In a close to zero-interest and low bond yield environment alongside a massive expansion of the money supply (over 4 Trillion dollars to date) what choices do investors have with respect to selection of conservative safe haven assets that can protect from inevitable inflation and posible dilution in the value of the US dollar.
The disincentive for keeping money in the bank or in bonds has never been higher. Inflation will now outpace the (close to zero) yields in savings accounts or bonds. Effectively, your money while safe from losses, is now losing value.
The counter bet to inflation and market uncertaintly is of course Gold which has been on a tear this year, up 60%, surpassing all time highs. Gold has become a "risk-on" asset.
Aside from Gold, investors have no choice but to opt for stocks if they want returns that exceed 0%. The FAANG stocks have become every fund manager and investors go to staple portfolio. Investment values and PE ratios are now in "high" territory. Let's take a look at TESLA. Tesla is trading on a multiple of over 800x losses. That's right, Tesla is still not making money and even it were, what is an acceptable multiple to be buying Tesla shares? At some point, the rationale driving stocks like TESLA has to shift and come back down to earth! That could be some time into the future, but we expect that time will surely come.
We can apply the same logic to a variety of stocks that are commanding high valuations despite a backdrop of record unemployment and severe drop in GDP. Admittedly, we will move past the coronavirus with the introduction of effective vaccines. The qestion for which there is no definitive answer yet, is "when"? And the second question for which there is no answer is, how much damage will the coronvirus inflict on the economy and how long will it take for the market to recover?
In light of the current economic climate, what percentage of your assets should be in cash, bonds, stocks, real estate or collectables, art and other fringe asset classes. For example, on the very fringes of the markets you will find highly regarded fund managers such as Paul Tudor Jones turning to position a small percentage of their clients portfolios in a new asset class, a digital one whose supply is finite as a hedge against inflation. You may have heard of Bitcoin. Aside from Bitcoin there is a growing world of enterprises that are utilizing blockchain to provide a new de-centralized, global economy that empowers the individual, their privacy and financial options. The world economic forum expects blockchain to grow to a 6 trillion global dollar global industry over the next 15 years. In a close to zero interest rate economy, the rise in de-fi (decentralized finance) is booming. Returns of 2-10% are common in this ecosystem, but they each come with a real degree of risk.
Investors are looking for options that provide their portfolios with a mix of safety and growth. A zero interest environment is forcing investors to take on more risk in the context of an economy that is facing extraordinary challenges. Asset allocation and risk-mitigation have never been more important in todays financial environment that has been radically altered by the advent of the coronavirus.
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