Crypto Market Commentary
30 April 2020
Doc's Daily Commentary
The 29 April ReadySetLive session with Doc and Mav is listed below.
Mind Of Mav
Predicting The New Money Game
There are times in history where significant change occurs before our eyes. This is one of those times. Money, as we know it, has changed and so has the ways we invest.
The upside-down financial world we now live in looks like this:
Negative interest rates
Below zero oil prices
Negative yielding bonds
Stock markets going up with record unemployment
Bailouts for corporates
Whatever you thought you knew about money and investing is likely to have changed. With these strange times comes opportunities and new education is needed to understand what makes sense for your situation.
Here is what you need to think about when you now invest your money (not financial advice).
The Value of Currency Will Drop
When the government prints money or creates money out of thin air to fund corporate bailouts and give people free money in the form of stimulus, this has a long-term effect.
A small amount of money printing won’t have a material impact. Right now, the US government, as an example, has printed more than $6 Trillion. In 2008, $800 Billion spent on bailing out the American Banks seemed like a lot. In this current recession, $800B is pocket change in comparison.
Deploying your money to work for you is one way to avoid the inevitable depreciation of value caused by this recession. In simple terms, having your money invested in an asset that produces more money can help safeguard you. The asset I invest in is my business; for other investors, it might be real estate or dividend-paying stocks.
You want to make sure you think about how the value of money going down could affect you.
How ‘Liquid’ an Asset Is Matters
When you hear the word liquid in financial terms it just refers to how easy an asset like stocks, bonds, commodities, or real estate is to sell. A liquid asset is one that can be easily converted to cash when you need to.
This recession has shown us that when everybody wants to sell the same thing, like oil, the price goes down quickly and it can even go negative because of the burden of storage.
Real estate is an example of an asset that is not easy to sell. It takes time to find a buyer and during a recession you can find many people just like you are trying to sell their properties too and there are fewer buyers, resulting in a lower sale price.
The biggest lie you can tell yourself as an investor is that you won’t need to sell.
None of us have a crystal ball and we may be forced to sell our assets for reasons we are not aware of. If that happens, assets that are easier to sell become attractive.
A Decent Return on Your Investment Comes with More Risk
It was always thought that government bonds (money you loan to the government which they pay you interest for) were the safest asset you could own. Good investment advice would always tell you to shelter the storm with bonds in case uncertain times approached.
That advice is out the window. We now have negative-yielding bonds that, instead of paying you interest, you pay the other party money to own them.
The value of these bonds with no interest or negative interest is going up. How is that possible? Because investors are betting that the bonds they own, which pay no interest, will be bought back by the Federal Reserve and therefore they are betting the price will go up despite the terrible yield.
What was supposed to be a safe way to loan your money to the government has become some sort of game of musical chairs where the person left with the bond becomes the greater of the fools who decide to play.
Leverage Is the New Nightmare
The current recession has shown investors just how important it is to have a financial buffer in case things temporarily go crazy.
When you have no money to deploy from the sidelines, your only option is to sell your investments in a bad market and get a lot less money for them to cover your losses. This is the result of leverage.
Leverage just means an investor borrows money to buy their investments.
They might put up $20,000 of their own money and then borrow another $40,000 on top. They then have $60,000 invested and can earn money on the whole figure, as opposed to their original $20,000.
This process of borrowing money to invest is all well and good until the market stops going up and has sudden downward movements. Then the magical term “margin call” comes into play.
All this means is when the value of your assets goes below a certain threshold, the bank you borrowed the money from asks you to top up your investment account with more money. If you don’t have the money when the margin call occurs, they are allowed to sell your investments to cover their risk, resulting in you getting a low price for your stocks, as an example.
Many people have always invested by borrowing money because it has allowed them to get bigger returns in the process.
In these highly volatile markets, leverage can be a problem — especially when lots of people get a margin call and have to sell their investments all at once, making the asset prices drop faster than otherwise would have occurred.
Having a financial buffer is key to protect you and too much leverage can cause you a lot of pain.
There Is No Silver Bullet
No matter what someone tells you there is no easy way to invest your money in this upside down financial world. Things have gone a little crazy, as we were long overdue for a recession and we take time to adjust to our new normal.
All you can do in these uncertain times is to be careful with your money and not take huge risks. It pays to learn how the financial markets have changed and educate yourself on what works for you.
Everybody has a different tolerance for risk.
Everybody has a different financial situation.
Everybody has a different amount of money they can afford to lose.
The key right now is to manage your psychology and not get overwhelmed by this recession.
It is perfectly fine to put on your learning cap and sit this one out or invest small amounts of money. What you don’t want to do is become too greedy and blow all the money you worked so hard to earn.
Coming Back If the Worst Happens
As careful as you can be, this upside-down norm of finance can still catch you out. Your retirement fund, family home, or savings in the bank can be affected because of what is happening.
This quite simply means you can still lose some or all of your money.
The good news is you can make it all back. The strategy to go all-in on is to create skills that you can deploy at any time.
You can lose your money and still make it all back again if you have the right skills coupled with an opportunistic mindset.
With all the craziness of financial assets and unprecedented amounts of money printing that reduce the spending power of your money, you can still do well.
Take time to learn the basics of investing, stay safe, be careful, have a financial buffer, try not to borrow money to invest, consider the updated risk with whatever assets you decide to buy, and know that whatever happens, investing in your skills is the greatest return on investment you can ever get.
You can still thrive in this upside-down world of finance if you don’t let your ego tell you what to do and get too greedy.
Slow, in investing terms, is good.
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