Hi All

Anyone who has already seen their quarterly statements for end March will have noticed some outsized 1 year returns. As much as these are impressive, please don’t expect to see anything of the kind again anytime soon. These reflect the fact that at the end of March 2020, markets were pretty much at their lows for the cycle and there was an almighty recovery from there. Next quarter the 2020 figures are out of the number, so it’s back to reality.

Medium term returns, so 3 and 5 year numbers, are also far better on the back of recent market activity which is a welcome change to the past few years. What it has done is justify having patience as an investor and allowing time in the market to do its work. Most of our plans are getting back on track and with some follow through of positive market activity over the foreseeable future, happy days may be back again.

Pundits are increasingly wondering if there isn’t a market bubble, specifically in the US. The effects of relentless liquidity creation over the past decade, magnified by Covid, has put so much capital into the system that some of it has inevitably found its way into assets, fueling dramatic price increases. We have all seen some of the recent drama with hedge funds blowing up, cryptocurrencies soaring in value, art achieving eye-watering sale prices at auctions and so on.

I saw an interesting webinar where a fund manager explained his view of what he calls the “bubble triangle”. These following 3 fundamentals need to be present at the same time to start calling it a bubble:
Unusually large liquidity extension- as detailed above.
Marketability of instruments- so for example the proliferation of SPACs (special purpose acquisition company) attracting capital in the billions to invest in increasingly alternative projects. Robinhood etc.
Speculation- Bitcoin as an example.

His contention is that they are all currently at work at levels not seen since the Dot-bomb bubble in the early 2000s. Alarmingly similar as well is the number of unprofitable listed Tech companies which is at record levels. With the current rotation out of so-called Growth stocks (e.g. Amazon) into so-called Value stocks (e.g. on the NYSE, hopefully a major correction can be avoided. If not, perhaps there are some reversals in store?

Inflation is a key and I feel we are in the early stages of a reflationary cycle. Nothing dramatic at this point, but inevitable nonetheless. Only Reserve Bank intervention keeping rates unnaturally low is keeping a lid on inflation for the moment. There is definite inflation at factory doors around the world and, as the “bailout” grant money keeps flowing through the system and the recovery trade continues, wages may start to increase which is always the sticky inflation.

I have previously mentioned that this will force the Federal Reserve to increase rates which will give the entire US economy indigestion during the adjustment period which follows. It won’t be pretty, but I believe it is a natural cycle which must at some point occur and I can’t see a better time for it than now. It will return some normality to a system which has, relatively speaking, become corrupted by a deflationary cycle over the past nearly 40 years.

In the meantime, we’ll make sure you stay well diversified so as to continue gaining returns the market gives us without taking too much risk.

More next time

Kind regards,

Ricky Williams
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