The Impossible Keeps Happening
The following below is from The Finance Professor. TFP is an investor and former CFA instructor. Enjoy!
You think you know the rules of investing? Think again: the impossible keeps happening and will continue to confound. It all started with rates going negative. In fact, something like $16 trillion in bonds carried negative interest rates. Don't be surprised if this number triples in the upcoming decade. Second, oil prices briefly went negative in the spot market, then over the next 18 months, rocketed to $120.
What else? Last week, e-Toro, a good-sized London brokerage firm, sold everyone out of their Russian stocks at prices as low as 1 pence. Wow. What is the point of selling at zero without someone's consent. Large multinationals like McDonalds and BP pulled out of Russia, leaving billions on the table and abandoning the Russian assets, ostensibly assisting the oligarchs in the process. Wow. Now the London Metal Exchange (LME) just cancelled all those crazy Nickel trades that took place on Tuesday March 8th. Yes, it was an insane day, but cancel all trades? Wow.
Expect the impossible to keep happening. The markets have gone insane. Gamestop went from $5 to $350 in five months, and nothing changed with the fundamentals. Hertz stock went ballistic for a short period because they were going to purchase some EVs. Can you imagine renting an EV and not knowing how or where to charge it? What a great way to spend your vacation, charging your EV - and the stock went up, wow.
Unthinkable? The world shut down over Covid. I repeat: the world shut down. It doesn't get more unthinkable than that. Yet right after the shutdown stock markets went up huge. Who would have thought? More impossible things have happened in the last 2 years than in the previous 50, and its going to keep happening. Previously unimaginable weather & storms will keep happening, which will ultimately affect markets. Germany is now re-arming. Wow.
A few years back, the country of Cyprus confiscated 10% of bank account balances, hoping to penalize Russians. You don't think Sanders, Warren or AOC wouldn't consider something like that? Real estate seems less vulnerable to confiscation, but the recent eviction bans have set an eerie precedent. We thought that democracy had prevailed, but the rise of China coinciding with the great financial crisis and turmoil in the USA has many questioning whether rational autocracy is superior. It was previously unthinkable, but with Trump, the USA displayed many banana republic like behaviour from both our people and politicians. And you thought that only in Iran did the people storm government facilities.
Investors must realize that in the current climate, almost anything can happen. Brainstorming provides a pretty amazing list of possibilities over the rest of the decade:
China offers Taiwanese $1 million USD each if a successful vote transfers Taiwan back to the mainland's control.
The USA experiences a pseudo-civil-war as a state like Texas or California tries to secede.
Storms keep rising in frequency and property in certain micro-areas become almost uninsurable and thus un-mortgageable, with prices falling 80% in response.
Capital gains taxes go to 40% or maybe capital gains taxes go to 0%.
Voters in a large, high-tax state vote to eliminate the state income tax.
Municipalities go bankrupt in droves and the Federal government decides to move all muni debt onto the federal balance sheet.
Long-term interest rates in the USA go negative.
In your parents or grandparents lives, in the USA, it was at one time illegal to own gold, wages & prices were controlled by the US Government, and it was illegal to produce alcohol. Its possible that crypto becomes illegal in the USA.
Lol, what if Russia is the best performing stock market in the decade? Could happen.
Spain, Italy or Germany pulls out of the EU, and the current EU collapses. WILL HAPPEN, just don't know when.....probably this decade.
Given that the impossible keeps happening, its hard to know how to invest anymore, as the old rules are being thrown out. Diversification is one answer to dealing with an uncertain world. True diversification would be only available to the truly rich, as you would own property on multiple continents, and you would be able to put money into a plethora of global asset classes, with global custody arrangements. The gold guys are advising that you store your gold in a secure vault, maybe in Switzerland, that way the government can't confiscate it. But, in this environment, what's to stop your Swiss custodian from keeping your gold? What are you going to do about it when that happens?
When investing, think about the possibility of the unthinkable and diversify accordingly.