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 –

  1. 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
  2. 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


Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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