Every Cloud has a Silver Lining

Trade in Whisky;

Events in the Middle East have not been well-received by financial markets. The VIX Index, which measures the cost of options, is deemed to be a measure of fear. The level is not yet extreme, but it is rising, and that is never a good thing.

The VIX

Source: Bloomberg

The greatest fear stems from rising energy costs and the uncertainty about when they will end. North Sea Natural Gas has spiked higher but is still well below the 2022 levels associated with the war in Ukraine. Brent Crude Oil has also risen sharply. Attacks on energy infrastructure in Qatar and Saudi Arabia, and disruptions to shipping in the Straits of Hormuz, have caused concerns over shortages.

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Oil and Gas

Source: Bloomberg

Interestingly, recent events have not led to gold making a new high. Silver is off sharply this week, while the dollar is up. Gold in GBP is flat.

Gold, Silver, and Dollar

Source: Bloomberg

The other change is in bond yields. Only last week, I highlighted how the bond market was settling down, and much has changed since. A crisis normally sees bond yields fall, but in war, the price of oil takes centre stage.

Global 10-Year Bond Yields

Source: Bloomberg

A higher oil price is inflationary, and inflation expectations have risen, more in Europe than in the USA, where energy prices have risen more sharply. The US has greater energy independence, which would explain it. Again, these rises are modest, but in recent years we have seen this before.

Global Inflation Expectations – 2 Years

Source: Bloomberg

Volatility is up as markets face uncertainty. Energy is higher, which has destabilised the bond market. Gold is flat, suggesting this is about energy rather than monetary conditions. Above all, we have no idea how long this will last.

I am going to raise cash in the Whisky Portfolio, as I always do when things turn sour. It can look foolish if markets suddenly reverse, but that doesn’t worry me for two reasons. Firstly, if things don’t improve quickly, a cash balance protects capital. Secondly, when things turn back up, you can be sure that there will be a change in leadership, as there always seems to be. Even if the market does recover, a successful portfolio will need to reposition.

I have done this every time the market turns down, and it never felt right then, and it doesn’t feel right now. But the facts have changed, and we have no idea how bad this situation will get. Cash is king.

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