COVID-19 is ripping through the global economy like an F5 tornado. With the coronavirus death rate sitting at 312,000, economists have started to ratchet down their estimates for global economic growth. The International Monetary Fund expects the global economy to contract by up to 5 percent in 2020. The global economy contracted by 0.1 percent in 2009 in the wake of the Lehman’s collapse and the Global Financial Crisis. This means that we are facing the biggest financial and economic crisis since the Great Depression of the 1930s. This financial uncertainty is causing money stress levels to spike off the Richter scale. According to the American Psychological Association (APA), money is the top cause of stress in the United States (https://www.apa.org/research/action/speaking-of-psychology/financial-stress). As we face this scenario of low visibility and high anxiety of the future, there are three things that you need to know and do NOW about your personal finances. Thing 1: Don't Hold Too Much Cash in the Bank Every financial crisis is different. COVID 19 is different from 2009, which was different from the dot.com crisis of 1999 etc. One thing that most crises have in common is the Pavlovian response of central banks to these crises. They cut interest rates in the hope they can electrocute the economy back into coherence. Cheaper money nudges consumers to borrow money to finance their buttocks augmentation surgery and the post-operation Louis Vuitton butt pillow. As interest rates move closer to zero in some countries and deeper into negative territory in other countries, the return on your bank cash savings starts to look uglier than your hairy aunt Mavis after a late night of poker and gin with the girls. How many times have you heard the advice that you need to save a portion of your salary every month? Let me outline 3 reasons why this is a losing strategy: 1) Cash is a paper asset that has no intrinsic value Ever since the world moved off the gold standard in 1971, cash stopped being an asset and turned into a liability. Before 1971, you could take your bills to the central bank and exchange them for the equivalent value in gold. Now, if you go to the central bank, they will just give you newer paper of the same value. This paper is nothing more than an IOU backed by the full faith and credit of that bank, and one thing we learned after the 2008 financial crisis is that high-quality banks can fail. 2) Interest rates are at record lows We are living in a world in which interest rates are at record lows. More than 1 trillion US dollars of bonds were paying NEGATIVE interest rates in 2020. A negative interest rate means that if you invest 101 today (for example), you will receive 100 when the bond matures. This is nuts – it means that you are paying the bond issuer to look after your money. 3) Missed opportunities When you lock your money into a savings account, earning record low returns, there is an opportunity cost (in addition to an inflation cost). So instead of saving money, look to invest the money and make that money work for you. Warren Buffett, possibly the greatest investor ever, became one of the world’s wealthiest people through investing – not through saving. Thing 2: Invest Today – but not in Government Bonds John Paul Getty is famous for three things – for once being the world’s richest man, for securing a $15 million discount on his grandson’s ransom in exchange for his ear, and for saying you should buy when everyone else is selling and hold until everyone is buying. So, in what should you invest? In times of crisis, investors typically look for safe-haven investments and there is nothing safer than sovereign (or government) bonds. After all, governments control the printing presses. When they run out of cash, they can print more cash but there is a small dilemma in investing in these bulletproof bonds – they don’t pay you diddly-squat. The safest of the safe are Swiss government bonds. There is nothing safer than a nation famous for Velcro, cellophane, the Swiss Army Knife, absinthe, the potato peeler, Helvetica font, LSD, muesli, edible chocolate gold, and milk chocolate. How much do you get paid if you lend money to the Swiss government for ten years? The answer is negative 0.32 percent. Is that a typo? If you bought a Swiss government bond in April 2021 and held it until maturity, you would have earned a negative yield. You were paying the Swiss government to look after your money. This is like going to the bank, asking for a loan, and the bank pays you the monthly installments. If you take on a little more risk and lend to the United States Treasury, that return bumps up to 1.71 percent which is as exciting as kissing your sister. Greece, not well known as the bedrock of financial stability, will pay you 0.83 percent on 10-year paper which is ludicrous. Lending money in the government bond market will get you nowhere fast (bond yields courtesy of Bloomberg: https://www.bloomberg.com/markets/rates-bonds) Thing 3: Invest in Real Businesses that are Recession Proof and will be Around in 10 Years Disruption is everywhere. Businesses and sectors are being disrupted like never before and COVID-19 will accelerate this disruption and the cream rises to the top. Technology, disintermediation, and the climate are making previously dominant companies vulnerable, while startup companies run by millennials in hoodies are becoming increasingly dominant. Failure to identify, understand, and exploit these changes will be fatal for any entrepreneur. Businesses fail principally due to their inability to anticipate changes. Charles Darwin said that it was not the strongest of the species that survives, nor the most intelligent. It is the species most adaptable to change. The twenty-first century has been fascinating from an investment and capital market perspective. We have witnessed two mega stock market crashes. The dot.com bubble burst in 2000 and the subprime mortgage crisis in 2007/2008 brought capitalism to the brink of collapse. Simultaneously, the meteoric rise of China has set up a battle for world domination. Major corporations and countries have gone bankrupt. Companies that did not exist twenty-five years ago are worth hundreds of billions of dollars. Facebook, founded in 2004, is worth half a trillion dollars, Alibaba in 1999 worth 450 billion, Tencent in 1998 worth 400 billion, Netflix and PayPal in 1998 worth over 100 billion dollars. Tesla which was founded in 2003 is now bigger than four automakers that have collectively been around for 400 years - Audi, Nissan, Ford, and Ferrari. Charles F. Kettering said that “people are very open-minded about new things, as long as they're exactly like the old ones.” People generally hate change, which is problematic, especially when it comes to business and investments. Here are ten trends that are changing the world in the long term. My advice is to embrace the change, find ways to exploit these trends, and avoid being on the wrong side of these changes. 1) China is challenging the US as the global economic superpower. I would not be surprised if, in 20 years, China is the largest economy and the US dollar is no longer the reserve currency of the world. 2) Wars of the future will not be fought over oil but over water. 3) Renewable energy will be the dominant source of energy in 2050 as fossil fuels fall below 20% of total consumption. 4) The banker of the future will be very different from the banker of the past. I will not be surprised if the bank accounts of the future will be with technology companies like Google, Facebook, and Amazon. 5) Even as the world’s population grows, car ownership is going to fall. Fewer people are going to own their own cars and instead, they are going to use ride-hailing services like Uber and Lyft. 6) Companies like Netflix are revolutionizing how we consume media. Expect cable TV companies and movie theatres to decline into extinction. 7) The current education system is broken and it is going to be disrupted. Teachers are teaching in the same way as 50 years ago – this is not sustainable. 8) Retail is changing. People are buying online and are not going to physical stores. In terms of clothing and apparel, Millennials and Generation Z are also buying second-hand out of concern for the environment. 9) Companies are being pressurized into being better social citizens. Companies that pollute fail to take care of their employees and do not apply solid corporate governance will be “punished” by their stakeholders. 10) Marijuana is not only for potheads. Expect medical marijuana to become more mainstream and socially acceptable.
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