LONDON: Portfolio managers and asset allocators in the post-COVID-19, post-crash, post-central bank intervention moment have a problem deciding what to do with their money.
While institutions and markets have been kept from imploding by the wall of money the Fed and other central banks have thrown at the economy, they still do not have clear long-term prospects.
Financial people, their slide packs in disarray, do not have plans that fit the circumstances.
Are we in a long-term deflation or disinflation? There’s a slide for that, which requires buying bonds and leveraging up the paltry returns.
Inflation? Could be less depressing, but more scary. The old slides would tell us to buy gold - if there were any physical gold available - as well as companies that have quick inventory turns, so prices can be changed quickly.
Of all the scenarios under consideration in virtual offices, the most popular is a relatively quick return to “normalcy”.
That means a rapidly developing V-shaped recovery under which one could go back to considering algo-generated combinations of stock and bond indices for the clients, so their long and comfortable retirements will be comfortably paid for.
That will not be possible. There is too much risk, too little return, too many people fighting over profits that are too small to support all the middle-class beneficiaries or would-be rich.
Our political and central bank leaders do not want us to be so unhappy that we want to change governments too quickly.
So the fiscal and monetary authorities have told the public in most advanced countries that we have a short-term liquidity problem. Not enough cash right now, but when the economy restarts, these trillions of dollars of short-term government backed loans can be repaid.
DEMAND FOR GOODS DISAPPEARED
Unfortunately, demand for goods the money can be spent on has disappeared, as businesses, rationally, can see no reason for new capital spending to meet market demand that does not exist.
READ: Commentary: This COVID-19 outbreak, corporate leaders should acknowledge they don’t have all the answers
And nobody is taking first-class trips to New Zealand or Disney World.
The supply of more modest goods and services that can be bought with the cash made available by central banks and government grants is also in short supply.
They are rationing burgers at Wendy’s fast food stores in America, and you cannot buy a new mobile device at Apple stores in Europe affected by closure orders.
This helps explain the “recovery” in asset prices over the past month and a half or so. There is no productive use for the liquidity injection, and not much supply of desirable goods available, so money has gone into speculation in securities markets.
WHERE TO PUT YOUR MONEY
This has raised the prices of shares and bonds above reasonable levels, so what do you do when you next sit down in front of your personal-account trading screen? Or propose to the investment committee at your institution?
We can begin by selling the 30-year US Treasury bonds I recommended back in January as an optimum portfolio asset. Back then, they had a 3.86 per cent yield, and now have rallied to a 3.12 yield.
So about a point of interest income, and decent capital gain, with apparent safety.
That is now over. Treasuries will not disappear or instantly crash. They are too much needed as collateral for other transactions. But the rally is finished. Over time, their principal and interest payments will be eroded by inflation, as all that liquidity finds its way into the prices of goods and services.
So gold, right? Gold sounds like a great hedge for uncertain times. If you can carry it from one place to another. It is physically very heavy and in short supply as it moves from its incarnation as jewellery and transient art through several forms of gold bullion.
Until you have a safe guarded by a trusted thug, you are better off with an ETF.
Then we have Chinese government bonds. At this point, gasps from all centrist western opinion, because the Chinese are now under suspicion. For everything.
But as Louis-Vincent Gave of Gavekal Research pointed out to me, China has the second-largest government bond market in the world, with an American-scale US$10 trillion-plus in issuance across the curve.
So far, its fiscal and monetary management has been among the most conservative of major countries in the post-COVID-19, post-recession world.
Assuming any of these insightful investment concepts work, and you realise large dollar, sterling or euro-denominated profits, you can sell your positions and reap your reward: more cash when there is not much to buy.