What are We Buying and Selling? - March 29, 2020
March 29, 2020 Thought process for building portfolios over the coming months: The short term is dominated by the uncertainty caused by the impact of the Coronavirus. In previous notes I have shared my belief and approach; now I think it is worth sharing more specifics about how I will be strategically positioning for long term investing horizons. My assumptions:
Never in History have we witnessed:
This scale of coordination working toward a cure and/or solution.
This level of technological advantage across all industries
This intensity of demand destruction and negative cash flow implications
This increase and level of spending in such a short time (to fight virus and offset adverse economic impact).
My conclusion: In the aggregate, we will move forward with our lives and economic activity more quickly than most of us believe is possible. This will result in:
Demand resuming more strongly and more quickly than expected.
The highly charged emotional decisions made today will have unintended consequences in the future.
Governments and Central banks acted with impunity, and the consequences for investing will be vastly different and more difficult. I would describe the situation as an ER doctor saving a life by giving extreme dosage of medicine. He/She is aware of the side effects, but will administer the drugs anyway to get the patient out of immediate danger.
Volatility will stay higher, correlations between assets will break down, and economic models using historical relationships will be less reliable.
Global politics and trading relationships will change.
Those able to recognize and adapt to the changing investment landscape quickly will have an advantage in the long term.
Because there will be so much increase in the amount of paper currencies in circulation globally, I want to buy assets that will protect wealth and future cash flows.
I will allocate capital to companies that are poised to grow and that will be able to raise prices. I will look for debt that will compensate for the risks of future inflation.
Government bonds are “safe” when it comes to repayment, but they may not safely assure your wealth is protected. At below 1% rate of return for US Government 10 year bonds (and a negative real rate adjusted for inflation), I personally struggle to view these assets as safe unless I believe prices of riskier assets will continue to fall, and/or the prices for the goods I will consume will remain at the same price or lower over the same 10 years period.
Many of the assets I believe will as protect wealth and cash flows over a long-term investment time horizon, are the same assets that are becoming cheaper today. Real estate investment trusts, natural resource suppliers, shorter duration fixed income across financial company debt, municipality debt, inflation protected debt, technology companies, real assets, and companies that will participate in infrastructure spending by governments should all provide protection over the long term.
Our intention is to increase overall equity weightings in our portfolio, and reduce weightings in cash, precious metals, and fixed income.
The counter argument is that many companies will go bankrupt because of this demand destruction which will result in insurmountable cash flow issues. I am sure there will be many examples particularly in small businesses across the country. However, that demand loss is temporary, and when it comes back, small businesses will be there to supply. Most small businesses in America fail, yet this is the backbone of our economy because new ones continually open.
I want to emphasize the importance of focusing on the aggregate power of more government spending, more central bank money, debt extensions, agreements not to evict, and many other short term life-lines being extended from every aspect of the economy. Taxes may have to rise in the future, but that is something we will worry about once we have plenty of growth.
The lack of preparedness in the USA for this current crisis was partly due to issues within our supply chain as much of our manufacturing base was transferred to Asia. I strongly suspect this relationship will change in dramatic ways. I suspect that sectors of the economy deemed to be part of our strategic supply chains will be brought back to being manufactured in the USA. There likely be willingness to pay higher prices for the sake of becoming more self-sufficient.
It is extremely hard for any economic models to predict this kind of behavior because it is vastly different than our recent past. Many economic and investment models use the recent past to help assess the future, but reliance on what used to work will struggle in a new reality. Adjust your perception to the new situation.
Equity prices may remain under pressure until infection rates of the virus start to level off and possibly until economic activity starts to resume.
At August Wealth, we are spending a great deal of time on thought process and strategy to capitalize on opportunities as they present themselves.
Joseph Cardello, Principal
August Wealth Advisors
The Loft, 101 Franklin Street, Suite A
Westport, CT 06880
Direct (916) 461-9451 toll free (800) 985-9477
“Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA August Wealth Advisors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence.”