On 5 December 1969 the single “Gimme Shelter” by the Rolling Stones hit the record stores. This classic rock song become a hit and has appeared in everything from The Simpsons to Dexter to the game series Call of Duty. The lyrics begin:

Yeah, a storm is threatening,

My very life today,

If I don’t get some shelter,

Lord I’m gonna fade away. 

 

The traditional shelters of capital – government bonds, the Japanese yen, gold (and gold stocks given their valuations) and the Swiss franc are creating pain trades as investors have largely been underweight in these assets.

The negative rate story continues apace, albeit the narrative feels increasingly tired. Like a slow moving tanker the narrative blends as the US moves towards Europe, which itself moves towards Japan as the new status quo. Negative rates don’t allow for compounding; investing as it used to be. Instead it’s about knowing with certainty that you can offload that increasingly negative yielding piece of paper to the next guy in line and at the back of the queue, the nearest central bank.

As the market squirms with every Fed utterance or political poll, the grind lower in rates is again putting the pension and insurance fund industry under intense pressure over and above existing negative rates and even despite the equity rally of the last half decade. Aggregate solvency ratios have plummeted and this ongoing underfunding should continue to see receiving demand in the long end and continued pressure on scheme sponsors to inject new cash at a time when margins are under pressure. 

In the case of US Treasuries the negative swap spread doesn’t put a premium yet on a cash bond and these bonds aren’t expensive in the repo market. Also yield curve flattening is probably more to do with the inane need for duration than for any imminent recessionary fears. Both the Japanese and European curves failed to flatten and signal past respective downturns. Perhaps inverted curves – akin to the UK pre crisis – are likely going forward as duration becomes prized once again. 

The Swiss National Bank (SNB) and the Bank of Japan (BoJ) may be the canaries in the coal mine. Currently the BoJ effectively sits on the boards of over 90% of the Nikkei 225 listed companies as a significant shareholder and this is only set to continue. Indeed, the SNB has over 2,600 individual stakes in US listed companies from Apple to Disney as over 20% of their over $600bn balance sheet is invested in equities.

The fundamental and technical demand for safe havens remains and indeed, some instruments, can easily still be deemed cheap. But the minute central banks change the narrative – intentionally or not – the fire sale begins. From our view, the best way to position for any eventuality is to have flexibility and diversification in the portfolio. Yes, this is what most fund managers claim to have in their portfolios, but liquidity is only real if it is available regardless of the market cycle and level of market stress. 

Oh, see the fire is sweepin’,

At our streets today,

Burnin’ like a red coal carpet,A mad bull lost its way.