Anyone who reads my RM column knows that I am a big fan of both rock n' roll and global markets. So, it was with great interest this morning that I read that the UK posted its largest percentage economic decline in 311 years last year. 311 is one of my favorite bands, and the UK is one of my favorite countries, as I lived and worked there as an equity research analyst for five years.
So, how to play this? Well, obviously government GDP data is slow to arrive and backward-looking and one could surmise that there is little value in it at all. For stocks that may be true, but for bonds, it is quite the opposite.
The issue is one of cash flows. The motto of my firm Excelsior Capital Partners is "cash flow never lies" and that is just as true for governments as private enterprises. The UK's Office of National Statistics published the following with it's late-January update:
Since February 2020, the number of payroll employees has fallen by 828,000; however, the larger falls were seen at the start of the coronavirus (Covid-19) pandemic.
Data from our Labour Force Survey (LFS) show a large increase in the unemployment rate while the employment rate continues to fall. The number of redundancies reached a record high in September to November 2020.
Depressed yet? You should be. The UK's headline figure of 5.0% unemployment doesn't seem high, but the human toll is much higher. That's fewer people paying taxes, fewer employers contributing payroll taxes and fewer extra quid for the average worker to drop at the pub, if pubs were even open. Shouldn't that show up in the government figures? I would say a 311-year low is a "yes".
But UK interest rates are still infinitesimal, even lower than ours in the USA. The Bank of England's overnight rate of 0.10% starts a curve that hits a 10-year rate of 0.51%, and climaxes with a 30-year rate of 1.10%. That's what the country of Adam Smith has 220 years after his death. It's free money, guv'nor!
The UK's government bonds are known as "gilts" because the notes themselves were first printed on gold-edged paper. That added value to the instrument, but today there are no physical notes anymore. You are just buying a fiat currency that is backed by...money-printing.
It's a bubble, mate. I am not suggesting the UK is in a bigger bubble than the U.S. -- I believe their fiscal management is somewhat more competent than ours -- but it is still a bubble. These coupons on bonds are just not mathematically correct given the fiscal hardships that governments are facing, partially caused by their own lockdowns.
Sure, in the current scenario I can understand why someone would want to buy bitcoin. That's not what I do, but it is a hedge against these houses of cards collapsing under their own weights. From a non-crypto perspective, the real problem is that currencies are valued against each other. What if they are ALL worthless? Sorry, Elon (Musk, Tesla (TSLA) ), that's not quite true. You want a country with a self-contained economy, decent demographics and natural resources.
There's a Swiss franc ETF (FXF) which is always a default setting for currency safety. Also, I think resource-rich economies are hugely advantaged, which may not be reflected in their currencies. Australia is a great example of this, so take a look at (FXA) , an Invesco-produced cousin of FXF.
If you look at the balance sheets of the major world nations and want to just say "chuck it all, let's buy Bitcoin," I don't blame you. I would just rather have the safety and transparency of liquid, exchange-listed assets, and I believe FXF and FXA offer those attributes.