As Central Banks all over the world do “whatever it takes” to counter the economic fallout of COVID-19, a fundamental fact remains; we are solving debt with more debt.
By ‘cranking’ up the economy and investment markets with artificial money, are we setting things up for a more pronounced ‘tank’ on the other side? Only to set the stage for a repeat cranking to avoid the next tank, and so the cycle continues.
In recent weeks, we bore witness to whipsaw swings in markets as asset prices rocked and rolled on the debt fueled foundations that were created post-GFC.
MMT (Modern Monetary Theory) has become the desperate new normal as currency issuers around the world print, print and print to stave off an economic Armageddon.
All this freshly printed money splashing around is fueling asset prices… again.
Ipso facto, moral hazard is invited to stay as investors are reminded that Central Banks will effectively underwrite and future-proof risk taking.
The solution is; there is no other solution. In this low rate world, Central Banks and policy makers have no other ammo left in their arsenal to battle the economic fall-out that is COVID-19.
However, as markets respond to the massive stimulus packages, we need to remove the rose-coloured glasses and stop listening to ‘experts’ who are telling us that we’ve come through the worst of it because share-markets are ‘recovering’.
By the end of April, the US stock market (S&P 500) had rallied 31% from its March lows. In a similar fashion, the ASX 200 climbed back in excess of 20% since the March nadir. In traditional economic parlance, an increase in stock prices in excess of 20% represents a bull market.
As at last week, more than 30 Million Americans had filed for unemployment benefits since the start of the lockdowns. That represents one in ten Americans. In the US, GDP shrank 4.8% in the first quarter alone. The Australian unemployment rate is predicted to hit 10% by June as COVID-19 wreaks havoc in our economy. The IMF has warned that Australian GDP could be down 6.7% in 2020.
This is not a return of the bull-market in any way, shape or form.
You can print all the money in the world but you can’t print tax revenues, and you can’t print jobs.
How far can we kick the austerity can down the road before higher taxes set in? There are choppy waters ahead.
As we move into an era of the Crank’n’Tank economic cycle (a phrase which this author is coining), what is the message to investors?
Well – to paraphrase Mark Zuckerberg; the biggest risk of all, is to not take any risk.
Once-in-a-generation value opportunities are there for the taking, but take the rose-coloured glasses off and keep a clear line of sight on the fundamentals moving forward. What matters is the long game i.e. asset allocation, and why seeking professional financial and investment advice is key to helping investors navigate these choppy waters, and to help them avoid making emotionally driven (and costly) decisions and mistakes.
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Naomi Mee-Martino CFP® is a Financial Planner and Partner with Bastion Financial Group.
At Bastion Financial Group, we utilise asset allocation, proven research based methods, a focus on education and decades of experience to help clients minimise the risk and stress of managing wealth. We are Certified Financial Planners and active members of the Financial Planning Association of Australia (FPA).
Important information
This article has been prepared by Bastion Financial Group Pty Ltd., Authorised Representative(s) of Godfrey Pembroke Group (ABN 38 078 629 973), an Australian Financial Services Licensee, registered office at Level 2, 26 Brisbane Avenue, Barton ACT 2600.
Any advice in this document is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal financial, tax and legal advice prior to acting on this information.
Opinions constitute our judgement at the time of issue and are subject to change. No member of the Godfrey Pembroke Group, nor their employees or directors, gives any warranty of accuracy, nor accepts any responsibility for errors or omissions in this document.
