Asset allocation: What's your next move?

I attracted a new follower this week (thanks, Westley) and it made me think that the once-prolific Paul Gibson should consider reinvigorating his LinkedIn blog which currently rates at around two uploads a year.

It's been a fascinating week or two in global risk markets but it is impossible to escape the idea that the US and Chinese are just vying to have the last word in this self-defeating and escalating trade war. I watched a strangely compelling episode of storage wars this morning in which one 'lady' outbid another simply for the hell of foiling her rival. She came out smelling of roses as there was a top-notch karaoke machine hidden behind a load of junk that ensured oodles of profit.

However, it is difficult to see how Trump or Xi could triumph from their increasingly intense row on trade. DJT knows that the concrete wastelands cannot be re-generated - how can a country that has failed to invest in its domestic industries for 40 years expect to defeat one that has achieved massive upward mobilisation of its poorer classes on the back of being a hub of low-cost outsourcing? Even if the technology angle was equalised, the number of US workers willing to commit their labour in return for a Chinese-size wage packet would be pitiful.

As many have done before, Trump is already looking to secure a second term and that means appearing to deliver on manifesto promises no matter how impossible they are to achieve.

His biggest 'win' so far is to get US corporates to repatriate overseas money with tax breaks which they are using to repurchase their own stock. This reduces P/E multiples, making stocks look less expensive - no wonder that he wants to score political upside from the rally witnessed in US stocks since his election victory.

Now he wants to talk down the dollar in order to talk up the value of American exports. Even if you believe the EU and the Chinese are currency manipulators, this too is a war with a zero sum outcome as it is impossible to unilaterally weaken a currency on an absolute basis - it is purely a relative equation meaning that one side can only benefit to the detriment of another. For the record, I don't believe the Federal Reserve are hiking rates because they need to - they are just looking for flexibility to cut when the inevitable downturn ensues.

So when will this happen?

John Stepek of Money Morning fame reminded us this week that people started talking down the last ultra-long bull rally in 1997. Indeed, the website www.irrationalexuberance.com based its name on the famous Greenspan quote of the same year. Let's bring in another one: 'the market can remain irrational far longer than you continue to be solvent'.

Sitting in cash, especially when the management fees eat up all the paltry interest that is earned, and more, is not a solution. I know this to my chagrin because I moved my pension fund to cash last summer.

Investing in the US, whether it be olde worlde DJIA, more expansive S&P500 or the technology-rich Nasdaq is not the answer since the Trump effect is fully priced in, and then some.

The eurozone is still playing catch up but the risk of fragmentation due to borrowing imbalances is simply too high.

In many respects, Japan is in good shape, but the demographic and debt-to-GDP ratio challenges are overpowering given strong outperformance over the lat 3 years.

Meanwhile, anybody looking to invest in a bond proxy index at these levels has to be a believer in an outright and secular depression scenario.

Emerging markets, with the exception of India's Sensex, have endured a horrible year to date. But it seems likely that the greenback will weaken from here - especially since the Donald appears to be demanding it. Fundamentals are excellent, as my colleague Tim Love impressed on me on Tuesday, and, should global trade wars diminish from here, there is every chance that the EM sell-off is severely overdone.

That said, in most previous cycles, EMs have been the first to succumb and the quickest to recover so the ever-challenging timing issue will be pivotal to an investor's success.

Two words apply here: active and dynamic. This is the only way to play prevailing market conditions.

For the time being trackers and ETFs have had their day. Should we get a 50-60% blowout, 'buying the market' may once more prove a profitable strategy, but, for me, the wind has changed direction for the forseeable future.

Please note that these musings are my own - written on a Saturday to satisfy my lust for creativity. This article has not been written in a professional capacity and the content does not necessarily reflect the views of my employers. But, if you have enjoyed reading it, please feel free to 'like' or comment.