Today we imagine a return to a normal world. Or at least try to. Because it wouldn’t last long.
Goldman Sachs CEO Lloyd Blankfein gave an interview on CNBC after his company announced its earnings for the first quarter of 2018. Here’s what he said:
“People will debate back and forth what’s normal, what’s the new normal, but conditions where interest rates are zero, yield curves are flat, there’s no risk premium. Where central banks all around the world are buying all the risky assets which then therefore put a damper on volatility and the opportunities to perform, that’s not a natural state.
“We have not reversed all of that, but we’re walking that back and walking to so the first indications of a withdrawal from what is an unnatural state.
“The market becomes a bit more volatile, people get compensated for the risk that they’re taking. Our clients are doing better consequently we’re doing better with them. So I wouldn’t say we’re popping champagne corks. But we can certainly see what happens when we start to walk back towards a normal financial market.”
And now for the context. Goldman’s equities trading branch posted a bumper profit, both higher than expected and higher than previous results.
The question is of course why. And the answer is the 10% crash in February.
Investment banks like Goldman Sachs make good money on trading volatility. The problem is, the central banks have quashed just that volatility. Blankfein is both complaining about this and celebrating the return of volatility in February.
Yay for Goldman Sachs. Who gave me a scholarship and internship, by the way, for the sake of disclosure.
The problem here is that the rest of us are not Goldman Sachs. And trust me, you don’t want to be.
We’re stuck with the real economy and struggle to make money on market crashes. The team is preparing a report on how to do just that, so keep an eye on your inbox.
But let’s imagine a return to what Blankfein calls the “natural state”. Where markets are more volatile, the yield curve unmanipulated, interest rates are higher and central bankers don’t buy risky assets. What would that world be like?
A total nightmare.
The International Monetary Fund’s (IMF) Global Financial Stability Report estimated 20% of US companies amounting to $4 trillion in assets are at risk of going under if interest rates go up, with half of those already in trouble.
In Europe, the so-called “zombie firms” are kept alive by banks to avoid having to realise losses. The problem is that bank funding costs will rise as the European Central Bank tightens. Italy’s bad debt problems alone are the size of US sub-prime defaults.
What would the Japanese stockmarket look like if the Bank of Japan hadn’t bought up three quarters of stock exchange-traded funds, about 4% of the total market?
Worst of all is sovereign debt. If the interest bill on sovereign debt were at a “natural” level, budgets around the world would be wobbling.
The natural state is simply not tenable. It won’t be allowed. But…
How long can it be avoided?
The real question is whether the reckoning can be prevented indefinitely. Could a recession occur in the face of very easy monetary policy and quantitative easing (QE)?
If you run with the drug analogy, then the question is whether the QE and interest rate drug is becoming ineffective. If the patient is so used to the drug that it can’t fight off a depression, what happens next?
The IMF is forecasting a slowdown in two years’ time. As is the US yield curve. So we might soon find out whether QE can save us once more.
The thing to keep in mind here is that debt levels are steadily worsening in the meantime. Despite decent growth, low interest rates and vast levels of support.
The government and central bank rescues have sent the world a clear signal that debt doesn’t matter by preventing a reckoning. And so everyone did the predictable thing – borrowed more.
How long can something like this continue? The answer is, a lot longer than you think. That’s why logical analysis is sometimes not so helpful. The moment you depart from the natural state, things start to look bizarre. But they can get a lot more bizarre, so pointing out the coming reckoning doesn’t help until it happens. It’s all about timing.
Akhil Patel has a very good understanding of the machinations of governments and central banks. But they’re not his focus. He’s all about timing.
The best part is, the whole cycle of upswings and downswings that Akhil has identified is predictable. Because of that, Akhil is always on the record. His predictions are always clear cut. So what does he say right now?
That’s for his subscribers to know. But I’m allowed to say this: we’re mid-cycle. A time characterised by a slowdown, or a minor downturn. Not a crash or a reset.
To find out what you should do to profit from the coming upswing, click here.
The time to pick stocks
With a highly confusing and bipolar outlook, what should investors do? Well, what about hunting for paradigm shifts in the economy?
The tendency of governments to mess with their economies is a constant throughout history. It always looks terrible at the time. But it’s not like we don’t make it through eventually.
Instead of focusing on the macro concerns, why not take the opposite approach? Look at the companies that could deliver a complete shift in how we do things. The investor’s success is determined by technology and innovation instead of trends and crises.
Right now, there are two remarkable opportunities which our analysts have discovered. The first is a potential cancer cure. You can imagine the regulatory drama involved in writing those words. But there they are.
The second opportunity offers to deliver Britain energy security and independence for an indefinite amount of time. No more declining oil reserves or importing gas. Imagine where this sort of opportunity would go, especially with political backing in the current geopolitical climate.
The idea of investments like these is to diversify macro-economic risks out of your portfolio by making them less relevant to the success of your stocks. Taking on other risks – the risks of technology and innovation – is a good example of proper diversification.
And the profits are much bigger too…
Until next time,
Nick Hubble
Capital & Conflict
Category: Economics