Spotting shaving cream froth on fluffy snow piled high in a long blizzard from 50 feet

I am well aware that the ‘Macro(economics)’ element of this blog has taken a backseat in my writing since COVID-19 broke and I have not updated my views on investment markets for almost a year. 

There are two main reasons for this. Firstly, these times are unprecedented – in fact I believe we have entered a new era which I refer to as the Great Reset – and I consider that it is far more important to write about the social and socioeconomic issues of the time.

Secondly, my views on the market have not really altered over this time. I consider that we have been in a highly irregular and unsustainable period of extraordinary support for asset market prices, and that commenced well before most of humanity came to understand that coronaviruses contain RNA and are covered in spikes.

The exuberance has been around a long time, this time around, and irrational exuberance is evident in many places, even beyond the erratic trade in cryptocurrency. I would suggest that handing over money for, or erratic trading in, blank cheque companies – or special purpose acquisition companies (SPACs) – often marketed by celebrities will become emblematic of the late stages of this period.

I believe that anybody active in this market is gambling and is over confident that they will foresee the change of tide before others. That does not mean that everybody holding assets is a gambler, but there is an argument for locking in returns for those strong characters who will resist the desire to plunge back in if the madness continues a while yet.

Like ‘my mate’ Tom Keene on Bloomberg, I am looking for an entry point in keeping with my long-term investment strategy. That entry point is well south of here.

Absolutely the market is frothy – very frothy – but the reason why some continue to disagree with this view is that spotting this froth is like trying to spot shaving cream froth atop of fluffy snow piled high in a long-running blizzard from 50 feet!

(Note, having lived only a brief period of my life in a region with Winter snow – indeed, outside of the tropics or subtropics – my snow analogy might be a little non-sensical but it seemed to make more sense than my first, cappuccino froth…)

And of course, by this stage of any such period, so many have been making so much money out of clipping the ticket of fund flows from the increasing activity that there will be no shortage of superficially reasonable arguments for why the party will surely continue.

The problem is that after a decade and half of expansionary monetary policy – ranging between extremely loose to ridiculously loose – it is really, really difficult to find any assets that are not overvalued on a reasonable assessment of long-term value. Thus, if over a long-term basis purchasing at these prices is not likely to be profitable, and here I have to point to GMO’s (the home of Jeremy Grantham) prospective returns analysis released monthly as one example of similar thinking to mine, the only reason to buy these assets is ‘tactical’, i.e. short-term, which is a strategy dependent on greater fools sending prices higher allowing an exit from the ‘trade’.

There is one asset which I would buy, if my circumstances were different, because it is one of the long-term premier assets (valued for centuries) which has not increased sharply in price over the last decade. In fact, this asset class has actually fallen over that period because of local economic circumstances, and now those circumstances have deteriorated sharply in the pandemic. Curiously, prices have not fallen sharply, as I had expected, which perhaps suggests that prices are about as low as they ‘can’ go. 

I believe that well-located, quality property in a premier tourist city in Italy, I looked especially at Florence, represents a very good prospect for long term investment in the current climate. Unfortunately my means precludes me from buying quality in this market, and I am not certain that scraping together funds for a subterranean well-located apartment, that may or may not meet cadastral requirements for habitation, would meet the brief. 

If I could buy a quality apartment in such a premier city that will always be of interest to humanity I would do so confident that I would receive a positive yield for the entire duration of my holding, and I would be extremely confident that over the long run I would make an excellent capital return. In my view, such assets are rare at present while trillions are invested in negative-yielding bonds and long-duration bonds at very low yields.

I do intend to give a full update on my investment views and my (admittedly muted, given I am allocated mostly to cash and gold) investment performance when I finish some important writing assignments including the second part of my response to Prof. Michael Sandel’s ‘meritocracy’ discourse.

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© Copyright Brett Edgerton 2021

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