20 August 2020
Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning and Partnerships, discussing the latest global events and their impact on the markets.
In this episode,
President Trump and the US Postal Service [01:14]
President Trump attacks the US Postal Service in an attempt to create more confusion before the general elections.
The US dollar is declining [01:50]
The US Dollar is declining steadily since the Fed introduced its monetary stimuli.
US-China trade talks on hold indefinitely [05:00]
The US ban on some Chinese companies have soured the relationship between the two countries.
Revisiting your risk level [06:40]
If you’re uncomfortable with how much risk you’re taking, now’s the time to review and adjust your risk level.
Correlation between Gold prices and stock prices [08:50]
Gold prices and stocks are going up purely because of the monetary stimuli.
How the Fed’s monetary stimuli help businesses[12:24]
Companies don’t need to seek a bailout from the government as the Fed can provide financing for companies directly.
00:01 | Philipp
Hello and welcome everyone to another weekly market commentary from StashAway. With us of course, our Chief Investment Officer, Freddy Lim. Hey Freddy!
00:11 | Freddy
Hi there again! Good to see you this week.
00:13 | Philipp
Yeah. Good to see you as well. Still looking strong there at home. All good on my end as well. I think we got quite a bit to touch on today. So, I suggest we get straight to it Freddy. Obviously, you know, elections at full swing. There's a lot of posturing as we already mentioned a couple of weeks ago by Donald Trump as well especially on the foreign affairs side of things, right? Let alone the whole discussion about the US Postal Service over the last five days.
00:50 | Freddy
That's a good one Philipp! I think he's trying to stop people from voting easily because all the polls are saying there's a 95% chance that Biden would win the election. So it's not surprising.
01:04 | Philipp
Not surprising he's trying to do a few things there his way, right? At least the things that he can control by installing someone in the Postal Service to head that.
01:14 | Freddy
But for the benefits of our users, the whole fuss about the Postal Service is that it's always losing money for years for very different reasons. But Trump is not really giving the $10 billion that they need to continue to function. And that may actually hit how the ballots are being distributed and received in the upcoming elections. It could really create confusion and delays with how the election is going to be handled. When you are trailing that's probably what you should do.
01:50 | Philipp
Yes, try to create confusion, right? That's a good way to move forward. But anyway with that being said, I think we had some other news items also including the US and China as well. But let's talk about the Dollar drop. Obviously, the Dollar reached highs during the market drop in March. I think at some point it was like 137 even, right? Now, the Dollar obviously has been dropping steadily ever since the Federal Reserve intervenes into the markets here during the drawdown. How do you see that Dollar drop affect people's investment portfolios, in general, going forward? Where does it leave us with?
02:36 | Freddy
Well firstly recall that as the stimulus came in in March, we actually mentioned this as well in a sense that massive money printing by the Fed is unmatched by the other side because in the currency there's always a pair as two kind of countries involved and the US obviously is going to print a lot more than the other side. So the Dollar trend is at mid-term perhaps even a long-term trend. And the mechanics of how it works is that the Fed has a lot of facilities to supply US Dollar offshore through global central banks. And whenever there's a shortage of dollar liquidity, among themselves they would start swapping currencies and hence there was never an issue with a shortage of US Dollar outside of the US. And that is another reason why technically whenever those facilities are drawn down seasonally to meet supply-demand or trade flows you can see a dollar decline again. And that really started like the last couple of days. Right. So this just gives the background for the users. Now, in terms of impact on investments Phillipp as you mentioned, that's twofold. I mean Gold which is a very very good proven hedge for the dilution of fiat paper money is obviously going to do well in this environment. It's a very medium-term thing although the prices sort of scares people but it is the right thing to view it as part of the portfolio that provides insurance against, the first defence against dilution of paper money. So, that's the first role of what a Dollar means. In terms of the second part of it, it means that when you invest, you got to start thinking about returns in your home currencies now. If the Dollar is going to be weak for medium-term and if you do well in US technology, for example, say you invest $100, it grows to $140 but if that's a 20% looming depreciation in the US Dollar, what it means is that in the global currency terms you're not making 40%, you're only making 12%, right? This has huge implications because it means that you should also look for although not fantastic return but you should also look for regional assets to own just to diversify your currency risk. So it is very difficult, very complex times for investors. That's understandable.
05:00 | Philipp
Yeah, I think you hit the nail on the head there with the diversified portfolio which we always preach in all of our videos and especially on a global scale as well. Staying global, trade talks, right? Obviously we've been covering this now probably well for the last two and a half years because it's been ongoing and intensifying obviously with the election coming up. They were supposed to be some trade talks happening last weekend already. And now going forward, these have been now officially cancelled indefinitely and it doesn't seem like before November there will be much movement happening. How do you see that impact?
05:39 | Freddy
Well, it just means that the US-China relationship has really soured to a point that they can't talk anymore and also COVID-19 makes it very difficult for the Chinese to meet the purchases they promised on products like agriculture. But what it means is that, there's a lot of bullying as well, the way the Chinese view it is that in the recent spat where the US is also banning Huawei from accessing paths that's commercial in nature like commercial chips. That's sort of blatant bullying tactics the way the Chinese would look at it in the name of national security. And so these things are ongoing, it's not going to change. The reason the market is not reacting a lot to it is because of Joe Biden's massive lead over Trump. As you noted, the Democrats are more interested in taxing the rich a lot than trying to fight a trade war with China. So, they have different priorities.
06:40 | Philipp
Yes, that's true indeed. For the next topic before we get into the users’ questions, I think it comes on the backdrop of what we just talked about but last night, the S&P 500 even now reached new highs, right? It's something we obviously covered as well quite a bit. So, you know you naturally get questions from people such as "Hey! Look we had a new high. What does it mean for my portfolio? Should I be rethinking my risk level? Should I go more defensive or should I leave it as is because when a vaccine comes it might even go higher than that?". So, where do you stand on that topic?
07:24 | Freddy
Well, I would say this, it depends on where your portfolio risk point sits. If you're on our platform and your StashAway Risk Index is a very high risk one, you are obviously more vulnerable and sensitive to a correction. And as we have always seen, markets always break and make new highs but the moment the media fans that new high a lot, you tend to have some sort of retracement. So, if you chose a high-risk point you should know what you're getting into. If you're concerned, the best time to review your risk level, bring it down. Conversely, if you have a risk point that's too low, very low and you are overly concentrated in bonds, then your concern is on the other side if inflation goes up and bond markets are reacting. So, either way, you will be sensitive. So, when you are concerned, try to bring your risk point towards the balanced portfolios. On our platform, this means that the StashAway risk indices are going to be around 10% to 16%. That's the area where the portfolios get a lot of balancing act. What I meant by balancing act is that, there's a lot of different asset types that balance each other out and there's a lot of intelligent diversification behind it. So, diversification - if you want more diversification you should sort of gravitate towards the balanced risk point in my personal opinion.
08:50 | Philipp
And you know something to think about for everyone right to revisit these at least once a year. Just think about, "Hey how has it always been for me? Am I worried all the time or not? Am I on track to reaching my goals?". So, one thing is having a risk index that might be too low but you still can’t reach your goals, right? So, we suggest always for everyone to do. So, let's move on to some of the user questions and if we're not answering yours today, we will in one of the future episodes. But if you ever wanted to ask us something just put them down below in the comment section but let's go with Gautam Nagpal's question, Freddy. He kind of continues, we already touched Gold a little bit here, right? But I think this is just a continuation of that. He's saying that the recent equity market rally has seen Gold move to all-time highs amid the risk-on environment. So, by having these high correlations it makes him think that the beta has increased actually quite sharply. So, do you think that makes Gold vulnerable? And most importantly, given its correlation to risk, is it still a worthy hedge given its volatility at these levels?
10:02 | Freddy
Well here's the thing, we get this a lot as well. Another way to ask the question, is the stock market so high and the Gold prices are so high. Who is right? Who is wrong? The thing is that the whole debate misses the point that they are both going up not because they are correlated or not, not because they stop thinking that we're going to recover or Gold thinks the world is ending. No, it's got nothing to do with any of these. They are just moving purely because of monetary stimulus. The monetary stimulus is so massive and through the money multiplier process that's by design a core part of our banking system because of fractional reserves, banks lend out the remaining printed money. That printed money multiplies, right? And in that fashion, that provided a jolt to all asset classes. If you go across bonds, you go across Gold, you go across stocks, every one is actually going up and that all of them are reflecting the same information and that information is don't fight the Fed. So, if that is not changing and that's not going to change, the pandemic is still going on, an effective vaccine is yet to be discovered. Mass production and distribution is other challenges around the vaccine even if it's found. We have a medium-term, a pretty long-term issue going on here. The monetary stimulus is likely to stay at least for the medium-term if not longer. And that means the Dollar depreciation is not going to change, Gold appreciation is not going to change. They are giving us the same information. So, Gold will remain an effective hedge for any globally diversified portfolio or any multi-asset portfolios you need to have enough Gold to hedge that dilution of paper money and it's got nothing to do with inflation. It's just sheer fact that currencies are, there are more currencies going around. Even if you do see inflation coming in, that itself dilutes the value of the paper money. So the hedge is in my personal opinion and by the numbers, by centuries of historical track record, Gold is high for a good reason and will remain an effective hedge for the medium-term.
12:24 | Philipp
And Jason Lim, on the next question, he's asking or he actually says, "Freddy explains stimulus packages and M1 and M2 money supply in previous videos. So how has the stimulus package helped in the crisis? Because we still see businesses shutting and how would further stimulus packages help?". So he's alluding to the fact that we may have not seen the worst yet, right? Because you know,
12:48 | Freddy
Well, here's the thing. Let me give an example on airlines. Without a stimulus, you could have gone to the government and asked for a bailout or aid and the government would give you a lot of conditions on how are you going to pay them back in ten years time. How many people you need to maintain on the payroll. And so on and so forth. But that didn't happen because now you can simply issue a new bond. And in fact issue as long maturity as it can, issue a new bond and the Fed would be the one buying it because of the stimulus. That is the function of the monetary stimulus. And even better, before the Fed came in and fund managers knowing the Fed will come in, they buy first. So we've seen a lot of famous fund manager raising funds for long-term with a long term lock-up period, so-called distressed credit funds, right? And there's a lot of such funding set up to do precisely this. So, in a way, this is monetary stimulus and the other type of stimulus is government stimulus, which could have been more targeted and more precisely designed to help people in need. So, to really help people and so I sort of halfway here, I actually agree with Jason that real help actually still have to come from some sort of fiscal policy related measure. Paychecks in the mailbox for people who lost jobs, people affected in certain industries, are there any relief we can give to their employers to help them out. So, those things are less efficient to design and implement but they are coming but right now we are seeing the first wave and the majority of it is due to the efforts of the Federal Reserve. So, I think we need to separate monetary stimulus from fiscal. Monetary stimulus serves a very different purpose like I said it's easy to fund yourself. Companies can actually not need to go to Congress anymore. That's one example. The other example is that we still need fiscal stimulus to come in and target where it's needed. So, I'm actually, I hope that's a holistic answer to that question.
14:56 | Philipp
I think it is. Thank you, Freddy. With that being said, thank you, Jason, thank you Gautam for your questions. As always, we really appreciate those. Before we wrap it up here, there's a couple of webinars coming up in both Malaysia and Singapore. For the Malaysian listeners, on the 26th of August, An inside look at StashAway, from 6 pm to 7 pm August 26th. In Singapore on the 27th August, we also have An inside look into StashAway webinar from 7 pm to 8 pm. Again, links for both of those below the video in the show notes or you can find them on our website as well. With that being said, we hope to be back with you again next week and otherwise have a wonderful rest of your week. Thank you so much. Bye-bye. Ciao.
StashAway Management (DIFC) Limited is regulated by the DFSA (license number F006312) for the provision of arranging custody, arranging deals in investments, advising on financial products, and managing assets, with a retail endorsement.
StashAway Management (DIFC) Limited (registration number CL 3982) is established in the DIFC pursuant to the DIFC Companies Law. Its registered address is Unit 1301, Level 13, Emirates Financial Towers, P.O. Box 507051, Dubai International Financial Centre, Dubai, United Arab Emirates.