Financial Market Update April 17, 2020

Almost 4 years of silence and no excuse... well, at least not one I can talk about without stirring up hate mail 😁.

I will try and make up for it. 

I would also like to remind the reader that time and events pass through a high speed rendering past comments superfluous, though also more poignant at times. 

Today, this report reflects on the following topics:

Financial Market Update April 17, 2020

DRIVING UNDER THE INFLUENCE - 
Financial Markets beleaguered by COVID-19

• Preamble COVID-19
• Grounded 
• The Damage is Done, Facts and Charts
• Asset correlations  
• Early warning signs
• Summary Part 1

"This Time, It is Different"

Short-term Brief

Past Events and their Lessons 

• 1987, Black Monday
• 2000, tech bubble burst 
• 2008, banking crisis
• Lessons learnt
• Summary Part 2

A Big Picture View 

Should we have known?

• Living in Denial
• Quo Vadis, Caesar?
• Summary Part 3a 
• “The required commercial impetus”
• Financial Assets to watch out for

     Gold
     Bonds
     Equity

• The devil in the detail
• Short-term risks
•  Summary Part 3b)

Conclusion

“lost a Shilling and found a Sixpence”

Disclaimer:

This report is a personal account and by no means designed to do more than entertain. The facts and charts are sourced from reputable resources and the author relies on their accuracy but cannot accept any liability for any errors. The views, arguments and recommendations, or any statement that could be construed as advice are voiced without reference to the general public or an individual investor’s circumstance. Do not rely on this report for any investment decisions, seek professional advice if you are not sure.

👴

Financial markets and COVID-19

A headline is not big enough to name all factors impacting on financial stocks, bonds, commodities, and currencies around the world. In line with today’s world leaders habitual scapegoating, headlines, tweets, and speech bubbles blame the virus and its consequences on China. During my 30-year professional engagement with the markets, nothing comes near what I am seeing now. I would encourage everyone to look closely!

😊

As an advisor, I have been through 2 horrendous stock market crashes, (2 ½ if we include SARS and subsequent recession):

1. The 2000 dot.com bubble bursting, with the Asian crisis, 1998 as its preamble.

2. The 2008/9 banking crisis, associated with the housing market crash, mis-selling of manufactured bond instruments, bank foreclosures and subsequent unprecedented bail-outs (“printing money”).

Each time, I learned more about financial relationships between asset classes, punters, technical aspects and - especially cycles. Each time, I managed to improve my capabilities to manage the assigned portfolios with respect to risk versus reward. Yet, the fear of another strike remained ever-present. Which is why some thought I was too cautious during the long bull market, especially when exuberance drove investment decisions.  

So, this is No. 3, the COVID-19 crisis. It is the first time that a crisis has constrained my private and professional life so dramatically.

Conspiracies thrive on the chances of it being yet another man-made disaster or - nature’s and the planet’s revenge, though it hardly matters on the ground: Our behaviours have become so nonchalant that even a lazy virus causes damage that we conveniently and repeatedly brush under the carpet as - facts of life, like the flu, respiratory diseases, cancer etc.

How much easier for a ‘virulent’ virus to destroy our rigid structures wreaking havoc! It caught us cold by playing on our tendency to outsource - left us interdependent without recourse,  while living off credit from one paycheque to the next, and blaming everyone else rather than sweeping the dirt in front of our own door. One (cynical?) consolation on my doorstep: the refuse collectors find a hand-written note (not mine!) when they come to clear the rubbish bin, saying “thank you for all the hard work you do ❤️”.

Recent analysts’ professional assessment or - guesswork more likely since statistics are behind the curve – is superimposed by sentiments of extreme alarm, or deliberate understatement, even now. The 'room' for public scrutiny has been walled off. People got used to being courted, guided, and browbeat by twitter rants. Have we become too lazy to figure things out for ourselves? Personal ramblings… sorry! It happens to the best these days.

Back to the task: Where we are in terms of damage?

Grounded by COVID-19

The lockdown of cities, regions and even whole countries has brought business life to a standstill, - except for the so-called essential work and workers, which each country defines for themselves. My office issued me a police pass just in case, though I would not count myself - semi-retired, and a high risk person of being infected by COVID-19 – as an essential worker.

The lifelines and trading routes to the outside world have been capped, resulting in huge queues of HGVs at inner-European borders, borders that had been razed to the ground since the 70’s!  In my last report I voiced reservations about stifled support lines and direct consequences to a breakdown in production, which sounded well over the top at the time. Our leaders spread the mantra – Wir schaffen es – We will make it! –  

Since then, lockdowns have become fierce, shops and business shut. Supply shortages are on the rise, even while the shelves on the supermarket shelves are packed again. Once the shelves fail to be restocked the media madness and trolling internet scams will splash onto streets and into homes. Are politicians talking up lifting the embargo on national businesses now because, maybe, they do not wish to discuss the topic of further deterioration publicly? It is ever so cumbersome to discern whose figures, statements, arguments about the crisis reflect the true picture on the ground. Are we fully informed, aware, and prepared for what lies ahead for Europe, America, Asia, and Africa? Personal fears among colleagues, family and friends find expression in every verbal exchange. I am totally out my comfort zone to picture the looming chaos and panic.

And yet, I also see unprecedented efforts to support each other, which is where – undoubtedly - the most significant capacity for longer-lasting transformations lies. 

😏

A factual account:

Values that have built-up over the last 6 years were wiped out in a matter of 6 weeks! Stock market indices around the world lost on average between -25% to - 40% from the peak value on February 12, 2020 to the low point on Thursday, March 23rd, 2020.  

Figure 1, major global indices year to-date; source FSM

Asian numbers compare favourably in this chart. The reason is that, ever since the inception of trade barriers instigated by US politics, North Asian stock market values failed to rise in line with the US markets. As such, they did not ‘require’ the same-sized correction. However, Indian, Philippines and Indonesian stocks were not spared. This is a notable reversal of conditional relationships between the US and Emerging Market equity during the bull market of 2005 to 2016, when Asia and EM outperformed developed markets by significant percentages.

Figure 2, source https://countryeconomy.com/stock-exchange

So many returns in dark red, except 1, Venezuela. But they deal with 1 million percent inflation. 

😢 

Asset correlations

Typically, when stocks correct, asset classes like precious metals, specific commodities and bonds tend to experience an upturn. That has been the pattern for previous crashes:

Black Monday, October 19, 1987

It, the Black Monday Crash, happened two years before I graduated as an investment advisor.

Memories thereof were still fresh on everybody’s mind in 1989 when, during his visit to my company, a Schroder fund manager gave his narrative of events leading to his failure to protect his investment. He blamed the ‘Great Storm’ ravaging the UK just before the preceding weekend, rendering roads and rails impassable due to flash floods and uprooted trees, blocking his way to the office from his Buckinghamshire home in Chiltern Hills. Internet trading from home was non-existent, leaving him in agony as he watched the mess unfold. He did muster a grimace of a smile while we sat and listened in awe.

The phrase to remember: “When everyone is a seller there won’t be any buyers, and markets will go into freefall.”[1]

Figure 3, The 1987 Black Monday CRASH, sources: gold prices -
https://sdbullion.com/gold-prices-1988, & S&P500 StockCharts.com

In these two intersecting charts, I am comparing the price movement of the S&P500 index with gold prices.

By ‘default’, gold is inversely correlated to stocks, when stocks come under selling pressure. On Black Monday, gold prices rose ca. 5%, confirming its viability as a safe-haven asset. The gains were lost the following day, believing that Black Monday was a fluke and everything would return to ‘normal’, speedily. Only after the realisation set in that a global recession has hit the economy and - equity values were tumbling, did gold prices follow through with a sharp rally into January 1988, almost hitting US$500 per ounce with - by 1987 standards - extraordinary volatility.

By March 1988, the stock market was on the mend, and gold prices had tumbled -16%. After that, pressures receded, and valuations began to show converse correlation again. While this account confirms an inverse relationship, prices did not reciprocate point for point. The gold price volatility was only a fraction of the NASDAQ’s.

In the run up to Black Monday, yields for bonds were as high as 10%. There was no comfort in that as the prices of US Treasuries suffered substantial volatility quite uncharacteristic for a traditional safe-haven product as expected today. In other words, prices for even the safest asset classes fluctuated wildly and without warning during previous crisis. With global yields being much lower since 2009, the inherent market risk of bonds is replaced by an image of a bond price stability with everlasting potency, a bit like the blond curl ...

The Tech Bubble, October 1998 to 2001

Figure 4, NASDAQ and S&P500 comparison 1996-2003;
source: yahoo!finance

Figure 5, https://s.tradingview.com/ 

The following 2 charts show comparisons:

in figure 4) between the S&P 500 and the NASDAQ.

in figure 5) between gold price and the S&P 500 equivalent ETF SPDR;

Merely comparing gold and the NASDAQ would not provide the visual of the correlations between the two asset classes because during that period, the NASDAQ rally was showing torrid returns of some +250% on the way up and -90% peak to trough, against a comparatively placid volatility of +5%/-16% for gold. 

Figure 5 provides the clearer picture: correlations between equities in the S&P 500 changed after the brief and - for the developed world relative mild - correction in 1998. The extraordinary rout in NASDAQ stocks created an environment for all stocks to rally, while gold went out of favour. From that point, October 1998 until 2003 at least, the inverse correlation between equity and gold persisted 100% of the time. 

However, the relationship (=correlation) between bonds and equities during the dot.com rise and fall alternated in response to human intervention: According to Wiki, the then-Fed Chairman Alan Greenspan reduced interest rates (=effecting a boost for long-term bond pricing) while at the same time promoting equity investment. It allows for the speculation that Greenspan feared a detrimental impact on computer systems upon reaching the year 2000. The digitalisation of industries was still in its infancy, but its importance for big businesses was clear. He counted on - as well as propagated - its multiple benefits for business processes and profit margins and so he had to introduce strategies to ensure the continuity of computerisation. 

Serving my clients in the computer industry at that time, I was told many stories: “Strange” things happened in the late ‘90s. Anyone who had had some experience with computer processes was hired (and paid hefty amounts) to overcome - what was seen as - the impending doom of computer technology by not being able to count beyond 1999.  I have never quite figured out whether these fears had been justified or not. By the way, it was the time when Indian IT specialist gained much recognition.

After February 2000,

• Greenspan raised interest rates very quickly – which resulted in bond yields rising and - bond prices dropping;
• a court ruling against Microsoft was perceived to target the entire dot.com sector;
• Japan fell into a recession again, a vicious cycle that had persisted throughout the ‘90s,
• and then there was September 11, 2001.

Whatever correlation between bonds and equities there must have been, it cannot be demonstrated in a simple chart under such circumstances.

Banking Crisis of 2008-9

I still remember very vividly when I had my first realisation of impending doom:

In February/March 2008, the “buck” broke par value, meaning that it was traded below its par value of 1 US dollar, which sent money markets spinning. Hitherto considered super-safe money market funds lost as much as 10% almost overnight (DBS money market, Singapore)! Worse still, many investors were blind sighted by the gigantic bull run in Asian equities that followed and lasted till August 2008.

 I wasn’t. My portfolios had been switched to cash, two weeks before Lehman Brothers collapsed mid-September 2008.

In December 2008, my company held a seminar, in which I presented a cycle chart about future money supply changes predicting an imminent and unimaginable increase in the money supply. I did not realise until much later that I had outlined to an unsuspecting audience the advent of ‘Quantitative Easing’, or QE, amplified through several stages as QE 1-3, later TARP, ZIRP and replicated by the ECB and BOJ. It changed the way we invested. 

Central banks around the world were rushing to bring their respective interest rates down to within a few basis points of 0%. The US dollar fell sharply against all major currencies, making gold the ultimate safe currency. As every central bank - competing against the Federal Reserve actions - was applying their own quantitative easing means, gold prices soared to an all-time high of just under S$2,000 per ounce (2011-2013). 

To serve QE objectives, Bonds became fiscal tools to enhance the liquidity in financial markets, with the Federal Reserve buying back bonds, then issue new ones with lower interest rates and longer terms to maturity. Rinse and repeat on a monthly basis! Thus, bond prices, too, had a super rally, which Bill Gross, the most famous bond fund manager of his time, called ‘the last great bond bull market’, -before the next interest rate reset, obviously, but that has quite taken off yet. He was right: the bond rally lasted until the end of 2019, primarily due to keeping interest rates at a record low, and high monetary liquidity. Does that not sound like complacency at the highest public level?

Lessons from the past

Early Warning Signs

Crisis periods proverbially teach important lessons and often entail as many opportunities for success as for downfall. But they do not obligate to learn. 

Here, a personal summary of the obvious lessons: 

• When one asset class rises disproportionately to others like the dot.com sector did into 2000, and heralded as a supposedly “New Era of unmatched prosperity and comfort”, friction and mismatches to conventional asset values are the result causing the kind of financial stress to the system that will erupt and break down established financial structures.
• Accompanying asset value surges (=Asset Inflation) typify the consequences of loose monetary policies, i.e. easy money, easy credit coupled with lack of financial regulation and oversight.
• When too many people get on the proverbial band waggon, valuations are skewed irrationally, which was the case with dot.com expectations (2000), the housing market (2007), and gold prices in 2013. (It has not happened to bonds yet.)
• Too many people on the band waggon also gave rise to scams, attracting unsavoury money management and – carefree investment practices toward gullible and greedy investors.
• Political disruption creates polarisation, loss of clarity, and loss of stability. A country cannot stand on one leg for long.
• Asset correlations fail, and currency wars follow.

Summary Part 1

In short: When too-good-to-be-true opportunity meets easy money amid lack of oversight and accountability, turmoil follows. This is all man-made, is it not?

I must ask because the blame is always put somewhere - or on someone - else. People are divided up, either branded as perpetrators or exalted as saviours, …until the next president arrives. This is the pantomimical state-of-affairs wrecking today’s America after promising to make it great again. And frankly, it is not funny anymore.

Pic 1, source China Daily.com.cn

One last observation: we must not expect learned lessons to be imparted to – and, indeed, propagated by - the next leadership, the next generation, or the new next-door neighbour.  Their experience of the crisis may have been quite different. The only thing we may congenially assume is that the present crisis is seen as - different from the past. At least that is the claim being made.

COVID-19 Crisis

            This time, it is different …

People have short memories. And so, each time a big event emerges and subsequently flounders they mumble the mantra, “this time, it is different”. The ‘longest bull run’, referring to the period from 2009 to 2019, seemed inexhaustible amidst claims of a new paradigm, the self-sustaining equilibrium and ever-lasting growth, - until the Coronavirus outbreak put an end to it.

What is different now is that we are talking about an actual virus impacting our health and wealth, not a computer malfunction, or a fiscal mismanagement per se. The rest is the same: it has caught us, the majority, unawares and unprepared. We failed to take note of the early warning signs just as we failed to recognise the imbalances in 2000, created by superlative valuations versus real income of the dot.com era, and again in 2007, when the US housing market bubble burst, and hedge fund manager, John Paulson, went short on the US housing market. 

The lack of preparedness currently is man-made: policies and fiscal decisions of the last 3+ years sowed the seeds for the present aftermath. Any attempt to call into question were ignored, dismissed - or thought entertaining… 

•   Past experience, like the Spanish flu a century ago, or SARS, H1N1, Ebola, 

•   Movies: “28 days later” (2002), “Contagion” (2011), “93 days” (2016)

•   former President George Bush, who desperately wanted to introduce an early warning system for emerging pandemics in 2005, fearing a biological weapons attack (of course, he was not taken seriously because of his misguided weapons-of-mass-destruction debacle);

•   lessons from the Ebola outbreak in Africa: ex-President Obama preparation for a renewed occurrence of a pandemic[2]; establishing an early warning system for pandemics.

•   Dr Fauci’s deliberation, 2017, “Pandemic Preparedness in the Next Administration”, which envisioned a “surprise outbreak” during Trump’s presidency.

•   The “Crimson Contagion” planning exercise, January 2019, showing how unprepared America was in the event of a pandemic. Yet, the overseeing department was dismissed, and the early warning system was shut down three months before the official starting date of the Coronavirus outbreak.

Late-night show (LNS) hosts in the US associate the Trump Presidency with the advent of the golden age of comedy. However, I am bemused: the comedy on display is more reminiscent to what the Germans call “Galgenhumor”, the funny bone of those facing annihilation. “Morituri Te Salutant, Caesar”. Yes, that too can be funny for a while, watching from up in the galleries.

Summary Part 2

Human behaviour, egos, ignorance, and a sumptuous dollop of narcissism: In juxtaposition, they contribute the most significant part to this drama. The virus causes the illness, but everything else was/is down to us, is it not?  Why, then, are we still talking about a virus as the root cause of the crisis? 

When they had the chance, they – the American electorate, Congress, or anyone there with spark and courage failed to dismiss their self-proclaimed cheerleader and “War President”. Can America only accept a boastful, recalcitrant ... president nowadays? (You may fill in the blanks at your leisure.) Must Obama’s legacy be eradicated at any cost, simply because it - he - is considered in direct conflict with the new goal of making present-day America great again? 

What a conflict, what a contrast!

Trust Trump's bleaching methods if you must. 

Before Virus Outbreak, a Cascade of Warnings Went Unheeded (NY Times, March 19, 2020)

🤒

Short-Term Outlook and Strategic Measures

Before taking a step back to view the bigger picture, here are a few topical points what to expect over the coming weeks and summer months.

• The preparation: In our portfolios we have exited all holdings of equity in end of March, and gold in mid-April. It was not a profitable exit but necessary to stop the volatility cause more damage. Markets since then have displayed exactly the kind of price fluctuations, tear-away rallies, and unexpected turns we wanted to stay away from.
• Global equities, I expect, will enter into another bout of volatile trading next week, which could extend into mid-May. Thereafter the volatility should reach calmer levels, hopefully providing a sensible setup to start buying equities again. This is purely a cyclical observation, but it may be supported by plans to restart economic activity in Europe and the US. We are waiting for technical signals to support our plans.
• Gold prices are performing according to their inverse correlation with equity, and the risk sentiment in the market at present. The cyclical outlook suggests that the fear factor is subsiding, and investors will switch from gold to equity. That is happening over the last 3 trading days: gold prices have quickly lost some 60 USD from their peak of USD 1745, last Tuesday. The short-term outlook by way of technical analysis is not pretty, but we can afford to have patience.
• Bonds will respond more to currency fluctuations for a while rather than actual price increments. As yet, I do not see a breakdown of the beneficial environment for bonds, but I will remain vigilant. As for currencies, I go with the Asian SGD, as it typically balances the fluctuations of the EUR & GBP versus USD.

Overall, we should enjoy a little relief as markets settle into calmer conditions, allowing us to put the stress of endless, excessive market movements to one side – till the end of summer?

😎

Big Picture Overview, The 10-yearly Relapse

SHOULD WE NOT HAVE AT LEAST ANTICIPATED?

Every decade or so, financial markets – and societies – seem to go through some sort of cataclysm. Ex-Fed chairman, Paul Volcker wittily remarked that “about every 10 years, we have the greatest crisis in 50 years”.[3]  Some wit, dear Paul.

The three financial market crests of 21st century, 2000, 2008[4], 2020, are highlighted in the next chart, showing the composite PMI of the Eurozone: PMI (Purchasing Manager Index) stands for strength in the economy.

Figure 6, composite PMI Europe, 20years

Spring 2000 marks the first PMI peak, accompanied by highest levels of GDP. It was followed by the collapse of both components, and a recession lasting till 2002. Financial markets recovered subsequently, and equity prices rose into 2007, but the advance was volatile. Please observe that both the PMI and GDP values were in decline since 2007, 18 months before the eventual collapse in March 2009. 

Why was J. Paulson the only analyst to interpret the writing on the wall correctly? I guess, when Trump finishes building his great wall, the writings can be bigger with more people to read…😊. We need walls, no doubt!

After the Great Recession, the increase in PMI is sporadic, boisterous at first, but rather lacklustre after 2011 by comparison. It was accompanied by erratic, yet comparatively tepid GDP figures. Both indicators peak late in 2017, indicating that the economic peak arrived much earlier than the political narrative suggest. This misconception in the face of the obvious chart-based conclusion is, incidentally, a mirror image of what transpired in 2007-9. 

Since 2017, the declines in both indicators have been sharp – contradicting the much-publicized economic bellwether reports by popular media and political exhortations. Again, despite voices of alarm, politics prevented and early follow through. Maybe it was not deemed politically expedient? In a society polarised into pro and contra, truth only appears in halves.

Signals, indicative of imminent future prospects:The trendline, connecting the low points, in 2020 points to a lower low, than is charted by PMI and GDP figures have yet to be updated. I conclude that this indicates more dire challenges ahead.

Taking up the question from my last report:

“Quo Vadis, Caesar?” ……… ”CAESAR??!!!”

Pic 2, by Robert Kiyosaki, "living in denial"

Back in 2002, the emerging economies of EMEA, in particular China and India, rescued the global economies out of recession. In 2009, the rescue came courtesy of pulling out all the stops on fiscal brakes, bail out the “too-big-to-fail banks”, and create jobs any which way. The world followed the Obama administration’s efforts to tighten regulatory requirements for banks and financial services.

Who or what could come to our rescue today? Any obvious candidate on the horizon? 

Nobody - unless we relinquish the notion of everyone for themselves, and that is proving to be difficult. On Easter Sunday, Germans went to protest on Berlin’s streets against being forced to stay home, the same happened in Michigan, and in India, protests even led to bloodshed. A further tightening of the lockdown screws by decree or circumstance risks major public unrest that could topple the leadership. Well considering that we may only have gone through the beginning stages of the crisis, these early protests should be cause for alarm. “Make … Great again” is a great nostalgic notion - based on little more than a warped memory. From the Earth’s point of view, "Great Again" may mean something quite different to what America was dreaming of while voting in 2016, and - every other nation that seeks to emulate this stance. "Dreams are my reality..".🎶

The necessary Herculean efforts to restart economies now, arguably require exceptional leadership capabilities and strategic vision. Alas, we were/are engaged in trade wars, currency wars, undoing every possible concept that could lead to a globally connected, inclusive - rather than exclusive - society. And so, I see us as yet further removed from any tools, skill, and capacities to fight what is coming. Moreover, the fiscal tools to counter an economic disaster of 2008-like proportions have been exhausted and not been rebuilt in sufficient quantity/quality. For instance, last year’s attempts to raise interest rate to normal levels have been reversed due to political pressure. Which means, the only tool left to halt another disintegration of the financial systems is ‘printing money’: new credit lines for companies and individuals, accessing taxpayers’ money of today as well as appropriating future tax payments. The margin for error in decisions, calculations etc. will be determined by the passing of time.

The recognition that we may face utter failure ought to be followed by U-turns in many areas (these sample arguments here will probably sound skewed for some ears):

• Reprioritising food safety in production and preparation,
• Salient responses to climate change, racism, personal and societal intolerances, - less talk more practical application.
• A cessation of the constant barrage of unwarranted, regurgitated information flow and tenuous/hair-raising opinions. Let us get back to verifiable content. We still need the media, but one that publishes verified information in their own words and add its own value rather than for the advertiser.

Summary Part 3a

I do not know enough about the individual subjects to evaluate in detail their impact on human behaviour, and financial market behaviour. I just observe the fall out: when integrity, honesty, and personal disciplines fly out the window, the subsequent void will be filled by greed, - and people who twitter all day long instead of doing their job.

However, if we join hands to resolve the millions of issues, we may be surprised to find that their solutions will provide the commercial impetus necessary to surmount the crisis.

Pic 3, courtesy of https://www.nytimes.com/2016/07/17/books/review/lionel-shriver-the-mandibles.html

Financial Assets and Figures to Watch

The prospective period for the events below to unfold is 18-24 months, but some may take years.

Bonds

In recent weeks, bond prices have undergone some severe jitters. Anticipation certainly impacts on investment decisions. Punters expect:

• An end of 0% interest rates, possibly by 2021, rising sharply after that, leading to -
• Inflationary pressures, the likes of which have been predicted by Bernanke and a host of other professional commentators in the wake of the QE measures (2009-2017) fighting off the Great Recession.
• The collapse of the US Dollar as lead currency (and with it a sharp loss in the value of US Bonds vis-à-vis Asian currencies in particular). 
• Mispricing of the underlying collateral / assets.
• S&P Downgrading of US credit rating (currently AAA), as the UK has already seen a downgrade, and Europe may soon (?) follow. In August 2011, the US lost the prestigious rating for the first time.
• Selecting bond funds according to safety considerations.  
• Corporate bonds will suffer volatility in line with equity.
• Bonds with longer-term maturities will become more volatile than -
• short term bonds, which should be hedged to your currency to preserve their buying power. Short-term bonds are less likely to come under intense pressure, but there are precedents like in 2008 with the US dollar. 
• Cash may become king, but the choice of currency matters, unless…
• Gold is pegged to a particular currency, which would result in significant currency exchange rate adjustments.

Gold & commodities

Precious metals, the asset class that many people pin their hopes on, has seen much cash inflow and rise in prices since the extent of pandemic became obvious. However, investors will have to be mindful of their home currency and watch what happens when central banks start buying gold bullion again. It is my favourite asset class for the next 2-3 years. Other precious metals, like silver, may perform nicely, too, but their determinate price is based less on the aspect of safety and more on making money. Hence volatility will be markedly higher. 

Other commodities are subject to how they are harvested, produced, or mined. For example:

·       Oil prices, the near-term outlook is bleak. OPEC wants prices to recover, yet oil consumption has slumped, and oil storage facilities are filled to the brim. Present price levels may cover Saudi and Russian production costs, but many other oil production companies face the prospect of bankruptcy medium-term. Volatility will be heightened by speculative investors to jumpstart a return to positive price development.

·        Soybeans, cattle, wheat etc. are farm products. If our farmers do get the priority they should, then prices will rise according to demand and supply rules. I fear for a disruption upon arrival of a second virus wave later this year. If we remain defiant in our expectations of “winging it somehow”, then prices could go wild – and few people will have the time or mood to watch this space ☹.
     
     Equities

Talking heads will claim that companies like AMAZON, Netflix et al. will benefit throughout the crisis – as they do since the lockdown measures. But it is only some 5 months since the virus was first acknowledged in China. As of now, we have no accurate data of the damage inflicted on global commerce nor can we conceptualise a roadmap to recovery. Rather, the high profile of present ‘stock market winners’ may be blown to bits when real mayhem ensues. At that point, patriotic investors will opt to fund their country’s war chest in preparation of - an invasion from – or an attack on … some despot, while there are those who will speculate on future spoils of WWIII.

Thankfully, short-to medium-term, reality is more civil. There will be time-pockets when equities will return to favour and prices spiral upwards as if there was no tomorrow. The turning points, both up and down, could come swift and mercilessly. I mean to say that investment is a question of knowing what you are doing and stay active in your approach (as always really). Present investment conditions, however, are not conducive for your pension money, nor for a buy and hold strategy.  Short-term, the biggest risk for investors is - falling for a fool’s rally in stocks and pile in without restraint, as soon as the risk of contagion is thought to be under control. Politicians already plan for people to return to work. Indeed, people are protesting in the streets for an early return to work.

Summary Part 3b

1     Gold, the traditional safe haven ‘currency’, is my preferred asset class medium-term. Watch for support and resistance levels, and - an increase in volatility. The latter purports changes in asset correlations and an increase in risk. So-called Gold Funds mostly invest in companies that deal with gold as their main asset. Volatility in these fund prices will align with equity and trading volumes. Hence, I adjust the actual allocation in the portfolio accordingly.

        Bonds need to be watched closely. Bond fund returns are small by any measure with the additional risk of currency exchange, though hedging to your home currency will mitigate the currency risk to some extent. When price volatility increases, we maybe nearing the final peak and an imminent reversal. In my portfolios I am gradually reducing the allocation in longer-term maturity bonds and hold more cash instead.

3   Equity is most at risk, but the asset class could also be providing the greatest opportunities in the short-term. However, risk profile stipulations should be maintained, or even turned down a nudge toward ‘conservative’.

The unwelcome "Heartbeat of the USD" denoting "All is Not Well!";
source: chartnexus 25-4-2020

The serious part of a downturn in financial markets often starts with major currency exchange fluctuation. The chart above looks like the first heartbeat of the volatility monster, the present American administration presumed dead since taking over in 2016. This fluctuation will be exacerbated by the rush of central banks to keep their currency competitive, just as they did between 2009 to 2011++.

Worries of the Wary

Individually and collectively, we all have prevalent concerns, of that I am sure, and currently maybe a few more than usual. I cannot and will not engage in the discussion as to when we get out of “it”. Too much noise already out there and so many variables to consider. It always amazes me that people entertain themselves with wild speculations about potential outcomes when really there is only ever one for each person.

“lost a Shilling and found a Sixpence”

In case, the reader is not familiar with the old value system: sixpence is half a shilling. 

😊

The truth in the old English saying may become more relevant as time goes by, although a universal acceptance may be illusory: “Limit my consumption? Over my dead body!” The meaning does not just highlight cutting consumption. 
It nudges us to 

• review our processes, how to make do with less,
• be more efficient -, yet 
• still be satisfied, even more so when the adjustments were made deliberately and conscientiously, 
• live life preciously. 

I hope that our current willingness -under pressure, I admit - to make do with half of what we are used to and embrace the upcoming changes, will endure once the first virus wave is over. I have my doubts though. Sanity is hard to come by under normal circumstances, and this crisis is not normal. Opening business again, struggling with recessionary aftermath, dealing with unruly unemployment conditions, and getting everyone to face up to the likely hardships, - we can only hope for success as there are no guarantees. What must happen under any circumstance is that the leadership rebuilds the necessary infrastructure to safeguard the world from a secondary wave of COVID-19, or indeed, any other pandemic.

As far as financials are concerned, I will stay with these markets and observe. Price fluctuations, asset rotations, volatile currency exchanges etc are arising to show the ‘realities’ of the economy. In combination, they will direct us toward the best way forward as well as which aspects, values, and side-issues to discard. “Idealistic” you might say, and I would reply, “certainly, dear reader, but I sense that without change – and applying the lessons learned - a return to what was there before is impossible.” Let us be more honest with ourselves at least: there are tons of things that could be improved. The first step arguably is prioritising what must change now, - and what will come later. In practical terms, my personal concern centre around the production, packaging, consumption and discarding of food, finding ways to disentangle ourselves from living off advertising money, and free money of any kind that bears no relation to the services we render, - and how to deal with rubbish. Even before that we need to sort out the rubbish that is stirring up dissatisfaction and frustration in the mind and unleashing it onto our immediate surrounding. 

Set your own priorities. Discard the dross and ease your burden. Better still, since we are still under curfew, start at home.

pic 3, https://www.freepik.com/pikisuperstar

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[1] SCHRODER, https://www.schroders.com/en/insights/economics/black-monday-30-years-on-how-it-happened-and-what-we-can-learn/

[2] https://int.nyt.com/data/documenthelper/6823-national-security-counci-ebola/05bd797500ea55be0724/optimized/full.pdf#page=1

[3]   https://herald-magazine.com/2018/11/01/today-in-prophecy-the-global-financial-crisis/

[4] August 2008 was the actual peak for global equities, March 9, 2009 was the lowest point.