It is the first day of the month and the first day of a new financial quarter. If you have survived the first 3 months of 2020 then I think it is safe to assume you are one hard bastard! We have almost seen a new world war, huge bush fires in Australia, a meltdown in the global oil markets and Coronavirus wrecking havoc across all industries and continents.
In this blog post I am going to share with you my thoughts on everything that is occurring right now and what I think might happen in the financial markets over the next few months and years. I will also open the comments section on this blog post to hear your questions and thoughts on what is discussed.
So strap in and prepare yourself for a few hundred words of ramblings from the crazy place that is called my brain. Enjoy!
Let’s start with the biggest elephant in the room, the mover of markets and the destroyer of industries.
I initially thought the markets reactions to this virus were over exaggerated and purely panic based thanks to the media. I still believe this is true but I now understand that it does not matter how dangerous the virus is, what is more dangerous is it’s ability to shut down global economies in rapid succession.
People have stopped moving, factories have stopped producing and we are all in lockdown. This is only going to get worse and I believe that when the economic data from quarter 1 2020 begins to be released we will see even greater sell-offs in the markets. It is going to take years for us to recover from a global shut down of almost all industries and it is very unlikely we will see a swift recovery as soon as the rate of Covid-19 infections starts to reduce.
The actual death rates of the virus is still small compared to deaths caused by normal flu, suicide, cancer, alcohol etc. It is not that deadly but it is contagious and that is the worry. No one should want to be the one to give it to a vulnerable person who then dies.
Like 99% of the population, I am not a scientist and I do not claim to be an expert in the field of contagious virus’s so I do not intend to provide advice on the matter because I do not know what I am talking about. Please, listen to the experts, do as they say and let’s get through this!
Last week we saw the US weekly jobless claims rise from around 200,000 (the lowest levels in 50 years) to over 3.2million in the space of 2 weeks. This is a DIRECT reaction from Covid-19 and its effects on the economy. The chart is below for your reference.
However, I have been monitoring the US employment figures every month as part of my trading fundamental analysis and more recently I have become very sceptical of the low unemployment figures being announced. I believe a lot of other traders and speculators felt the same and a big move in unemployment was expected.
When the data shown above was announced the Dow Jones and S&P500 markets actually rallied! This is a complete breakdown and opposite reaction to how market fundamentals should normally work. This “shock” announcement of mass unemployment figures was entirely expected by traders and if anything, we were/are all actually expecting worse to come.
I believe we will continue to see global unemployment figures rise dramatically over the next 2 weeks/30 days and perhaps longer. Keep an eye out for that one!
Banks going bust.
I don’t believe this is as big of a risk as it was back in the 2008 financial crisis. Believe it or not, lessons were learnt and banks aren’t holding vast amounts of unsecured synthetic mortgage debt worth pennies on the Pound. Yes, we will begin to see an increase in credit defaults as unemployment rises and more of us are made redundant or furloughed but that is only a small part of banking business that is most likely equated for.
The majority of “Wall Street Banks” have multiple revenue streams from traditional banking, consultancy, wealth management and more importantly their trading desks. A lot of trading desks from the big banks have been claiming record trading performances over the past month thanks to the increased volatility and movements in the markets. According to Business Insider, Barclays’ earner approximately $250 million from its trading business on a single day in march thanks to surprise rate cuts from the Fed sending rates to nearly zero and increasing volatility.
There are similar stories of record performances from JP Morgan and other individual trading desks.
The trading business of banks can almost be treated like a “hedge” against poorer performance on the traditional banking services like lending for mortgages and personal loans. With increased regulation since the last financial crash on lending practices and the mortgage sector as a whole, and the excellent trading performances being announced, I feel that we will not see the need for another “bail out of the banks” during this market downturn.
One thing I am worried about, and I am planning for, is a large increase in inflation over the next 6 months/few years. There is even strong potential for hyperinflation.
Hyperinflation – In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimise their holdings in that currency as they usually switch to more stable foreign currencies, often the US Dollar. Prices typically remain stable in terms of other relatively stable currencies.
Almost every central bank across the globe has now announced massive fiscal stimulus packages to combat the effects of coronavirus in the individual and global economies. This includes cutting interest rates, providing liquidity to the markets in the form of buying back their own government bonds and even giving individuals pay checks. In the US they are giving $1200 ‘stimulus checks” to almost the entire population, and in Australia they are doing something similar.
The downside to this is that the funds have to come from somewhere. Central banks DO NOT hold enough reserves to cover the amount of spending required to deliver their stimulus packages so they are having to print vast amounts of their own currencies to do so.
The natural laws of supply and demand show that an increase in supply decreases value. Currencies are going to decrease in value real fast when the central banks are printing at the rates they are. This will almost certainly reduce buying power as the increased funds begin to circulate but the question is, how much will inflation increase?
Inflation based trades.
The best and simplest trades for inflation are to buy fixed assets and commodities like Gold, Silver or Oil. These tend to increase in value inline with inflation and increase in value beyond inflation levels with increased speculation.
Gold is currently sat around multi year highs so picking other reduced value commodities will likely improve your chances of profiting from increased inflation.
Real estate has always been seen as a solid inflation “hedge” although it is costly and there is the fear that a recession may reduce capital values greater than the increase from inflation. Real Estate Investment Trusts (REITS) and property ETF’s make investing in real estate easier and more accessible for smaller investors although it is definitely considered to be high risk investing.
House prices and debt.
Following on from the previous section, I think it is important to talk about the potential impact on house prices right now.
All markets work on supply and demand. If everyone is selling then house prices will fall. However as it stands we are currently in a state where it is similar to the housing market being closed for business. No one is really buying, no one is selling and no one is moving so the impact on house prices right now should be effectively zero.
Do I think house prices will fall in the future? I believe we will see a correction in prices but that is natural for any asset or financial instrument but I do not think we will see a market crash.
The chart below shows a long term view of average house prices in the UK.
As you can see, the 1987 financial markets crash did see a large decrease in the average house price in the UK from around £140,000 down to around £80,000 but this was soon recovered. More importantly, if you look at the 2008 financial crisis, the effect on the housing market was much less substantial and although the chart ends in 2015, we are now at levels way above 2007/2008.
I often see people online saying “I am waiting for the next housing market bubble to burst before I buy” but in reality, the next correction in house prices will not see them drop by 40%/50% or more. Which is what most of these people on social media are implying they are waiting to happen. These people will likely become long term renters or end up buying houses at even higher prices.
Long term we should see how prices continue to increase. Inflation is set to increase over the coming years (see previous section) and low interest rates means coming out of this more buyers who are still employed will be able to afford to buy new homes.
It is not all doom and gloom!
Non-existent (near zero) interest rates and the cheapest oil prices for nearly 20 years means we are primed for economic growth when the world starts to move once more. These are the perfect fiscal conditions for businesses to thrive and that should not be forgotten.
On an individual/personal level, the sell-off seen on nearly all stocks and commodities is a god send for those of us with investable cash. Oil and gas companies such as Royal Dutch Shell RDSA/B and large UK home builders such as Taylor Wimpey TW are all now trading at prices less than 50% of what they were at the beginning of the year. People were willing to buy shares in these companies 3 months ago when they were trading at those highs so they are a appearing like the bargain of the century right now!
If the world does get back on it’s feet, factories start to open for production once more and people begin to travel then there is no doubt in my mind that these stocks will bounce back to their original levels.
That’s all for today!
Feel free to discuss anything I have mentioned in the blog post in the comments section below. I am always interested to hear other peoples views and opinions on the financial markets.
Let me know what specific stocks, currencies, financial instruments you believe are undervalued and could prove profitable over the next few days, weeks, months and years!
Here is a picture of me drinking a beer and watching horrible bosses in business class. Let’s not forget that humans are resilient, markets bounce back, there is always money to be made and more good times are always on the horizon!
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