Which button should you push?

2017 — WTF Is Happening?

So we are smack bang on the half way point of 2017 and so far, the world of finance feels something like what I’d imagine it would be like to circumnavigate the world in a dinghy. Actually, come to think of it, the world outside finance feels like that too.

We have a leader of the free world who tweets. A female superhero taking the world by storm. A mangled attempt at Brexit. And on a less tongue in cheek level, multiple psychopaths performing acts of terrorism throughout the world.
Or for those who like numbers (yes, we are OCD), 2017 is the 2017th year of the Common Era (CE) and Anno Domini (AD). It is also the 17th year of the 3rd millennium, the 17th year of the 21st century, and the 8th year of the 2010s decade.

Within the wild west of finance, we have seen an epic equities run, a bond market that doubts the equities market, heinously low levels of volatility (the theta burn is real for options traders), negative but recovering interest rates and a property market that doesn’t know which way is up (but for Europe & Australia, could be poised to quickly learn which way is down).

SO — What should you look for in H2, 2017 and most importantly, where should you put your precious, hard-earned money?

Traditionally, there are four main areas that you can invest your money. Often referred to within finance circles as ‘the investment quadrant’.

• Equities (aka the stock market)
• Cash (aka in an interest bearing bank account)
• Bonds
• Property

The bad news is that I’m pretty bearish on all of them for H2. But I’ve got alternatives, so please read on.

First, why am I calling short on all of the traditionals?

Well cash and bonds fall into a similar bucket for me. They’re relatively (mostly, very) safe but as an ROI, they suck. You buy a bond, or dump your money with your bank and you essentially lock in a loss. Not great, hey…

All investments should be analysed on a ‘risk, return ratio’. This is an analysis of the risk you take on for the investment, compared with the return you receive. And in this light, cash and bonds have traditionally been bumper investments (particularly for those with a more defensive appetite). Both governments and banks have been super safe and super dependable investing partners, making the ‘risk’ half of the ‘risk, return ratio’ an extremely low one. To be truthful, before 2008 it could have been categorised as obsolete. To boot, returns have been healthy, which are predicated by the interest rate instilled by each country’s central bank.

To summarise — no risk, healthy return = winning.

BUT

We are now seeing historically low interest rates globally. So the returns from cash and bond investments has dropped substantially. And again, to boot, risk has risen significantly (in relative terms). Since the GFC, we have seen what we previously thought was impossible. Governments have gone broke. And we are not just talking about the epic performance that Greece put on. Even safe haven governments have faced huge sovereign debt and default risk. Which like you, me or a business, is when incoming money cannot meet outgoing money. You would think this would be difficult for a country, whose money effectively comes for free in the form of taxation received, but apparently, it is not.

We have seen countries have their security rating slashed (somehow the USA is still rated AAA, despite a national debt of $19t and counting — but that’s probably a whole other blog for a whole other day).

And we have similarly seen banks crumble too. Or in the case of Australia, have our government use their impeccable operations for some more of that free money mentioned above. Point being, banks are not as safe as they once were.

So to summarise — higher risk, negative returns = losing (in my books anyway).

For a very quick maths lesson, the returns are negative because the interest received from bonds and cash (less your chunk to the tax man of course) is less than the current global rates of inflation. You will currently receive about 2% return pre-tax from both and through H1, inflation has fallen nicely within the G10 economies, within the cherished 2–3% band.

Some countries even have negative interest rates, which means banks are CHARGING YOU to hold your money.

AND CUE THE DRUMS…

People are falling over themselves to invest in both of these asset classes.

I’ll repeat that, as I believe that it bears repeating. Investors are LOSING MONEY (in real and nominal terms) by investing in both cash and bonds. Yet demand for both is healthier than ever. This probably speaks the biggest volumes about the doubt people have in the other two quadrants of the investment quadrant.

Needless to say, until the risk, return ratio is repaired, you won’t find cash or bonds in my list of recommendations. You’re better off sacking it under your mattress.

Now quickly onto property and equities.

Property is looking really choppy, in my view. I’ve just come back from the U.S.A and sentiment is higher there than any of my previous trips. I spent the bulk of my time in Los Angeles and prices are going nuts there. So the U.S.A looks pretty safe for now but with interest rates being aggressively pushed up by the Federal Reserve, that will cool it off. Australia is on the other end of the spectrum. Chinese buying has cooled and is being looked at as high up as the Chinese Government and if you go more than a day without hearing the term ‘property bubble’, then you’re actually living in a bubble.

So until the trusty ‘risk, return ratio’ starts to look more healthy, count me out. At this stage, we are looking at high risk and possibly regulatory intervention that can change your return dynamic and ratio significantly.

Equities have had a bumper run. So unless you rode it and have profit to play with, I’d suggest not getting off the bus.
Macroeconomics are looking stronger than they have in years; Existing home sales are strong, new home sales are strong, unemployment is low, crude inventories are high and we are seeing hawkish commentary from the Fed.
Which does not suggest an equities dip.

BUT

We are overrun, and again this is just my humble opinion. Well actually, it’s not just mine. Last night we saw Tourbillon Capital (a $3.7b Hedge Fund) issue an investor note stating that “People are just paying significantly more for assets without any fundamental improvement in those assets.” And they are not the first to withdraw from overweight in equities because of the same concerns.
To reiterate, the fundamentals are good but we’ve got a bit overexcited and my prediction is that H2 will be rocky. We won’t see a dip but we’ll see more than a few blips.

SO — IF I THINK EVERYTHING IS SO BAD, THEN WTF (to use the title of the blog)…

Well, I’m long three things and yes, I understand they are more risky but I’m backing them for a strong second half and as always, closely eyeing risk verses reward;

1. Crypto — Bubble, schmubble. Even my old mate Mark Cuban has come out and said cryptocurrency is a bubble. HUGE DISCLAIMER: He gave no analysis whatsoever, apart from too say that too many people are making money from it. Ummmmm, ok, thanks for that Mark. I fully expect the party to continue well into the future and will soon blog about which crypto’s I do and don’t like, and which spreads I am trading.
2. Options — They are cheap right now because we’ve seen the markets consistently crawling upwards. Many an option owner is ‘feeling the burn’ right now and is eager to unload their holdings at a price that is below the implied volatility levels. I think you can make a handsome return by being an options holder in H2, and I particularly like puts. Like I said re. equities above, we will see blips. But just imagine if we see something massive like an impeachment, or a political fallout with Russia or North Korea. I particularly like Q4 to be long, there’s some big announcements coming that will get both equities and forex markets shaking in their boots. One of which might well be avoiding the extra interest rate rise that the market has mostly priced in (see my previous blog — http://www.leightaylforth.com/2017/06/feeding-currency-into-system.html / https://medium.com/@leightaylforth/cryptocurrency-flow-on-effects-cb6ecf6b7f77)
3. You — I’m always pro-you! And I’m always going to be telling you to back yourself and start that idea you’ve been thinking on and talking on for too long now. You are awesome, you are smart and you know that you are driven. This is where the best returns always come — investing in yourself. I love Venture Capital and have plenty of content coming your way in upcoming blogs to help you along.
   Masssssssssive note here though — if you need more than yourself to get your startup off the ground, then invest more in finding the right team than anything else. Getting the right people around you is more important than your idea itself, more important than your execution and more important than any of your systems or IP. It doesn’t matter if you are the smartest, the most dedicated or the most determined. Without the right crew, you are weightless.
   As I saw written earlier this week, ‘culture eats strategy’.

Congrats on your first half of 2017. You made it here and that is half the battle. All the best for H2.

Friends in Australia — enjoy those tax returns. Friends in the rest of the world — we’re half way there, take a deep breathe and brace for the second half of the year. Is that a tidal wave I hear in the distance? Don’t worry, I’m sure this tin dinghy can adsorb it 😳😳💩

Oh — and watch out for the Solar Eclipse! August 21 is the date.

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