Why You Should Ignore ‘the Best Financial Advisors’

Wednesday, 2 October 2019
Adelaide, Australia
By Bernd Struben

Even the best financial advisers will no longer recommend holding cash as an investment: with the official cash rate below 1 per cent, “cash in the bank” as an investment choice is dead.

James Kirby, Wealth Editor, The Australian

In 2007 I was working for a financial media company in The Hague. As a senior editor my beat was covering major commercial real estate transactions across Europe.

And in 2007 those transactions were booming.

One of my first international jaunts was across the Channel to Brighton. That’s where they held the annual CMBS conference. Which stands for commercial mortgage backed securities.

Those too, were booming. Though, I probably don’t need to tell you that the bottom fell out of that market when the global financial meltdown oozed across the Atlantic later in 2008.

But in 2007 that meltdown wasn’t on anyone’s radar yet. At least not at the Brighton conference.

The broad theme was all about how much money you could make by selling debt. More than that, one young gun made a compelling presentation that if the people in the room wanted to make a fortune themselves, they too should pile on the debt.

He admitted it might sound counterintuitive. But even if you didn’t need to take on debt, you should still do so to make that borrowed money work for you.

That worked well…right until it didn’t.

By 2009 it was cashed up investors calling the shots, snapping up stocks at bargain basement prices.

The London Stock Exchange Group Plc [LON:LSE], for example, has gained 1,724% since February 2009. That’s no typo.

Why am I bringing this to your attention today?

We’ll get back to that, right after a look at the markets.


Overnight, the Dow Jones Industrial Average closed down 343.79 points, or 1.28%.

The S&P 500 closed down 36.49 points, or 1.23%.

In Europe the Euro Stoxx 50 index closed down 51.20 points, or 1.43%. Meanwhile, the FTSE 100 fell 0.65% and Germany’s DAX closed down 164.25 points, or 1.32%.

In Asian markets Japan’s Nikkei 225 is down 116.35 points, or 0.53%. China’s CSI 300 is closed today for National Day 2.

In Australia, the S&P/ASX 200 is down 88.55 points, or 1.31%.

West Texas Intermediate crude oil is US$53.93 per barrel. Brent crude is US$59.14 per barrel.

That puts Brent crude down 2.7% since I wrote to you yesterday. Here’s what else I wrote yesterday, ‘With more crude readily on tap than global markets are demanding, OPEC+ will struggle to keep a floor beneath crude prices heading into 2020.’

That struggle just got a little more difficult with OPEC’s membership set to shrink by at least one, come 2020.

As Bloomberg reports:

Ecuador said Tuesday it will leave the Organization of Petroleum Exporting Countries in JanuaryIt also comes less than a year after Qatar announced it would leave, saying it wanted to focus on natural gas production.’

Now Ecuador isn’t a major player in global oil production. But it’s planning to ramp up its output. And by exiting OPEC, Ecuador hopes to attract foreign investment to make that happen. Other cartel members will surely be watching. Even if OPEC+ doesn’t splinter, the incentives to cheat on agreed production cuts have never been higher.

If a tenuous peace is maintained with Iran, crude could slide another 10­–20% from today’s prices. If some hot–headed field commander on either side gets an itchy trigger finger and a shooting war breaks out, we could be looking at a 100%-plus price spike.

(Click here for Callum Newman’s favourite ASX-listed crude play, courtesy of our friends over at AFAU.)

Turning to gold, the yellow metal is trading for US$1,480.90 (AU$2,207.00) per troy ounce. Silver is US$17.31 (AU$25.80) per troy ounce.

One bitcoin is worth US$8,313.11.

The Aussie dollar is worth 67.10 US cents.

Borrow and spend

As you know, the Reserve Bank of Australia (RBA) is on an interest rate cutting path to zero. Yesterday’s 0.25% cut brings the official cash rate to a paltry 0.75%. And governor Philip Lowe has flagged another cut in the wings.

In a speech last night, Lowe said the rate cuts were meant to promote a shift from saving to investment.

Unfortunately, much of that investment is flowing back into the Sydney and Melbourne property markets. That means investors piling on fresh mortgage debt even as they rekindle the housing bubble.

According to the latest data from CoreLogic, house prices in both Sydney and Melbourne notched up 1.7% in September. That’s four consecutive months of gains.

Here’s what CoreLogic’s head of research Tim Lawless — gotta love that name — had to say. As quoted by the AFR:

It’s starting to put the month-to-month growth rates close to where they were when the markets were racing along during the peak of the boom… To consider that only four months ago values were still falling, it does look like this is quite a rapid bounceback.’

But as some of the most indebted people on the planet, shouldn’t Australians be focussed on paying off their debts rather than taking on more?

Apparently not. Especially if you’re young.

From The Australian:

Ultra-low interest rates are prompting financial advisers to reassess investment advice and now tell younger clients that paying down debt is no longer a priority…

“Now the picture is changing, the rates are so low and getting lower,” [James Gerrard at financialadviser.com.au] said. “If you only pay around 3 per cent on money you have borrowed but you can get a total return of between 5 per cent and 8 per cent investing in almost anything from shares to property … then you have to sit back and take that equation into consideration. In terms of growing your wealth, borrowing to invest might be the better opportunity.”

I’ve never met James Gerrard. But he sounds a heck of a lot like the eager financial adviser presenting at Brighton’s CMBS conference in 2007. And just like that young gun he ignores the fact that assets — even blue chips and property — can lose a lot of value quickly when the economy turns pear shaped.

Granted a 5–8% return ‘investing in almost anything’ sounds pretty good. But it won’t look nearly so rosy if the assets you borrowed money to invest in lose 50% of their value.

What does the 1% know?

While the world’s central bankers are encouraging you to raid your savings, borrow to the hilt and invest, not everyone is buying their message.

This headline comes from the AFR, ‘World’s wealthiest families stockpile cash as recession fears grow’.

The article cites a just released 2019 UBS Global Family Office Report, done in conjunction with Campden Research. The report surveys 360 high net worth family offices. Campden estimates that single and multi-family offices around the globe manage some US$5.9 trillion (AU$8.8 trillion). And many are cashing up:

A majority expect the global economy to enter a recession by 2020, with the highest percentage of gloomy respondents in emerging markets. About 42 per cent of family offices around the world are raising cash reserves.

Somewhere I can hear Philip Lowe heaving a resigned sigh. If rates at 0.75% aren’t enough to part people with their cash, he’ll just have to go lower. Maybe even negative.

Except, if Japanese companies are anything to go by, ultra-low and even negative rates won’t do the trick. Just have a look at the table below:

chart image
Sources: Bloomberg
Click to enlarge

From Bloomberg (3 September):

Firms listed in Japan held 506.4 trillion yen ($4.8 trillion) in cash as of their latest filings, the highest level on record, according to data compiled by Bloomberg. It’s more than tripled since March 2013, months after Prime Minister Shinzo Abe returned to power vowing to stamp out cash-hoarding.’

And this despite Japan having led the way to zero bound interest rates.

Rather than my trying to analyse what’s going on behind the scenes with the cash hoarding Japanese CEOs, I reached out to our wealth preservation expert, Vern Gowdie.

Here’s what Vern told me:

The current crop of Japanese executives have been conditioned by an entirely different set of economic circumstances to those in the “rest of the west”. They’ve been through the aftermath of a massive private sector debt bubble, whereas we’re still inflating ours.

In the 1980s Japanese corporations abandoned all moorings to value. Ridiculous prices were being paid for assets. Over the past three decades the valuation pendulum has swung back from the right to the left.

Maybe they, like me, see everything has been pushed too high in the universal search for higher returns. Better to sit on 100% of your money earning sweet f*** all than it is to watch it all go down the drain.

They may have (finally) realised that when the proverbial does hit the fan, cash is king. They really are keeping their cash for that rainy day.

Vern’s own family office is well prepared for that rainy day.

In fact he literally wrote the book on how to survive — and even prosper — during the next crash. One he believes could knock 65% off stocks and high end property prices.

Whether that crash is unfolding before our eyes today or still several years away, now is the time to prepare.

You can click here to get immediate access to Vern’s bear market survival guide.

Or you can dance along to Lowe’s happy beat.

Borrow to invest? Share your thoughts at letters@portphillipinsider.com.au.