2472772 CPL
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It's all such a farce now isn't it?



Tue, 05/29/2012 - 13:50 | 2472548 Lost Wages
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It will be the Great Decoupling before the Great Smash.

Tue, 05/29/2012 - 13:50 | 2472553 Stoploss
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I submit that with out job's, no country is a safe haven. Only the  touchable FRN will be the most sought after. What is the 100B? Euros? Yen? What?

100B worth of lies maybe?

You have a global anti work force generation eviscerating every private job they possibly can, yet this is a safe haven? Whatever.

Tue, 05/29/2012 - 13:51 | 2472555 CvlDobd
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"All this suggests a "decoupling" of the U.S. bond and stock markets"

Finally! We should be nearing the top as idiotic ideas like this tend to mark them.

Tue, 05/29/2012 - 14:01 | 2472599 Bay of Pigs
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Not his best effort. This post is pretty laughable and has some serious flaws in logic.


Tue, 05/29/2012 - 14:13 | 2472675 CvlDobd
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"That leaves Japan and the U.S. as the only available large, liquid markets. But Japan's basic dynamic is stagnation and malaise"

Let me finish this sentence for Charles.

whereas in America the economy is experiencing organic growth due to sustainable debt, free markets, small government, and a general 'can do' attitude among the well educated populace.

Tue, 05/29/2012 - 14:39 | 2472811 ThirdWorldDude
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Charles and Mark (Grant) are either golf buddies or they've had the same mentor at Harvard.

Tue, 05/29/2012 - 20:03 | 2473782 AUD
AUD's picture

Throw in Niall Ferguson, this Azizonomics dude & Nigel Farage, even if Farage doesn't write newsletters.

Tue, 05/29/2012 - 14:00 | 2472593 Boilermaker
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Here comes the IN-YO-FACE absurd rally into the close!!!!

Hang on to the oh-shit handles, Ben gonna hit the gas!

Tue, 05/29/2012 - 14:05 | 2472617 CvlDobd
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I went on margin at lunchtime to buy QLD and leverage my leverage!

Gotta get back to my lap dance now. I'll check in at 3:59 to get my guaranteed gains.

Tue, 05/29/2012 - 14:07 | 2472637 Boilermaker
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Be sure to get those gains in singles!  Never tip a $5 bill unless she allows you the 'stinky pinky'.

Tue, 05/29/2012 - 14:01 | 2472598 Piranhanoia
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Are they "warts" or a 50 kilo tumor the citizen has to pack a lunch for?  Risk management that can't see the difference is playing roulette.

Tue, 05/29/2012 - 14:05 | 2472618 RiverRoad
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Karma:  As the dust settles from this Financial WW3, the world will find itself back in a post WW2 do-over scenario: weak Europe/stong dollar position again.  Only this time it will be different with the presence of a rapidly developing China. It will be their call whether to go with our fiat or not and they are already sidelining the dollar in their trading with Japan....

Tue, 05/29/2012 - 14:06 | 2472622 narnia
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Why would you arb out of the EUR for $ if the EZ is facing massive deflation?

Tue, 05/29/2012 - 14:06 | 2472625 gjp
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The very fact the trillions of false wealth can only find a parking place in 'transparent and liquid' US markets means that it will be in US markets, where said fictitious wealth was for the most part created, that it is vaporized.  Totally.  Couldn't happen to a more corrupt, deluded, destructive and self-serving bunch of grubbers.  Maybe Europe goes first but Wall Street will only truly meet its maker on home soil.

Tue, 05/29/2012 - 14:16 | 2472700 tired_of_manipu...
tired_of_manipulation's picture

Nice post.

I remember something like this back in 1997/98.  In the end though, the US market still tanked but was buoyed from a complete crash by small investors...  who simply don't exist anymore. 

To paraphrase, there is 100 billion in financial assets but the manager has no way to purchase 100 billion worth of actual 'capital'.  The financial assets will in the end be vaporized if there is no capital to back them up, no matter where they go for 'safety'.  Over finananced and under capitalized.  

Tue, 05/29/2012 - 14:09 | 2472644 lemonobrien
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this is the whole motherfucker; everyone runs to the U.S. of A and then it falls. Its great for gold; cause those not knowing will sell, the price will lower, then BLAM. the motherfucker comes back. It's what is happening now; you can feel it; it feels good; but it is not. deceptive. I lived in Japan in the 90s, same thing happened when the yen would strengthen; and ebb-an-flow. wash on, wash off. America though, is the last piece, the queen, the checkmate. We may go into militarism though. we're the new nazis.

Tue, 05/29/2012 - 14:15 | 2472691 Boilermaker
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Look at the 'shoves' upward on the SPX and the DOW.  Every downward movement is now met with a forceful jam higher.

Get ready for some seriously stupid garbage now.

Tue, 05/29/2012 - 14:22 | 2472725 DarthVaderMentor
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Nah...this is a hopium rally....already losing its mojo.

Tue, 05/29/2012 - 14:33 | 2472782 falak pema
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they could if they are prepared to pay back their debts. But they aren't and that is the crux of the matter. SO they will print to escape from this responsibility. And then the US will be in the pillory box in front of the world. You cannot be leader of free world and be the first CROOK on earth. No way. 

Somebody, somebody will cross the Rubicon in the USA and then all hell will break lose as it won't be Caesar but Orestes...

Tue, 05/29/2012 - 14:33 | 2472784 JenkinsLane
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Could they fuck

Tue, 05/29/2012 - 14:35 | 2472790 silverserfer
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the gold market is too small and not liquid enough? Huh, well $100 bill I think can vaporize quite easily due to its "liquidity".

Newsflash, the gold market is big enough to accomodate all liquidity. You just cant get $100 bill worth without an extensive prolonged cash for gold program that takes 10 years to fill your order. 

Tue, 05/29/2012 - 14:37 | 2472799 Rich V
Rich V's picture


Could U.S. Markets Rally In A Global Decoupling?

Yes they could rise just like the stern of the Titanic rose as the bow went under the waves, enjoy the view from the top because the bottom is comming.

Tue, 05/29/2012 - 14:37 | 2472801 Vince Clortho
Vince Clortho's picture

Another market moving profit opportunity for the people with the resources to move the markets.

At some point this may involve the Dollar having safe haven status... at which point the strings will  be jerked in another direction.

Tue, 05/29/2012 - 14:39 | 2472807 slewie the pi-rat
slewie the pi-rat's picture

is it possible that the FED can finance the Treaury without monetizing?

we are SO GETTING INT0 DEBT even if benzelbub could!

that's the freaking POINT, isn't it?  these guys are shelling out the USA and we're talking about the price of butter

but  it will be different this time, as we know...

Tue, 05/29/2012 - 14:52 | 2472837 collon88
collon88's picture

The author touts US stock and bond markets but has left out the most obvious one, to me at least, that being the FX market.  Talk about liquid! If capital preservation is the goal in a crisis, what about long USD against the usual suspects (see what happened in 2008)?  

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