2022: financial hurricane or return to normal?

July 26, 2012, 10 years ago. Mario Draghi, President of the ECB, gives the famous speech “whatever it takes”, in which he announced that the European Central Bank would do what it takes (cost, whatever it costs) to preserve the euro and its member states. In addition to being a milestone in European history, that speech also represented a prelude to a monetary policy characterized by low (in fact often negative) interest rates, flooding liquidity and massive buy-backs of Member States’ bonds (the so-called quantitative easing or monetary easing). ).

European Quantitative Easing came a few years later in 2015, following the launch of similar programs in Japan, the US and the UK. Under zero interest rates and central banks’ purchases of securities have characterized monetary policy for the last 10/15 years practically all over the world. These policies have the benefit of stimulating the economy by enabling families, businesses and states to borrow at low cost and create development, growth and jobs. The risk is creating inflation, overheating of the economy, but in recent years with inflation there has been very little of it, especially due to technological developments, the low cost of commodities and globalization. In short, low rates, low inflation, growth and jobs: the best of all possible worlds, someone called it “gold cap” (gold cap)

Could this situation last indefinitely?

One of the first rules they teach at the university when studying finance is that “there is no free catering” and sooner or later the bills have to be paid. 2020: Covid-19 pandemic, lockdown, blockade of entire production sectors, recession. The response from central banks and governments is immediate and massive: injections of additional liquidity, low interest rates, the purchase of securities, money flowing into entire productive sectors. Markets respond well, consumption rises, GDP rises: the worst seems to be over.

Unfortunately, just like when leaving the highway after an accident, not all cars are moving at the same time and it takes some time to clear the queue. Similarly, after covid, many raw materials, electronic components, semi-finished products began to run out, this led to higher prices and delayed delivery times. So in light of the rising demand, the products were not delivered. A spiral of upward prices starts: If you want an item, you have to pay 10 times as much, and in any case, you have to wait to receive it. In addition, Russia’s invasion of Ukraine in 2022, the timing of which is not random and leads to a further flare-up of prices, especially for energy and raw materials.

Inflation is flying and is dangerously close to the psychological threshold of 10%, the central banks, led by the Fed, are forced to rush to cover by raising interest rates when it may be too late. First there were 3 increases, then 4, now even 8: the markets are panicking. On equities, the companies that have to make greater use of debt suffer the most, but the real disaster is on bonds and government securities: BTP loses more than 20% Over the last 40 years, the global bond market has only been negative 3 times, it worst year was 1994 with -2.9%. This year we are at -10.7%: something never seen before. Sharply rising interest rates and the expectation of further rate hikes are causing the prices of low-coupon bonds bought in recent years to collapse. Jamie Dimon, head of JP Morgan, spoke of a financial hurricane.

The world bond market has yielded returns over the years


BTP has lost 24% in one year

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Then? What to do? Is it the end of the world?

It is not the doom of the world, it is a return to normal, perhaps a little abrupt, but a return to normal. For 10 years we have lived in a fairytale world, with high prices, where it was difficult to distinguish where there was value, from where there was not.

It is normal in a world where when I borrow money I get a positive rather than a negative interest rate in return. It is normal for prices to rise based on market dynamics in supply and demand. It is common for those who have made debt to invest and create development in their own country to be rewarded with lower spreads than those who have used low-cost debt to make running expenses and welfare.

I know it may seem cynical, but the return to normality also brings back profits, the distinction between a good investment and a bad one, between good debt and bad debt, between solid companies and deceased companies kept alive with state aid. .

First there is the surprise, the shock, the confusion, the fear, but then the return to serenity, to rationality, will make us discover that there are a lot of possibilities. First, the market punishes everything, but then you will look back at the basics and you will find that there are many quality investments at a reduced price.

The world does not end, on the contrary. In the last 20 years and in the next 20, humanity will experience more change than in the last 2000. The advancement of technology will revolutionize the way we live, work, communicate, travel, heal, have fun, and so on.

In a little over a decade, we will only travel on self-driving electric cars, we study and work in the metaverse, our refrigerator will act directly. In Asia, one billion people who want to get out of poverty will join the middle class. Cures against diseases that have hitherto been considered incurable will be discovered.

We are in the midst of the fourth industrial revolution and we are facing an era of well-being, health and progress that was unthinkable until a few years ago. It is an unstoppable phenomenon that no one will be able to curb. By meeting at work, fund managers, entrepreneurs, scientists, I can see every day how many incredible projects will come to life in the next few years.

In light of this, one can only be optimistic. In the end, humanity has always moved forward and overcome all crises. The markets have always grown, they experience brief moments of sharp decline, and then they resume their normal course, which is uphill.

Sometimes they ask me when is the right time to invest, my answer is ALWAYS because the long term market is always rising. But if they were to ask me now, I would add that if the right time to invest is always, after a sharp fall it is even more, because there is an opportunity to buy securities of the same quality at 20% / 30% or even with 50% discount compared to last year.

The market rewards those who are patient and courageous, rewards those who manage to remain calm in these moments of decline, buy on the downside and wait for the subsequent rises that will sooner or later come.

The performance of an investment portfolio builds especially during periods of decline, as it continues to buy at a discount in times of pessimism, not when markets are high and euphoria reigns.

In my last newsletter I wrote “We are living this year with big changes, we do not know what 2022 will bring, but no matter what happens, we will have to be ready to face it and transform any challenge into an opportunity”

Here we are, 2022 has come, with many challenges, but also many opportunities, it is up to us to decide if we are ready to take them.

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