The TCFP investment committee met today to discuss the current economic, political and investment environment.
As a result the TCFP Model Portfolio will remain unchanged.
Here are brief notes of our discussion:
Politics
The UK needs a reset, the new Conservative government attempted to start that process with their mini budget. It was a good set of announcements, announcements that were needed in our view.
However, within hours, non-Government heads were lost left, right and centre and the Government backtracked.
But it is not particularly relevant to the model portfolio which has a global perspective, weighted towards dollar assets. If the pound weakens against the dollar (which it did) the portfolio gains.
Of far more import politically is the Russia / Ukraine war. The brinkmanship dial is being turned up, we have not yet reached 11, but may well do.
Whereas the head of the CIA or MI5 would not gain anything from assassinating the head of state that is not the same in Russia. One of the two competing security services (neither of which is the army) would have much to gain by doing so, but not just yet.
That said, we have no doubt that sweet CIA nothings are being whispered into their ears, but nothing will happen until it looks like that dial gets to (or near) 11.
Interest Rates
The market thinks interest rates will peak at 5-5.5% followed by a decline to 3%. We think (hope!) they will peak at 4-4.5% and stay there.
If they peak too high more harm than good will be done. We believe signs of that harm (already starting to show) will become ever more evident and interest rates will not, we hope, peak where the market currently expects them to.
We believe the Fed’s wish to maintain rates at around 4% (a good thing), whereas the market does not.
Timing wise we, and the market, agree the peak is 6-8 months away.
Inflation
This is all the Fed cares about. They could care less about a recession.
The costs of goods and services is already coming down, what the Fed fears is the second wave where, with near full employment, big wage increases keep inflation higher.
For this reason the Fed wants bad economic data – it wants less economic activity and less employment.
It is an unpalatable (and unspoken) truth, it is the medicine that is needed. Nothing else will work.
GDP
Talk of GDP numbers, company earnings etc. is redundant. The necessary inflation killing recession is underway.
At some point no more “economic chemo” will be needed, the patient will have been cured and brighter days will arrive.
As each day passes those days are closer.
Expected investment returns
In the short-term, who knows what the next several months might bring regarding investment returns. The possibilities are so wide that discussing them is pointless. Neither up 40% nor down another 20% would surprise us.
The short-term is of little interest because we do not need your investments to cover short-term costs – we have cash and/or known income to do that.
In the long-term things look bright, from this point forward we can expect an average 10-11% pa return. Up significantly from our expectations (6-7%) at the beginning of the year.
The reason for that is simple (but not necessarily intuitive) the more investments fall in value the more they are likely to rise in the future.
Even more counterintuitively, the more investments fall in value the less risky they are. Get in touch if you want me to bore you on this for 30 minutes.
A word of warning – this only applies to our well diversified, mainstream approach to investing. If you are into crypto or NFTs or Moldovan vineyards or anything vaguely esoteric and/or undiversified – good luck!!
If you have spare, spare cash now is the time to invest it.
TCFP Model Portfolio
Still no changes, which may surprise many although the reason is simple.
What we are looking for is equities crashing and bonds soaring. Although equities have crashed bonds have had a bad time too. It is very rare for that to happen.
What it means is that there is not a clear divergence between what bonds and equities are doing. There are the signs of something starting to happen though.
If that something continues changes could happen before the year is out. But we are not counting our chickens.
We remain ever vigilant for good opportunities for existing invested money – none exist currently.
If, however, you have accidentally forgot to mention a spare wad of cash, now is the time to invest it.
And that was it for October’s meeting. The next meeting will be in Janaury, or sooner if needs be.