- “The coronavirus pandemic could cause UK economic output to plunge by an unprecedented 15% in the second quarter of the year and unemployment to more than double, according to dire forecasts.”, “The deepest recession since the financial crisis is now all but unavoidable, according to analysts at the Centre for Economics and Business Research (CEBR), after businesses shut up shop and consumer spending fell dramatically as a result of lockdown restrictions.” https://www.theguardian.com/business/2020/mar/30/coronavirus-forecast-to-cut-uk-economic-output-by-15
- “The UK economy could shrink by 35% with 2 million more people unemployed because of the coronavirus.”, “Under this scenario, unemployment would rise to 10%, meaning 3.4 million would be out of work.” https://www.businessinsider.com/coronavius-uk-gdp-expected-to-plummet-in-next-quarter-2020-4
- “According to a recent International Monetary Fund (IMF) report, they are predicting a -6.5% drop in the UK economy.”, “As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis.” https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020
First, before reading this article, you should know I am no longer a licensed investment advisor. This article is purely my opinion and should not be taken as investment advice. You should fully research and understand your investment opportunities prior to investing and if necessary, seek professional investment advice.
When thinking about investing, most people consider the risk involved as we all should. However, the problem lies in not fully understanding those risks. We tend to believe if we hold onto our cash, under a mattress or in a can in the garden, or in the bank, it is ‘safe’. Holding cash at home could be considered safe if the definition includes being able to visually see it and in the same location you saw it last. (As long as it is not stolen.) In the bank, we assume our cash is safe and the bank will pay interest on the money we hold in the bank. Unfortunately, interest rates around the world are typically less than 1%. The real risk with these scenarios is, we lose purchasing power of our money. The £100 we hid away in the can in the garden this year will not buy the same number of products next year, meaning we loss purchasing power because what we have now buys less. To avoid the loss of purchasing power, we need to invest our money in other places other than cash. Cash reserves are something everyone should work towards. Once you have them, understanding how to deploy or invest that cash is the purpose of this article.
Another risk of holding cash in the bank in uncertain times is the possibility of losing access to that cash. Is that a risk you are willing to take? Greek banks have restricted access to cash as of March 2020. There are reports that similar restrictions have occurred in the US, India, Germany and the EU all in 2020. Banks restricting access to cash is a normal occurrence during difficult financial times so that banks can stay solvent. When you have a bank account, you are not the owner of the cash but a lender to the bank with a right to that cash. Banks do not have ‘your’ money on deposit in the bank for you to go and get any time you wish. In order to serve all customers, in uncertain times, banks will resort to limiting access to cash. This creates a problem when the ‘right’ opportunity comes along for investment and access to your cash has been restricted.
The possibility of limited access to cash brings up another question, should you pull out of investments that you are currently in? The answer to that is simple. No. Unless it is an asset you expect will free fall when the lockdown is over. Most investment advisors will tell you to continue to invest (dollar cost averaging) through the dips and downs of the market. You cannot time the stock market; this is not a cliché but a proven fact, repeatedly. You can get ’lucky’ from time to time but people will most likely lose in the long run. So, you may be asking, is now the time to still invest in the stock market? I believe so, with a portion of your portfolio, if you understand what investments to consider and which segments of the market to invest in. If you do not understand this thoroughly, always educate yourself before investing, regardless of the current market conditions.
So, we can all agree we are in uncertain times. How do we invest, or should we invest in these uncertain times? To answer that question, we must answer another question.
“What are the possible outcomes of these uncertain times?”
The answer is: The exact same as “normal” or more stable times. The real question is, “Are we ever in certain times?” I would say no, as uncertainty is the certainty of time. That said, there are changes in the stability of the economy. The economy can only move in one of three ways; up, down or sideways, meaning no change. Since no one has a crystal ball, it is impossible to know, for certain, what direction the economy will go. Are there investments we can choose that will perform well no matter the direction of the economy? The answer to that question is unequivocally yes.
In order to determine those investments, we must look at uncorrelated assets, assets that don’t all move in the same direction under the same conditions. We start with investments that have remained stable over time, precious metals is the first one that comes to mind.
As you can see from this 300+ year chart, there are ups and downs with precious metals, over time, yet the trend is consistently up with a few aberrations after the Great Depression and after Black Friday. Precious metals are considered a stable investment and was one source that protected my clients when I was a Registered Investment Advisor.
Another investment that we should consider is real estate. Is all real estate good in all economic markets? No. For instance, if you hold commercial real estate and the demand for commercial real estate drops, you will likely lose money. If you hold mortgages or rents and the economy tanks and people can’t pay their mortgages or rents, you will likely lose money. If you are in traditional bank funded development and the bank stops funding because the economy has dropped, you will likely lose money.
There are other considerations in the current real estate market when thinking about commercial real estate. Every company has been forced into remote working scenarios, furloughs or layoffs. Many of the remote working companies did not previously allow remote work for a variety of reasons. I was told about one company once they went to remote work, they saw a 25% increase in productivity. I propose that companies are going to recognize the benefits of remote work and many workers will not return to an office when the lockdown is over. Many small businesses will simply not be able to recover even with government bailouts. These changes will lead to less demand for commercial office space and increase vacancies across every country. It will have a devastating effect on commercial real estate prices and returns.
Mortgage lending has already taken a hit in the US and I expect this to be the first shot across the bow of the pending devastation to the housing market in the US. JPMorgan Chase has raised the requirements for getting a mortgage to a minimum of 20% down and a 700 credit score. According to Experian, one of the major credit monitoring companies in the US, the average credit score in the US was 703 in the second quarter, prior to the economic impact of the The Great Lockdown. This means that by now, the average score has already fallen below the Chase minimum. I believe Chase will not be the only lender to adopt these requirements, they are simply the first. Mortgage applications have already fallen to the lowest level since 2015 and with ongoing high unemployment (some reporting as much as 30%), there is no reason to think this trend will not continue. You might be asking; what does this have to do with the UK? This is simply a sign of the times and is affecting all of us globally. This is not a looming global financial crisis, but one already upon us.
How do you make money in real estate in all markets? Historically, people created wealth with real estate in both down markets and up markets. How? The common denominator is they had a strong cash position. In other words, they had cash reserves available to invest in all market conditions, especially in a declining economic environment. Is it possible to have a cash position and not be able to take advantage of a declining economy? Yes, let’s consider why.
As I already stated, access to cash is not a guarantee in uncertain economic conditions. All we have to do is look back to 2008 to see bank closures and restricted access to cash under a falling economic system. We have seen throughout history, every major country has either completely stopped or limited cash access at various times throughout history and as recently as March 2020. While some might think it would be better to hold onto cash during uncertain times, it may in fact be better to find investments that will likely perform well regardless of the economic outcome of the current uncertain time. Better to invest your cash than leave it in a bank that may restrict access to your funds if the economy tanks.
All these economic conditions will most likely lead to recession. The IMF is predicting a temporary slowdown in the economy with a return to 4% growth in 2021. While I am not an economist, I have enough credits for a minor degree in economics and enjoy and understand the topic. I have always wondered; why, if economists understand the markets so well, are they not all wealthy and retired? The answer is simple, they run predictive analytics that are NOT always accurate. Scott Anderson, chief economist at Bank of the West in San Francisco wrote in a note to clients, “Economic models are incapable of forecasting what comes next, since we have never seen anything like it in the post-war period on which economist models are trained. Policymakers are literally flying blind and making things up as they go along.” Thankfully, we do not need predictive analytics to see that with a jobless rate at more than double the rate prior to the lockdown (and expected to last until 2023) the economy will not grow like it did prior to the lockdown. We will most likely be in a global recession.
So, here is the good news. Again, we ask, where do we invest given this economic outlook? When markets are down, and I am referring to any market, it is a buying opportunity for those who are liquid, meaning they have available cash. Today, most of you still have access to your cash. Most banks have not started restricting access. So, take this opportunity to determine what investments you can take advantage of. The buying opportunities have begun. Investing in those opportunities should be done NOW. Don’t take a ‘wait and see’ approach. You will most likely miss the opportunity. Invest now, while you still have access to cash and before the opportunities pass you by. Sitting on the sidelines, waiting to see what will happen and how this whole mess will work out will cause you to miss some of the best buying opportunities of your lifetime.
Again, this is article is not written as investment advice. You need to already understand and be educated on the opportunities you are considering or seek professional investment advice.
The author, Joey Jones is a Co-Founder and Chief Revenue and Compliance Officer at CurveBlock LTD. Joey owned and operated a Registered Investment Advisory firm with 37 geographically dispersed agents which he successfully exited.