Should you care how much cash you have in your pension?
In the past you got a job, worked for a company and when you retired your employer gave you a pension. You had very little say over your pension arrangements, let alone any influence as to how or where it was invested. That has all changed and now, as never before, millions of people all over the world have their own pension and can decide where it is invested. This means that you need to take more responsibility for your retirement and ensure that you understand what is happening globally, so you can navigate the ups and downs of different equity, bond, property, and now Crypto markets.
The dark days of 2008 seem a long time ago now when equity markets tumbled. It looked like we were going to see a collapse of a number of banks across Europe and the USA, forcing governments to step in to bail out heavily debt-laden institutions. Against this backdrop we saw the emergence of something called “Bitcoin” – a Cryptocurrency.
Bitcoin’s price rose from US$0.01 in 2008 to over US$20,000 in December 2017 and has led to the creation of over 3,400 other Cryptocurrencies and a new Asset Class emerging.
As the graph shows (see chart graphic below) bonds, equities, properties and even classic cars have all had a good run. BUT – what goes up must come down!
So what could bring this long run bull market to an end?
Political unrest: will Germany continue to bailout Portugal, Italy, Greece and Spain, not to mention the continued troubles in the Middle East, which has recently been leading to higher oil prices?
Governments cannot afford the social support: the net of ever increasing healthcare and pension payments. The have no cash! So it looks like they may have to raise taxes, so reducing demand as people have less money to spend.
It is often quoted that when the US catches a cough the world gets the flu – and according to Diane Swonk, chief economist at Grant Thornton “The U.S. economy has a bit of a cushion, and we can weather the storm for a bit. But the storm is still brewing and the undercurrents are clearly forming,”
International Trade wars: as Trump tries to make “America great again!”
Rising interest rates: the average period between interest rates being ratcheted up and the markets taking fright in the last 50 years is 34 months.
The Fed started raising interest rates in December 2015, so 34 months from then is October 2018!
Many public company directors have their remuneration linked to the company’s Earnings Per Share (“EPS”). In order to improve a firm’s EPS, if the number of shares stays the same you need to increase the company’s earnings – i.e. increase profits. Alternatively you borrow, and buy back shares, with fewer shares your EPS rises so giving the directors a bonus.
In 2017, S&P 500 companies bought back over US$530Billion of equity, but in 2018 they are expected to buy back over US$800Billion of their shares. There are only ten companies in the S&P 500 that are cash positive, meaning they have NO debt. With corporate debt as a percentage of GDP in USA at a historic – high at over 72 per cent – rising interest rates will not be welcome.
Corporate disappointment: Facebook recently announced that they had only increased revenue by 42 per cent and in doing so missed investors expectations and paid the price by losing over US$120billion in two hours – reminding us how fickle investors can be and how fast stocks can fall.
Just talk to your local estate agent, who will tell you how sluggish property prices are where you live. The issue is that prices are not just sluggish; they are falling.
Yet complacency seems to be the order of the day, as investors appear to ignore the gathering storm clouds. What will be interesting is when the penny drops and markets suffer dramatic falls, will we see Cryptocurrencies come of age? Will they prove to be a safe haven and continue to be uncorrelated to other asset classes, as the table below indicates they have been in the past? This could well happen since what other asset class represents good value for investors currently?
So before the markets fall, take a long hard look at where your pension is invested. Maybe now is the time to say thank you to one of the longest bull markets in property, bonds and equites and raise the amount of cash you have. By holding cash in your pension fund or portfolio, the risk is an opportunity cost, i.e., markets may still go higher – but how stressed will you be if markets fall by more than 25% as we saw happen with Facebook in just 2 hours?
There are enough uncertainties to trigger stock, property or bond market to fall. Cryptocurrencies may offer a home for some, given how they historically have not corelated with other assets. But this market is still relatively small. We could see Cryptocurrencies become more popular, as apart from holding cash – what alternatives are there?
Important Information: The views and opinions provided by City A.M.'s CryptO Insider are of those named in the article and should not be taken as investment advice. This communication is marketing material
