#14 🔊 Austyn’s Weekly Financial Strategy.

Below is a link to a short Q&A audio interview I’ve just recorded where I give my thoughts on these extraordinary times.

Link to Audio Recording

Nick Griffith:

Very good to have you on the call this afternoon, this is our weekly Q and A, Nick Griffith talking to Austyn Smith. I say let’s get stuck in on the 11th of June 2020. So I think we’ve spent nearly 90 minutes in prep mode for today and we’re going to condense this down to just 10 minutes…

Austyn Smith:

10 minutes! There is a lot to talk about.

Nick Griffith:

I think one of the main things I found most interesting was your views on what the Chairman of the Federal Reserve has said in the last week, and his message being really what we called a ‘Dose of Reality’. So perhaps we could start there, with what you thought, what insights you have.

Austyn Smith:

Yes. So I was sharing and talking about what happened yesterday on Wednesday, the 10th of June, and I was listening to the Chairman of the Federal Reserve, and he’s probably the second most important person in the world, because he’s effectively the Chancellor of the Exchequer for the globe as it were. And he’s independent from Trump and generally the Chairman of the Federal Reserve, they’re quite plain talkers. And certainly Jerome Powell is, and this is where some of the insights come from. And so it’s worth talking about, as he was effectively saying that interest rates are going to be low, very low near zero, for the next two years until 2022.

And so whilst stock markets go up, stock markets go down, and in America they’ve shot off in anticipation of a recovery this summer. He was really giving a dose of reality, not to trim the markets back in any way, and we’ll come onto that in a minute, but more just telling it how it is. And you get things from Jerome Powell that you’d never get from our politicians or European politicians. So it’s worth listening because that’s where you get some of the really big insights.

Nick Griffith:

Interesting. And I think he summarized some of the actions that they were doing back in March and also what some of the future plans are. So yes, I think some of those would be interesting, in what’s happening and what they’re prepared to do.

Austyn Smith:

I think the biggest thing that came out of this was that the effects of COVID, are going to be with us for at least two years. And we’re not hearing that from anyone in the UK or anyone in Europe, but you’re hearing it from America and you’re hearing it from the Chairman of the Federal Reserve. And they have said that what’s happened in the last three months has been the biggest economic shock the globe has experienced in our lifetime in 90 years, far bigger than 2008. And again, I think you don’t get that information in the UK or from the UK papers because it’s not very palatable. So they have pumped loads of money into the system, lots of stimulus measures and that sort of thing.

But what was very interesting last night was that they only said ‘so far so good’, we’ve got a long way to go. And actually we’re prepared to do a lot more if the need arises. And so I think that’s just made markets stand back a little bit to think, well actually, yes, we thought, perhaps things were going to get better much quicker. But if Chairman Powell is coming out and saying, we’re not even thinking of raising interest rates. In fact, his quote was, “we’re not even thinking of thinking of raising interest rates.” It’s so far off the radar at the moment.

Nick Griffith:

Not even thinking of thinking?

Austyn Smith:

And there is a backdrop to this as well, that’s not widely reported. And that is that in America just recently, 17 States have seen an uptick in COVID infections.

And there is obviously a risk of a second spike and it’s becoming very politicized in America, even today, their equivalent of Rishi Sunak, our chancellor of the Exchequer, is a chap called Steven Mnuchin, who’s the U S treasury secretary. And he’s already coming out and saying, whatever happens, we’re not shutting down the economy again, even if there’s a second wave. And so the Chairman of the Federal Reserve is an apolitical person. He’s not going to side with anyone. But all he was saying was that even if there is a second spike, even if it’s a regional second spike, that’s obviously going to dent confidence and will slow down the recovery, but he’s not even factoring that into his calculations at the moment. He’s just basically said to the global economy and to America, “I’m going to keep interest rates near zero for two years, I’m going to pump loads of money into the system.”

You would normally expect the stock markets to be joyful at something like that. And maybe they will be at some point. He also came out and said, that if there’s an asset bubble, like we’ve seen in the past, he’s not going to raise interest rates deliberately to stop it because he said, that’s not my remit. My remit is to get everybody back to work. He is very concerned that 20 to 24 million people, depending on what metric you look at in America, are out of work. And he’s very concerned about the long term impacts of that.

Nick Griffith:

I think it was reassuring having important people like this being decisive, and there were some positives. We also talked in the prep call about your experience going back to 2008 – 2011, ( where we created Cautious Blend ® and Safe Harbour Planning ® ) and how that effects actions now, and puts us on a better track, ( as well as going back to comparing this with the Great Depression )

Austyn Smith:

Yes Chairman Powell was asked in the press conferences …is there a comparison to the Great Depression in the 1930s? And he categorically said, no it isn’t, because the global economy today was in a much better state than it was back in the thirties.

And he said something that I hadn’t heard in that context before, he actually said, what we’re going through at the moment is a ‘natural disaster’. And in a way, I guess it is, it’s something that has completely shocked the world in a very short space of time. And, what he did say is, just because we’ve gone into it very quickly and the responses have been very aggressive in supporting the markets and hopefully supporting the real economy, it’s still going to take longer to get out of it. And I think that’s the real bit that I got from it, that whilst there’s a lot of positivity out there and we’re reopening and everything else, unfortunately it is going to take a little bit longer. And that’s just something that I think we’re all perhaps getting used to, as in getting used to thinking about it that way.

Nick Griffith:

And I think in terms of what to be doing about it? We were in agreement, that certain wealth managers were doing less, but actually, particularly when it comes to financial planning and management, this is not a time for doing less. In fact it’s a time to do more. And I thought you came up with some good points, if the impact is two years, what changes would you make to how you’re approaching things?

Austyn Smith:

Yes I think the reality of where we are at the moment, and even the Federal Reserve is saying this, is that everything that they’ve done has worked so far so good in the first three months of this, but it’s still early days. And so, ourselves, as looking after people, are going to have to remain adaptive and perhaps have more regular reviews. And as you say, it’s not a time for doing less, it’s actually a time for doing more. And that doesn’t mean that you’re constantly changing things around just for the sake of it, because you can do lots of reviews and sometimes you decide, well, actually I’m not going to do anything. But it’s certainly a time to be reviewing things on a more regular basis, because as the Federal Reserve said, it’s a very moving picture and they’re prepared to do a lot more to help the stock market and the economy in the next couple of years.

And so I think how that translates into what we do, is looking at what’s been said, because it’s the only place where you can get some element of truth in the world. There are so many news sources and it’s choosing the right ones to look at, because there is no forward guidance in the UK, whereas you do get it from America. So, in the short term what’s done well in portfolios is some of the more cautious stuff, some of the quality bonds that are in the portfolio. So those can be added to. But also certain pockets of stock market based investments as well. And I think that’s what we’re going to be adding to. But just being very cautious from the point of view, that things are going to be moving so quickly over, I would say the next 12 to 18 months, where you’ll see certain pockets, create asset bubbles, those asset bubbles might last for three to six months. You might then need to take profits from that and then rotate and move into something else.

And I think that’s what we’re looking at really over this year and possibly next. So we started doing the weekly calls, which is really all about more regular communication. We’ve got more regular rebalancing, more risk assessment going on with what we’re allocating clients into. And this really goes back to our experience of 2008. And of course, no experience is always the same, but it’s being very adaptable to a changing situation. And between 2008 and 2011, well, you had the financial crisis, but then you have the Euro crisis as well. So there was a lot going on and we were able to get clients through that relatively unscathed. And that’s what we intend to do this time.

Nick Griffith:

Yes. Right. And what if there was going to be an asset bubble, do you think then, they ( Federal Reserve ) would step back from what they were doing and stop the stimulus packages?

Austyn Smith:

No they’re not. This is a really important point. So in the Q and A, it’s a bit like the government’s press conferences, they have lots of journalists asking questions. And so they have Financial Times, Wall Street Journal, Bloomberg and all those sorts of people. And he ( Chairman Powell ) was directly asked that point that, if asset bubbles are being created, perhaps in technology or global health and pharma, because everyone seems to funnelling into that at the moment, would he then raise interest rates to head that off ; because chancellors or treasury secretaries, they don’t want asset bubbles, it’s boom-bust economics. But he flatly said, no I’m not going to intervene. I’m going to just keep pumping money into the system. Because I think what they’re really worried about, is that if they turn the taps off too quickly, it will actually make the situation worse. And then they won’t have anything to get them out of that hole.

And there are more tools that central banks could use ; negative interest rates to force people to put their money to good use. And the other one in America that they’re talking about at the moment is something called Yield Curve Control.

Nick Griffith:

I love this one. What does that mean in simple language?

Austyn Smith:

It means, fixing a rate of interest that doesn’t change for the next few years. because normally fixed interest, gilts and interest rates, they fluctuate daily, because they’re traded. Basically in America they would just fix it. And that would mean that people would know exactly what their borrowing costs were and that would then stimulate the economy again.

So they’re looking at doing other things. And I suppose another takeaway from what was said last night was, … a big problem has occurred, we’ve thrown the kitchen sink at it, and we’re prepared to do it again, which is quite astounding when you think about it.

Nick Griffith:

Reassuring.

Austyn Smith:

Reassuring and I would say it’s extraordinary as well. So yes, it’s clear evidence that they’re going to do whatever it takes. In fact, going back to the start of his press conference he said, we’re going to do whatever we can, for however long it takes. He thinks it’s going to take two years, which I thought was interesting because no one, this side of the pond, is actually saying that.

And I suppose it takes time for all of these things to sink in and it might not be two years, but that’s how long the Chairman of the Federal Reserve thinks it’s going to be before the global economy recovers. But we will have, opportunities, and possibly asset bubbles which we can tap into over the next 12 to 18 months.

Nick Griffith:

Opportunities.

Austyn Smith:

Opportunities, and we can tap into some of that and hopefully park some profit and push valuations further, but still erring on the side of caution, which is what we do. We’re not getting rid of our cautious viewpoints because that’s just our DNA really.

Nick Griffith:

And I think what they say is a week is a long time in politics. Well a week is a long time in COVID19.

Austyn Smith:

It is yes.

Nick Griffith:

So we will be doing another one of these to recap on the last seven days news in a week’s time. So…

Austyn Smith:

And we didn’t even talk about Brexit, because we did in our prep call.

Nick Griffith:

You just did.

Austyn Smith:

We didn’t have time. So I’ll have to do it next week.

Nick Griffith:

So, in the meantime, I’ll say thank you very much for your time, Austyn. It was a pleasure to chat.

Austyn Smith:

Thank you very much, Nick. Take care.

Past performance is not a guide to future performance
The value of investments can fall as well as rise
Portfolio performance varies according to client circumstances

About Austyn

Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in 2010, 2013 and 2017.

Following his work on risk reduction strategies, in 2011 he was recognised by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’

Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.

With over 25 years financial strategy and wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.