In the almost aftermath of a global pandemic, the question I keep being asked is “Where should I be investing my money?”
I usually start by pointing out that this has not really been such a terrible time for investments – provided that you weren’t overweighted in favour of airline and hospitality stocks.
But apart from that, it is quite rare that I get to have such an easy and confident answer. Previously, I’ve had to throw in a whole bunch of disclaimers. Phrases like “unless something dramatic happens, like the apocalypse”.
But once we’re in the apocalypse, my belief is that the system has a lot more certainty in it, weirdly enough. You just look back at what we did last crisis. And the crisis before that. And the ones before that.
Here’s the thing:
- the Great Depression was a real fiscal lesson for politicians in how to deal with a massive economic crisis – you put together a New Deal; and
- the Great Recession was a real monetary lesson for the world’s central bankers in how to deal with a massive credit crisis – you initiate Quantitative Easing.
When the Fed prints money in a world of free capital flows, everything else is marginal
People love to focus on the details of investments: PE ratios and leveraging, dividend yields and volatility.
But the thing that we should probably bear in mind is that these are marginal points of difference. They matter when the global macroeconomic forces are largely stable.
What are the global macroeconomic forces, you might ask? Off the top of my head, these six:
- The US money supply
- The Euro money supply
- The Chinese economy
- Whatever OPEC is up to
- US government spending
- European Union public spending
And the US money supply is right at the top of the list, by far.
When the US money supply grows at pace, it wipes out PE ratios like a stray branches in a flood. The activities of governments in the developing world get relegated to minor domestic concerns, with (at best) a minor impact on domestic currency fluctuations.
Here is a great graph of the ZAR movements that I saw in an Anchor Capital note back in September (when the ZAR:USD exchange rate was still above R16.50 to the USD):
I want to highlight just how strong the Rand got immediately after the global financial crisis. That was not a ‘South African economy fundamentals’ market assessment. That was a global capital flows problem. The
US world’s money supply was on the hunt for yield, because the US yields were being driven to all time lows by the Fed’s quantitative easing program.
And when the Fed stopped printing, the Rand unravelled. Like the Turkish lira, the Brazilian real, the Thai baht, etc, etc, etc.
The investing money did not care who South Africa’s president was, or whether the tax burden on GDP was too high. It cared that the markets were open, and that interest yields were positive.
So will the Fed have Post Covid QE?
Well, it already has mid-Covid QE going on.
Back in early 2020, the Federal Reserve suspended the unravelling of its balance sheet from its last Quantitative Easing programs. And then a few weeks later, it began 2020 QE 1. To ‘stabilise’ markets. The Fed Balance Sheet leapt from USD 4 trillion to over USD 7 trillion. Almost instantly.
And things did stabilize. Markets recovered from their mid-March lows (reaching all-time highs since then, in fact):
Donald Trump thought it would win him re-election.
Here in South Africa, despite junk status and a completely shutdown economy for six months, the ZAR strengthened:
But this was only stabilization.
If I were in the Fed’s shoes, I too would show restraint while the Covid pandemic rages. I wouldn’t really try stimulate a physically closed economy back into activity. It’s closed for business, after all.
But once the vaccine program takes effect, and the last waves of Covid begin to smooth out into a general sense of control, then the economy will reopen.
And then we’ll need a real economic stimulus plan (part of which just arrived, thanks to a Democrat House, a Democrat Senate, and a Democrat President).
Credit will need to be cheap. Fiscal spending will be broad. It’ll be New Deals and Quantitative Easings.
And as for post Covid investing
It’ll almost certainly look like it did a decade ago:
- Developing currencies will strengthen
- Stock markets will boom
- Bond market yields will be negative
- The naysayers will flock to gold (if they’re old) and crypto (if they’re believers).
I would not be surprised to see the South Africa Rand back at ZAR 9 to the USD, or stronger. People will call it a bubble.
And it might be a bubble.
I just no longer have the same worries that I once did about that kind of bubble ever bursting. That just doesn’t seem to be the way that it works. This is not a bubble of enthusiasm. Pricing bubbles of that kind are an emotional tide, and those tend to recede at some point.
But bubbles of actual money supply in the big reserve currencies? I think that, given time, the larger volume of money just becomes the new normal (as it did after 2011).
So buy stocks. And worry less about the stock markets in developing economies – those should also do well (even if the fundamentals look less good).
And what does that mean for the holders of investments in the long term?
They’ll learn to settle for “real returns” of 1% – and call these a good returns, relatively speaking. The 4% rule will be a fiction – you’ll have to save a lot more than that if you want to retire on the dividends. And consumer prices will be mostly the same.
But because asset prices will be inflated, inequality will look worse. The rich will be richer on paper, and wealth will be more out of reach for the non-wealthy. And we’ll cycle on with more Opinion Pieces and more Get Rich Quick schemes until next global crisis.
And then we’ll start again.