Happy New Year! Yes, I’m late to this party!
Actually, I have wanted to write my following Good Fellas Way Investing note for the last month, but if I’m honest, I haven’t been able to find a clear position or view on what’s going on in global markets.
I have been reasonably vocal that inflation is high, interest rates are high and going higher, and that these high-interest rates will impact the economy with a recession to company profits will be weaker. Ultimately, this will lead to equity market weakness.
Well, a couple of months on, equity markets have rallied 10%, bitcoin is up a whopping 40% (the riskiest asset on earth), and even property seems to be near a bottom. So it seems the global view formed these last couple of months is that we are heading for a soft landing and maybe not even a recession at all, and if that is the case, then shares are cheap.
But as an OG in traditional finance, it’s hard to ignore history, and let’s be honest: it’s the only analysis we can look at for possible future outcomes. My analysis is that we are so used to everything happening at light speed that we haven’t seen a crash or even a reported slowing of the economy. It’s not coming at all, and we really are living in a forever “numbas go up” dystopian political heaven. But there has to be a sensible reason why:
“drumrollllll it’s Liquidity”
Some of you think, “What the hell is liquidity?”
“Liquidity is simply the amount of cash in the economy available to businesses and consumers and it will have global effect.”
In mid-December, China announced the relaxing of COVID restrictions. The Chinese population has been in lockdown for three years and has saved a lot of $$$. Further, they announced a stimulus package for their economy in the hundreds of billions. Add a warmer European winter in the northern hemisphere that allows for more consumer spending, and we still have governments globally providing fiscal support for their economies.
The last point supporting liquidity is the rest of the world’s overhang from prior savings in COVID, which has now all but run out. So all this liquidity flows to the banks, and they are making more now than at any time since the GFC. Higher interest rates make for wider margins (depositors vs. borrowers).
At this point, they have not seen any impairment in their assets and are keen to lend. All of this liquidity is, in my view, why we are where we are. To illustrate how the chart below, courtesy of Cross Border Capital, works in reverse, the lower the redline, the higher the liquidity in the global economy. If you notice, on Oct 22, the liquidity was higher than even during the GFC.
Bank Reserves are also strong, not quite like during COVID but well above “Ample Reserves,” and so now we have an explanation for why asset prices have moved higher despite the poor fundamentals and weak global leading indicators.
So where to from here,I remain of the view that in time we are going lower on asset prices, equities down 20% , property another 5-10%, Bitcoin to make new lows … and bonds are approaching their peaks and starting to represent a compelling investment choice after a decade of sub-4% returns. I recently looked at a blended bond portfolio, which had a 6.3% return per annum over a 5-year term… That’s not bad for retirees.
Anyway, my view remains that now is not the time to get bullish and get FOMO… the economies globally are slowing, and interest rates are starting to take effect…. The Australian news cycle mentions the mortgage stress almost daily now, and yet we still have at least another 50 basis points of higher interest rates, consumers are tightening belts fast, retail sales missed at XMAS, and now discretionary spending is in free fall.
As the saying goes, “it’s time to go fishing,” and by that, I mean to sit on the sidelines and wait for opportunities to present themselves. Yes, I’ve been saying this for the last 6 months, but like fishing, you need to be patient to catch the big fish; they don’t come along all that frequently.
In my first couple of posts, I have talked and mused about the global macroeconomy and how I am reading it. While this is interesting, and I have a passion for understanding the global economy, I want to change it up by adopting one of my favourite sayings: “Yeah, mate, that’s helpful, but not useful.”
Below I have attached my broad asset allocation. Note that this is broad, and we get quite specific as we break down the asset classes into the details of each investment. Everyone will have slightly different bands. The point of sharing this with you is to encourage you to genuinely look at a long-term investment strategy.
So, in my next post, I’m going to share with you more detail on how we break these assets down and what we are looking for in each my asset class.
Chris Fellas for The Good Fellas Way