Ten years on from what is known in Australia as the Global Financial Crisis, and the Global “Free Market” Capitalist economies do not resemble their post-World War II construct.
As I write, fully 80% of German Government debt has a negative yield meaning that creditors are willing to pay the German Government for the opportunity to hold it’s debt.
Unsurprisingly, in this world of “free markets” dependent on Central Bank purchases of Government Bonds, and in Japan’s case, explicit purchasing of publicly traded shares, the prices of nearly all attractive, long-term assets are fully valued to say the least.
The mantra of TINA – There is No Alternative (than to step out the risk curve and purchase more risky assets to obtain a return) – is the order of the day.
Nobody can confidently predict how all of this experimental monetary policy manipulations will end and when. What can be said with some confidence is that 10 years after the last major financial crisis, there is not a lot left in the currently understood “locker” for Central Banks to draw upon in another crisis. The US looks likely to reverse some of its interest rate rises, from such low levels already that the usual response in a crisis to decrease interest rates by 4% in interest rates would similarly place their Government debt at a significant negative yield.
Repositioning of Geopolitics is another major complication, which alone previously would not necessarily have been a major concern, but is in the current backdrop of concerns over deflation and low wage inflation, and global debt piles. It is clear that under Trump the US has shown it will no longer acquiesce to Chinese emergence as a super power while flaunting international trading rules and subsidising (and carrying out industrial espionage) in technological innovation in telecommunications, etc. (This realisation early this year was the reason for our decisive action to sell down Chinese stock holdings – and the situation is playing out as I expected with rapid re-engineering of supply chains by large western corporates away from China and to other low-cost suppliers in the region.)
It now appears clear to me that Paul Volcker’s greatest achievement was not slaying the inflation dragon but in creating breathing space from political interference in setting monetary policy. Already under Greenspan that began to reverse, but the GFC has accelerated that movement and it appears to me that Central Banks are quite attuned to what their political masters always find desirable – looser financial conditions and higher asset prices!
Obviously that is not a sustainable situation, but markets can remain irrational for longer than many sceptics can maintain their position/stance.
Investment considerations over the next 30 years is and will continue to be quite unlike the second half of the 20th century. Except in one important way – the businesses that prove to be exceptional over the long term – resisting rapidly evolving technology and economic conditions – will continue to significantly outperform. However, even Charlie Mungers expresses serious doubt that he would be able to outperform the indices from this current position.
So what to do?
In recent weeks Ray Dalio has received much publicity for writing a paper discussing the above points and stating that he believes that we are near to a paradigm change – ie that global debt levels will weigh and there is likely to be an event which ushers in a new paradigm. His conclusion is to buy gold.
His thoughts and conclusions are similar to mine, except that I would not be so bold as to say that any event is imminent. It’s difficult to know when the herd will decide to recognise that the emperor wears no clothes. However, it is clear that virtually all asset classes are very fully valued and one has to work hard to identify any assets that are reasonably valued, much less undervalued, in which to invest or park money.
Berkshire Hathaway has amassed a cash pile of $120 Billion largely due to a lack of opportunity, and incidentally it’s share price is still only 5% higher than when we sold out of our position almost 2 years ago while the S&P500 is up over 20% (due to a shunning of value style investing).
The point being that I agree with Dalio that gold is a reasonable place to park cash over the short to medium term. The argument that gold produces nothing is essentially gone now that bond investors need to pay sovereigns for the privilege of providing them with capital – so any long term store of wealth that does not have a high holding cost is worthy of consideration.
The AUD has corrected somewhat in recent months (currently buys around 0.68usd and widely considered to remain under pressure) while gold has appreciated. So plan is to allocate around 12% to gold in the first instance, with the first half of it purchased in unhedged form (GOLD ETF) – so that it is both a gold and AUD position – and then over the next few months a second tranche of either GOLD or GAU (the latter hedged in AUD, in the case that the AUD falls from it’s current level).
One of the few other assets of which I am aware that has not experienced a strong run up in price in recent years, and therefore may be a good asset in which to protect wealth over the long run, is pockets of rural property. So I will continue to investigate whether there is an opportunity to invest in some agricultural land, possibly with a ruin in need of renovation if in Europe.
When we do experience a significant market correction we will take a significant position in Berkshire Hathaway as it appears relatively rare amongst US corporates in that it has invested in plant and machinery for future industrial growth (whereas many others have borrowed to simply buy back shares and boost share prices).
Additionally, as medium-short term positioning want to be “short” AUD, against USD as EU seems to be struggling in face of Global trade issues, and as a short term positioning consider taking some tactical equity risk as reasonable view that stocks will gain until April/May 2020?
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© Copyright Brett Edgerton 2019