Charles Gave: When Stocks Crash, a Flight to Bonds Won’t Work Anymore

Financial Sense  ( Original )
APR 9, 2018

Thirty Years is a long time. It’s nearly a career for some people. So you have financial advisors who have been in the business since they graduated from college, are now in their 50s, and have never operated in a genuinely inflationary environment.

What happens the same rotation trade you always make for your clients when stocks crash, simply rolling over into bonds? A lot of advisors are going to get a “crash” course in the wisdom of precious metals investing during inflationary periods.

We've been living in a disinflationary environment for last 30 years and, overall, this has been good for companies and the stock market, says Charles Gave at Gavekal Research. This may be about to change, however, and the implications for investors are quite profound if so.

If we assume we are moving into an inflationary period, the direction of bonds, long bonds and stocks have a positive correlation. This means that if the bond market goes down, the stock market goes down, Gave stated, and if the bond market goes up, the stock market goes up.

This is the inverse of what we’ve seen over the last 30 years, where we had a negative correlation between long-dated bond and the stock market, Gave added, which is typical of a deflationary or disinflationary period.

“Most money today is managed with the idea that if the stock market goes down, the bond market will go up, and that is not what happens in an inflationary period,” Gave noted. “I'm trying to warn our clients to be careful that the diversification tool that they’ve been using for 30 years may be about to stop working.”

ORIGINAL SOURCE: Inflation Paradigm Shift May Be Underway, Says Charles Gave at Financial Sense on 4/6/18