OK, last post on credit cycles ...
There's a nice rhythm to asset allocation around credit cycles, which is as follows:
1 - At the deep low of a credit cycle, you want to move heavily into growth stocks. The deep low of a credit cycle is subject to high volatility, and a liquidity crisis. The markets recover from this deep low when the monetary authorities unleash a new round of credit easing, following an extreme liquidation of financial assets. Often, you can easily see 3-fold increasing in financial asset prices of quality high-beta names from the deep lows.
Typically, you'll have a 1-1/2 to 2 year period of exceptional returns for quality growth stocks (one's that are left standing/solvent) after deep cylical lows.
2 - As the credit cycle matures, dividend paying stocks start to outperform growth stocks. This is a good time to transition some of your holding in growth stocks to stocks that pay a solid dividend.
3 - In the late stages of a credit cycle, you want to begin to move into cash, and in this cycle also physical gold bullion. At the end of a credit cycle, cash is king, and you want to be liquid to take advantage of exception investment opportunities and valuations once the deep cyclical low is reached.
I would make the case that we're currently at the late stages of phase 2, and investors want to seriously consider making the transition to stage 3 at the present time.
The above concerns investments in equities. But a similar model can be developed for investing in debt and commodity markets as well.
Would love to hear others thoughts on the matter.
All fow now,