What does Safe Haven mean in these troubled times?

by Shaun Richards

We find ourselves yet again in a crisis and are reminded that some perspective is needed.  From CNBC at the end of last year.

The S&P 500 has returned more than 50% since President Trump was elected, more than double the average market return of presidents three years into their term, according to Bespoke Investment Group.

After that the equity market took the advice of Jeff Lynne and ELO as 2020 began.

And you, and your sweet desire
You took me higher and higher, baby
It’s a livin’ thing

Whereas a few minutes ago Bloomberg tweeted this.

European equities are poised for their worst week since the 2008 financial crisis.

So ch-ch-changes and another clear reminder of this came from Bloomberg as recently as the 20th of this month.

Virgin Galactic climbed again to a record high, defying analysts who say the stock is overdue for correction

We can stay with the theme of the man who fell to earth because since then the share price has halved from $41.55 to $21.30 after hours last night.

If we take this as a broad sweep ELO were on the case it seems.

It’s a terrible thing to lose
It’s a given thing
What a terrible thing to lose

Where can you go?

Japanese YenSwiss Franc and Euro

You may be questioning two of those so let me explain. If you look back in time I wrote quite a few articles on the “Currency Twins” the Yen and the Swissy. This was because they were borrowed heavily in before the credit crunch and people rushed to cover positions as it developed. This was equivalent to buying them and they surged building a safe haven psychology. Although it was more minor there was some of this in the Euro as well.

If we move forwards to now the simplest is the Swiss Franc based as it is in a country which is considered safe and secure, hence the demand at times of fear and uncertainty. The Swiss National Bank has returned to selling the Swiss Franc recently to try and keep it down. Switching to the Yen the main issue here is the large size of Japanese overseas private investments. At times of uncertainty the fear is that the Japanese will start to repatriate this and push the Yen higher so markets shift the price just in case. The Euro is not quite so clear but the area does have strengths as for example its current account surplus. Also at times like this it gets a bit of a German sheen as well.

You may have noted an interesting similarity here. This is that all these three currencies have negative interest-rates and I have posted before that there are avenues ahead where the SNB will cut to -1%.

US Treasury Bonds

There are two factors here of which the opening one is the effective reserve currency status of the US Dollar. So you can always buy commodities and the like in US Dollars with no risk of devaluation or depreciation. Next comes the fact that bonds offer a guaranteed return as in you will always get your nominal US $100 back as well as some interest, or if you prefer yield or coupon. So you get both the reserve currency and some interest, hence the knee-jerk rush into US Treasuries at a time like this.

The problem is the old familiar refrain that things aren’t what they used to be. In particular you get a lot less yield now as for example both the two and five-year yields have fallen below 1% overnight. I have chosen these because in a safe haven trade you tend  buy short maturity bonds. But it is also true that longer-dated bonds do not offer much these days as even the ten-year Treasury Note has seen its yield fall below 1.2% now. Some events here are contradictory because the two-year future is up 27 ticks this week and whilst that is really rather satisfactory for those who got in early it should not move like that if you are looking for stability. You do not want Blood Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round
Talkin’ ’bout your troubles it’s a cryin’ sin
Ride a painted pony let the spinnin’ wheel spin

Some of the logic above applies to other bond markets which have soared too. Although in some cases the logic gets awkward because both the German and Swiss bond markets have yields which are negative across all maturities. So here we are back to the currency being a safe haven and such a strong one that people are willing to accept increasingly negative yields to take advantage of it. My home country the UK has seen Gilt yields plummet too as a combination of factors are in play. The irony is that the safest UK  haven which is RPI linked Gilts already were extremely expensive and frankly having little relationship with inflation which seems set to fall in response to the present crisis.

Gold

This is something of an old curiosity shop in these times. In general we have seen a gold price rally which continues a phase we have been noting in recent months. But it is also true that just when we might have expected it to rally rally further the price of gold fell backwards.  There are an enormous number of conspiracy stories about gold and its price but for out purposes it is something of a patchy safe haven. Our favourite precious metal was of course “The Precious! The Precious! ” in Lord of the Rings but in our world the central banks give that title to other banks.They however are most certainly not a safe haven as we learn more about the use of the word “resilient ” by central bankers.

Comment

Let me add another factor in the safe haven world which is timing.If you had movd into any of the markets above earlier this week you would now be doing rather well. This comex with an implication that prices and levels matter which often gets forgotten in the melee and excitement.

There are also other winners which get given temporary safe haven status at times like these.For example those producigface masks or involved in teleconferencing.  I have to confess I had a wry smile at the price of teleconferencing companý Zoom rising as it did not work on my laptop when I tried it for Rethinking the Dollar.

Apologies to those affected by a blog misfire earlier as Windows 10 played up again.