Unemployment: The Canary in the Economic Coal Mine

In a world where Japan and the UK are now in recession and China and Europe’s economies slowing; what is the prognosis for Australia and the rest of the world?

For a while now, the anecdotal evidence indicated the Australian economy was trending towards a slowdown, whether from talking to retailers or from conversations with consumers about the cost of living. However, the critical economic measures were not reflecting it. Now that is starting to change. Unemployment rising is the canary in the recessionary coal mine. As the economy slows, businesses are forced to lay off workers. That further reduces the amount of money consumers have to spend in the economy. This creates a downward spiral of slowing business conditions and job losses that ultimately lead to a recession.

Outside of the USA and a handful of emerging markets, there are few regions that display robust economic growth. Part of the reason for the continued strength of the USA share market and economy more broadly is their position as the focal point of the global economy becomes magnified as geopolitical tensions rise around the world. Emerging markets such as Chile, Mexico and Vietnam are doing well as the beneficiaries of the US reshoring their supply chains away from their reliance on China.

China’s systemic issues are a problem, from their over supplied property market through to their over reliance on building and infrastructure to stimulate growth. Overlay the slow but steady shift away from China being the worlds supplier and they are severely restricted in their ability to stimulate their economy. This does not bode well for many economies, especially Australia because of our reliance on the mining industry and China being our key export partner.

In Australia, a recession was always on the cards when you get such a fast rise in interest rates. Interest rates are starting to bite. Its taking a long time but all the signs are there from rising mortgage stress to falling retail sales. However, until there is a greater slowdown in the jobs market it’s a guessing game for central banks as to when to stop hiking rates, let alone drop rates.

We now have unemployment creeping up from 3.5% in June 2023 to 4.1% now. This is data I have been watching most closely as an indicator that Australia is starting to head to recession. A sustained China slowdown, impacting the mining industry here would compound this issue and accelerate the timeline.

Central banks manage interest rates in a comparable way to driving a car. Unfortunately, it’s much more like hitting the accelerator and jamming on the brake rather than moving smoothly through the gears which is how it would work in a perfect world.

The problem then is that there is a lag effect. Once you have that material move in the unemployment rate the wheels of economic decline have already been set in motion. So, in the months that follow, as the RBA works out its next move, it is more likely than not that unemployment keeps rising from here. Until it gets to a level where it is very clear that interest rates do need to be cut. At that point however, real damage will have been done to the economy and it will continue to flow through for some time even as rates are being cut.

What this means from an investment portfolio perspective is that I am very cautious. We are underweight growth assets such as international and domestic equities. We still have exposure to many of the big tech companies across the world that I believe should form the core of your investment portfolio for the next decade. But we don’t hold the level that they represent in the S&P500 index.

We have a strong preference for solid and almost boring businesses that are more likely continue to deliver reliable profits in tough times. Additionally, we are overweight cash and income assets such as bonds and high-quality corporate debt.

We have positioned our portfolios for recession as a realistic risk we want to mitigate against. If it doesn’t happen that’s great for Australia and our portfolio’s will do just fine collecting dividends and interest and adding some growth along the way. However, I’d certainly prefer to err on the side of caution in this environment and continue to protect against the downside risk of a recession.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

10 Themes for 2024

1. The rise of AI

2. China slowdown

3. Geopolitical tensions  

4. Energy 

5. Falling interest rates 

6. Government bonds 

7. US election

8. Rising unemployment 

9. Government debt

10. Austerity

Many years ago, I remember reading that as you progress through life you first acquire information, then knowledge, and ultimately wisdom. So, it occurred to me at the time, some 25 years ago, that as the internet started to really change the world and usher in the “Information Age”, technology would eventually lead to the “Knowledge Age” and one day hopefully a “Wisdom Age”.  

With the breakthroughs in artificial intelligence in the past two years, I genuinely believe we have now entered this second great phase, the “Knowledge Age”. Advancements in technology continue to grow exponentially with none more exciting and impactful than AI, which is still in its infancy. This year will see AI become more mainstream and integrated into our lives than ever.   

With regard to AI investment, opportunities remain endless as every company in the world rushes to implement the technology into their business in every way they can. This is a multi-decade opportunity just as the internet was before it. This is not just about the mega tech companies, it’s about every company. The changes ahead will be genuinely transformational for the human race.  

Beyond China’s challenges in the property and debt markets, their economy is still coming to grips with western nations reducing their reliance on Chinese supply chains. It is China where I suspect the first economic domino to drop. A more severe economic slowdown or crisis in China is certainly a potential catalyst for triggering a range of other domino effects across the world. The prospect of an ongoing slowdown in China will make conditions especially difficult here in Australia.  

With every new international conflict, the USA becomes more distracted, and their resources, power, allies, and control are diluted. Before those more idealistic and critical of the USA military become too excited about a weakened USA, for all their flaws, the USA, and its military might remain necessary for global stability. Their enemies though, already realise this and are more emboldened than ever knowing that they can get away with more than they usually would. The risk of escalation is high as spot fires of war spring up around the world. The prospect of conflict becoming bigger or entrenched globally is real. There are significant economic impacts here from inflation to global trade.   

Energy remains a high-conviction long-term investment theme despite the prospect of a slower economy. The move to clean energy is slow and expensive while there has been a chronic underinvestment in traditional energy, such as oil and gas, across the world. This dynamic combined with the potential for supply disruption due to geopolitical tensions across the Middle East and Europe may well see a higher oil and gas prices in 2024 and beyond. 

I think this year we will see interest rates stay too high for too long and with that a global recession will see unemployment rise sharply before interest rates are reduced. There remains a chance of the ‘Goldilocks’ scenario unfolding if central banks can orchestrate the perfect balance, but I have just never believed that to be a realistic scenario to use as a base case. Human nature and by extension that of our economy and society more broadly is one of extremes, not balance. It’s why we get booms and busts.  

The opportunity in government bonds is uniquely exciting given it’s the world’s safest and usually most boring asset. After a couple of very poor years where we almost completely avoided this asset class, bonds are back in 2024. You can pick up a 4-5% income yield these days and with the prospect of interest rates starting to fall later in the year, bonds are poised to deliver solid returns in 2024. Bonds could easily achieve a 10%+ total return with very limited downside risk.   

Elections don’t usually move investment markets significantly. However, the US presidential election is set to be different. Perhaps the most polarising figure in the world this century is Donald Trump. I’ve been saying for a while that by the end of 2024 Trump will either be in jail, dead or president of the USA again. I don’t know which, but I will not be surprised by any outcome. If he wins back the presidency, which I think is very possible, the world is in for a shock as he is likely to be far more ruthless and bold this time around. 

The US government debt is now $34 Trillion and growing fast. Expect Government Debt to be an election topic in the US and other countries where debt is at record highs. There will come a time whereby the people will have had enough and smart politicians will campaign on that basis. The first steps will be to balance budgets and that will require increasing taxes and cutting spending. Austerity is likely to re-enter the political, economic and consumer conversation for the first time in a long time.  

The world sits as a virtual tinder box awaiting a match to set it alight in a way that has not been seen in my lifetime. I know we’ve seen 9/11, the GFC, and the Gulf wars, but the set of circumstances the world now faces are potentially more concerning than at any of those times. I say potentially, and that is key, things may not play out that way, but from an investment perspective prepare for the worst and hope for the best.  

Regardless of the situation I am extremely optimistic about the future for both investment markets and the world. There will always be set back and conflict but time after time people rise up and continue to succeed. Maybe in the decades ahead we can look forward to a transition to a more peaceful Wisdom Age but for now there is much to be excited about as we enter the Knowledge Age.  

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Bubble of Confusion

One of the more random books on my bookshelf at home is one I bought many years ago called “Self Defence in 30 Seconds”. The author, Robert Redenbach, is a specialist in teaching self-defence tactics. There are several passages that I think apply equally well to investing as they do to self-defence. He outlines the three phases of a pressure situation where you need to defend yourself as follows:

• Phase 1 The Error

• Phase 2 The Bubble of Confusion

• Phase 3 The Result

In his opening sentence he writes: “There are only two rules for self-defence: 1) avoidance and 2) survival”. Avoiding bad situations seems obvious but it’s possible you take a wrong turn and end up in a dark alley in the wrong end of town. This is an example of an error.

From an investment perspective, everyone is still underestimating the dark alley of high interest rates and debt. That’s the error. I would love for a soft landing to be a real outcome. For the economy and for share markets. But if history and my experience are anything to go by that is not how it usually plays out.

The bubble of confusion he refers to is a 30 second window you get where you’ve walked down the wrong street, and you realise you made an error. You’ve got 30 seconds to survive what happens next. Still on the first page he states:

“… It is a tactical error to believe that if you can’t defend yourself in the first 30 seconds, more time in the affray is going to help. It won’t. It’s like trying to save yourself from drowning: if you can’t do what needs to be done in the first 30 seconds, more time in the water is going to make the situation worse, not better.”

For investors, the best option is to avoid being caught in the error. But if you can’t avoid it be sure you are positioned to survive it. That means reduced exposure to downside risk assets and reducing or even eliminating debt. These situations evolve very slowly, they build up over years and they take longer to peak than anyone expects. Then it all happens very quickly.

For investment markets, as it becomes clear that inflation is coming down and the economy slows investors will enter their own bubble of confusion. They will celebrate a return to the good old days (2010–2021) as they anticipate a return to low inflation and low interest rates.

With US inflation at 3.2% and Australian inflation figures released yesterday down to 4.9%, prices are no longer increasing like they were a year ago. The reason for the confusion is that the set of economic conditions that occur as inflation falls look the same as the early stages of the economy entering a more severe slowdown including a recession.

I expect the next 6 months through to mid-2024 to see much of the world enter this bubble of confusion. Investors will latch on to the ‘good news’ of lower inflation before realising that its actually ‘bad news’ as the lower inflation becomes a lead indicator of a global economy starting to slow more significantly. Frankly, it’s better that this happens sooner. If inflation rears its head again later it only forces rates higher and defers the eventual ‘bubble of confusion’ phase, making the slowdown more brutal when it arrives.

Australia will be especially vulnerable with inflation that’s now ‘homegrown’ and a reliance on potentially economically hobbled China. It’s a question of whether the economy, once it slows, settles to a nice soft-landing phase (what the market expects) or if it falls off a cliff (not what the market expects). These events tend to drag on until a sudden tipping point where things decline rapidly as the bubble of confusion ends with a result.

The path to a hard economic landing often looks and sounds like a soft landing until it’s not. In fact, I recently read a headline in the Financial Review stating that investors are expecting a “soft landing recession” I don’t even know what that means. Investors, commentators, and governments will contort themselves in every way to sound optimistic.

Ahead of every crisis I’ve ever seen over the last 25 years, I cannot tell you the number of times that almost every expert or government agency provided commentary or opinions that the emerging event was not in fact a crisis or a problem. Once there is clearly a problem the message becomes ‘it won’t last long’.

To be fair, governments are tasked with maintaining order, so they are going to provide the advice that’s required to ensure the best overall outcome. Investment institutions are tasked with making money, so they are never keen to talk negatively about markets.

This is very often at odds with the best outcome for any individual investor. Those messages are designed to manage the masses. More often than not as a crisis emerges, those proactive first movers who act counterintuitively to the crowd, recognise the problem and act are better off than the person who sits on their hands and lets it happen to them.

It’s critical how you assess the data as it emerges, how prepared you are, and how quickly you act will determine your result. These basic principles apply equally to managing investments in an economic crisis as they do in self-defence.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Here is the conundrum

The US Federal Reserve is between an economic policy rock and a hard place. They are committed to reducing inflation to 2%. To do that they need to raise interest rates. They have increased interest rates from 0.08% Nov 2021 and are now at 5.33%. Inflation is falling. In the USA, inflation was 9.1% Jun 2022 and is now 3.7%. But it’s not at 2% yet. As much as it’s come down, hitting the target is proving to be sticky.

So, that is the conundrum. To solve it, the Fed can take one of two paths:

A. They raise rates until they get to 2% inflation, or

B. They raise rates and stop before it gets to the target hoping that momentum carries it through to the 2% target?

The problem is that there is a very real time lag between raising rates and seeing its effects flow through to the economy.

With option A, if they increase and hold rates until the targeted inflation rate is reached then it is almost certain that the months that follow will see the time lag impact the economy very significantly. It will likely cause a recession. Interest rates will then need to be cut quickly to offset the damage. But there will certainly be economic damage.

With option B, the risk is that inflation rears its head again if they stop too soon. It also begs the question of when you stop raising and how long they should hold rates for before realising inflation isn’t going to reach the target. Higher inflation, if it becomes entrenched, is an economic cancer that will riddle a nation’s stability.

Right now, in spite of all the interest rate increases, the US economy is surprisingly quite strong. Normally a strong economy is good news for investors because it generally translates into good business conditions and in turn good returns for shares. It would normally be bullish for the share market.

So why am I bearish when the US economy is relatively strong?

It’s because it means that while inflation has come down, the underlying strength of the US economy indicates that so far, the rate increases haven’t yet slowed the economy enough. To get to the 2% inflation rate sustainably will require some economic pain. At the moment, too many of the key indicators such as unemployment and GDP still seem to be running too hot. Unless the US economy starts to slow, I think it means that rates in the US may go up further during 2024.

After trying to manage the inflation issue using option B, I think that in the end the US Federal Reserve will need to revert to option A. It will result in significant economic consequences including a recession. That’s why I am bearish on stocks and the economy. I think the relative strength we continue to see only means that the interest rate environment stays higher for longer until they get inflation well under control. Achieving that will ultimately mean the central bank will break something in the economy.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

China Slowdown

The much-heralded China economic reopening doesn’t seem to have materialised in the way markets anticipated. At various points during Covid, the prospect of China reopening for business post covid sent markets rallying higher on the expectation of higher demand driving the global economy. But so far, the reality has been underwhelming and it appears there are more economic challenges ahead for China than many anticipated.

Yesterday’s inflation figures for China show the once-powerful engine of global economic growth to now be heading for deflation. The CPI rate of -0.3% for the period was lower than expected and the flow-on effects are massive. Lower inflation and the prospects of lower economic growth are genuinely problematic for a nation that has been all about growth for the past 30 years.

In the past, China has had many long-term trends playing into their favour driving their growth. But suddenly there are a number of these trends are being reversed and we are now starting to see these factors impacting the country negatively. China has been the biggest beneficiary of globalisation over the past 20–30 years. Combining that with a huge population and rapid urbanisation sparked decades of investment that turned China into the world’s second-biggest economy.

Yet what China faces now is a totally different situation, and I am not sure the world has really considered what all of these variables combined really mean. All these issues are well known but China has been such an economic juggernaut it’s difficult for people to look at the situation with fresh eyes and consider what all these issues converging really mean for China and the world.

The catalyst for changing these trends was Russia’s invasion of Ukraine effectively waking the world up to the economic consequences of a conflict on the global supply chain. National security became the number one issue for every nation in the world and overnight it commenced the slow reversal of globalisation. As countries extricate themselves and their supply chain dependency from China this new trend will weigh on the Chinese economy as decades of investment is slowly unwound.

Meanwhile, emerging economies such as Mexico, India and Vietnam are booming as the USA and other Western nations are reshoring their supply chains and manufacturing. Make no mistake the process of untangling the global supply chain is still underway. The global supply chain dependence on China is a bigger vulnerability for the Western world than Germany’s dependence on Russian energy. There is no quick fix so all sides are working as quickly as they can to mitigate their risk. That’s a problem for China’s long-term economic growth.

Another overarching theme is their changing demographics. China’s population is aging and by 2035 an estimated 400m people will be over 60. Population won’t be the driver of growth it once was. But the trend that really accelerated the Nation’s growth over the last 20–30 years was the urbanisation of China. As people moved from the country to the city there was massive investment in infrastructure and property. Entire cities were seemingly built overnight. But simply developing infrastructure and buildings isn’t sustainable, in fact, it might be part of the current problem.

China is now at a crossroads.

The spectre of large amounts of debt has hobbled the economy. Economic growth has been lower than expected and in the past that was the signal for stimulus from the government. More often than not in the form of infrastructure and property development. It’s unlikely to be the case this time around and those past actions are part of the problem. Large debts at all levels of government, especially local government, were used to build projects that didn’t necessarily stack up financially. There are large amounts of infrastructure and property development that provided economic stimulus and jobs at the time but sit vacant or barely used now they are completed.

This is a serious problem.

It means that many of these projects haven’t delivered the returns needed to pay for themselves. But more importantly, faced with slowing growth, it may stop the government from being able to roll out the old playbook because they have effectively over saturated the market. The property and debt issue in China has been lurking since the collapse of Evergrande back in late 2021 and there remain serious problems and questions with regards to the entire sector. I am sure grand announcements of government stimulus and investment packages are coming but China need a new strategy to reignite growth.

By way of investing in Chinese equities, I still believe the country remains uninvestable. As I’ve previously said in these notes before, regardless of how big the opportunity may seem I am not interested in investing funds where a country’s government can torpedo entire companies or even industries overnight on a whim. Business is difficult enough at the best of times and I have no interest in the space and wish those brave, naïve, greedy or silly enough to invest there good luck.

With all of these long-term trends reversing, it will be extremely difficult for China to grow in the same way they have for the past few decades as they go forward. It’s time for investors to think carefully about what these changes mean and reevaluate what the flow-on effects are not just for China but more importantly for the companies in your investment portfolio that are heavily exposed to China. Australia has benefited enormously from the growth of China but if the Chinese economy faces a genuine slowdown and they are unable to resort to their usual ‘just build more playbook’ in the same way they have in the past there are huge implications for Australian companies of all sizes.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Signs of Distress

There are some troubling figures starting to emerge in relation to a jump in bankruptcy, insolvency, and mortgage stress. These areas have all spiked recently as the covid era business protections are removed and markets are left to function more normally. Keep in mind that these figures are coming off a low base, but it signals a new phase for the economy. Here in Australia according to the latest insolvency statistics from ASIC (Jul 2023), insolvency rates are climbing sharply now too. During covid, insolvencies were in the 4,000-5,000 range annually. In the last 12 months, this figure has increased substantially and is now in the 8,000 to 9,000 range with 866 businesses being wound up in May alone. This is emerging across the world with places such as the UK particularly severe. The key concern is the flow-on effect through the economy. Increased bankruptcy means less jobs and less money being spent by both consumers and businesses in the economy. It snowballs from there.

At the same time, here in Australia, we are starting to see a spike in borrowers in mortgage stress. According to Roy Morgan research, over 1.4 million Australian borrowers are facing mortgage stress, up 78% from a year ago. The figure means almost 30% of all mortgage holders are in mortgage stress, which is the highest rate since the GFC. The most troubling aspect of these figures is that they’re at these alarming levels despite the economy not being in a recession and at a time of record low unemployment. If we see the unemployment rate materially rise in the months ahead, which I believe we will, these figures spike even higher. With so many people already struggling now while most people have a job, imagine the economic carnage when the unemployment rate rises. Mortgage stress means consumers have less money to spend on everything else. It slows economic growth, and it becomes a vicious cycle leading to more insolvency, less jobs, less spending and so on.

The added issue with mortgage stress for the property market becomes forced selling. It’s been a long time since we have had a situation like that with property, but I think it’s now a possibility. Distressed property owners selling drives prices down fast. Even during the GFC here in Australia, we didn’t really experience property issues in the same way the USA did. You really need to go back to the early 1990s since we’ve seen a scenario like that. It’s simple supply and demand. When you get distressed sellers, a glut of properties form and supply becomes greater than demand. The prices start to fall to meet demand. As people become more desperate prices fall even faster. Compounding this issue is the fact that buyers realise if they wait, prices will go even lower. So then demand starts to dry up and the situation becomes even worse. I’m not saying that will definitely happen, just that it could occur in this cycle. It’s on my radar and it hasn’t been before.

When we start comparing statistics to the GFC era, you need to keep in mind that in many cases we are talking about the maximum pain points that peaked at the end of the GFC in 2009. What came with that was a whole range of government stimulus and borrowing that was designed to make the upfront pain easier in order to spread out the pain over time. But we never stopped making things easier. Now, we’ve created inflation and as the economy gets worse, there isn’t a lot the government can do to help. Businesses, consumers, and families are going to have to wear the pain. Governments will lower interest rates, but we have the spectre of inflation hanging over us now so governments will be hamstrung with the policy moves they can make. So, while the GFC was bad, it wasn’t as bad as it was meant to be. Governments kicked the can down the road. We are getting closer to the end of that road.

The convergence of these variables doesn’t happen very often, but we have all the requirements for these once-in-a-generation scenarios forming in the background in this economy. It’s one of those things that when you say it, people think you’re crazy, but then when it happens, those same people will say it was obvious. Now interest rates may well still be low historically, especially compared to the 1990’s but it’s all relative. Someone borrowing as much as they can at 3% is going to be in trouble when their rates double to 6% or worse. As slow as the downturn has been to arrive once it is here it will be a problem for the whole economy and all asset classes. We’ve already had a false start in 2022 and since then everyone wants to pretend the worst is behind us. Diversify, be patient and be prepared. You don’t have time to position for it later. The time to position for the bad is when it’s still good. It’s too late to batten down the hatches once the storm hits.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Property Trust

One of the defining parts of the GFC was seeing the impact of a credit crunch on large property fund investments. These funds held billions of dollars in all types of property including offices, retail and commercial. Like any investment, these include both good and bad managers. Often when these investments perform badly it’s for relatively obvious reasons such as too much leverage. However, the GFC highlighted a different twist on the problem with debt.

In the lead-up to the GFC, credit was easy to source, it almost didn’t matter how much debt you had as you would just refinance it on new terms when it came due. But once the GFC hit, the music stopped, and it was far more difficult. It led to both good and bad property assets becoming distressed, and not because there was too much leverage or difficulty making repayments. It was because if you couldn’t refinance the loan it had to be repaid in full. This became a major problem that wasn’t expected.

Many big property players had become so complacent during the times of easy money that they forgot the fundamental rule of managing the maturity of their debt. With no refinancing available, the only options became asset sale or default. It was a catastrophe with many funds caught out. The only thing worse than being caught out with a default or having to sell assets in a fire sale is having it happen when everyone else is too. It led to many property trust structures collapsing and investors losing millions.

Fast forward to 2023 and there is an element of this beginning to emerge again. In the USA alone, there is almost $1.5 trillion of commercial real estate debt due in the next 12-18 months. There are two parts to this problem emerging. Firstly, that debt is going to be refinanced at much higher rates and that’s obviously a big problem for organisations making repayments. It may mean that many organisations are not even able to gain approval to refinance under the new terms given the new rates change all the financial models they previously applied. That’s one aspect where failure will occur.

The second part of the problem is going to be those that can theoretically afford to refinance may still miss out. With financial conditions tightening and banks being far more selective, there will be a significant number of organisations that will miss out. Lenders will move from friendly facilitators of business to ruthless corporate vultures pre-emptively picking and choosing the assets they support and those they don’t. Understanding the bank’s place in the pecking order of default will play an important role in their decision-making and which assets and organisations succeed and those that fail.

This time there is a lot of debt not just linked to property assets but also a range of business and other financial assets. The key to property trusts and corporations surviving all of this is making sure they get ahead of any potential credit crunch. They need to refinance sooner rather than later and ensure they have sufficient access to capital, so they are not forced sellers at the wrong time. Make no mistake when push comes to shove in these situations, the deck is very heavily stacked in the bank’s favour. In a time of crisis, the banks will make the decisions that are in their best interest, not the borrower.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Balaji’s Bet

Amidst the emergence of the banking issues, US entrepreneur and former partner at prominent Silicon Valley venture capital firm Andreessen Horowitz, Balaji Srinivasan made a very public bet on Twitter. He bet $2m that the price of bitcoin will go to US$1m in 90 days. Given the price of bitcoin at the time was about US$26,000, it’s an aggressive bet and it certainly gained a lot of attention. The good news is that we will know very quickly just how clever he is. The bad news is that if he is right then the world is in far more trouble than anyone is prepared for. I’ve had a few people ask me about this, so I thought I'd provide my thoughts more publicly. 

Over the past decade, Balaji has amassed a huge following in tech and cryptocurrency circles. He also gained prominence over the past few years for his predictions on a range of topics including how Covid would play out. He is a smart guy and is very influential within the tech and VC space. His views on the banking system and the pace of change are extreme. His rationale for his position is his prediction of imminent hyperinflation, his concerns around the bond losses the banks hold and ultimately the collapse of the USD. He views bitcoin as the likely replacement.

For the record, I think he’s completely wrong for several reasons but it's worth exploring his rationale and the counter points. Financial markets are always a melting pot of diverse views and sometimes the most unusual perspectives prove to be right. Considering different viewpoints in a critical manner is always worthwhile even if it is especially unusual or extreme. It’s always worth understanding the rationale behind someone's position.

Firstly, in the short term, a US banking crisis is likely to be deflationary rather than inflationary. The real risk for the economy right now is if banks tighten their lending criteria and start to hoard cash for their own liquidity. That potentially starves businesses, consumers and the economy of the capital that generates economic activity. This would more likely lead to an old-fashioned credit crunch which would hammer economic growth. So, an escalation of the banking crisis he predicts is not inflationary at all and may well ‘cure’ the inflation problem. 

Secondly, in anticipation of a credit crunch or recession, the impact on interest rates is more likely to change from rate rises to cuts very quickly. The bond market is already telling us rate cuts are coming with 2-year bond yields dropping from about 5.05% to 3.94% in a matter of 3 weeks. Bond markets are now pricing in several rate cuts in 2023 even though the Fed’s position is that this is unlikely. The implications are that the tightening in the banking sector is effectively acting like added interest rate hikes which will further dampen inflation. The hyperinflation argument seems extreme and unlikely. 

Thirdly, any interest rate cuts would quickly erase a sizeable part of the unrealised bond losses that many institutions are carrying on their balance sheet. These unrealised bond losses are a big part of the problem at the banks, and a central part of the Balaji thesis. Whether interest rates come down due to market forces or because the Fed deliberately changes course is largely irrelevant. If interest rates do come down, it will reduce the bond losses that banks carry, which will alleviate the pressure on the bad bond investments in the banking system.

The unrealised bond losses are a significant issue for banks, but it's not necessarily the existential issue Balaji seems to fear. The US govt can simply choose a different interest rate policy. If push comes to shove and the Fed must choose between addressing a bigger issue in the banking system or inflation its likely they choose the biggest immediate threat. That would mean dropping rates due to banking issues and dealing with inflation later.

While there are not many tools at the disposal of the Fed to fight inflation, they have lots of tools to deal with bank issues. In the face of Bitcoin appearing as a threat to US hegemony, I would say that laws in the US would change rapidly. I'm not saying that’s a good thing but I'm a realist. As great as all the tech and VC gurus think bitcoin is for the future of a utopian world, if it’s a threat to the US and its dominance, they will restrict it and suffocate it, or even make it illegal if needed. I would not underestimate the US govt ability or willingness to protect itself by any means necessary if its position is threatened.

While I do think cryptocurrencies may be the future of money, I am not convinced that it will be bitcoin. Even if it should be, the control of the monetary system is far too important for governments to relinquish control. Additionally, there is a major risk in holding bitcoin that it has no intrinsic value and that its price is simply determined by the flow of money in and out. If a more technologically advanced and energy-efficient cryptocurrency ends up being adopted, then bitcoin will end up worthless as everyone moves across to the new coin. 

I think that Balaji’s prediction is a combination of self-promotion combined with limited downside risk. He knows that as money moves out of banks, some will certainly find its way into bitcoin, limiting the downside risk, while all the publicity and uncertainty puts upward pressure on the price. Overall, I suspect as part of the Silicon Valley clique that is very bullish on cryptocurrencies and exposed directly to the collapse of Silicon Valley Bank that he’s just a little too close to the situation to see the forest for the trees. A little like a conspiracy theorist who goes down a rabbit hole and continually reaffirms their theories in an endless stream of combined confirmation bias and group think. 

What’s certain is that you’ll increasingly hear and read these types of Armageddon predictions as the global economy head into recession. But there is an enormous difference between a recession, even a bad one, and the type of predictions the most extreme people will start to espouse. In times of uncertainty fear mongering escalates and is an easy way to grab attention and headlines.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

An Economic Downturn is Inevitable but Normal

An economic downturn across the world, including Australia, is inevitable. It’s simply a part of the natural business cycle. I remember my mum talking about this when I was a kid. Dad had a small earth moving business in Geraldton in country WA. WA is probably more accustomed to the boom-and-bust nature of the business cycle than most economies given the mining industry. In Geraldton, you’ve also got farmers and crayfishermen. So, the ups and downs of a good or bad season are very much part of the fabric of the local economy. 

In the early days, Dad was a sole operator and business came in by word-of-mouth. No phones back then so you’d get calls on the house landline and take messages. Most people would call in the evening when dad was home to book in jobs in the days and weeks ahead. A plumber needs to hire dad and the backhoe to dig a leach drain for a new house, or a farmer needed him to dig the footings for a new shed. I was always proud that Dad had the reputation as the best operator in Geraldton. 

Usually, dad was really busy and worked 12 or 14-hour days, 6 days a week. He’d have Sunday off for family time. He charged an hourly hire rate so there were no wages, there was no safety net. So, you work when the work was there knowing that at some point it might not be. In the 70’s and 80’s various economic challenges arose. There were certainly times when work was quiet. If the phone didn’t ring there was no work, there was no money. 

When work was quiet one particular time, I was old enough to wonder if things would be ok. Mum’s answer was simple. Yes, it comes goes in cycles, quiet times don’t last, and it will get busy again, don’t know when, but it will. Booms and busts have been happening for years, it’s just how it works. And she was right. Many people understand the cyclical nature of the industries the economies of regional towns are built on. Farmers have good and bad seasons, and they know neither lasts forever. But these days we’ve become conditioned to only good times. Even when Covid hit, governments across the world made life easier for people to the point that many still have surplus savings from that period. 

But these extended good times haven’t made us more prosperous and helped us collectively put away more for a rainy day. It’s had the opposite effect because people have not had to worry about when things go bad for so long. So, they just stopped worrying and lived it up. That’s where we are at today, after 15 years or more of good times, complacency has set in and suddenly everyone is surprised at the prospect of a downturn and looking for someone to blame. 

No doubt there are various organisations, including the RBA and the federal government that have made the situation worse. What these organisations do really does impact the economy. They do significant damage to the economy and business when they get it wrong. Just ask anyone who paid interest rates as high as 18% back in 1990. To this day they have not forgotten the pain and difficulties of that time. Conversely though, today we’ve experienced too much of a good thing and now it is coming home to roost. 

While Paul Keating was much derided for his “Recession we had to have” comment in 1990, he wasn’t wrong conceptually. The Government and RBA nearly broke a generation of mortgage holders by forcing rates up too high. But the idea of a recession being needed once again rings true to me. In some respects, I think it's inevitable and just part of the natural business cycle. Something is lost when people don’t experience the full cycle of the good and the bad. The problem this time around is that people are woefully unprepared to deal with a downturn not just financially, but mentally in my view.

What’s created this is 3 things. A super cycle boom on the back of a once-in-a-generation urbanisation of China, low-interest rates by the government for the past 15 years in response to the aftermath of the GFC and a boom mentality that has been normalised. The third change is the biggest problem now, as this has conditioned people to expect good economic conditions or a safety net. This is understandable if that’s all you’ve ever known. But it will make the adjustment more difficult as conditions return to normal and the eventual bust is much bigger than it would otherwise have been. Ask anyone in small business in a country town, that's just how it works, but it's up to each of us to prepare for the tough times ahead.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Lowe needs to go.

When you’re in the top job in any organisation if you don’t get it right, you’re out. Whether it’s the coach, CEO, or Prime Minister, they are the first to go when things go wrong. So, it’s beyond comprehension that after getting it so wrong so often that Phillip Lowe is still the chairman of the RBA (Reserve Bank of Australia). He got it wrong on inflation. He got it wrong on rates. He got it wrong when he told the Australian public as recently as 2021 that rates won’t go up until 2024. He’s getting it wrong again now. He is still hoping that inflation is transitory. Even in his speech today he’s indicated a pause in rate rises as soon as May. Yet with interest rates at only 3.6% following yesterday’s interest rate increase, there is a long way to go before the RBA tames inflation at over 7.8%. 

Here's the thing. If you’re too tough on inflation you can drop rates quickly but if you are too soft on inflation and it becomes entrenched it’s a recipe for economic disaster. I appreciate that many of the initial drivers for inflation have been on the supply side and there isn’t much the RBA can do about that. However, inflation is an insidious cancer. If you don’t do everything to remove it, it will find its way into other parts of the economy. This is a genuine concern. This is already happening in the USA where as recently as January it was thought inflation was starting to be tamed. Yet just a month later, data has shown it is likely to re-emerge. Many say Lowe’s doing too much, but everyone continues to underestimate inflation. I don’t think he’s done enough. 

After some horrendous missteps, Lowe now seems more worried about managing expectations rather than inflation right now. Why else would you increase rates by only 1.25% over the last 6 months and say there is still more to come? The RBA are compounding their initial mistake of being far too slow to act by now being far too slow to raise rates. Their argument that it takes time to see the economic impact of rate increases would have been better served by front-loading the rate hikes and doing 0.5% in Oct, Nov and December 2022. It’s a slightly higher overall increase but now they would have had 3 months to observe the effects instead of still talking about what theoretically may happen. 

If Lowe thinks there are more rate increases to come, then get on with the job and increase rates by the amount needed to make an impact. We should have rates at well over 4% right now. There’s far too much mollycoddling all around in my view. If people with mortgages are going to suffer financial pain because they listened to him the first time and borrowed too much, then so be it. That’s how markets work. There’s too much trying to signal intentions and too many cleverly crafted speeches for people to interpret the language. He’d be better off playing it with a straight bat. There are winners and losers. It’s not his job to worry about consumers’ feelings or mental health, it’s his job to manage inflation and that means making the hard decisions that are needed. The overall consequences will be worse if he delays. 

There are really two ways to kill off inflation, the first is by raising interest rates. By doing so Central Banks seek to increase borrowing costs sufficiently that it reduces spending, dampening demand for goods and ultimately slowing the economy and the pace at which prices go up. There is a second, less common solution and that is simply inflation itself. If left to run rampant inflation eventually leads to demand destruction for goods and services resulting in a similar effect to that of rising interest rates, except it's uncontrolled. 

I’d liken raising interest rates to the back-burning of forests. Back-burning results in deliberately burning forests in a controlled, planned manner that is designed to mitigate a disastrous bushfire that engulfs everything. Letting inflation run wild is the equivalent of an out-of-control bushfire with no back-burning. Central banks slowing or pausing rate hikes in anticipation of a slowing economy is the equivalent of not fighting a fire because you hope there is rain coming. Maybe it does, maybe it doesn’t but you can’t afford to take the chance. You fight the fire with everything you’ve got while it’s burning. 

What we’ve got currently are the most difficult set of inflationary economic pressures in 40 years. There is no easy solution. The reality is either way there is going to have to be pain here. Either it’s the pain of inflation or the pain of rate rises. One results in controlled inflation, and one doesn’t. The fact that raising rates will cause many financial pain and hardship does not mean it’s the wrong path. That soft approach to dealing with economic problems only leads to a bigger problem later. At the first sign of pain, the outcry leads to short-term fixes, not long-term solutions. 

Lowe has repeatedly shown he is not capable of getting the basic decisions right. Nor has he been able to navigate the political tensions that arise with making conditions tougher for the economy in the short term for its benefit in the long term. He didn’t take the pain early and now whichever way he turns there is a bigger problem. Conveniently for the Government, when public outrage hits fever pitch later this year because either inflation is too high, or interest rates are, it will be Lowe’s fault. So, the government will not remove him until it is politically necessary. Regardless of that, Chairman Lowe has got it wrong too many times and needs to go. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Market Ahead in 2023

In recent months, share markets have been relatively resilient and some of the bear market fear has dissipated. So, is the worst of the share market turmoil over and is it time to buy?

The short answer is no.

My view remains that this market has another big move down ahead. How I think the market and economic events unfold over the next 12 months is this. Europe continues to fall into a deep recession for all of 2023. The US goes into a recession too. Ultimately dragging the rest of the world’s economies into a recession. My priority remains protecting investors’ capital. I am prepared to miss out on short-term gains by being under-invested if I am wrong. In my opinion, this remains one of those periods in time where protecting the downside risks is significantly more important than any potential opportunity. It is prudent to be cautious in this environment. We will still have our capital intact and can invest in great opportunities in due course. What I don’t want to do is invest too early when sentiment is overly positive because everyone wanders back outdoors in the eye of the storm. The real economic storm is still ahead.

In 2022 all the talk was about inflation and interest rates. That will continue in the early part of 2023 as central banks around the world are forced to over-tighten and create deeper problems. My view is that in 2023 the key topics will become company earnings, global recession, and unemployment. Unlike any previous downturns in the last 20 years, where constant bail outs and money printing supported markets, government’s hands are tied this time around. Countries around the world will simply need to endure an economic downturn the old-fashioned way, take some pain and come out the other side with a better foundation for future growth. It’s not the worst thing that can happen and frankly, if we’d all faced up to a couple of downturns in an organic way, we’d be far better off right now.

But in any case, if Europe and the US are in recession, and China continues to battle covid then it’s difficult to see how Australia avoids an economic downturn in 2023. I know everything seems pretty good now and it doesn’t seem like we are anywhere near a recession, but a downturn is heading our way. When you look at how the world is positioned, a deteriorating global economy is pretty obvious. The problem for most investors in accepting the impending economic reality is that there is a major difference in what we all see and experience right now in our daily lives versus what we can’t yet see and experience in the near future. Overlay what most investors optimistically want to see and it’s often only when things are undeniably bad that it’s finally accepted.

Over the next 6 months, I think we see corporate earnings deteriorate and consequently real cost-cutting across the board. Then the job losses really start to kick in. First with European companies, then the multinationals with significant exposure to Europe, before flowing through to the rest of the global economy. They have started in tech already but will become mainstream in due course. The tricky part for investors will be when we start to see inflation fall, share markets will start to celebrate the return of low interest rates. That’s going to be a monumental head fake for markets as the dream of a return to lower inflation and lower interest rates becomes an economic nightmare in the form of a global recession. In 2023 the downturn will get real. The real economy will start to suffer. That’s when stock markets will enter the final phase of this bear market and crash back below the lows of 2022. If inflation stays persistently high, it will only make the downturn worse.

That said, there is an important distinction to make here between the share market and the economy. I expect the economic situation across the world to deteriorate for most, if not all of 2023. But while I expect the share market to fall significantly as the economy weakens, by mid-year, investors will be looking ahead to how the global economy will be starting to recover in 2024. Share markets don’t wait for the actual economic recovery, they are looking 6-12 months or more into the future. So, while I expect more share market pain ahead, the real buying opportunities will present themselves around the middle of 2023, as the deteriorating economic situation is still unfolding. Take note of that because the time to be bold and buy stocks is when it feels like the economy is starting to look quite bleak, but before the economy is at its worst.

General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Heroes and Role Models

Legendary investor, Ray Dalio, founder of hedge fund Bridgewater Associates tweeted recently:

“I think it’s a really good thing to have role models and heroes, which our society is lacking and in desperate need of.”

It is a really powerful statement. It captures the underlying problem building for many years and now manifesting in the form of the many crises the world now faces. A world plagued by short-term thinking and transactional relationships across business, politics and even sport.

When I was growing up there was no internet. My kids call this period ‘the olden days’. I call it the 1980’s and 90’s. Back then your role models were your parents, and your heroes were footballers. Choices were simpler. My role models, by default, were my dad and my uncles, hard-working blue-collar men. My heroes were Michael Jordan, the greatest basketballer to ever play the game and John Worsfold, the tough as nails West Coast Eagles premiership captain.

In the age of social media, how and who people chose to be their role models and heroes is a very different process. From B grade celebrities to Instagram influencers through to YouTubers and TikTokers, the choices are almost unlimited. In the fight for clicks and the attention of followers, the world has degenerated into a free for all of the loudest and most controversial. In many cases, there is no real substance to the people we follow and aspire to be like today. The content as fake as the people promoting them. Even sport today has become a place for highlights and showmanship over team and sportsmanship.

All I know is what I learned. From my dad and uncles, I learned about hard work, being a man of your word and having respect for others. From my coaches, I learned to play the game of basketball the right way, as a team. As a kid, I learned so much from my heroes, John Worsfold and Michael Jordan. Both were extremely influential in how my mindset developed as a person. Both were renowned for their determination and resilience, their refusal to ever back down and their sheer will to triumph in spite of any obstacle they faced. I absorbed all I could from my heroes. I wanted to be like them, and I developed a similar mind set because of it.

I believe to this day that hard work, integrity, respect, and mental toughness are the most important attributes you can have. Generally speaking, I think these are underemphasised in today’s society, and it comes back to the Ray Dalio quote at the start of this note. Today, society is not necessarily lacking the exposure to role models and heroes, but rather its lacking exposure to the right role models and heroes.

But I’m not all doom and gloom, I don’t think all is lost as it often feels to anyone remembering the good old days. Instead, I think these things go in cycles. It’s like the old saying ‘when the student is ready, the teacher will appear.’ Or as history has shown, the teacher will appear, and the student will soon adapt.

One of the most ironic benefits of the difficulties we have ahead of us from an economic and geopolitical standpoint, over the rest of this decade, is that it will lead to society refocusing on what really matters. At that point, we will see what the world needs most, real role models and heroes, who were always there quietly setting the example for when we are ready to see it.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Phase 2 of the Bear Market

The way I see this bear market playing out is in 3 phases. The good news is we’ve already been through the first phase. That was the first 6 months of the year that saw the S&P500 in the US down 20% and the NASDAQ down 30%. The first phase was all about inflation driving interest rates up and the subsequent one-off re-rating of asset prices that followed. In that situation there is no recovery or bounce back per se, it was an adjustment due to the mathematics involved in valuing assets. Higher interest rates mean lower asset values. In simple terms that 20% fall was the result of interest rates moving from 0% to 3%.

That was phase 1.

Phase 2 is all about what happens over the next 6 months. I’d separate this phase into 2 parts. The first part is all about the downgrades in company earnings we can expect during that time. How severe those downgrades are will determine how markets perform next. Many institutions haven’t updated their forecasts for specific company earnings or entire sectors simply because of how difficult forecasting has become in the last few months given all the volatility in the world. From the price of commodities through to the impact of unprecedented currency moves, these will all impact company earnings.

You only need to look at the price of oil to see just how difficult forecasting is right now. You can find forecasts from leading investment institutions that range from $65 a barrel to $380 a barrel and anywhere in between. The thing is both ends of the extreme are plausible within the context of the scenarios outlined with competing forces of recession risk versus chronic underinvestment in an essential commodity. Currency is another issue. The continued strength of the US dollar as capital moves to perceived strength and stability is starting to reverberate across the world. The Euro is basically at parity with USD now and the Yen has plummeted against the dollar.

Earnings season in the US for Q2 begins at the end of the week and over the next several weeks will provide a glimpse into the real impact all these variables are having on businesses’ bottom lines. In Australia, we will see companies reporting their full year results in August. How earnings look this quarter and the next two will really dictate how deeply the slowdown is going to bite and how quickly markets stabilise. The issue has been compounded by companies becoming increasingly reluctant to provide earnings guidance along the way due to the unpredictable nature of the current business environment. But that only makes the situation worse when the actual results come in below expectations and analysts are caught off guard and need to adjust quickly and dramatically.

The second part of phase 2 is all about the potential for shocks to the system in the next 6 months. There are mini disasters everywhere in the world right now and we only need one to spiral out of control to send the financial world into a panic. It could be a currency break down or a bigger country with a Sri Lanka type problem, an energy shock, or a genuine black swan event. But there are just so many more issues than normal bubbling below the surface that I don’t think markets are adequately weighing the risk of something breaking. Every one of these machinations has a consequence and it won’t take much for something to break and create a more severe dislocation in markets.

In that mix of variables, we’ve got a US inflation report out tonight and the Nord Stream 1 gas pipeline between Russia and Germany being closed for 10 days for annual maintenance. There are real fears that Russia may not turn the gas back on. I think this is a real threat and if it comes to pass would cripple both the German and European economies. Regardless of timing, it remains a threat to Germany’s economy, and by extension Europe’s until they have removed their reliance on Russian energy.

Phase 3 covers the first 6 months of 2023 and will be all about where interest rates finally settle as we head into the new year. For many months markets have assumed about a 3% Fed/RBA rate. Once we come out the other side of the earnings adjustments the next question will be, where do rates end up? The risk being that Central Banks increase rates much further than needed for fear of being out of line again. Happens every economic cycle. My view is that Central banks will be forced to raise higher for longer to extinguish inflation and to ensure that it does not return as it did in the 70s and 80s. That’s going to be difficult if the world exits phase 2 in a recessionary environment.

So, the next 6 months will be critical for investors, and I will be pleasantly surprised if company earnings prove to be resilient. However, if consumer spending falls off a cliff, which I do expect, then businesses will be in for a tough time. It’s impossible for the average household to maintain their usual discretionary spending when they are being hit with massive hikes in mortgages, fuel, energy, and groceries simultaneously. There’s simply less money to spend on everything else. Companies are going to notice it. If not this quarter certainly in the next 2. Almost everyone will need to tighten their belts and make hard choices about their discretionary spending.

I would expect within the time frame of phase 2, between now and the end of the year, we are going to see markets really start to work out the magnitude of the issues at play. I expect the market to fall further and find a bottom in that time and that the investment opportunities we have been waiting for will come sooner rather than later.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

A World Splitting in Two

In the quest for lower costs, efficiency in supply chains and productivity gains, globalisation was pursued relentlessly. It made sense for a long time. Yet, for all the benefits gained from increased globalisation over the last 4 or 5 decades, the Russian invasion of Ukraine has highlighted its major fault lines and flaws. The benefits of interdependent economies and globalised trade in times of war have been exposed as vulnerabilities.

What is evident now is that the world is deglobalizing. But this is happening only to a point. The primary theme emerging is that every nation must make all decisions through the paradigm of their national interest. There can be no sustainability without national security. No trade or investment without first considering the national interest. Moving forward they must go hand in hand. It makes sense that national security and independence of core strategic functions for a nation must be a priority.

Germany will go down in history as the poster child for what can go wrong when economic or ideological objectives are pursued without sufficient emphasis on their strategic national interests. While well intentioned, by becoming increasingly dependent on Russian oil and gas, Germany have left themselves at the mercy of Russia and provided Putin with all the leverage he needed to pursue his military objectives.

When push comes to shove, I have no doubt that Russia will turn off the tap and stop the gas supply to Germany. That will have devastating and far-reaching implication for Europe and its economy. Of course, Germany will give in to any Russian demands before that happens. Look for smaller nations to be hit with cuts in gas supply when the Russians feel the need to fire a warning shot across the bow of Europe. While oil embargos play out well from a PR perspective and placate the masses of concerned citizens across the world the reality is far different. These are relatively ineffective in my opinion.

Firstly, there will be countries that end up buying Russian oil. The opportunity is simply too great for India, China, and a number of other eastern nations to not buy it. The supply of oil will ultimately be redistributed and no doubt other countries struggling without Russian oil will find a willing seller in India or others who are more acceptable nations for the west to deal with. The oil embargo sounds punishing but it’s unlikely to be real and countries will find a way around it out of necessity in my view.

Secondly, Europe is far too fragmented to maintain the unity that initially appeared so promising. As situations within nations become more extreme in relation to both energy and food shortages the leaders of each country will ultimately be forced to do whatever is needed to get their nation through the crisis. Simultaneous food and energy shortages will mean every nation for themselves.

The unity of the European region will face one of its most difficult challenges in its history in the months and years ahead as they face twin crises of energy and food shortages. Putin and Russia, for all their military ineptitude so far, are sufficiently well versed in the region to understand that as the situation for Europe becomes more dire and individual nations suffer that Europe will likely fragment. Putin will press his advantage here in an attempt to divide and conquer.

The changing geopolitical landscape has changed the world forever. We will enter a phase of bifurcation of the global economy. This is a 5–10-year process but it’s already happening. There will be far reaching consequences for the way nations and companies reorganise their operations and supply chains.

This will accelerate the split in the world between the East and the West. On one side US, Europe, and their allies such as Japan, South Korea, and Australia. On the other, I expect far closer bonds to develop between Russia, China, Saudi Arabia, and several eastern European nations, such as Hungry and Serbia. Expect India to walk the tightrope between both sides as they have 1.4 billion people to provide for and are unlikely to have the inclination or luxury of picking sides.

But it is not only nations that need to protect themselves and mitigate these risks. There are significant risks to the world’s biggest companies that need to be addressed too. Having supply chains based in China to build products for customers around the world is now the equivalent of Germany sourcing their energy from Russia. It’s a vulnerability and you can guarantee that companies around the world are working feverishly to build out contingency plans and capacity in other areas of the world. There are many thousands of companies in this position with the highest profile and most exposed being giants such as Apple and Tesla.

While all of this is critical, almost every aspect of this process will be inflationary. From now on the model pursued will not be the cheapest and most efficient method of supply and production, but the one that does not make us vulnerable to our potential enemies. Companies and nations will need to act with urgency to ensure they de-risk their exposure in the decade ahead as the world splits into two competing economies. Any companies that do not address these vulnerabilities will become uninvestable because of the existential risks they face.


General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Will Property Prices Fall?

There are so many issues for investors to navigate at the moment. We’ve got several once in a generation events colliding to create volatility and distortions in not only financial markets but for every type of asset. Any one of these issues would be the leading story of the day in their own right in more normal times.

War in Europe, Global inflation, Rising interest rates, Global food shortage, Energy sanction and shortage, Pandemic, China lockdowns, China slowdown, Supply chain crisis, Rising bond yields, Tech stock price collapse, Yen vs US drop, Sri Lanka crisis.

While it sounds like the missing verse of ‘We didn’t start the fire’ by Billy Joel it has been our reality for the past year or two. Many issues are interlinked to be sure and while they all impact the world it is less obvious in many respects how these all flow through to impact the daily lives of ordinary Australians.

The one issue that will have the biggest direct impact for most Australians, or at least be most relevant in the year ahead, is rising interest rates. This brings me to the elephant in the room.

Australian property prices.

We really aren’t prepared for higher interest rates and their flow on effects. As with most events lately, this will have a once in a generation impact on people with mortgages and force property prices significantly lower. Most are already aware of it but don’t give it much thought as it seems so far away. But the RBA raising rates now puts this firmly on the table. 

Do I think house prices will fall? Yes.

We’ve already seen big falls in bond markets and stock markets globally and property has its turn ahead. I think we are looking at a 20%+ fall in residential property prices here in Australia in 2023.

You have to go back to early 1990’s for the last time there was a property crash. The current environment is set up for a similar repeat. While we are not going to get anywhere near the huge interest rates of the ‘90’s, that won’t stop the problems for the property market. Rates have been so low for so long that a few percent increase is going to cause a lot of pain.

Only a few months ago, the Commonwealth bank warned the RBA if they raise rates by just 1.25% that many borrowers will have financial problems. I think rate increases will go past that level. Many homes owners are overextended already. They go to the bank and ask how much they can borrow. When rates are 2% that amount is a big number. When home loan rates are 6% or higher, those borrowers have a serious financial problem.

Many won’t be able to afford the home, it will result in urgent sales, defaults and forced sales. When this happens at scale, the market becomes flooded with distressed sales and the price of property drops accordingly. Making matters worse is that when people expect asset prices to fall, they stop buying. They wait for a cheaper price which only compounds the problem for the distressed sellers.

Of course, this situation only serves to compound the problems for consumers who are already having to adjust for higher energy and food prices. The wage increases they demand will likely add to inflationary pressures but are not likely to maintain their standard of living. Consumer’s discretionary spending will fall further as they are forced to allocate more of their income to paying their mortgage.

None of this is rocket science, it’s mainly common sense when you simply think through the flow of money and impact of the situation. The reason for hesitance in accepting how this will play out is the cognitive dissonance we experience in understanding what we see right now, which is broadly good economic times still, compared to what this rationalisation tells us is going to happen.

For stock markets, this will have a huge impact in the year ahead. Some sectors will be beneficiaries and others will be causalities. This flows through to sectors as diverse as retail, hospitality, and entertainment. It flows through to the banks, long the mainstay of the Australian share market they will see much lower growth in new business while simultaneously experiencing a rise in bad debts and defaults. From a portfolio perspective careful stock selection has never been more important.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Feels a Lot Like a Bear Market

In a bull market, momentum relentlessly drives stocks higher. You’ll get occasional pull backs and profit-taking but then it just goes again. We’ve seen that for much of the past decade. Bear markets are basically the opposite and are typically defined as the market falling by 20% from its highs. So far this year, the S&P500 in the US is down about 13%, so we are not there yet, but I think that’s where we are heading soon enough.

One of the problems as you progress through a bear market is that no one wants it to be the case. They want the good times of the bull market to keep going. So, when markets bounce as they did in mid-March everyone likes to think everything is back to normal. Denial kicks in, but the inevitable drop after the bounce comes soon enough. This is called a ‘dead cat bounce’ for exactly the reason the imagery of the phrase conveys.

The S&P500 in the US fell steadily from Jan-March. But then surprisingly (to me at least) it rose 11% in the 2 weeks to the end of March for no good reason, only to fall by the same amount in April. Dead cat bounce. There were a whole range of factors contributing but the most surprising part was just how much it went up. I raise it only to point out the vagaries of the stock market and why you need to be more cautious in bad markets and difficult times. In a bull market, you can buy the dip. In a bear market that is generally a mistake. In a bear market you are best served by waiting. You buy when there is blood in the water.

Perhaps being so cautious will mean you miss out on some upside if the global situation suddenly changes. If that happens, then so be it. The aim of the game in this environment is the preservation of capital in the first instance. Genuine bear markets are not all that common, but they do happen from time to time. As they unfold investors will find every way to talk themselves out of it until it’s impossible to deny. We are getting closer to that point now. Frankly, it’s kind of obvious.

In a bull market, investment and business conditions converge to provide stocks with all they need to rise ever higher. Everything about the economic and geopolitical conditions are favourable and trending up. Currently, the opposite is true, everything looks ugly and is trending the wrong way. Inflation is high and will force central banks across the world to hike interest rates far more dramatically than many expect. The war in Ukraine is causing all sorts of significant flow on effects. Many won’t be felt for months, some years. China’s economy is forecast to slow dramatically especially on the back of their massive lockdowns with covid. The list goes on.

The likelihood of recession globally is increasing. Markets won’t wait for the recession to be here to retreat. They are already retreating in anticipation and as it becomes more apparent in the weeks and months ahead, they will retreat further. So, make no mistake, markets are forward looking. By the time the consumers and businesses across the world are dealing with the reality of a hard economic landing at some point in 2023, markets will already be looking ahead to the recovery. So do not confuse the current economic conditions with what the share market will do. They are operating on different timelines. One (the economy) is the actual conditions and the second (the share market) is anticipating the future conditions.

The earnings numbers for last quarter and guidance for the following one coming from the mega tech this week will be critical to just how quickly markets adjust. Normally, I don’t put that much weight on the quarterly reporting and prefer to focus on the long term. But in this market the quarterly numbers are going to have an outsized impact on the market from here. We’ve seen it recently with Netflix being smashed after failing to deliver. If the mega tech companies report revenue and profit in line with expectations or better, markets probably hold up ok for now. But a miss will be a completely different story.

I expect the next couple of months to be tough. Markets need only a couple of bad news events to really drop their bundle from here. A reality hit confirming what most are concerned about, a consumer lead recession, will sharply turn sentiment negative and potentially push markets into bear market territory. Right now, there are several risk factors that can easily flare up in the next month or two and become the catalyst for the market to react negatively and take a further leg down. There will be great opportunities once markets settle but for now, I remain cautious.

We remain defensively positioned expecting further downside risk. We are overweight cash, floating rate notes, and commodities, especially energy.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Are You Ready for What's Coming?

To quote the well-known pugilist and lesser-known philosopher Michael G. Tyson “Everyone has a plan until they get punched in the face”.

Right now, we are on the cusp of a once in a generation adjustment as the world moves from low inflation and low interest rates to high inflation and high interest rates. So, are you ready for what comes after you’ve been hit? Because inflation and interest rates are about to punch everyone in the face, consumers, businesses, governments and yes, investors.

Central banks around the world had their chance to deal with inflation proactively and they missed it. Inflation in the US is now at 8.5% and its 7.5% in Europe. There is an inflationary wildfire raging across the world and so far, central banks have turned up to fight it in clown suits with water pistols.

Yet, most are sleep walking into the situation unfolding. They have their heads in the sand, are in denial or simply not thinking objectively enough to assess what is happening. Individuals and institutions with vested interests talk in theory and forecasts on spreadsheets. They make the numbers fit their narrative.

This is a problem. They don’t understand how this really impacts the economy and society.

When I first started in the investment industry as a 21-year-old in 1997, it had been 10 years since the 1987 crash. Over the next several years as markets rose, the more seasoned investors would lament the fact that the younger generation had never seen a crash. They’d argue that it caused them to be overly optimistic in the face of rising risks as they had not experienced a genuine bear market.

The old heads were right. Nothing prior could prepare you for living and breathing in the moment of an actual crash. Not just a fall but a market that completely capitulates into free fall. The GFC provided everyone with that experience, and you become a better investor because of it.

Just as when I was a young adviser, as part of a generation of advisers and investors who had not experienced a crash, there is now a similar dynamic at play. Today, there is an entire generation of advisers and investors and for that matter businesspeople, bankers and executives who have never experienced high inflation and high interest rates.

This is a problem. They don’t know what they don’t know.

I continue to see people wheel out advice, commentary and strategies that may have worked for the last 15 years but are no longer appropriate for the way the world has changed going forward.

I’ve said this before, but I cannot emphasise it enough – high inflation and high interest rates are a game changer for investment portfolios. Most asset classes will need to adjust values lower, bonds, shares, and property. You’ll want to be positioned more defensively during that transition until the one-off adjustment occurs for asset values.

The level of complacency on this topic and impending adjustment astounds me. Most are completely underprepared for what’s coming and seem to prefer passive reassurance that all will be ok than preparing proactively for the inevitable. It is difficult but necessary to be proactive with the preparation of the transition from low interest rates to high interest rates.

This is a generational adjustment.

To a large degree, a big part of the problem is the misconception about what low rates and high rates actually are these days. The fatal flaw of those new to markets in the last 15 years is that they frame those questions within the context of their own universe of relative experience. However, we are breaking out of that cycle.

Ask anyone if interest rates can potentially go to 5% and I will be able to tell you how long they have been investing or advising for based on their answer.

Most with under 15 years of experience will dismiss such a suggestion out of hand as ridiculous. They say this not because it is ridiculous but because they’ve never seen it and the ramifications of that move are so significant that they refuse to consider it.

Conversely, anyone who remembers the 1990’s will say something like ‘It wouldn’t surprise me’. That’s because they remember what historically high interest rates look like at 15% plus and that historically normal interest rates are more likely between 5%-10%.

The last 15 years were the anomaly, not just the last 2 years.

Until everyone understands that the new interest rate cycle will see interest rates move towards more normal levels in the historical sense then they will continue to be underprepared for the problems that continue to evolve before us.

There will always be opportunities for long term growth, but it is critical to ensure you understand when pivotal moments of economic change require a more patient and defensive approach to portfolio management.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

What the Bond Market Is Telling Investors

I had ‘bond market concerns’ listed as #10 in my ‘10 Themes for 2022’ article earlier this year. In my opinion, sustained low interest rates had created one of the biggest bubbles in the world and it was due to unravel. It’s an issue markets are not well prepared for because bonds are seen as very defensive. Usually that is true. But we do not live in usual times and as interest rates rise there were always going to be adverse consequences for bond values.

The beauty of bonds is that they are far better at pricing risk than share markets. In fact, that’s really all they do. Bond holders assess the yield return they need to justify the money they lend you for the risk you present to their capital. It applies to corporations as much as countries. In that sense, it is comparatively simple and carries far fewer of the multitude of emotions and variables of share markets and individual stocks.

Since the US Federal reserve increased interest rates by 0.25% earlier this month, share markets have rallied strongly. In a market where interest rates are starting to increase sharply, you’d expect share markets to fall, not rise. Meanwhile, in just the month of March, the 2-year US bond yield increased significantly from 1.31% to 2.30%. It’s a big deal. Rising bond yields lead to falling bond values, and that is reflected in the Bloomberg Aggregate Bond Index being down around 10% from its highs last year.

So, one of these markets has got it wrong, and it’s not bonds. 

The S&P500 is up 9% from its recent lows and in no way is any of the news better. If anything, the prognosis for global economy and equity markets is worse. Bond markets are working this out but share markets still haven’t caught on. The low interest rate party is over. Yet for some reason, presumably a combination of optimism, naivety and greed, equity markets are still in denial. 

But it’s not just the fact that interest rates are going much higher. Usually, interest rates need to go up to slow a booming economy. The real problem now is that interest rates need to go up and the global economy doesn’t look good. There are signs that the Europe and even the US are headed for recession, possibly early next year. As the yield curve starts to invert, the bond market is telling us recession is increasingly likely in the US.

While many institutions and analysts are going to become fixated on the debate of whether we will or won’t see a recession, they are kind of missing the point. Whether or not its officially a recession it’s pretty obvious that those economies will slow considerably. Company profits will suffer, and jobs will be lost. None of that is good for the economy or share markets.

There is a theory that share markets are efficient. That they are correctly priced at any given moment as they adjust instantly to new information, as all information is known by the market and is assumed to be correctly weighed and priced. It is a great theory. The problem is it’s not how markets actually work in practice. You see just how inefficient markets are in times of geopolitical and economic crisis. All sorts of distortions occur. That is what we are seeing that now.

While I think much of the recent surge is money flowing out of higher risk areas across the world and into comparatively safe markets, it does seem that equity markets will continue to be in denial until they are faced with actual interest rate increases of 0.5% multiple times. Until then, markets appear willing to believe the worlds current economic problems will simply improve from here by themselves.

Unfortunately, that isn’t going to happen.

The good news for the Australia economy amongst all of this is that we produce, in abundance, most of the commodities that the world needs more of, from wheat to iron ore to energy. We are a safe and stable country with low sovereign risk. As countries and corporations around the world look for where to safely invest for the future, we are fortunate to be at the top of the list.

So far, the Australian economy has been broadly insulated from the same inflationary levels as other nations. That won’t last much longer as prices across the board jump to even more extreme levels. From a stock perspective we have held core positions in Woodside Petroleum, Santos and BHP for some time and we have increased our holdings significantly over the course of this year too.

Overriding everything else in the short term is the outlook for higher inflation and rising interest rates and ensuring that our portfolios are prepared for that eventuality. We continue to hold an overweight cash position and I expect the stock market to pull back as the economic reality sets in. That reality may be closer than many investors realise if bond yields continue their dramatic rise.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Seeing the Forest for the Trees

Amongst the sheer volume of urgent daily events, detail, and information to digest at the moment, the most important attribute for investors is to ensure that it doesn’t distract them from what matters most. Think long term. At a time like this, when everything seems to be on a knife edge, it is critical for investors to understand they need to zoom back out and not allow themselves to be engulfed by the all-consuming urgency of the 24-hour news cycle. It will overwhelm your thinking if you let it.

That said, the current short-term events from war in Ukraine, to supply chain disruptions, and inflation, do have significant long-term implications too. So, it’s important to understand that the macroeconomic and geopolitical events occurring now are changing the world. Understand also that unless there is a serious escalation in the war, investment markets will adjust and move on. But it is important to look through all the data and news and work out what actually matters from an investment perspective.

The main short-term trends are:

• Inflation was already heading higher across the world due to supply chain issues

• The war in Ukraine makes this worse as it’s forced almost every commodity price to increase

• The food commodity shortage has the potential to be an economic & humanitarian disaster

• Europe heading for recession with a low growth and high inflation environment which is bad

• USA is similar to Europe, but they have a better economic backdrop and prospects

• Australia is in a better position. Yes, high inflation is coming but likely higher growth too

Short term trends do matter for long term investors. They bring opportunities to take profit on an overpriced stock or buy an undervalued company. The short-term volatility will impact your entry and exit points for assets, the timing of when you might invest. This is especially an issue for new portfolios being established. However, it’s more important to understand the impact of the current situation on long-term global trends and adjust accordingly.

The main long-term trends are:

• Significant increase in defense spending globally

• Globalisation unwinding in preference for national interests

• Long term economic decoupling from China and the West

• Energy independence and growth in national renewable energy sources

• Sustainability refocuses to start with national security strategy

• Technological advancements continue regardless

Long term trends influence where you will invest. The increase in defense budgets globally will create huge demand and growth for a range of businesses across industries, not only defense. After decades of underinvestment in defence and short-sighted strategic thinking, the current crisis has awakened most countries to the need to become increasingly self-sufficient with more turbulent times ahead.

Chinese stocks and US listed Chinese companies, regardless of their returns and potential, remain uninvestable as far as I am concerned. Even when they are attractively priced, these companies (eg Alibaba, Baidu, Tencent) risk being torpedoed by their government on a whim, without notice. It makes the allocation of portfolio capital to this area too high a risk.

Beyond the obvious though, unless China categorically distances itself from Russia, the likely result is the West doing to China what they did to Russia, but over a 10-to-15-year time frame. So significant realignment is coming for all businesses doing business with China over the next decade. The flip side is more opportunities for businesses in Europe, the USA and Australia.

Energy across the board will be a huge focus. In the short term, it’s great for almost all energy companies as there simply needs to be more energy supply secured by Western nations. Long term, I expect a rapid rise in renewable energy as the climate issue merges with the strategic national security issue. Governments will push hard here for many years ahead, climate and sustainability will be the sell to the community, but the end game here is securing energy independence and national security.

The flow on effect of these huge new capital allocations are important.

But the #1 most important long term mega trend remains the continuous disruption of technology. Don’t lose sight of that. Even in a market where most tech stocks are out of favour, that remains the most important trend. It influences almost every investment decision I make. It influences the types of companies we buy shares in and those we avoid, which is just as important.

The short-term issues may impact the prices we pay and the timing of investments but behind the scenes, all sorts of incredible companies are continuing to work relentlessly to change the future. So, understand what’s going on in the short term, because it is important, but keep focused on the long term because that’s what really matters for long term investment returns.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Next Phase in the War

Geopolitical conflict is unpredictable. One of the major problems for financial markets given the situation in the Ukraine is that it could escalate or deescalate in any number of ways. It’s impossible to know what comes next.

Yet, as uncertain, and unpredictable as the entire situation is in Europe, I think the most probable outcome is very simple. Russia takes Ukraine while the USA, Europe and their allies allow it to happen. It seems the most realistic way it plays out without a major escalation. The alternatives are not great.

The US and Europe have been clear so far in stating they will not put troops on the ground in Ukraine and they will not put in place a no-fly zone over Ukraine. Both of those acts would spark a massive retaliation from Russia and probably lead to World War III. US President Biden said as much in a tweet over the weekend.

So, Putin likely gets Ukraine, for now at least, and probably in name only. In due course the Ukrainian people are sure to take it back. Putin needs to accomplish his objective though, declare victory, and save face, otherwise the stakes are raised higher. But Putin will go no further. The western world has collectively combined to collapse the Russian economy.

The counter measures from NATO countries means Russia have been crippled financially and economically. Not only from heavy sanctions, compounding their downfall is that almost every multinational company in the world is withdrawing and refusing to do business with them.

The most important next phase of the war is how China responds.

China has deep ties with Russia, but Putin’s strategic blunders and the fact that China is still an emerging power, and not the power it will one day be, puts them in a precarious position. Tolerance for a pro-Russian stance is almost nonexistent in Western Society now so it is a rare opportunity for the US to aggressively pursue its agenda without looking like the bad guy.

I would expect the US and Europe to apply maximum pressure on China to definitively choose sides. The current mood globally is very much one of “you are either with us, or you are against us”. The strategic rationale from the US seems obvious; if you are our enemy now and you will be in the future, we would prefer that battle now, before you are any bigger.

While the Chinese economy is significantly larger and more difficult to extricate from the global system than Russia it is now clear to China that a strategic misstep could see their emerging nation face similar devastating sanctions. This would be an economic catastrophe for not only China but indeed for the global economy. But if China continues to support Russia explicitly or implicitly it is very possible that it will come to that.

China though, are masters of passive aggressive business and political negotiations. There is no country better at using capitalist system against the West by punishing a company or an industry. It would not surprise me if the sudden ‘covid lock downs’ of entire Chinese cities, critical to the global supply chain, such as Shenzhen, was a warning from China to show they can do economic damage too.

To nullify a future adversary early in their ascent I expect the US and its allies to fully leverage the current situation to force China to make a call and not sit on the fence. Either way, how China proceeds from here will have a significant and lasting consequences for the entire world and its economy.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.