#10 🔊 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.

Link to Audio Recording

Nick Griffith:

Very good to have you join us this afternoon. It’s Thursday, the 14th of May, and here we are with our weekly Q&A. So let’s jump in, and discuss what’s happening in the news today, and in the last week. New stimulus packages planned in the USA, not just increasing them by 10% or 20%, but doubling the size of the stimulus packages, and even talking about negative interest rates. Austyn, what does this all mean?

Austyn Smith:

Yes, so let’s talk about the last few days. I think the world and the USA are just getting a dose of realism at the moment, because in the last 48 hours their chief medical officer has said don’t reopen too quickly, because otherwise you’ll have lots of suffering and deaths, which is pretty brutal, but that’s what he said. Also, last night the chairman of the Federal Reserve, Jerome Powell, in the United States said that he was becoming increasingly concerned about companies’ lack of cash flow over the next few months, and that liquidity issues could become solvency issues, which then means companies could go under in the next few months.

In America, they have already done a 2.9 trillion dollar bailout package. They are now thinking about doubling it with another 3 trillion, so that just tells you the size of the problem. Also, to cap it all, their jobless figures are still going up, 36 million people have filed for unemployment benefit in the last eight weeks, which has led JP Morgan and others to suggest that very shortly America will have a 20% unemployment rate.

The reason I’m talking about America is because they have a different take on it (the virus and consequences). They’re a bit more brutal about things, and I think in the UK, we’ve only just got round to thinking that we might be in a recession, whereas, in America, they’re talking about how to avoid a depression, so there’s a very different take on it in America. They are throwing the kitchen sink at it.

The reason I mention this, is not to frighten anyone, but businesses have to make decisions based upon what’s going to happen in the next six to 12 months. If you take too literally some of the talk about a ‘V shaped’ recovery happening, and you make decisions based upon that, and it doesn’t happen, that can then cause all sorts of problems.

The American information and the American news tends to be a lot more brutal and realistic. Hence why we’re talking about it, so yes, that’s what’s going on at the moment.

So to recap, I think we’ve had three phases so far. We’ve had a very sharp correction, because we had the economic ‘sudden stop’ when things shut down. The second phase was, I would say a reaction to the bailouts that have happened around the world, so April was fairly positive in terms of a little stock market bounce, and then we’re now entering the third phase, which is very much volatility based, possibly with more stimulus packages, but still less likely we’re looking at a V shaped recovery. This is why Federal Reserve is very worried, and they’re also talking about negative interest rates for the first time, which is very, very unusual. (Where it would cost you money to leave assets in cash, with the idea to encourage people to deploy it elsewhere, to help the economy)

Nick Griffith:

Indeed, and there’s no doubt the world is changing during this pandemic, but how do these changes, as you see them, effect some of the decisions you’re going to have to be making now, and in the future?

Austyn Smith:

I think it really means that we have to be very adaptable, and that we can’t make any assumptions, because I do think history is being rewritten. This is not normal. This is a health crisis that’s caused a shutdown of the economy, that’s caused a financial crisis, so the traditional ways of solving a financial crisis were just to throw loads of money at it. Yes, it’s having an effect and it will stabilize stock market prices to a degree, but it won’t help the real economy, and so we’re seeing it more clearly in America, with their unemployment situation.

In the UK it’s a bit more positive. I think in the UK and Europe, furloughs are being extended. There is a lot of support for the grass roots coming through, but at the end of the day, we’re a global economy. So if America continues to have these problems, that will slow things down, which will affect the recovery and people’s assets in terms of what’s happening on the stock market and things of that nature.

Back in the last crisis, in 2008, one evening in desperation I stuck into Google, “how do you deal with uncertainty?” Going through pages and pages of answers from different areas, I came across a US, five star general who had written a paper about how do you deal with uncertainty on the battlefield, because you start with a plan and within five minutes the plan’s gone, because something has changed outside of your control.

In a way that’s what’s happening at the moment. There are so many moving parts, and so many things outside of our control, that I think it’s perfectly normal and perfectly acceptable to say that I don’t know. There’s a bit of truth and realism to that, rather than a political response that seems to say, “Oh yes, we’re going to have a V shaped recovery and everything’s going to be fine.” I think there are a lot of serious people that I listen to and speak to, that for the first time ever, they really do not know. I think we have to take that onboard, and take on the fact that we make a plan, and then we review it, and that happens on a constant basis.

We do this 360 overview every so often, but now actually that has to happen on a much more regular basis, because there is very much a definite shift in winners and losers, as I talked about last week. That is, I mean we are in a fundamental shift now. People talk about going back to how things were, or going back to normal, but actually I’m looking forward to the new normal, because I think the new normal’s actually going to be better. It’s just that we’re just going through scary times at the moment. It’s also why our Cautious Blend® process is important.

Nick Griffith:

Yes, it’s interesting, and certainly there’s a lot of changes. We’re also seeing the economy just starting to open up in a few areas. I think we’re going to see some of the positives also come through from this, over time. I’m just wondering what you think the impact of these are likely to have on the economy, and investments as well?

Austyn Smith:

Well I think, just to talk about positives firstly, the furlough has been extended to October. That’s very positive. We’re just now beginning to hear that manufacturing’s reopening. Jaguar and Ford are reopening their plants, and there is this, if you like, global experimentation about what reopening looks like, and it will be different between us, and Europe, and America, and other countries around the world. No one really knows, and also no one knows how quickly the consumer will pick up the other side of this as well.

Of course, without a vaccine that’s available, there’s the threat of a second wave, or a third wave of infections. A report I read a couple of weeks ago indicated, that for the USA there was a high degree of likelihood that there could be a second wave in July, and perhaps a third wave coming in November. This is being factored into people’s thinking as to how this year goes, because another thing which I don’t think our press really talks about is the probable reality that, whilst self-isolation will ebb and flow throughout this year, realistically we are where we are, probably until the end of this year. Hopefully there’ll be a vaccine that’s available at that time, or some other type of treatment.

We are going through this shift and it is difficult, and it is scary in some respects, but it really is changing the landscape of the investment world as well, so we have to be adaptable to say, “Well okay, what companies are still going to be around in 6 to 12 months time?” Those could have been really good companies 6 to 12 months ago, but they’re not perhaps going to be so good later on. Even British Airways have said today that despite the furlough being extended, if there’s to be a viable business in the years to come, they still have to consider making people redundant now. If other companies follow that, it could be that we see our own unemployment rate drift up in the summer.

Where are we going with all of this? Well, there are things that we know and things that we don’t know. The things that we know are that there’s going to be massive public and private debt, because we can see that happening now, lots of companies taking on debt. The likelihood is, I think a strong likelihood, is that real interest rates are going to stay low for a few years, and that’s going to be manageable, and that inflation, yes it’s there lurking in the background, but it’s not going to hit us straight away.

My current thinking, based upon some of the things I read in the Financial Times, and Martin Wolf, their Chief Economic Correspondent, he wrote an article about this, which said that he’s of the opinion that we probably can’t repeat austerity in the same way as we did after the last crisis, and that taxes will rise. He points out that wars and pandemics change society.

Also, I think technology is going to change us dramatically as well, and the pattern of our work. I think we’re already looking at less commuting, less pollution. People’s work life balance is improving, and I think this is probably going to be a transformative and permanent shift. I don’t see it immediately going back to how it was, and some of those are really positive things.

Nick Griffith:

Yes, for example, I think a lot of people are spending more time communicating, keeping in touch with their families, so that may be a positive shift.

Austyn Smith:

Yes, I think we are going to emerge into a really quite different world, but it takes sometimes things like this to actually shift, because there’s always a world of the status quo, or vested interests who would like to keep things as they are. That said we will keep the best parts of the old normal.

Nick Griffith:

Shall we cherry pick out the best bits?

Austyn Smith:

Yes, cherry pick the best bits of the old normal, and then as we’re going through these scary times, we’re having to evolve and adapt, and come up with new ways of doing things, and then of course we’ve got the new normal.

I think that is going to be quite a positive thing actually, once we get through to the other side. So yes we have to be ‘eyes on’, and very adaptive in terms of managing people’s money, and ‘making retirement safer’. I think as we go through this, and hopefully we’ll continue to think calmly and manage our way through this, that as we get to the other side, there’s a great deal of opportunity.

Nick Griffith:

Thank you Austyn. Thanks very much. Anyone has any questions, then please do send them in. We’ll be doing these calls weekly, and we look forward to going through and speaking next week. Thanks very much.

Austyn Smith:

Thank you Nick, take care.


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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.