It was nearly 60 years ago, back in 1964, that Bob Dylan wrote his anthem of change: The Times They Are a-Changin'. And so they were.
The 1960s and 1970s saw a tremendous change to the established worldview in western countries. The American civil rights movement and reaction to the Vietnam War created a schism between the young and previous generations.Yet the 1970s is less well remembered as an extended period of high inflation, high-interest rates and depressed asset prices. It's a reminder that there are more significant economic cycles to consider than the fluctuations we experience within narrower windows of time.
It's remarkable to consider that we have been in a very stable economic environment for over 30 years. It's been a period of declining interest rates, low inflation, and rising asset prices. You could forgive people for thinking that's just the way it is.
In his recent edition of 'The Lander Report', Dynamic Asset's CIO and Portfolio Manager, Dr Jerome Lander, provided a confronting analysis of today's economic and market situation. His analysis is impeccably informed, logical and offered with historical context.
Take a look at some of Jerome Lander's key insights through excerpts from the report.
The market has changed
"A lot of the commentary we hear today is that the market is very challenging, but the point I'd make is that the market has changed. It's not just challenging; it's changed. As both advisers and investors, we need to change with it if we're not going to be left behind."
"The challenges appear more persistent than they're being given credit for. They're not temporary problems. In our view, they represent a permanent regime shift that has many implications for how people should manage their money.
"For those of us who work in finance, most of our careers have been in a very favourable market. We've been in a market where people expect to make money all the time because values just keep rising. Inflation has been subdued. It's been a period of what I would call peaceful prosperity. That and globalisation have had many benefits for markets.
"Central banks have been reacting extremely favourably for investors, pushing interest rates to near zero. There has been hyperstimulation that has transferred wealth from the population, from governments to corporations. These things are very favourable for asset markets and have been imputed into asset prices.
"We see more recently, since the COVID-19 crisis, that all of the above is no longer the case. It's a crucial point to recognise.
"The situations with Russia and China challenge the period of peaceful prosperity. How do we deal with power politics? What does this mean for globalisation? What does it mean for supply chains? Well, it means a lot.
"It means that you're no longer integrating more and more countries into a global community, where free trade means the cheapest supplier can provide goods. It means a lot. Buying from more friendly countries may come with a higher price, which means inflation. Plus, there must be a large amount of investment to get everything in place to get those goods moving.
"All of this has significant implications for us as societies, but also very importantly, investment-wise. One of the implications is higher inflation.
"We've seen in the last few years that asset prices move up in concert with more accessible liquidity being provided by central banks.
"If central banks have to fight higher inflationary pressures, then all of a sudden, that liquidity is not there. It's what we've seen already. This is not like I'm talking speculatively as in previous times. "We're now talking about a scenario that has hit us today, so we have had interest rate rises.
"In the US, interest rates have increased by half a per cent. Wow, big deal. Well, look at what asset prices have done in response to that. They have almost entered a bear market. We've seen nearly 20% off the S&P and greater than 20% off NASDAQ stocks.
[This situation has worsened in recent weeks. Ed]
"We've seen some strategies down as much as 50 to 70% already - some concentrated technology strategies from very famous managers.
"Central banks don't have your back in this scenario anymore.
Suppose there is political pressure to fight inflation seriously, and they want to get inflation back to the previous levels. In that case, the only way to do that in this environment is to squash demand because central banks can't solve supply-side issues. They can't solve the energy crisis. They can't solve commodity supply.
The implications for advisers and investors - Change
"In the medium to longer-term, we're moving out of this period of peaceful prosperity. With asset prices being so high and long-term valuation reversion suggests low returns from traditional assets such as equities and bonds. This is not the environment where you want to have the kind of passive portfolio that was so well suited to ten years ago. In all likelihood, they will do very poorly".
Asset prices may at best wash up and down, confuse everybody, and end up going nowhere.
Arguably, in that sort of environment, they may continue to derate to a level more compatible with what we've seen in the past when we have high inflation and a high-interest rate environment. A low-growth environment.
"We have to remember that economies haven't been well run. That true wealth is built on real productivity growth, not on asset prices.
"Why should you expect high returns from traditional assets in that environment? We must react to this.
"We don't just sit there like a deer in the headlights and pretend it's all the way it was before in the old good old days when things were so great for investors. If they're not great anymore, prospectively, we need to do something.
"What can we do differently in this new regime, and what do you need to do differently if you want to survive it? Because our whole industry has been built around a very similar portfolio – the strategic asset allocation portfolio and that's worked very well in the past.
"But as I've hopefully explained quite clearly, prospectively, in all likelihood, that is no longer the case.
"We need to do something different if we are to have a chance of meeting our client expectations and doing well for our businesses".
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