Where to invest in an uncertain economic environment?

Oct 28, 2019

Welcome to Finance and Fury

1. Today’s episode is a thought experiment –
   1. Investing in the potential future for the economy, Gov expansion and increased money supply – inevitably with The replacement of the Dollar – who knows when - over the next few years, decade, or never
      1. But it is an option – know that because the IMF is looking at it – and politicians are promoting these policies
   2. Permanent QE – will start to become a way to keep markets dropping – soak out additional supply
   3. Lowering rates and moving towards cashless economy to avoid BOJ situation
   4. Fiscal expansion – Government spending – and redistribution in the form of Helicopter money
   5. Abandon the dollar – IMF SDR – new reserve digital currency
2. To start looking at investments – look at the desired effects On the Economy - What this will all do if the policy works as intended
   1. Boost Nominal GDP – sign of economic growth and to increase confidence, spending/consumption even further - Aim is to increase consumption – increased spending, increasing the inflation on money through velocity
      1. Nominal GDP is helped by inflation and these policy options – even if real changes don’t occur
   2. C – increased spending on consumption – doesn’t even have to be real if you create inflation – consumption stays the same but
   3. G – spending by gov goes up – so the infrastructure spending will be reflected in GDP
   4. I – If the economy is seen as to be growing – businesses might consider investing more, hiring more people, etc.
   5. Net Exports – through printing money in Western Economies – you pass on inflation to other nations
      1. USA expanding money supply through QE – China saw inflation – so had to devalue its currency to remain competitive – but this can be costly and emerging markets will see problems with their currency – exactly like Asian currency crisis in the late 90s – one of the root causes started with massive monetary expansion from nations like the USA from early 80s
3. If it works great – it may work for a while – but I think that it will probably have a little real positive impact on the real economy
   1. First – these policies are concocted by economists about studies and theories to trial out
      1. Make up companies, medical companies – tested out products in trials before selling it to the public
      2. Economists and policy makers skip the testing and the option of you buying or not – choice
      3. Mass policies and increase Gov involvement – or central planning – impossible to properly forecast individual adaption and choice
   2. Secondly – The average person doesn’t look at the GDP when deciding to buy a new car, or even understand what GDP is – the disconnect with the average Joe is large between policy makers who fly in private jets to Davos and are driven around and given 6 Star treatment
   3. Don’t know how or why – can be a million different individual reasons it will come unstuck –
   4. Only know why after the fact – hindsight is 20/20 – but this underlying concept of disconnect with central planning and individual decisions (especially in the billions) is why nothing to date central bankers have tried has helped in the long term – often made it worse

4. If this doesn’t work - Down the line - Create two things - mass uncertainty and liquidity issues
   1. When something promised to work doesn’t work – how confident are you the next thing tried will work?
   2. Eventually, the uncertainty of Gov/Central Bank involvement will increase – ceasing spending and investment
   3. As uncertainty grows it can turn to fear – market panics - Human behaviours/emotions play a roll –
   4. Why Complexity theory is starting to be a better metric in financial markets – Market Crash = Phase transition
      1. Will probably do a whole series on this – fascinating way of looking at markets
      2. Follows human behaviours and accounts better for adaptive changes in choice when compared to ridged equilibrium model

 

Uncertainty and Risk

5. Risk and uncertainty are related but different
   1. Risk = speculative/volatility
   2. Uncertainty = Unknown risks – generally creates a freeze response initially – just don’t do anything – spend or invest
6. Uncertainty creates an environment where people avoid risks but then once they become afraid exit from existing risks
   1. In shares – creates selling – not sure what is going to happen – we are loss averse = sell to avoid losses
   2. Talked about this in a previous ep - What assets will survive a financial correction – it will be those that people still have confidence in
      1. Confidence is key – Confidence in any asset is what is needed
7. Why is confidence important? If a lack of confidence/panic is what causes prices on assets to drop heavily –
   1. Then the solution is to be in assets that while may be impacted in prices (short term volatility) – will not go to zero
   2. Asset goes down in value – so what? - Depends on the type of asset and what you do, and what those investments are to you

 

Types of Assets 

8. Shares – Share will be volatile - probably go down in value –
   1. Your options -
      1. You sell – crystallise losses
      2. They keep going to zero
   2. Solution – Step 1 - Buy good companies, diverse business models, diverse markets and a lot of different companies – diversification. Step 2 – Don’t panic sell
9. Managed Funds/ETFs – Active or passive?
   1. High conviction – Active funds – Benchmark unaware - ones that are undervalued through not ETF purchase
   2. Why active is important?
      1. Contrarian trend – can avoid any overpriced share in the index – even if a company isn’t making money (like Z1P or Afterpay) – people buy them and they get into the index – the prices go up for no other reason
      2. Price making – in a correction there are many bargains on shares – passive funds won’t take
   3. High Conviction - Contrarian to the whole index –
      1. Goes against the trend of full invested funds in passive – active managers can hold cash for bargains
   4. Benchmark unaware - being a large cap manager limits bargains and forces managers to into the top end of an index which will suffer in large passive ETFs/index selloffs -
   5. I think of TLS, bank shares are volatile term deposits – not expecting great growth off them, the valuations are almost like a Utility company – but decent dividends
10. alternative asset classes – Hard assets – gold
    1. Gold/Silver/Palladium/Platinum – Two options depending on how bad you think crash will be –
       1. Really bad - Not on futures contracts or derivatives, but one that has the underlying asset
          1. Not enough gold/silver etc. in the world to cover the size of ETFs/funds with positions in gold
       2. Just a massive correction – Gold priced ETFs -

 

Summary – Assets that while not retaining value like you could want (drop in price) – if you hold, you can survive

1. Have a range of investments (not just bank shares)
   1. Some physical assets – Gold
   2. Shares in companies that people will still use – not fad companies or ones build on people’s discretionary spending
   3. Don’t know how well Index’s will fare with the new overweight position in passive funds
   4. Property – That you can hold and not need to sell
2. Make sure they are quality assets
3. Don’t sell – enter the market slowly during a panic

 

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