Someone once told me “never go shopping when you’re hungry”, it turned out to be sound advice. I recall when I was about 20 years old, just received my pay packet, and headed straight to the supermarket to stock up my empty food cupboards. By the time I got to Wednesday I was throwing half the stuff i’d bought in the bin as it had gone out of date. I bought virtually everything I saw at the time that looked remotely appetising as I was so hungry.
There’s a lesson to be learned from this in today’s current low interest market. Generally investors are being pushed further and further up the risk scale in search for half decent yields, so those that have always sat in cash are now dabbling in structured capital at risk products (scarps) or bonds (be it corporate or government) and possibly a bit of equity content (via some absolute return funds), those that are comfortable investing into bonds are now venturing into higher yield bonds (previously considered junk bonds), those that were previously comfortable investing into equities are still investing in equities but paying a higher starting price. So we are all shopping when we’re hungry for better returns and to some extent ignoring the fact that we are accepting a higher level of risk in return.
Everyone knows the old saying “what goes up must come down”. The forces of gravity will always win in the end. Quantative easing by most central banks around the world have acted like steroids to their respective economies, and served to prolong the current market cycle, but in my opinion this will soon come to an end and reality will hit like a punch in the face from Mike Tyson.
Central banks are virtually out of options, as they can not go any lower with interest rates, they are even struggling to find government bonds to buy back. Inflation will spike higher than anticipated, some are even suggesting 5% in the next 12 months and I would not rule it out. Central banks will then be forced to raise interest rates which will then force consumers to tighten their belts. We then get into the forces of natural gravity coming into play and I believe the next recession could be the longest we have ever seen.
It’s not all doom and gloom, the UK could already be ahead of the curve when compared to other western economies, as Brexit will force us to seek trade deals around the world rather than being reliant on just the EU. Although we might feel the forces of gravity a little harder than the US as they are already on a path to raising interest rates gradually. We have a weak currency which means our exports are cheaper which could serve to lessen the hard landing.
Only time will tell if I am just thinking in “glass half empty mode” or being realistic, but one things for sure……………
in the near term it is all about ‘return of capital’ as oppose to ‘return on capital’.