A healthy market and economy can’t continue for long without access to ample credit. The Bank stocks have been underperforming for well over 3 years. Far longer than they did just before 2000 and 2008.
What has become clear over the last month is that while central banks have been raising rates to contain inflation, the growth outlook has continued to deteriorate. Of key importance is that credit lending has materially shifted to tightening.
This is a challenging overall negative atmosphere, but there will always be rewarding proactive cyclical opportunities to grow wealth. A Best Investor approach with careful risk management techniques provides the optimal performance in any environment. As in sport, the best performance requires having a gameplan for both offense and defense. The key to success is understanding the relationship of business cycles and financial asset classes.
Although the Fed admits they have little understanding about inflation they believe they are now fully on it.
At the same time as they are tightening aggressively to contain inflation, they now seem unaware of the economic track record of doing this in an economic slowdown that Fed Chair Powell says he does not see.
The evidence strongly suggests that tightening into a slowdown will simply deepen the downturn. Now the European Central Bank (ECB) has joined this tragic trajectory, in even more challenging circumstances.
“The way you create deflation is you create an asset bubble. If I was ‘Darth Vader’ of the financial world and decided I’m going to do this nasty thing and create deflation, I would do exactly what the central banks are doing”
Stan Druckenmiller
The Federal Reserve is now responding with accelerating rate hikes following backward looking inflation data which showed a new high this week of 9.1%. However, the forward looking markets have started reacting differently.
Bond market volatility and the Global Credit Impulse indicate a risk hurricane.
Best Investors always focus on minimizing risk.
“[Ptolemy’s] Earth-centered universe held sway for 1,500 years, showing that intellectual brilliance is no guarantee against being dead wrong” Carl Sagan
“…at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.” Paul Tudor Jones
It has become an industry standard that asset management starts with a risk assessment of the investor. Once that is completed a portfolio is selected which in theory “matches” the investor’s risk profile. In most cases once the portfolio is allocated there is limited activity until the next review or interaction with the investor.
This process may have been sufficient for purpose for many investors in the relatively stable conditions and broadly benign investment environment of the last decade. However, in today’s markets it is likely to become clearer that risk based allocation and passive management is somewhere between suboptimal and simply dead wrong.
Central Banks and Wall street remain cycle blind.
A major problem but also an opportunity.
Why Wall Street earnings estimates are likely to be wrong at the worst time to be wrong.
It is important for investors to fully understand that current conditions are unprecedented in their own lifetime investment experience.
The scale of the credit cycle has continually expanded over the last 50 years, and policy makers are now confronting the biggest credit cycle peak just as they take on the largest inflation breakout in 40 years.
CB Investment Management has partnered with financial tech platform, Pontera, formerly known as FEEX. Pontera specializes in providing full access to all trading and managing of held away accounts (i.e. 401k, 403b, 529, Government IRAs, etc.). No transfer needed!
Last week the central banks displayed how far they are from resolving current challenges, and some made stunning inaccuracies in their assessments and statements.
Investing like the best can lower your stress and risk levels while bringing you higher, long-term returns. It can provide a stable platform for planning and give you more financial security now and for the rest of your life. Let’s get started.