#11 🔊 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 the continuing unprecedented events.
Good to speaking to you. It’s Thursday afternoon, the 21st of May 2020, and we are doing our weekly Q&A. We’ve just been chatting about what things have happened in the last week, and a couple of things caught your eye. So I thought we’d start out with those.
Yes, as a brief round-up, it looks like Europe are now catching on the coattails of America and coming together with their own Europe wide bailout policy. They’re looking to raise a 500 billion Euro fund so that all member states can benefit from that. We’ve had the FTSE improve a little, but it’s just as well we can’t travel very far, because it’s partly on the back of our currency devaluing a little bit more. And we’ve seen a lot of volatility in the stock market based upon, ‘is there a vaccine v’s isn’t there a vaccine’, and are the tests any good? But underpinning everything, is the Fed, and where in America last weekend, the chairman of the Federal Reserve, Jerome Powell, was on a program called 60 Minutes. His comments are supporting the stock market at this stage because he said that they are ‘not out of ammunition yet.’ (more stimulus is available).
I think we were talking before about the stock market narratives and it seems that if news of a vaccine test comes out, the stock market reacts to that very quickly. So perhaps the new narrative is that ‘a vaccine will cure everything’. How does this affect the volatility of everything?
Yes, stock markets do go in narratives and as human beings, we all latch onto stories. So the ones we’ve had so far are, it’s just a flu, which I guess gives some justification to minimize what’s going on. Some people have latched onto the story about herd immunity, which justifies carrying on economic activity, even though that might risk lives. And then the third narrative has been flatten the curve, which justifies keeping the lockdown and keeping loss of life down as low as possible.
So those are the three narratives that have been floating around over the last few months. What we’ve seen just in the last week or so is a new narrative, which is that a vaccine will cure everything. That’s on the back of some positive reports from America about some drug trials, and of course, it’s still really early days yet. When I talk to people in the medical profession, they say that normally these things take at least a year. And so I think we’re going to have a lot of stop and start in terms of those sorts of stories. And possibly those narratives will rotate different at times. So, as we talked about last week, the stock market’s entered a very volatile phase, and we’re likely to see that continue.
Yes, I think we are seeing things in some senses being drawn out. I think that the furlough scheme is essential, to provide support for people, but are we not pushing some problems down the road?
Yes, governments around the world have done what they needed to do because they asked for the economy to be shut down. So they had to then support people and business. The furlough scheme has been extended to October and I believe that there’s now over eight million people in the UK on that. I guess they’ll have to review it again in October, but at some point, they’ll have to stop it. At some point, there’ll have to be tax rises or changes to our tax system to pay for it. Although the other story I read this week, was something called a perpetual bond or a war bond, and that some of this debt will just be tied up and forgotten about for 60 years, well, not quite like that, but you know what I mean.
In terms of our World War II debt this was only paid off a few years ago, (December 2006). So some of it might be tied up and pushed out, because we had austerity after 2008 and with what’s being lent to companies and individuals today, this is far in excess of what those bailouts were 10, 12 years ago. So there’s going to have to be a mixture of responses. And in fact, the one I heard about called a perpetual bond is basically where the debt is never repaid. Whoever buys into that just gets a rate of interest in perpetuity. So there are some creative ways that central banks are now thinking about these things.
Although, one of the very bizarre things that happened this week, was the Bank of England issued gilts at a negative yield, which means that if you held them to maturity, you would lose money. They’ve never done that before. So there are some strange things going on in the financial system at the moment, and it implies that inflation has fallen, and could fall further… deflation.
Talking negative numbers. It was in the papers today, for the second time, that the Bank of England is looking at negative interest rates, and a few people are even wondering, what does that mean?
Yes, we touched upon it briefly last week. Well put it this way, you’ll have your money in the bank, but it won’t pay you any interest. And maybe you’ll have to pay some money back to the bank for holding your money, which is bizarre. And I know that Scandinavia have experimented with it, and the Bank of England, are talking about it again. It’s the same in America, but the people I read out there think it would be a very, very bad idea if that happened. At the end of the day, the chairman of their Federal Reserve is saying essentially that he’s going to do whatever it takes and that there’s more ammunition to fire, at further problems that might arise. I think in a bizarre way, that is what’s supporting the stock market at the moment.
So when we’re issuing updated values to people, I think broadly, people are reasonably surprised, there’s not too much, that’s gone wrong, in the last few months. That’s because we’re cautious and hopefully proactive, but values have held up pretty well. And I think that’s because of these nice messages coming from the central banks around the world. But don’t let that allay people’s concern too much because being very realistic, this second quarter, the results from companies are going to be far worse than the first quarter. And the V-shape recovery is looking less likely. That said, with the world reopening, we’re going to see what happens next soon enough. We’re going to have a track and trace app maybe in a month’s time, to help with a second wave . So things are still not as rosy, as maybe the level of the stock market gives us the impression.
It’s a global world we live in these days, as we know, and you’ve got some countries unlocking and other countries like Brazil and Russia, probably not even at their peak yet. So how does that imbalance effect the uncertainty?
Well, it might not be reported in the mainstream media, but Brazil is really having a problem at the moment because they have a president who is not taking the virus seriously. So countries like Brazil, Russia, Mexico, they’re going through their own problems at the moment. And these countries are responsible for a lot of exports, a lot of oil or a lot of raw materials, that sort of thing. So supply chains are still going to be affected. Even if Europe restarts quite nicely, or even if America restarts without too many problems, there’s always a risk of second wave or a third wave, and that’s a risk that businesses are not going to get back to what they perceive as normal, as quickly as possible. What struck me as interesting is that the big airlines and the companies that are associated with the airlines, are saying that they’re not going to be back to normal for at least two or three years. And I’m thinking, well, surely that’s not going to be the case. Surely in a year’s time, we’ll all be back on the plane.
But they’ve taken the view that that’s not going to be the case. And of course, Rolls-Royce wanting to lay off about 9,000 people, which is pretty horrendous. And of course, then the supply chain in the UK that works with Rolls-Royce. The ripple effects. And so I think we’ve still got a long way to go. And just to recap, perhaps a month ago, maybe some people thought there was going to be a V-shaped recovery. But maybe we’re looking at a W and that’s being reasonably positive, where things perhaps get slightly better in the summer, but then possibly tail off again, as we hit the autumn. And of course, then our natural flu season as well would have hit at that point. And so there’s lots that I’m trying to keep an eye on, Nick.
There’s lots happening. But there is positive news when you look at some of the health data in the UK. Some of the trends in infection rates and death rates are going in the right direction.
Yes, there are some positives, and there’s more testing in the UK. And as the World Health Organization has always said, testing is the root of this and as much testing as possible should go on and then hopefully through technology, perhaps there will be some movement in the summer and some relaxation of lockdown. I think it’s very much going to be stop-start, not only in our economy in lockdown, but also just in the greater stock market scenario. One of the guys I follow in America, Howard Marks, was recently interviewed and I’m directly quoting, and he said, “no amount of sophistication is going to allay the fact that all of your knowledge is about the past and all of your decisions are about the future.” What he’s saying there, is that even someone of his immense experience, … there are so many things that we still don’t know about this situation, because it’s not a normal financial meltdown. It’s not a financial crisis, it’s a health crisis that is overarching that.
No one who works with funds and money is a doctor or medically trained. We’re not epidemiologists, and even leading people with those qualifications, I’m sure that they don’t know for certain.
Our best guesses are based on the information today, which could be different tomorrow.
Yes and I think on the information point, there’s a lot of misinformation out there as well. So I really do think we have to be careful. I was listening to something this morning and something struck me when the guy said that, “the information that finds you, is not necessarily the information that you want to find.”
I think with the sophistication of some of these companies that try and target certain people in certain sectors, there’s a lot of misinformation that gets sent out. So it just reinforced to me actually that if someone’s trying to push information to you, they might have another agenda. Maybe it’s better that we go out and find our own information.
And hopefully we can add something into the mix by offering up a contrast or a discussion around some other points as well. So thank you Austyn.
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
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.