Before I get stuck into today’s essay, just a reminder you will find more valuable insight from Vern Gowdie below.
In times of crisis it pays to listen to those who forewarned the impending doom. The tricky part is for this crisis, we can’t recall anyone that accurately got it right.
Except Vern. He’s been on top of this crisis, this crash, right from the outset. And now he’s been proven right, he’s not going around gloating about it. That’s not Vern’s style.
Instead he’s helping people navigate their way through this mess and come out the other side in a better position than they went into it.
You can see his contribution today below. And if you haven’t yet heard Vern’s interview with Dan Denning, I suggest you click here now and listen to what they have to say.
Easy solution, get rid of the humans
If a berry grows in the crop and no one’s there to pick it, does the berry really grow at all?
Slight twist on the philosophical falling tree thought experiment there. But in the current global crisis, topical to say the least.
When the crisis began to gather pace, the government assured us there would not be a shortage of food. This didn’t stop the crazies from hoarding toilet paper and paracetamol. But it seemed no matter how bad it got, we’d still have food.
Well, what if that assurance was a little hasty?
What happens if these lockdown and self-isolation conditions last another three months? Six months? 12 months? Will there be enough people to pick the fruit, to plough the crops, to collect, pack, transport, and deliver the goods we need to operate a functional society?
Probably not.
And that’s a problem. When goods can’t move from A to B, supply chains fail. And the ramifications of that are more than just economic. They fast become survival problems.
Now, I’m not saying we’re on the brink of going full ‘Walking Dead’. But we need to consider what impact the restriction of human movement and economic shutdowns really has.
That’s because it’s pretty likely that again in our lifetime, we’ll have to deal with another pandemic. This isn’t the first one we’ve had to deal with.
You might remember the outbreak of the Hong Kong, or Asian Flu, in the ‘50s. You likely remember the fear and panic around the ‘outbreak’ of AIDS in the ‘80s. You almost definitely remember the Zika outbreak, Ebola outbreak, and Swine Flu outbreak.
Now we all are living through the coronavirus pandemic. And the reaction from government has been extreme, heavy-handed, and sets a dangerous precedent for when this happens again.
That means we need to prepare for all this again. We realistically need to anticipate this will happen again and be far more ready for when it does.
That doesn’t mean a secret stash of dunny roll to lock in the garage for the next decade. It means future-proofing industry and supply chains so economies can still function in the event of another shutdown.
Fortunately there is an easy way to do that. It just means getting rid of people.
Who’s going to drive your truck?
Right now, if you take humans out of a supply chain the supply chain shuts down.
But what if those supply chains were autonomous? They would never shut down.
You could remotely operate robotics or machinery from home. Or you can leave them to their own devices if they are truly autonomous.
Think about a container ship entering into port. The ship is laden with containers of goods, both perishable and non-perishable.
Those containers are loaded onto trucks, and then driven out to various points, be it packing and distribution centres or directly out to suppliers.
But what happens if there’s no crane driver to get the containers off the ship? What happens if there’s no truck driver to drive the trucks?
Worse, what happens if there is no one at the packing and distribution centre to unload the truck, pack the goods, and send them on to the ‘last mile’ delivery services?
This is a situation that we find ourselves facing now. Albeit there are some people still working, but not many and not enough.
You only need to look at your local supermarket shelves to see that deliveries are clearly not getting through as they should be. And we know that there’s ongoing strain on suppliers of perishable goods to even get their products to the shelves.
Automation and autonomous systems fill those gaps that people vacate in an economic shutdown like this.
But right now, we’re only just starting to test and trial these systems. They’re not in mass circulation across industry…yet. That future was always coming, but was seen to be some time away.
We think this future will accelerate, and in the space of just the next couple of years, we will have a thriving industry of autonomous workers and systems to co-exist with humans when we’re at normal working conditions — and there to pick up the slack if we go through another crisis like this again.
But it’s not just supply chains where we will see an explosion in autonomous and automated systems.
Hello, this is your new mortgage advisor speaking
One of the current difficulties in this crisis is small and medium businesses staying afloat. The government has put measures into place for assistance. But providing assistance and getting that assistance are two different things.
That’s because on a good day it’s an absolute nightmare to get through to your bank. And even if you do, you then have to find your way to the right department with the right person to access the right ‘system’.
It’s a headache at the best of times.
Now with millions of people each day trying to get through, it’s an almost impossible task. Hours of wait time are common for people trying to get through. And often, they can’t get through at all.
In a small business a day means everything. And every day that passes without this government assistance, is another day towards failure for a lot of small business.
That’s because almost every situation needs to be dealt with by a human at the bank. But the banks are also running on lower capacity with less people in their call centres and able to deal with the surge of enquiries.
Again, there’s a solution to this problem. And it’s this solution we think will see rapid acceleration and adoption out of this crisis. The ongoing development and use of artificial intelligence to handle customer queries is going to massively ramp up.
Banks cannot be as unprepared as they are now to deal with a surge of contact like this. It’s already having a massive impact now. It can’t and won’t happen again.
The critical turning point will be systems that can deal with complex queries and make risk assessment calls from start to finish.
Imagine being able to use an AI-driven automated system to get a new mortgage from start to finish? And to have that system be flexible, and able to negotiate with the user just like a human could and would.
That’s the kind of development that’s coming fast as we move through this crisis. It has to come fast because organisations can’t be caught short again.
This acceleration of autonomous and automated systems is going to herald a new change in how we interact and transact with each other and business in the next few years. It’s going to come at us with pace and huge investment once this crisis is over.
From every major crisis in the past we’ve seen an explosion in new industry that accelerates growth and provides massive opportunity. From this crisis, that opportunity might be rooted in automation and autonomous systems.
Regards,
Sam Volkering,
Editor, Money Morning
[conversion type=”in_post”]
Practicing What’s Preached
Vern Gowdie, Editor, The Gowdie Letter
‘Not bearish? Yeah Vern and I’m Santa Claus.’
The doubters are still doubting. That big end of the telescope remains firmly pressed against their eye.
In case you missed the relevance of these opening remarks, please read yesterday’s article titled ‘How Do You See Me?’.
My investment philosophy — gleaned from more than 30 years in the rough and tumble of this business — is very simple ‘winning by not losing’.
This table — from the soon to be available ‘How to arrange your wealth now for a Post-COVID 19 World’ — spells out the mathematics on ‘gains required’ to cover ‘losses incurred’.
|
|
| Source: Port Phillip Publishing |
The greater the loss, the steeper the road is to recovery.
The Aussie market — at present — is down around 30%. Making up that lost ground requires a gain of…42.9%.
Here’s a quick back of the envelope exercise. Long-term growth rate from the market is around 6% per annum. Breakeven time frame…seven years. Not good, but not devastating either, assuming that’s the extent of the market loses.
But, what if — ultimately — the market loses 65% or 80%? How many years/decades will it take to rack up gains of 186% to 400%? Do the maths…it’s a devastating prospect.
And then you ask, will investors live long enough to see recovery?
Winning by not losing is about avoiding (the majority of) the downside and participating in (the majority of) the upside.
Who doesn’t want that? Traders try to practice that every day. But I’m not a trader, never have been. Never will be. My approach is about long-term wealth creation.
That’s what most people want. However, their actions of ‘buying high and selling low’ run counter to that aim.
While the ‘winning by not losing’ theory is simple, the practice does require a level of research, mathematics, gut feeling, and a truckload of patience.
When evaluating the risk versus reward of an investment, the benchmark is the risk-free return (the interest rate paid on a government-guaranteed deposit).
Here’s an example of how this works when markets are in bullish (overvalued) mode:
| Investment | Income return | Potential loss |
| Term Deposit | 2% | NIL |
| Higher yield | 7% | -50% |
| Net outcome | +5% | -50% |
In this instance, you ask yourself is it worth risking half my money for a 5% return?
The answer? Hell no.
Therefore, the money stays in the bank, waiting for an equation that offers a more favourable outcome, far more upside and much less downside.
Individual shares are not my thing. Too much work for me. My investing world is focused on major asset classes, indices (ASX 200 and S&P 500); REIT ETFs; bond ETFs; currencies; gold; term deposits.
A lot of water can pass under the bridge before these markets present a favourable risk versus reward outcome.
So you wait (and you wait some more), which is where the patience comes in. That’s the theory.
Now, here’s how this model has been put into practice. In recent months, The Gowdie Letter has attracted a number of new readers.
The 2 March 2020 issue addressed the ‘permabear’ myth and provided insight into the rationale behind some of my recent (well, recent in my context of investing time frames) recommendations/investments.
Here’s an edited extract from the issue…
AUD versus US
Remember the good old days of the mining boom when one Aussie dollar bought US$1.10?
On trips to the US, you didn’t mind paying the ‘tip and tax’ back then.
In the midst of our strengthening currency, economists were tipping US$1.20.
People tend to extrapolate the trend.
In November 2012 (prior to me joining Port Phillip Publishing), we transferred a sizeable sum of Aussie dollars into USD…our average buy-in was around US$1.05.
My reasoning for buying USD was again based on, risk versus reward.
For us to lose 50% in value, the Aussie dollar would have to go to USD$2.10.
The RBA would never let that happen.
The more probable scenario was for the Aussie dollar to fall back towards the median range of US75 cents or in the event of another global economic crisis, possibly into the sub-US50 cent range.
Downside was minimal…maybe 5% to 10% if we went to US$1.10 to $1.20.
But, my guess was this would only be temporary.
Whereas, the upside was at least 30%-plus and possibly, over 100%.
It was the very, very low risk versus much higher return equation, that convinced me to put a considerable amount of money into this investment.
Our investment in US cash — with interest payments — has returned around 70% (now it’s more than 80%) over the past seven (and a bit) years.
Was this a bullish or bearish investment selection? Neither. It just fitted our low risk versus high reward criteria.
GOLD
From 2010 to its peak in September 2011, gold (in US dollars) was unstoppable.
The arc-like price movement was a result of the hysteria over the prospect of hyperinflation.
Central banks were going to create another Weimar Republic or turn us into Zimbabwe.
Buy Gold. And people did.
|
|
| Source: Trading View |
I questioned the hyperinflation hyperbole.
Why? This is not what happened in Japan…after almost two decades of stimulus.
My publicly stated view was (and still is) we were more likely to see deflation.
And the CPI numbers show us we’ve been far closer to deflation than hyperinflation.
I wasn’t anti-gold, just anti the rationale that was pushing the price higher.
So I didn’t buy during a manic run.
The crosshairs on the above chart have been deliberately aligned with the US gold price in early August 2015.
At that stage, gold was down over 40% from its September 2011 peak.
That looked reasonable to me.
After four years, the heat was out of the market.
The risk versus reward equation — while not as good as the US versus AUD — warranted a ‘dip the toe in the water’ exposure to gold.
In the August 2015 edition of Gowdie Family Wealth (a previous newsletter), I recommended a 5% exposure to the GOLD Exchange Traded Fund…a fund that reflects one tenth of an ounce in Aussie dollars.
|
|
| Source: Market Index |
The buy-in price was around $141.
The current price is $236 (now $245), a gain of 67% [now 74%] over a 4.5-year period.
The combination of a rising USD gold price and a falling Aussie dollar has turbocharged the GOLD return over the past 12 months.
All the talk at present is about buying gold as a hedge against COVID-09. The contrarian in me, is looking to do the opposite. I get nervous when the crowd starts prefacing recommendations with ‘you can’t go wrong buying’. Yes, you can.
AUD versus GBP
Markets don’t like surprises and the Brexit vote to ‘leave’ in June 2016, was definitely a surprise.
Talk of economic Armageddon saw the Great Britain Pound (GBP) get hammered.
That’s the kind of market that gets my attention. One that’s been moved away from historical levels by emotional reactions.
The 14 October 2016 edition of The Gowdie Letter recommended an exposure to GBP.
Here’s an edited snippet…
There are a couple of ways to gain exposure to the GBP.
Firstly, buy the physical currency.
Secondly, invest in the BetaShares British Pound ETF [ASX:POU].
Here’s a link to the BetaShares site.
Check out the top of the performance table:
|
|
| Source: BetaShares |
In the last 12 months, the fund has lost 21.4%.
Over a five-year period, it’s struggled to make 1% per annum.
These are great numbers.
One of the criteria for value investing — low risk/high reward — is to buy quality assets that are unloved.
At present, the British pound is not all that popular.
While the GBP has had a tough time of late, it could get worse…especially if a forecast recession does materialise.
Due to the potential for the pound to lose even more ground against the Australian dollar, the recommendation is to dollar-cost average our way to the 10% exposure.
Our strategy — starting this week — is to move 2% per month for the next five months.
If you do not have a British bank account, you can dollar-cost average your investment via the BetaShares British Pound ETF [ASX:POU].
Please note, this investment could take two or more years to realise a decent return.
Our initial buy-in was around $16.
Which, as it turned out, was pretty much the lowest point on the chart. That was ‘more a*se than class’. You can never, ever pick the bottom or top.
|
|
| Source: Market Index |
The current POU price is around $19.27 [now $19.96]…a gain of 20% [now 25%] over the past 3.5 years.
Not brilliant, but better than the cash rate.
Back again.
Hopefully that extract has given you a better understanding of how the winning by not losing approach works.
You have to question popular thinking. You make an educated guess on the upside versus downside. You make proportionate allocations depending on the risk versus reward equation…in the case of the USD investment, the equation was so compelling our allocation was almost 20%. Then…you wait for the trend to play out.
While share markets, of late, have been falling like a stone, these currency investments (and gold in AUD terms is partly a currency play) have been RISING in value.
In due course, if share markets go where I think they’re going, we’ll be doing the same risk versus reward calculations for the major indices.
However, markets are not even close to warranting the numbers being done…yet.
Why do I say that?
Here’s just one of the many valuation metrics that form part of my research.
The Total Market Capitalisation (TMC)/GDP or sometimes referred to as the Buffett Indicator.
In 2001, Warren Buffett said in a Fortune magazine interview, ‘it [TMC/GDP] is probably the best single measure of where valuations stand at any given moment.’
The latest reading is 113.70
|
|
| Source: Guru Focus |
According to the valuation table, this reading is at the high end of the MODESTLY OVERVALUED range.
|
|
| Source: Guru Focus |
That is NOT what I’d term as a ‘low-risk’ proposition.
Look at where the TMC/GDP ratio fell to in 2001/02 and 2009, under 75% and touching on 50%, the MODESTLY UNDERVALUED range.
And, if you go back to the early 1980s, the ratio was well into the SIGNIFICANTLY UNDERVALUED range. When that ratio starts to head much further south, then we get interested.
In the interim, I’m going to practice what I preach, and…wait.
Regards,
|
Comments