Rosenberg: S&P "Should Be 1000 Points Lower Than It Is Today"
Rosenberg also thinks Powell won’t cut interest rates, even if we get a 20% sell-off. That’s how determined Powell is to normalize interest rates, according to Rosenberg.
In other words, we are in the middle of the Fed tightening cycle. As history shows, a tightening cycle is almost always followed by a recession.
Bottom line: All signs point to a recession, which, Rosenberg predicts, is a year away. As such, he suggests de-risking your portfolio. That means raising cash and investing in asset classes that are not correlated to the stock market.
Finding assets uncorrelated to the stock market is not easy. Generally, bonds do well, but they are reaching historical highs. Plus, they are threatened by rising interest rates and excessive U.S. debt.
Dividends can cushion a fall in equity prices, but only to an extent.
That leaves us with gold a time-tested hedge against recessions that is largely uncorrelated to stocks and many other asset classes.
This means when the markets tumble, gold tends to rise. Here’s proof:
There have been seven recessions since 1965. In five of the seven recessions, gold prices rose.
This makes sense when you think about the nature of investing in gold. Gold is called a fear trade, meaning that when investors worry about instability in the market, they tend to buy gold, such as liquid sovereign gold coins or gold bars.
Not only that, gold’s correlation to stocks drops during a recession.
Look at the chart below to see what happens to gold’s correlation to other asset classes when the economy tumbles. (A “1” correlation means assets always move in the same direction; “0” means they move together 50% of the time; and “-1” means they never move together.)
Gold already has a negative correlation to the S&P 500 during periods of growth. In an economic collapse, the correlation grows even more negative.
That makes it a perfect hedge against the bubbly stock market that we have today.
* * *
Olivier Garret is the founding partner and CEO of Mauldin Economics, a publisher of financial research geared to individual investors and institutions. In 2012, he launched the Hard Assets Alliance, a trading platform for precious-metals investors. In addition, Garret is managing partner of three hedge funds invested in the resource sector.