Defensive assets are at all-time record levels. This is notably dangerous since few people who own these assets have any idea how overvalued and vulnerable they are. “Price is what you pay, value is what you get.” This is a quote from Warren Buffett.
These days many momentum and technical traders, along with other institutions such as hedge funds, are heavily invested in defensive assets. Even though they realize they are taking big risks, they don’t want to leave the party too early. Once the so called yield assets begin to experience more notable declines, as utilities (XLU) have already been doing in recent weeks, there will be a massive withdrawal of funds as these large traders’ cash out of dividend equities, REITs and U.S. Treasuries.
Many of these newcomers to the party are amateurs and will panic if they experience even a small loss of 10%. They believe that they have invested in so called “stable” companies which will produce strong, steady gains, for many more years. The companies themselves and their profits are mostly very stable, but their stock prices are definitely not. Eventually this new money will go into the cyclical assets, especially since investors who have recently taken the plunge to move their money from short-term deposits are unlikely to quickly put their money back into time deposit funds and earn half a percent.
Even though we have received some negative comments from some of our subscribers that we are cashed out early, we would rather remain in cash and miss the final move, than be positioned wrong and lose money, especially since there is always another bus coming if we miss the current one. In our view these days, the only value is in commodity based ETFs, i.e. EWZ (Brazil index ETF) and XIU (Canadian index ETF).