How to capitalise on the depressed global market and what investment strategies might be worth considering, if any?

Welcome to Finance and Fury, the Say What Wednesday edition.

Question from John:

“I have a question on how to capitalise on the depressed global market ie what investment strategies might be worth considering if any. I know it’s very much early days, but I’d be curious to hear your thoughts, if you have any, on timing, likely post -CV19 effects of the financial measures that are being put in place (ie what might the recovery look like)”

Great question – Very deep topic – the situation is changing every day – so doing this podcast on an ever-moving situation creates a dilemma – what I say today at time of recording – may not be accurate by the time you listen – evolving

1. But what we can do is look at the causes of the loss of the economic confidence and the markets crashing –
   1. Then look at to the triggers of potential market recoveries along with asset classes

Start and look at what happened in the ASX – Shares have been hammered – lost 32% in a matter of a month –

1. Record Drop in such a short time – why? Was it fears from the death rates?
2. Looking at the numbers of pandemics in the past and how markets responded –
   1. Back in 1918-1920 – Spanish Flu – ASX market went up 12%, 18% and 10% – so pretty solid years
      1. This is meant to have killed 50m people – when world pop was 1.8bn – so just under 3% of population
   2. Asian Flu – 1956-1958, an outbreak of Influenza A would travel from China to the U.S. and rest of the world, killing 2 million people worldwide according to the WHO – Markets went up 10%, 18% and 23%
   3. 2009 Swine flu – CDC from April 2009 to April 2010 there were about 60.8 million cases of the swine flu with about 150,000 to 575,000 fatalities – 12,469 deaths in the United States – markets went up 40% and 3% – coming from bottom of GFC
   4. For comparison, the WHO estimates that 250,000 to 500,000 people die of seasonal flu annually – but it doesn’t create a market collapsing
   5. Important point – it is not the virus that investors and by extension – the markets are responding to – 30 pandemic like illnesses in the past 40-50 years – markets have never responded like this before
   6. This all comes down to a few elements working in conjunction – Confidence and expectations but it appears to be in reaction to what Governments are doing –
      1. Confidence and Expectations – How the price of the market works – expectations – if people are worried about losing money – they will sell down shares and hence – trigger the start of a market decline
         1. First panic sellers start the self-fulfilling prophecy – market sees losses from mass sales and then the flow on effects of further sales continue
         2. Example – if only 100 people in market – 1 sells their shares – not much effect – but now if 15 people sell their shares lowering prices by 10-15% – creates a panic for the rest – they sell – losses continue to grow
      2. So markets are responding to the Government policies – on both sides – on shut downs and then printing their way out of the problem
         1. I’ll do a full break down in another episode next week to run through government stimulus packages – these keep changing as well –
      3. Support and resistance levels in the share market – this is what speculative trading reverts to – there is a minimum point based around fundamentals that the market can drop to –
      4. Floor and ceiling – floor is support – ceiling is resistance – think of a super bouncy ball – throw it with enough force can break through a weak ceiling – that is where buyers and sellers act as the support and resistance –
         1. You foundations and floor can be solid – i.e. the true valuation of all business in the market as an aggregate – but this doesn’t matter in a panic – the market responds to demand of buyers and sellers –
            1. If everyone dump their shares now – then all companies would go to essentially zero – smash through the floor
            2. That has been what has occurred in a smaller extent over the past month
         2. When you look at the amount of money in the ASX in super funds or in custodial holdings for index managers – it makes up slightly more than half of the market – so when people now sell the index – the index drops –

But long term – given government involvement – something to watch out for – Government restrictions being eased will be a sign of the start of market recovery – but economic recovery may take some time

1. Going back to the episodes on the future of the economy – the thing to watch out for is the monetary reset – gold and other physical assets – and other physical assets will be better than cash – but in a panic cash is what people run towards –
   1. Think of the economy as a flow of money – Money sold from assets has to flow somewhere – if not repurchase – has to go to cash – for most of the global economy – cash is USD – why AUD has tanked in comparison – not due to our dollar weakening but USD strengthening
2. Now enter permanent QE and helicopter money = money supply increasing on top of the demand for dollars – inflation = silver being better than gold but only once real inflation kicks back into the system –
   1. This comes form economic recovery and real price inflation in goods – not due to artificial supply shocks

Clients and friends have been worried about inflation/hyperinflation – what does the Road to hyperinflation look like

1. Covered in a previous SWW episode – but first is Lowering supply – supply shock
2. Increased demand – helicopter money – giving people money to spend
   1. By this comes back to confidence – if there I no confidence – people will save the funds
3. In Australia – may not materialise – a lot of our goods are imported and also – people spend more to pay mortgages
   1. So biggest concern is the currency lowering to lead to inflation

This said – lets look at asset classes –

3. Cash – Right now – a great asset class to have as it can be used to buy longer term assets – but Cash won’t be king once inflation kicks in – given the low interest rate environment – inflation will destroy the real value of money
4. Fixed Interest – Debt Instruments – not all made equally – but it is still all debt –
   1. Government bonds – Are growing in size now due to deficit spending
      1. Interest rate drops have boosted existing bond prices based around coupon payments
      2. But the more of these out there – and the fact that interest rates have very little downwards movements – can be a risk for prices long term – also – some do suffer inflation risks
   2. Capital Notes or corporate debt – would avoid
      1. Capital notes – used as part of bail ins if banks default – APRA controlling super funds and banks has been a match maker – forced them to buy – Example QSuper – most of their ‘bond fund’ is in corporate debt – wont disclose which companies but given the rise over the past 2 years as banks have been issuing notes – have one guess where the money is going
   3. Overall – with QE and lowing interest rates and yields – the next decade for FI may not look so pretty
      1. Gov Debt – have trouble paying this back but the central banks are buying these up at this stage though QE – prices as well can crash if there is a long maturity and higher duration risks – increasing the sensitivity to interest rate movements
      2. Corporate debts – especially capital notes issued by the banks at risk – would avoid – interest rate risks but risks of default or being used as bail in if notes in banks is high
   4. Shares – longer term – starting to look attractive
      1. Recovery at this stage of markets going up – dead cat bounce – been playing out for the past 2 weeks – bouncing around the 5,000 mark – whilst low prices – Have the potential to drop lower at this stage
      2. Personally – think they may – Crashes come in compounding events –
         1. GFC – took 18 months to play out – first 9 months saw a crash but then the Lehman Brothers collapse created a further crash –
         2. When did things turn around after the GFC – When the global committee known as the G20 got together – Again – Governments controlling the economy after the mess of their legislation changes in 1986 in Aus and the UK and 1999 in the USA came to fruition
      3. From here – if we do drop back to the lower support levels of 4,000 – but from current levels would be a 22% drop – hence why DCA is going to be a better strategy over the next 6-12 months as opposed to dumping in everything now
      4. Nobody knows where the bottom will be – has to do with confidence – markets responded to government stimulus – but market sees this as a positive sign – as it is speculative – which is a fragile reason for a price gain – similar to large crashes of the past – do have a dead cat bounce – who knows when this may continue to decline – so slow and steady entering markets is the best approach at this stage
   5. Gold and precious metals – provides a good hedge against inflation or market crash from here
      1. Gold price – based around what the future of the economy looks like –
      2. The best thing about gold and precious metals – prices in USD – so the price of these assets help to avoid the Aud demise if we continue to deficit spent – USD gets away with it – can finance through being global currency reserve –
         1. But petro dollar may have seen its slow demise along with the de-dollarization I talked about 5 months ago with the China/Russia alliance and their IMF SDR backing

All this being said – no way to tell exactly how the policies will play out – or how the market will respond –

1. Saw on Monday a 7% gain in the ASX due to the announcement of more stimulus by governments – But at what long term cost – this money is coming from debt
2. Therefore – This money needs to be paid back – but not if Governments default
3. Current size – $189bn – with 19m adults in Aus – $10,000 more per person that gets added to the debts that we owe governments – if you are a tax payer
4. But the market is now more speculative –

Summary –

1. IMO – Best investments for the longer term – start to rebalance back towards shares
   1. Bottom is probably not here – but if markets continue to decline – continue to rebalance
   2. Have capital hedges in a portfolio – Gold and precious metals
2. Evolving at the moment – so hard to say when timing is best

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