#15 🔊 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:

It’s Thursday afternoon, 18th of June, and it’s our weekly Q&A, thanks for joining us. Let’s get stuck in. Reflecting on last week, we had some positive comments from the Federal Reserve last week, and then this week they announced more stimulus packages. Today, the Bank of England is announcing another 100 billion pounds in support. So what’s actually happening do you think, what does this really mean?

Austyn Smith:

Well, firstly, it says that they’re dealing with a pretty big problem, which I think we knew that already, but it goes back to what the Federal Reserve in America said last week, in that they’re going to do whatever it takes, for as long as it takes, to bring back financial stability, and their ultimate aim is to bring back jobs in the workplace. How that translates into markets is that there is this ‘tug of war’ going on at the moment between those that are taking a very positive outlook that perhaps the worst is behind us, and those with perhaps a more balanced view that, weighing out the pros and cons, there’s perhaps some caution that’s still required.

Last week when the Federal Reserve said what they said, it did boost markets, but they also said at the same time, that in March when things got really bad, that the whole financial system was at risk again. It’s what we call systemic risk, which none of us want to think about, because it takes us back to 2008. That’s essentially what happened in March, and the Federal Reserve admitted that. We still have this situation where Central Banks, be it the Bank of England or the Federal Reserve in America, are pushing loads of money into the system, which is really to provide credit for the large companies, and to make sure that the cogs of the financial system work smoothly. It’s not, as yet, what I would say, hitting the real economy. It’s not supporting small to medium sized businesses at the moment, but I think their intention is that there will hopefully be a trickle-down effect.

Nick Griffith:

So it’s there to support the major companies, and do you think that the Fed is and the Bank of England is backing liquidity in the market?

Austyn Smith:

Yes, because the Federal Reserve has effectively stepped in, and this was their announcement on Monday, which is saying that they’re now going to start buying individual companies corporate bonds. Effectively what that means is that they are bankrolling those large, multinational companies, and allowing them to borrow at ultra low rates. This is supporting corporate bonds and treasuries at the moment, but it really is sort of underpinning, this idea that Central Banks are ‘Please can you borrow your way out of this?’ It is, perhaps, stockpiling up problems for the future. But at the moment, each day, you have this ‘tug of war’ between those that believe that the Federal Reserve and Central Banks are going to be supporting them versus what’s on the other side, which is increasing infection rates in Arizona, Florida, and other States in America. And also we’ve seen a spike of infections in Beijing in the last week. It does show that the recovery is there, but it is quite fragile.

Nick Griffith:

Is there a danger of the market, having what you might call a false sense of security, in any way?

Austyn Smith:

Yes. Central Banks have shielded people with investments from the real economy because they’ve stepped in, they’ve done quantitative easing, they’ve done whatever stimulus measures they’ve done. We’re talking, as we’ve said before, trillions of dollars worth of stimulus measures. That has given stock markets a boost, and so they’ve recovered a bit. Mainly in America, although Europe and the UK are beginning to catch up a little bit.

So yes, there is perhaps a false sense of security. There is certainly perhaps a bubble that’s beginning to develop, and that can be incredibly dangerous. I’m beginning to read articles from financial journalists titled, “How to Time a Bubble.” Of course, it’s very tongue in cheek.

Nick Griffith:

How do you time a bubble?

Austyn Smith:

Well, you can’t time a bubble, it’s incredibly dangerous and fraught with difficulty. It just shows that these stimulus measures obviously have an effect. They are having an effect on mainly the American stock market at the moment, but as I said, Europe and the UK are beginning to catch up a bit. It’s still only helping the financial system and the large businesses. We still have the real economy problem. Of course, stepping back and looking at the bigger picture, we still have a health crisis, and that health crisis is going to ebb and flow. That’s why you’ve got this ‘tug of war’ going on.

Nick Griffith:

That’s a good point you mention about the bigger picture. I think it’s probably good to check in and remind yourself, remind everyone listening, what are your main priorities when making decisions in the bigger picture? What would you call your main priorities in the way?

Austyn Smith:

I guess it kind of follows the Hippocratic Oath to a degree. We don’t want to do any harm. For us, the first priority in this current situation, is to get through this relatively unscathed, which we’re on the way to doing, and that we’ve got a long way to go, and slowly does it.

The second priority is obviously to look for opportunities for growth, but not so that it overrides the first priority. The first priority is always to protect your downside, and to get through relatively unscathed, because this is one of the biggest global problems that we’ve had in many, many years. With the amount of money that’s being thrown at it, it’s much worse than 2008, and we also have a health crisis on top of that as well. It’s really important that the changes that we do are slow and gradual, and we don’t get carried away. The changes we’ve recently made, what we call a drip feed strategy, is a tried and tested route to having a large proportion of your money helping to protect the downside, whilst gradually drip feeding into the market. It’s not a case of going all in.

Nick Griffith:

Yes. I think that’s interesting. Others, you say perhaps are gambling, if they’re going and looking at trying to capitalize on big opportunities, and taking bigger risks, which could backfire.

Austyn Smith:

Yes. There is certainly an element of speculation, or gambling, in the market at the moment. It’s quite interesting to read, that globally there haven’t been any sporting events. Certainly in the American market, they have an online trading app called Robin Hood, and a lot of people that would normally bet on sports and are now betting on stocks. Hertz, the car rental company which is filing for bankruptcy, has seen massive surges and drops in its share price to the extent that the stock market regulators in America are investigating, because there’s just so many people literally day-trading, betting on things, and Hertz is still filing for bankruptcy. A lot of people stand to potentially, to lose a lot of money.

Also, at times of crisis, you tend to get problems that have been hidden, come to the surface. In 2008, we had things like, the Bernie Madoff scandal, who ran a big hedge fund that was found to be a Ponzi scheme. If we go back further to 2001, we had Enron and World Com, and the accountancy scandals with Arthur Anderson. Just today, I’ve seen, there’s a European company called Wirecard, who has admitted to the stock market that they have misplaced 1.9 billion Euros and they don’t know where it’s gone!

Nick Griffith:

Under the mattress.

Austyn Smith:

The other thing that is on my radar, and on everybody’s radar that does what I do, is that you will always get these unknowns coming at you, and you do not want to be affected by them as much as you can be. Again, that might mean avoiding certain sectors, certain smaller company sectors at the moment, because whilst that could give you a lot of speculative return, some of those companies won’t survive, and some of them will be hiding things in the corner as it were.

On the flip side, there’s still a lot of stuff to be optimistic about, but I like to take the view that it’s probably better to be cautiously optimistic and see how things go. The scary thing I’ve seen recently in the US is that they have now risen the bar in relation to when they would shut down the economy again, if there was a second wave. They’ve said it would have to be a lot worse, before they shut down the economy. I find that a little bit scary because if they’re only shutting it down when it’s a lot worse, then it could already be out of hand, so there’s that scenario as well. Yes, there’s a lot on the radar as it were.

Nick Griffith:

In the prep call I think you mentioned an important point about the media, where the headlines, particularly in the financial sector, are designed to catch attention. But when you read them, there’s an element of contradiction or not a full picture of what’s happening.

Austyn Smith:

Yes. What I’m finding is that when you read a headline online, it’s there to grab your attention to make you read the article. Then when you read the article, you realize that they’re talking about something else, or they can’t back up what the headline said. Where that’s dangerous is, in terms of financial journalism, or where newspapers have paywalls. So on the Financial Times, Bloomberg, CNBC, you might be able to read part of an article, but not the full article. I’ve found that there’s some contradiction and some misleading headlines that don’t always follow through into the text. I guess what I’m trying to do is to read as much as possible, and I get information from all sorts of different sources, and then really just assimilate, “What are the dangers at the moment? What are we trying to avoid? What are the opportunities?” And then come out with a balance, which we call our Cautious Blend ®, and part of that is this drip feed strategy. Hopefully then we can avoid too many bumps in the road.

Nick Griffith:

Great. So putting all that together, what would you say for this week is the main thing for people to take away?

Austyn Smith:

Well, I suppose, certainly the American stock market, if we’re using the analogy of the tortoise and the hare, it’s been a bit more like the hare just recently, but that doesn’t mean that the worst is over. I would tend to err on the side of slowly does it. Also, I read an analogy the other day which stuck in my mind, which is from the film Jaws, if people remember that, from the mid seventies, which is, along the lines of, “The economy isn’t a beach town waiting for summer to reopen again, it’s a beach town hoping the great white shark in the water will go away.”.

We still have this thing called COVID, it’s not going to go away quickly. Stock markets are going to ebb and flow, this tug of war that we’ve referred to. China has been open for a month already, and they’re now having problems in Beijing in the last week. So perhaps, things are going to be a bit slower, and then that will eventually affect the stock market. We just have to tread carefully. Hopefully things will keep moving along in a positive frame, but we have things in reserve to protect the downside. And if there are opportunities, if markets fall in the next few months, then again, we have a reserve to be able to take advantage of that. So hopefully those two things working together should mean a successful year.

Nick Griffith:

Great. We will check in again on the latest news and insights next week. Thanks very much for your time, Austyn.

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.