Doom, gloom, and a lack of trust…welcome to the new investment paradigm

Don’t get sucked into the recent rally of stocks on Wall Street. It’s little more than a forlorn hope – the weakest of bear market rallies.

It won’t last much longer, as we travel through a time when world’s oldest, and newest, asset classes are falling in value, as irresistible rises in interest rates get close to colliding with an immovable recession. Precious capital is being spent on fuel and food, leaving less to invest for the long term, as economic warfare between Russia and the West rages. And there remains quite a lot of capital to destroy following 14 years of asset bubbles in the wake of 2008. 

I bought my first flat in 1991 with a 10% down payment, when interest rates were 14%.  Even if we don’t get to that level, we shall surely see 6% to 8%, reinforced by fear and terror in the media and spiralling pay demand

Real estate has long been a store of value for those wanting to protect their estate against the ravages of inflation. In the current environment, however, we must query this. If you take a walk along London’s Oxford Street, you can see that recession has already carried off a stream of old-established shops.

Half the premises which offered quaint clothing, and collectables, near Jermyn Street are no more. You can blame online retail and the pandemic. But whatever the cause, retail streets are like coral reefs. When they decline, they never come back. 

Cryptocurrencies are a modern asset class, which, to my mind, have been little more than a haunt for speculators and con artists. I fell victim to them at one point and decided to take out a closed High Court hearing against the alleged miscreants.

Sadly, there is no shortage of Magic Circle lawyers (top London law firms) who charge high fees to admit their clients are crooks – without prejudice. You might, of course, be lucky enough to invest in crypto at an early stage before a scam takes the price higher. But you never hear until after the event, when the promoters have decided to pull the rug on their clients. Serious capital has been destroyed. Investors will need to raise more collateral to remain players. And when we belatedly regulate the sector, prices will fall further as the shysters move out.

They say private equity is still holding its value, despite the downturn in venture capital. And private equity managers are said to be very clever people. But we are still facing a situation where Internal Rates of Return will decline over time. This means that if you invest $100, you may see a return of $150 over three years, but no more than that over five, and no access to your capital either. 

You need to be my age to remember the ravages of inflation, whose impact can badly undermine values. The recent devaluation of currencies, rising oil prices and the housing market’s collapse rings a bell. Housing did recover, but boy did it take its time. And we haven’t even seen a proper decline yet, with the Fed only targeting 2.5% for now.

I bought my first flat in 1991 with a 10% down payment when interest rates were 14%.  Even if we don’t get to that level, we shall surely see 6% to 8%, reinforced by fear and terror in the media and spiralling pay demand.

Bonds will stay on the down escalator, as credit spreads increase. This has severe implications for the cost of servicing debt. An investment in distressed debt would seem to make sense.

Taxation will need to rise to balance the books, with the poor paying a little, the middle class getting hammered and the rich leaving the country.

The energy companies will be taxed, again and again. And that will hit the pension schemes that rely on them for income. 

I am taking my time to seize opportunities. But I’m not rushing, because prices are likely to weaken further.

History shows that war often turns into a way out of a financial crisis as it wipes out excess demand and supply at a stroke. We saw this happen in China, the Roman Empire, the British Empire and Europe during the 20thCentury. Now we are seeing a curious amalgam of economic warfare and localised fighting in Ukraine. 

The situation could lead to more foreign exchange devaluations, possibly forcing countries back on a gold standard to develop trust, given its absence elsewhere.