Europe

From hot to cold

Buenos Aires, Argentina

I’m in transit. Late last night I got back to Buenos Aires from Uruguay, driving most of the day and taking the ferry boat back across the River Plate. Early tomorrow morning, I’m heading to England. I’ll visit family and catch up with some of my contacts from the financial industry.

The temperature in Buenos Aires is 33C (91F). Where I’m headed, the mercury is expected to register -1C (30F) upon arrival. I’m passing from hot to cold. But only weather wise.

Argentina suffered its (latest) financial crisis last year. That’s when the Argentine peso collapsed and lost around half of its value against the US dollar. Now it’s stabilised and things have cooled down…not least the economy, which is suffering a sharp recession and increased unemployment. One thing is still running hot though. Local price inflation is expected to be in the high 20s during 2019, down from the 40s during 2018.

In the UK, things are the opposite. According to the latest data, there’s a higher percentage of working-age people in employment than at any time since 1970 (the earliest data collected). The employment rate is also higher than before the global financial crisis that started in 2007 (see the following chart).

This wasn’t supposed to happen. The mere act of voting to leave the European Union in 2016, in the Brexit referendum, was supposed to make the country’s economy implode. Mind you, interest rates are still ultra-low in the UK. Proving, once again, that credit bubbles are a great antidote for many ills, for a while.

The UK’s credit bubble, and the risk that the hard-left opposition Labour party gains power in coming years, are the real risks to the UK economy. Brexit is just a noisy sideshow by comparison.

(For more about the UK’s credit bubble, see here. I wrote it in August 2017, but it’s still relevant. That said, all the Brexit uncertainty has weighed indiscriminately on UK stocks. Once there’s more political clarity – hopefully within a couple of months – there will be some great bargains. That’s especially true of large British companies that do most of their business overseas, meaning they’re relatively unaffected by the UK economy.)

Brexit is an emotional subject for the Brits. The country was once famous for “stiff upper lips” and keeping calm while carrying on. But a lot of people seem to have lost the plot over the European Union question, on both sides of the fence. Emotions are running high.

That said, the Brexit debacle is probably enough to test anyone’s patience. Note: by “debacle” I mean the ineptitude of the UK’s political class, not the shape of any eventual outcome. Once I’m on the ground, I’ll find out if anyone is still talking to each other.

In the meantime, what’s going on in the markets? Stocks are down a bit today. We’re into full-year earnings season, so there’s a lot of noise. Traders get very excited about quarterly results. Far too excited. Almost all the value of any stock (and most investments) is derived from prospects that are many years into the future.

(For an explanation of why, see Part I here and Part II here. I’ve done my best to simplify things. But if it still seems complicated, don’t worry. The crucial point to remember is simply that most of the value of a stock is derived from far into the future. This is why stocks are such great bargains during market panics. That’s when prices plunge based on short-term considerations, and longer-term prospects are ignored.)

But stocks have already recovered strongly from their lows of late December. The S&P 500 index of US stocks is up 12% from the 24th December trough. The pattern has been repeated in other stock markets.

Gold is trading at $1,285 an ounce. That’s up over 9% from its low on 14th August of $1,175.

Long-dated US treasury bonds are back to providing a hedge against stocks, after falling along with stocks during September and October. The iShares 20+ Year Treasury Bond ETF is up nearly 8% since its low on 2nd November.

I continue to recommend 40% allocation to stocks, 35% in cash (or equivalents), 15% in gold and 10% in long-dated US treasury bonds. I don’t plan to change that (if at all) until there’s more clarity on the Brexit outcome and US-China trade relations.

The future is always uncertain. Each kind of investment can go from hot to cold, or from cold to hot. Owning an appropriate mix of investments – each attractive in its own right, and with a clear portfolio role to perform – ensures comfortable climate control, whatever the market weather.

As for now, ahead of my flight to the cooler climes of the Northern hemisphere, it’s time to discard the light, summer garb and pack my winter gear…

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com


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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.