The Motley Fool

Quick Thought Of The Week: Melt-Up

Rather than experiencing a market meltdown in the face of a possible slowdown in world growth, many global assets are in melt-up mode. A melt up is what happens when stampeding investors rush headlong into certain asset classes for fear of missing out on their rise.

By all counts, the Dow Jones Industrial Average should not be at an all-time high. After all, in the first quarter of 2019 US corporate profits fell 3.5% after being unchanged in the previous period. Earnings for the second quarter are not expected to be exceptional, either.

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But a misguided belief that the White House can pressurise the Federal Reserve to cut interest rates and reverse its plan to shrink its bloated balance sheet has pushed up bond prices. Not just in the US. Other sovereign bonds are rising too.

It has also driven up the price of gold to a multi-year high. Some reckon it has further to climb. Meanwhile, bitcoin has risen to a 2019 high. Crypto fans have found their voice again. They are saying we haven’t seen nothing yet.

So, what has changed?

Not a lot, really. Except that the US administration is once again picking fights with every man and his dog. The latest is Vietnam.

And geopolitical tensions, which remain high despite The White House’s stage-managed photo ops in Asia, could be enough – according to some commentators – to force the Fed to cut interest rates twice this year.

But hang on a minute.

What if the US trade representatives can actually engineer a deal with China that would avoid a loss of face by either country? It is a tall order. But we know that both America and China are hurting economically, even if they refuse to admit it.

What then happens to those bonds that are sporting negative yields? What happens if you are holding onto gold at multi-year highs? What if you are holding onto cryptos at multi-month highs?

Investing is an activity that requires forecasting the yield on assets over the life of the asset. If the asset yields nothing, then that is probably what you will end up with…. nothing ….

…. It is easier to stay out of trouble now than to get out of trouble later.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.