Could the seasonal September stock market sell-off be overshadowing a period of forced optimism in stocks, triggered by smart capital flows in reflation assets?
Reflation is a fiscal or monetary policy designed to expand output, stimulate spending, and curb the effects of deflation, which usually occurs after a period of economic uncertainty or a recession.
So fiscal expansion and continuing monetary easing are likely to be a tailwind supporting the post-pandemic economic recovery, whatever shape that may be.
The consensus amongst CEOs surveyed is that there will be a U shaped economic recovery, described as an economic recession and a longer period to a recovery.
“The consensus amongst CEOs surveyed is that there will be a U shaped economic recovery, described as an economic recession and a longer period to a recovery”
WEALTH TRAINING COMPANY
What is the rationale for forced optimism, particularly for reflation assets in these challenging times?
Central banks are punishing capital on the sideline, conservative savers with cash deposits at banks. The interest on deposit accounts doesn’t even keep up with the under-reported inflation rate.
Compare your grocery bills, your property taxes, the cost of medicines, educational tuition costs, home, auto, and health insurance over the last few years and you tell me if there is near to zero inflation?
So the central bankers put on their best poker face and pretend that there is no inflation, the real inflation rate is under-reported, brushed under the carpet, hidden.
We are unlikely to see inflation, according to the central banks.
Why? The post-pandemic economy is so overleveraged both in the public and private sector debt that lenders can’t afford higher interest rates.
“We are unlikely to see inflation, according to the central banks”
WEALTH TRAINING COMPANY
Public deficits are already above the GDP of dozens of countries, including some of the largest economies
“The debt incurred on COVID-19 relief will add to the considerable red ink already on their ledgers before the pandemic arrived. Leading up to the crisis, government debt accounted for a large chunk of gross domestic product – or exceeded it – in dozens of countries, including some of the world’s biggest economies,” according to data published by the International Monetary Fund (IMF) in October 2019.
What’s more, corporates are also up to their neck in debt as a record number of companies go into debt to pay dividends to their private owners.
“The idea of putting safe-haven assets in a category is misleading, particularly when their price isn’t factored into the equation” – Wealth Training Company
Forced optimism in reflation assets to counteract dwindling dividends and pitiful bond yields could be the best place to invest going forward
The 10-Year Treasury note yields just 0.65%, at the time of writing this piece and the world’s stockpile of negative-yielding bonds have climbed to near the $15 trillion mark, prompting investors into a sense of forced optimism, to take on more risk.
As we have said above, safety in cash, even the king USD is being eroded with negative real interest rates and hidden monetary inflation.
The cost of creating currency when there is no increase in productivity is monetary inflation, the worse type being hyperinflation of the Weimar Republic of 1923.
So the Fed, the world’s central bank by default, sees no rate hikes until 2013, despite hidden inflation. Moreover, the Bank of England governor hints at negative interest rates.
Meanwhile, the central banks continue with their multibillion-dollar asset purchases creating currency out of thin air, lending to already heavily indebted governments, financing corporate bailouts, and welfare checks for the growing army of displaced workers.
We could be on the cusp of monetary inflation, despite the benign inflation data, which is why we see forced optimism in reflation assets
In these challenging times, why then forced optimism in reflation assets, bearing in mind that safe-haven assets have been promoted as the best place to shelter in times of uncertainty?
The idea of putting safe-haven assets in a category is misleading, particularly when their price isn’t factored into the equation.
Was gold a safe haven asset for investors who bought in September 2011 when gold hit an all-time high of 1,851 USD Oz? Investors would have had to wait 10 years to see a return. Meanwhile, had the same investor put 1,000 USD in Amazon the stock would have been worth $13,300 as of Dec. 9, 2019, for a total return of around 1,232%, according to CNBC calculations.
Imagine buying crude oil during the Great Lockdown 2020 at 10 USD or even 20 USD a barrel, which would have returned 400% or 200% respectively over less than six months.
“Millennials spend more on life experiences than previous generations” – Wealth Training Company
Forced optimism in value assets, which have been oversold due to demand shocks from the 2020 pandemic and the great global lockdowns that followed could offer investors the best opportunities going forward
The pandemic, a black swan event, is not indefinite, human resilience leads us to think that this pandemic, like 10 of the worst pandemics in history, will also be assigned to the history books.
Moreover, Sigmund Freud’s repressed memory theory suggests humans deliberately block out traumatic events. If so, this supports the view that there will be a recovery, perhaps even pent-up demand for products and services that enhance human life experiences.
Millennials spend more on life experiences than previous generations.
So the alphabet shape guide to recoveries could be V-shaped for entertainment, live concerts, restaurants, and travel.
Forced optimism in value stocks which benefits from government stimulus could also outperform going forward
Governments likely to invest in Infrastructure, civilian engineering projects roads, bridges, public utility water, electricity, sewerage system, and defence, particularly at a time of low-interest rates.