Investment

Family offices – Prepare for a hot, short expansion

Family offices need to prepare for a hot, but short, post-pandemic expansion, according to Lisa Sharett, investment chief at Morgan Stanley’s wealth division.

This is likely to lead to periods of higher interest rates and inflation. It could lead to a slide in the dollar, which was already underway last year.

Whatever the Fed does, Lisa Sharett is confident that inflation will surge in the second half of this year…

Following last year’s monetary stimulus, dollar assets owned by the world’s central banks fell to 59% of the total, a 25-year low, according to the IMF. They will represent less than 50% in less than a decade, at current rates of decline.

Sharett points out that the pandemic has left consumers with the healthiest household balance sheets for years. Excess corporate cash and profits as a share of assets are near historic highs. The vaccine programme is progressing. 

So renewed stimulus should lead to excessive trading, pushing up risk assets, forcing down bonds and leaving “safe havens” like gold and bitcoin on the sidelines.

The US government is mailing stimulus cheques worth $2 trillion to its citizens.  A phased $3 trillion green infrastructure programme will bolster confidence in roads, cybersecurity, 5G communications and clean energy.

Sharett says this will have a big impact: “Even without a full rebound in employment, economic activity is poised to get back to 2019 levels which would make this recovery the fastest since the 1970s.” 

This implies GDP will grow up to three times faster than in 2013-14.

An “everything” rally has pushed the S&P 500 to a record 4,075.  Commodity prices are soaring. 

Money is steadily being shunted into real estate. The S&P Case-Shiller US house price index saw a 11.2% gain in January.

Craig Lazzara, S&P global head of index strategy says of residential property:  “The 11.2% rise is the highest recorded since February 2006, one month shy of 15 years ago. In more than 30 years, January’s year-over-year change is comfortably in the top decile.” 

Phoenix came top with a 15.8% rise, followed by Seattle with 14.3% and San Diego with 14.2%.

The Canadian central bank has warned its housing market is overheating, but admits it can do nothing about it, because interest rates need to stay low for the economy.

Green Street’s commercial property index was up 2.5% in the first quarter. This is 5% below pre-pandemic prices, but a growing deal pipeline implies big gains this year.

To suppress inflationary expectations, core CPI inflation will, as ever, use a basket of goods that understates the rising price of staples, notably food and fuel.

The Fed has also decided to start publishing M2 money supply data monthly, rather than weekly.

Steve Hanke, an applied economist at John Hopkins University, has criticised the Fed for making this move because money supply has been seen as key to inflation for decades.

Hanke is an expert in the causes of inflation, publishing blogs on the subject for the Cato Institute, funded by Charles Koch. He has found that countries that suffer high inflation tend to hide, or ignore, the data which analysts need to forecast inflation. 

Whatever the Fed does, Lisa Sharett is confident that inflation will surge in the second half of this year, with the addition of an extra million jobs a month and upward pressure on wages. 

And that could stop the boom in its tracks if, or when, a further fall for the bond market triggers a drop in the dollar and a rise in the cost of credit and mortgages.

Chris Thomas, head of digital assets at Swissquote, says: 

“The Fed will purposely be slow to react because we need to make sure the fire gets lit properly again without the match burning out. 

This will create a far more interesting trading environment in the next few years.” Current momentum trends could still be worth chasing, particularly in real estate. But they could also produce a golden period for systematic hedge funds capable of navigating choppy waters. 

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