Intuition may be better guide in navigating troubled waters-Part2

midas finserve
Intuition may be better guide in navigating troubled waters-Part 2
Last week, We started a discussion on how to assimilate the implications of the evolving economic scenario for investment portfolios
We find it more suitable to be guided by my own intuition rather than depending on some discreet random third party thoughts, simply for the reason that most experts are refusing to analyze the current situation in the emerging context for future. May be I am reading all the wrong financial literature, but to me the narrative seems overburdened with historical perspective.

In my view, that every major economic (and therefore market) event in past 150years has an independent historical context; though when lodged in an economic essay of few pages, these events may look similar and repetitive.

Industrial revolution, WWI, WWII, Cultural Revolution in China, demise of Bretton Wood, Demise of USSR & Reunification of Germany, US engagement in Gulf war, advent of ecommerce, and China’s entry in WTO and OBOR, are some of the key events that have shaped the present day global economy.

In hindsight, one can establish a strong cause and effect relationship between all these events and easily explain the sine waves on Dow Jones graph.

For example, the following 100 year chart of Dow Jones Industrial Average (DJIA) index of US stock market, highlights that between Industrial revolution and advent of ecommerce, US stocks moved in a wide range, virtually going nowhere in seven decades, that witnessed two great wars, worst economic depression, total collapse of British Empire and colonial imperialism, many episodes of deflation and hyper inflation, trade wars, evolution and demise of USSR, bifurcation and unification of Germany, formulation and breakdown of Bretton Wood.

Between two wars DJIA lost 86% of its value in 3yr period from 1929-1932, and returned more than 400% in next five years 1932-1937. Similarly, post WWII DJIA returned over 400% in 17yr period during1948-1965, only to lose 70% of its value in subsequent 17yr period 1965-1982 as Bretton Woods collapsed, oil spiked, US-Japan trade war unleashed.

This statistics only highlights that if a 45yr old investor had relied on trend seen in 1929-1937 market bust and boom cycle during 1965-1982 market bust, he would have probably died without recovering his losses, as DJIA did not breached 1965 peak before 1995, and the composition of market had changed dramatically by then from commodities, infra building and manufacturing to services and technology.

I am therefore not too inclined to look at history to seek guidance for the future market trends. In that I have learned from history that history is no guide to future, till the future itself becomes history.

In my view as an investor I shall keenly watch the following trends over next few years and keep adjusting my portfolios according to the changes in these trends.

(a)   Over past two decades the transactions in world have largely become dematerialized. Physical movement of commodities, money, securities and people has got reduced materially.

The dematerialized commodities, currencies and securities have led to material dissipation in information arbitrage. However at the same time it has also caused many episodes of superfast spread of misinformation leading to totally avoidable worldwide market panic and mispricing of assets.

A tiny investor like me can obviously not take advantage of global panic attacks. This require large amount of resources and tools to assess the correct situation before many others do. What I can however do is to not get panicked by these episodes.

Shipping and global transportation of workers could be a sunset industry in next few decades, in my view. Hyperinflation that many have been waiting since beginning of QE in 2008-09 may also remain elusive for many years.

(b)   The demographic changes that have occurred over past 5-6 decades shall result strategic, financial and economic rebalancing of global power structure. In post cold war era, the world has been mostly unipolar with US and its allies dominating. However, as the larger emerging economies are growing much faster than the western developed world, and have demographics in their favor, we shall see many more power centers, especially China & India, emerging.

I see the current Sino-US & India-US trade and VISA disputes, OBOR project, popularity of crypto currencies and reemergence of gold as popular reserve storage for central banks, etc. as reflections of this trend only.

Unlike in pre WWII era, the war in this dematerialized world would be fought on trading terminals, central bank treasuries, and conference rooms.

More than $17trn of sovereign debt trading at negative yield also reflects the strong aversion of developed world investors to tread the untested waters in search of yield for now.

Crypto not being a regulated market yet, I am contended buying Gold. Short USD trade could be treacherous, just because its sound so obvious.

(c)    Developments in the fields of Artificial Intelligence and Bio Technology will disrupt many more business models. Many corporate might grow larger and stronger than governments. This shall resuscitate the class struggle and return of communism in some form. We already seeing rise of socialism in many European countries in past couple of decades (see here).

To me this means that there are more than fair amount of chance that India stays a lower middle income economy for many more decades, just like Brazil.

I shall therefore mostly ignore the “abysmal per capita consumption” argument for most things in Indian context. Rising inequalities will though keep me glued to discretionary consumption space.

Author: Midas Finserve

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