Why are real assets outperforming financial assets?

Certain countries have accumulated large cash reserves in foreign currencies over the last decade

There investment decisions has an affect on global asset prices

If there is a global growth slowdown from DM experiencing weaker GDP growth (which they are very likely to experience)

Then countries like China will have smaller trade surpluses

Hence will accumulate less USD

What will they do with the USD they have?

If they see the USA has a policy of weakening their ccy (they have an incentive to do so as foreign countries buy US debt in USD as it is perceived as the global reserve ccy)

Then they will change their investment habit of buying low yielding US treasuries and buy other USD denominated assets such as commodities or equities (real assets)

Hence we see large capital flows into real assets which previously went into financial assets

This will have the affect of reducing the value of a future cash flow of USD, hence the Shiller P/E ratio will come under pressure to decline (equities prices fall if profits do not increase by more than the multiple on profits decline)

Commodities such as gold benefit

This is a typical cyclical behaviour last experienced in the 1970s when equity multiples decreased but commodity prices increased. When financial assets become too expensive from too much credit, real assets become more valuable until financial assets become too cheap and enough debt has been destroyed

History rhymes