This is an edited version of our live Q&A as I discuss the past year and the prospects for 2021 with Tony Locantro, an Investment Manager at Alto Capital in Perth. Note I had to edit two short segments where third party copyright material was included in the live stream.
Contents 0:00 Start 00:17 Introduction 01:25 Tony Welcome 06:00 Tony On Property/Markets 14:55 Discussion On Asset Classes 23:45 Tony On Financial Strife 31:30 Tony On Financial Markets 36:00 Tony On Gold 41:30 Small Caps Overview 55:05 Questions On Small Caps And Hedging 1:12:58 Economic Exceptions 1:23:00 Closing Comments 1:27:00 End and Outro
Original stream is here with live chat: https://youtu.be/4LvrMQRlziw
Join us tonight for a discussion about the state of the financial markets, and the prospects for 2021. Tony Locantro from Alto Capital will share some of his stock picks, as well as discuss the macro environment. You can ask a question live via the YouTube Chat.
And remember if you retweet Cookie Boy’s $1 pledge for each to charity that will increase the funds going to charity tonight.
it's that time again
on Tuesday one of Australia's best stockbroker Big T @LocantroTony is doing a live show with @DFA_Analyst
A reprise of the current market moves, and a discussion about the underlying drivers, as well as the top 5 issues we get asked about. Plus a quick preview of a new intro…
0:00 Start 0:30 Market Moves 0:26 Nucleus Wealth Article On Capitalism 8:53 Markets 16:14 Drivers 17:33 Top 5 Topics 20:42 New Intro Candidate 21:06 Outro
Ray Dalio has a series of explanatory videos that talk about debt cycles and in particular the contrast between a short debt cycle and a long debt cycle.
With record levels of corporate debt around most of the globe:
COVID-19 lockdowns suggested that this would be the end of the current short term debt cycle and potentially the end of the current long term debt cycle.
Governments and central banks to the rescue
Swift intervention by central banks and governments hit pause on the start of deleveraging. In effect they threw a lot of money at the economy, most ended up cushioning the blow for people who suffered from the shutdown. But a significant amount also ended up with people who didn’t suffer. Also, without travel, many more affluent people travelled less and consequently increased their saving and investment.
Also, evictions and bankruptcies were made more difficult, and interest-rate holidays on loans given. The new rules prevented negative outcomes while encouraging positive ones. The stock market boomed.
Is capitalism finished?
We have been cautious on risk for months, avoiding the crisis at the start, but with minimal participation in the market recovery. And, to date, we have been wrong. We did identify the most likely reason to be wrong would be if governments would take ever more extreme steps to cancel capitalism. And that is what happened.
In many countries, “extend and pretend” has replaced the threat of bankruptcy. Someone who can’t pay their rent is not evicted but allowed to accrue debt. Don’t foreclose on those who can’t pay their interest. Instead, build up their interest payments into a larger debt burden.
The end game seems to be a cohort of zombie consumers and businesses. Weighed down by debt burdens too massive to ever pay off, but supported by interest rates low enough to keep them from defaulting.
US Treasury Secretary Mnuchin is letting several minor lending programs expire at the end of the year, to the loud complaints of many – including the US central bank. Many programs will likely be re-instated once Biden is in power. In other countries, there is very little consideration given to finishing similar programs.
It would seem we have a zombie future.
Can the debt cycle blast higher?
The question from here is whether a new debt boom can be launched without the old one ever having peaked.
Until recently, I thought the odds favoured the end of the cycle. I was wrong.
I’m still sceptical of a debt boom for businesses. Governments and central banks will try, but debt levels are already high and further interest rate reductions will be limited.
Another household debt boom is possible. Although Australia has already played this card:
The other difficulty is that despite the European Central Bank’s best efforts, household debt has been declining across much of the Eurozone.
The most likely outcome now appears to be continued increases in government debt, but limited increases in corporate debt. Household debt is an open question.
Are we reduced to watching governments and central banks?
Mostly. It seems clear that policymakers have decided on zombification. Limit bankruptcies. Increase debt. Never raise interest rates again.
It doesn’t make for a healthy economy. But it limits short term pain which appears to be the current goal of every politician.
The economic plan is to try to get a debt-funded consumer boom going so that bankruptcy protection and consumer support can be removed.
Policy mistakes are what matters from here. The goal? Prevent a business cycle from occurring.
Indications that a normal business cycle is occurring will be a sign to sell. Too much support and markets will grind higher.
Damien Klassen is Head of Investments at Nucleus Wealth.
We overview the recent shows on Walk The World, where I discussed deflation and inflation with Steve Van Metre and the recent In The Interests Of The People show with John Adams following his article on the question of Quantitative Easing and deflation.
I caught up with Steve Van Metre to discuss the latest macro outlook.
Steven Van Metre, Certified Financial Planner™ Professional, (CA Insurance License #0D45202 & Investment Advisory Representative with Atlas Financial Advisors, Inc., a Registered Investment Advisory firm.) is a financial planner, portfolio manager, and President of Steven Van Metre Financial. He specializes in retirement income strategies and the direct management of client assets.
Join us for a live discussion on investing in the current environment. I will be joined by Damin Klassen and Tim Fuller from Nucleus Wealth. You can ask as question live via the YouTube Chat.
What are the forces pulling the market higher, versus lower, and which will likely win out?
Investment markets have a host of both positive and negative factors fighting for supremacy. The real question is whether central banks and governments will engineer a continued suspension of capitalism. I was sceptical six months ago. I’m less sceptical now that capitalism will return anytime soon. On balance, however, there is still plenty of room for caution.
Short-term government policies to suspend capitalism (increased hurdle for bankruptcies, mortgage holidays, eviction moratoriums, banks not recognising bad debts, etc.) have morphed into medium-term policies. And, it is hard to see any government ready to exit. There is a quiet extension to each policy that lapses.
We took advantage of pre-election weakness to increase our risk exposure a little. But given the rise in markets since the election, the positive factors have mostly been reflected already. And, the positive factors tend to be short-term, the negative aspects tend to be medium-term.
Key positive factors for share prices
Government stimulus: Global governments continue to add stimulus. The US has some question marks, and the stimulus won’t be as large as if Biden won Senate majority. But it would seem additional stimulus is highly likely.
Low probability of US tax hikes: Subject to the Georgia senate run-offs, it looks unlikely the US Senate will pass Biden’s company tax rate increases. If passed, these would have reduced US earnings by around 10%.
Earnings very good: 3rd quarter earnings were much better than expected. Analyst forecasts haven’t changed much, but that is better than usual! Typically, later year forecasts are far too optimistic and get revised down as they get closer. Forecast growth is 24% for 2021 and then 15% for 2022.
Inequality to remain high: No changes to taxes in the US = economic inequality likely to remain high. In Australia, there are tax cuts for the rich, reduced support for the poor. Travel limitations depressing spending for the rich. Plus stimulus tends to be relatively indiscriminate; some ends up in the right hands, some in the hands of those that don’t need it. Net effect: the rich have more money to put into investment markets.
Other positive factors for share prices
Bankruptcies, evictions limited: in many countries bankruptcies are down 30%+, driven by a mix of stimulus and rule changes. Businesses feel richer if they haven’t had to write down bad debts. Not fixing the problem, just delaying the pain.
Mortgage repayment holidays: as above.
Wage growth very low: helpful to company profits.
Productivity: forced change/digitisation often results in better outcomes. Having to fire staff usually results in the least productive going first, increasing overall company productivity.
Low oil prices: keeping transport costs down.
Vaccine hope: successful trials give hope to an end of the virus.
Policy certainty: President Biden is far less likely than Trump to be unpredictable.
Key negative factors for share prices
COVID in the Northern Hemisphere: It is ripping through populations. Importantly, hospitals are reaching capacity, which means lockdowns have begun again in Europe and seem highly likely in the US.
Valuation: Share market valuations are extraordinarily high.
Latent bankruptcies: Changing the rules so that companies and individuals who are otherwise bankrupt are allowed to increase their debt does not fix the problem. It also runs the risk that the bad actors not paying their bills start to pull down the good actors.
Low genuine credit growth: credit growth has been poor; banks are still tightening lending standards. But the credit growth also includes mortgage holidays. And companies borrowing to survive rather than to make productive investments. Which means genuine credit growth is lower than the already weak headline numbers. Economic growth has been tied at the hip to credit growth for the last decade. It is difficult to see what will replace easy money as the only thing holding economic growth up.
Other negative factors for share prices
Short term gap in US economic conditions: There may not be stimulus until Biden takes power. If so, there are three months with limited government support while the virus sets new records. This might be enough to tip the economy into a funk and result in more job losses.
Inequality longer-term effects: the short term effect of increased inequality increases savings and investment and (probably) increases stock market valuations. The longer-term impact is depressed demand and profits. And more political upheaval.
Structural change: leading to weak demand, higher unemployment. There are industries like travel and tourism which will have to deal with lower sales and employment. The means job losses continue as former employees have to give up on finding a job and retrain for a new industry.
Net effect
It bears repeating: the positive factors for investment markets tend to be short-term, the negative ones medium-term. Will there be “clear air” for a few months before the consequences begin? Maybe. The stock market has had a lot thrown at it and is still holding up.
On the flip side, the risks are not symmetrical. The upside appears more limited than the downside.
Damien Klassen is Head of Investments at Nucleus Wealth.
