In 1974, Canadian rock band Bachman-Turner Overdrive released a #1 hit single “You Ain’t Seen Nothing Yet”. The chorus of BTO’s song includes the famous stutter “You ain’t seen nothin’ yet. B-b-b-baby, you just ain’t seen na-na-nothin’ yet.
The lyrics of the song remind me of what could happen in the markets over the next four years. So, if we think that stocks, bonds and currency markets have been volatile since the conclusion of US presidential election, then we just ain’t seen nothin’ yet. The incoming US administration has barely started work and markets around the world have already reacted violently.
It seems that everywhere we look, traders are clueless as to where they should be putting their cash. Nothing seems to look safe right now.
One minute, shares look like a good place to park our money, and in the very next minute it looks like a dreadful idea. Meanwhile, fixed-income instruments are all over the place with bond vigilantes demanding higher premiums in the face of rising risks and rising inflation.
And what about currencies? What indeed? The US dollar has been rising, though nobody quite knows why it should. Some say that it is because interest rates in America are high and could remain higher for longer. Some point to the unexpected robustness of the US economy, strong earnings and the resilience of American shoppers. They say it is a sign of US exceptionalism.
Whatever the reason, central banks around the world are on tenterhooks. They can’t decide whether to raise interest rates to support their falling currencies or to cut the cost of money to spur economic growth.
Worryingly, it is not just emerging-market currencies that have been put on the back foot. Safe-haven currencies have been on the slide, too. Both the Swiss franc and the Singapore dollar have slid around 7% against the U.S. dollar. That could be especially awkward for Singapore that uses its rising currency to control inflation.
Whilst we, in the words of BTO, ain’t seen nothing yet, there is something that we can do about it. What’s more we should do something about it.
Some believe that inflation is dead. But inflation only needs the flimsiest of excuses to resurface. And the next US administration has given it the perfect condition to return with vengeance.
Our best antidote against inflation is not to wait for central banks to take up the fight. Instead, our best tool could be inflation-beating assets, such as shares. That said, stock markets could be volatile. But volatility is only a risk if we don’t fully understand the assets that we have invested in.
So, ignore the noise and focus on the facts. As the Year of the Snake slithers into our lives, the world will be upended by people who speak with forked tongues. By all means trust but always verify.
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Disclosure: David Kuo does not own any of the shares mentioned.
