Week four of lockdown and we could soon make the move to level three

I’m a bit of a movie buff and I have to confess, this week was starting to feel a bit like a rather light-hearted Hollywood flick from the early 90’s, which depicts some rather unwelcomed events reoccurring in exactly the same way for an unfortunate weatherman (played by Bill Murray), who has to live those days/events over and over and over and over and over… ok, you get the idea.

Financial Markets have been anything but repetitive and it’s fair to say, these last two months have been unlike anything we’ve seen before – ever! Yes, the world’s battled pandemics and we’ve endured plenty of share market corrections, but we’ve never had an economic disaster on this scale, nor it seems a coordinated response so enormous.

It wasn’t that long ago that the Governments of the World needed to contend with a Global Financial Crisis (the GFC, being driven by a US banking crisis). The Financial System was ultimately rescued, but a great many people were annoyed that the “suits” on Wall Street were also bailed out. To save the system - we had to save them, and just one decade on, this is no Groundhog Day.

Now to save Main Street - the Fed has to bail out Wall Street. Using history to guide them as what “not to do” (thanks to the lessons learned from the devastation of the Great Depression & indeed, the GFC), Central Banks and Governments have realised that the risk of not doing enough would have been the total collapse of the economy and a descent into unimaginable social unrest.

One of my weekly reports gave me with this snapshot of the Federal Reserve’s balance sheet. It tells us that the US Central Bank has decided to defend and protect the economic and financial system of the United States at any cost (as we’ve said before, they’ll worry about the consequences later). This shows just how much the Fed has been buying, (how much money it’s “printed” to buy the assets from the market), to force interest rates lower and money into the system.

You can see, the so-called extra “printing” started around the time of the GFC, levelled out in 2015 and was declining until late in 2019 when the press started up again. These last two weeks, they’ve been pumping like there’s no tomorrow. That’s a wall of money that you can see rising on the far right of this graph. I can’t wait to see what the Fiscal machine does when they get it fired up.

In terms of your investments, the market is moving very fast and I feel (as we implied in last week’s commentary) that current prices (in general) have potentially run beyond the reality of what the economy is able to deliver in the near term. We’re sailing into uncharted territory.

As we’ve said before, the Share Market is a weighing machine and it’s been weighing up the benefit of that approaching wall of money. Looking forward as it does, the weighing machine assessed the wall has enough to support us to get through. That sentiment helped return our share portfolio values to a middle ground between where we started the year and where we found ourselves at rock bottom. As the recovery hasn’t even started yet, this new ground isn’t firm. As we said going into lockdown, we’re going to need to be patient and have a bit of Fortitude (more on that later).

Given such a strong and ongoing response from Government, we should be confident, but we should also be realistic. The green shoots of an economic recovery that will allow the State to step back are a long way off. Meantime, some of their funding (our taxes) will also prop up businesses that perhaps should have failed (that were struggling before Covid19). So, we need to be alert and question the role of different assets in our strategies as we look forward.

Good business will be looking even better in three years’ and so as Warren Buffett says, our job is; “To be fearful when others are greedy and be greedy when others are fearful”. I prefer to be smart over greedy and we need also to be cautious, diversified and stick to our long-term plan.

We’ve talked a lot about markets, about shares and businesses and yet for many of us, the single largest part of our wealth is typically tied up in real estate – in homes, businesses, rental properties and in our lifestyle batches. So, what of those values? What’s happening there?

We’ve felt first-hand the brutality of Share Market volatility - slicing prices daily. As we know, the true value of something can be very different when the dust clears. While liquidity is a vital ingredient to a strategy, it’s savage in a crisis. While in our minds the value of our biggest asset hasn’t changed, there is a very distinct possibility that it has.

The report attached from ANZ looks deeply into the NZ Property Market; residential, commercial, lending, rents, interest rates etc. It’s a really interesting research piece, and a little sobering as it predicts quite a slowing.

But as our Prime Minister would say, we’re all in this together so, if you’re not needing to sell, don’t think about selling (unless buying and selling in the same market). On the positive side, for young homeowners, prices are likely getting better.