The Jenga economy!

So, investors have taken fright once more and what promised to be a quiet summer, characterised by the continuation of the short volatility trade and range-bound markets, has proved anything but.

This provides a great pre-text for a market-timing discussion, but since I have got it hopelessly wrong yet again, I would rather not go there – short risk in the first five months of the year and long risk (via EM equity exposure) since (nuff said!).

Like many of us who incline toward the perma-bear argument (1929 revisited), I fidget when in cash and perspire heavily when exposed to risk. It seems there are two things I know (or don’t know, depending on your perspective).

The first is that EM equities are typically leading indicators – the first asset class to get decimated in any bear market (and the first to recover). And, secondly, EM economies and corporates are in so much better shape than their developed counterparts. You can pick your metric: debt-to-GDP, price-to-book value (PBV), price-to- free cash flow (FCF), demographics, urbanisation trend and middle-class expansion – the list just goes on and on.

My heart says ‘run and hide in safe-haven assets’, but my head says ‘buy (what is relatively) cheap and hold – you can’t go wrong!’

I’m also swayed by the immortal words of John Ruskin…

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much it costs you a little money [but] when you pay too little you sometimes lose everything [because your rationale is completely flawed, which is why the asset was ‘too cheap’ in the first place.]”

It’s difficult to rationalise that I paid too little for my EM exposure in early June – especially in hindsight!!!!!

My money is firmly directed towards an autumnal ‘risk-on’ rally (as we saw in 2007) before some major market fallout at some point in 2020 (2008).

I want to believe in more stimulus, I’m desperate to be convinced that non-organic expansion (M&A) and share buybacks can sustain an equity rally in perpetuity and, of course, I would love to have confidence in the concept that we can ‘borrow’ consumption from the future (via ultra-loose monetary policy and an unprecedentedly cheap cost of capital) without any repercussions.

It strikes me that the management of the global economy, at most of its regional levels, is like a perilously wobbly Jenga tower. It’s largely built from bricks that have yet to be kilned and everybody knows that we need to neutralise them sooner or later for the sake of future generations.

The Fed (bless them!) have tried to dislodge a few of these excess bricks without jeopardising the stability of the tower, but now they find themselves rapidly shoring up the foundations by reinserting the same bricks.

Jackson Hole looms on the horizon and doubtless the rhetoric will be more about preventing the Jenga economy from taking on the appearance of the leaning tower of Pisa and less about monetary policy ‘normalisation’.

If you aren’t worried, you probably should be!

The views conveyed in the above post are solely my own. If you have enjoyed reading this, please feel free to like or comment. I am currently seeking a new professional challenge and would be delighted to consider freelance work (please see my website wwww.investmentmatters-comms.com) or temporary/permanent contracts as and when suitable positions become available. Please contact me via LinkedIn or send an invitation to connect.