Rate Cut, Whenth?

One of the most anticipated moments in the market would be the announcement of a rate cut by the United States (US) Federal Reserve (Fed). In the recent Fed meeting held around a week ago, they are expecting to go through three rate cuts in 2024. This news had sent the markets to a rally (at least for the US and our local Straits Times Index). While we feel some exuberance over this, we need to be cautious, too, on how the actual thing may unfold in the months to come on interest rates. Below I will describe four snippets on why we should not be too held up by excitement and exercise some prudence in our investment decisions.

Picture credit: Pexels from pixabay.com

#1: Markets Are Forward Looking

This is typically a given, as expectations are a major driving force in determining the market sentiment. Some of these expectations are calculated by analysts, e.g., a fall in x% in interest rates would reduce y% of interest costs of a company or industry, thus providing an additional z% of profits. Other expectations, however, are fuelled by blind optimism which are usually baseless and this may cause them to be overblown. If the super-optimistic target is not reached after reality sets in (e.g., rate cuts did not happen, see #2), then the price or index will fall hard.

 

#2: Rate Cuts Expected

When one expects something, the person is holding the hope that it should happen. As this is real life and not a fairy tale, the word “hope” is one of the dangerous words to use in investing, for one does not know whether it will happen or not. It is important to know that the Fed makes interest rate decisions by looking at economic data such as inflation and unemployment. A plan is made when certain conditions are met, but if during its execution something else crops up then it must be readjusted. This meant there is a possibility that the Fed may rescind on their three-cuts schedule.

 

#3: Cuts Are Not Drastic

Even with rate cuts imminent, it is likely not going to be reduced by a huge number each time. The Fed had mentioned that the cut, if it comes, would be on a gradual approach, so if the no-cut scenario in #2 does not happen, then it is probably a gentle step-down rather than a big drop.

 

#4: Effects Of Cuts Take Time

Though a rate cut signifies cheaper borrowing costs, this effect takes time to realise as some of the current debt held by companies and real estate investment trusts (REITs) were based on rates during the last couple of years. This means at least for another year or two, the companies and REITs are shouldering the high cost of borrowing until the debt could be swapped or restructured to the current lower rates. Hence, looking out for strong balance sheet and cash flow are important during one’s analysis of a security in question, like whether it can sit out comfortably in the next few years or so.

 

What Now?

REITs had been hammered, and treasury bills and fixed deposits were getting popular in the last two years, all thanks to a high interest rates. If you are an active investor, and if your portfolio allocation allows it, you may want to consider looking at the above two, for the former they may not stay low for long, and for the latter they may not stay high for long. For REITs, as I had highlighted in #4, it is preferable to go for the healthy ones, like with lower gearing and in a region/country/sector which is thriving come rain or shine, e.g. Singapore retail scene, provided the price is right.

 

Related post:

ZIRP Is An Anomaly

Gaining And Holding

There was an interesting point brought up during one of my group investment discussions:

If a crypto trader had earned millions back in early 2021, did he/she ever thought of exiting the volatile positions and put them in a, say, dividend portfolio to earn cashflow?

 

Putting the crypto context aside, this could mean other scenarios, too, like:

 

I had a 2,000% gain on Nvidia over the past five years, and now I want to exit and invest in a portfolio to preserve it. How to go about it?

 

From my anecdotal observations and readings, the above two italicized situations are very far and few between. The reason is simple: with their given risk appetite and methodology, investors/traders would stick to what they are familiar and comfortable with. A switch to investing for safety, like cashflow (e.g., dividend investing) for a trader is like a total shift of paradigm and mindset for them. Especially when the accumulation stage, i.e., raking in those millions, occurred over just a short time (five years or less), the propensity of continuing the strategy that brought in the dough would be high as the conviction of it works all the time is in their minds.

 

Every Day Is Not A Sunday

 

In a battle, both gaining and holding an objective or position is crucial. If we just keep on attacking and capture places along the way, very soon our resources are stretched, and if we are not careful, the other side would probably launch a successful counterattack which may wipe off our earlier gains. Therefore, in military strategy it is important to learn offensive and defensive tactics to minimise losses and to strengthen the overall positions.

 

The abovementioned can be employed in real life investing/trading as well. The first realization is that for every investible instrument out there, every day is not a Sunday; stocks, cryptos, real estate investment trusts, precious metals, etc. have their ups and downs. Though these may go up eventually over time, but we would not want to go through the heart attacks of experiencing ups and downs too often. 

 

While I do not encourage a full shift and I acknowledge the urge of trading is there (disclaimer: the Bedokian has a trading portfolio), a partial move of gains from the high volatility instruments to deemed safer ones would be advisable for wealth preservation. Thus, it is good to learn other forms and methodologies of investing that in a way lessen the losses, and a good one is to adopt a barbell portfolio strategy of having high risk/low risk assets in equal weights, and/or to create a conservative diversified portfolio with blue chip equities, bonds, exchange traded funds, etc.

 

High-Ho Silver!(?)

Canadian Silver Maples (Picture credit: lecho0047 from pixabay.com)

Gold had recently hit an all-time high of USD 2,190-ish due to the expectations of a cut of US interest rates coming soon. To explain further, a cut in the rates would bring down the demand of the USD, and gold, being typically seen as an USD substitute and non-yielding asset, would go up in value (see my post here for the relationship between gold and USD). 

 

With this, naturally its counterpart silver would be expected to go on an all-time high soon, yet the current price of the grey metal was nowhere near its two zenith points back in 1980 and 2011.

 

The first high was on 18 Jan 1980, when it traded around USD 49.45 per ounce (oz), and that was the result of market cornering by the Hunt brothers (article of this story under the Reference section below), so this was not due to pure economic reasons. The second high occurred on 29 Apr 2011, where silver reached close to USD 49 per oz. Depending on the news source that you read from, this rise was attributed to reasons ranging from the emerging Eurozone crisis, the silver supply chain issues, to the rising demand in its use of solar panels. In both cases, it went back to around their pre-spike price levels after a while.

 

Both gold and silver, though classified as precious metals, have different applications and use cases, thus giving the notion that both are the same and different simultaneously. Gold is mainly used for jewellery and investment, but it also sees some applications in the electronics field. Silver, on the other hand, has a heavy utilization on top of the ones for gold such as photovoltaic cells for solar panels, medical uses and even a component in the upcoming trend of electric vehicles.

 

Silver As An Investment

 

Three main ways of directly investing in silver would be via physical (bullion, i.e., coins and bars), securities (e.g., exchange traded funds (ETFs)) and precious metals savings accounts.

 

For physical bullion, the tips of investing in it would be similar to that of gold’s (see here). However, the premium for silver is higher than that of gold’s. For instance, based on online prices of a bullion dealer, a 1-oz silver bullion’s bid premium is around 15% over spot as compared to a 1-oz gold of 3% to 4% or so. Also, for a given amount to invest, the quantity of silver would be larger than gold, so storage is something to ponder about.

 

If going physical is not your cup of tea, then there are ETFs available, but they are listed overseas and, in my opinion, only a couple are suitable enough (e.g., SLV ETF). In the case of savings accounts, a couple of local banks provide this service.

 

The fundamentals of investing in silver (and gold) are very different from equities, real estate investment trusts and bonds. A popular way is to use the gold-silver ratio (see the write-up here for more information), while others use technical indicators such as lines of resistance and support, among others.

 

How Much Silver To Invest

According to the Bedokian Portfolio, the commodities asset class which silver belonged to stands at about 5% to 10%. There is no hard and fast rule on how much silver to invest in, so in my view it is up to the individual on allocating it with the gold and crude oil, the other two commodities for the asset class.

 

So now begs the question, will we see a high in silver prices like the time in 1980 and 2011? 

 

Only time will tell.

 

Disclosure

 

The Bedokian is vested in physical silver and SLV ETF.

 

Disclaimer

 

Reference

 

Beattie, Andrew. Silver Thursday: How Two Wealthy Traders Cornered the Market. 1 Feb 2024. https://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp (accessed 9 Mar 2024)

Rational Exuberance?

For those who are experienced in the markets, having that “every day is a Sunday” feeling shared by many spelt signs of a possible meltdown looming over the horizon. In other words, the deemed unrealistic feeling that things will keep going up is called “irrational exuberance”, a term made famous by the then Federal Reserve chairperson Alan Greenspan back in the mid-1990s when he was describing the internet bubble, which eventually popped.

Going by English definition, the roots of irrational are purely psychological and emotional, as opposed to rational where objectivity and fundamentals hold key. Throw in the word “exuberance” which means excitement and is already a mental state, we can see why irrational exuberance is something we need to be wary of when it reared its head in the markets.

 

Now back to the blog post title, are we able to have a thing called “rational exuberance”? It sounds paradoxical, as it implies getting excited while keeping a cool mind. Imagine standing next to your favourite idol and yet display a cool composure (i.e. no giggling or hands-on-the-head-with-mouth-open expression) while having a joint photo taken; to me, that is a form of rational exuberance.

 

Yes, you can have those moments of rational exuberance. Playing again by word meanings, we can devote our investment energy in an objective way. One example would be to calmly scout for bargains when the markets are down. Another is to average up a security when the price is going up and you can still calculate its potential of climbing further. In other words, do not be swept by the maddening crowd, but instead going enthusiastically and rationally along the right direction.