The world money is not enough

Let me be frank.

By the time you read this, I have no idea where the market will be for almost any asset.

The volatility and speed with which they are moving as I write makes it almost impossible to say what an asset “is” priced at. By the time you lay your eyes upon it, the reality may have completely changed.

For an example of this, let me show you how an index deliberately designed to be “low volatility” traded until yesterday’s close:

That said, let’s try and extract some value from yesterday’s carnage, which ravaged pretty much every major asset class except volatility itself. In times of stress, market participants reveal their true nature. When push becomes almighty shove and the chips are down, they sell what they can, and what they can’t simply doesn’t trade.

At the time of writing, the FTSE is at the same level that it was at in 1998, and which my colleague Nickolai informs me it has hit 27 times in the past. “Buy-and-hold” and expecting stocks to rise in real terms only seems to work for the Americans – not that they were exempt from being wrecked yesterday. If you want long-term reliable success, you need to be more discretionary and active with your choices, something we aim to help you with here at Southbank Investment Research. 

Fund manager Charlie Morris summed yesterday up as “Finance attempts anthropology, as the market tries to visualise society this time next year.” I would describe the day’s events simply as “Nowhere to hide.”

Yesterday, even the safe havens like US Treasuries and UK gilts sold off, albeit marginally. Gold was no different, for the reasons I highlighted yesterday.

Indeed, there was an opportunity yesterday for investors to buy US Treasuries straight from the source at auction – but it was met with poor demand.

And that sell-off in government debt came even after the Federal Reserve said it would begin printing money on an utterly enormous scale.

While I’ve no idea what the price of assets will be by the time you get this, I can tell you that at 5.30pm yesterday, the Fed printed half a trillion dollars. Today, it shall print a nice, round, unimaginable, trillion.

This is more than everything the Fed did in the entirety of 2009, fresh out of the crisis… over the course of 24 hours.

The announcement of this made the US stockmarket rally for a little while… and then it didn’t. The gigantic cash injecting into short-term funding markets, along with the announcement that the Fed was going to begin buying long-dated bonds again (QE), was not enough. A trillion was not enough.

My colleague Nickolai thinks coronavirus is the ultimate anti-bubble to the stockmarket, the “perfect pin” to pierce the sky-high valuations we’ve seen in the likes of the FAANGs. To his eyes, the virus is something which is not only incredibly hard to price, and impossible to stop through money printing alone, but at the same time any government attempt to contain it is negative to markets – shutting down trade, closing borders, etc.

As you’ll know if you’ve been reading these letters for a while, I was wondering in early February why the risk of coronavirus was not being priced into stocks (No symptoms? No problem! – 12 February), despite copper, oil, and the rate of global shipping collapsing.

After a while of the stockmarket seemingly being “immune” to the coronavirus, I began to suspect stock prices are simply not driven by reality any more. Or at least, that they are chiefly under the influence of other factors which were overwhelming the corona-selling.

The latter may still in fact be the case – this massive shock being triggered originally by just a few baby boomers retiring, drawing down their stock holdings to buy a nice new car or golf clubs, and their selling pressure acting as the snowflakes which caused the avalanche of risk we saw cascade yesterday.

But considering the fall yesterday, this thesis is less likely – or at least, there would need to be an awful lot of coincidences involved. How ironic that a perma-bear like me would be caught off guard by the brutal move down that we saw yesterday.

Two months after billionaire hedge funder Ray Dalio declared that “cash is trash” as an investment decision, cash has become king. Despite the Fed printing vast quantities of money currently, most of it is being pumped in via the short-term bank lending market because banks don’t have the money to do it any more.  

This is partly due to post-2008 regulation, which we may see revoked in the future to unrestrain banks and allow them to lend (which in itself might unleash the trillions the Fed has injected), but also because the US Treasury is issuing just so much debt that banks are reaching the limit of how much money they can create to lend it to Washington. The Fed is stepping in to create those dollars itself, and thus subtly printing dollars for the Fed government to spend, via the banking system.

While that’s very negative for the US dollar in the long term, the dollar is still the global reserve currency, and if the banks don’t have dollars, you’re not gonna find many of them elsewhere. I reckon the dollar is going to rise, just as it has from all of the asset selling so far, not to mention when the eurozone’s banking system starts reflecting the damage dealt by the coronavirus – but you’d be best holding gold in the meantime…

I’ll be back as ever on Monday. Over the weekend, I encourage you to examine your own investment positioning and strategy, and make sure you have a plan that you can stick to, no matter the chaos ahead. Once you’ve done that, relax, crack open a beer, or another favoured tipple – and prepare for the fireworks that Monday will undoubtedly bring.

Wishing you a good weekend,

Boaz Shoshan
Editor, Capital & Conflict

Category: Market updates