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High Inflation! How should we invest if inflation remains high?

3 minutes to read

How should we invest if inflation remains high?

Those who expect persistently high inflation should think about inflation-tracking retail government securities centred around the US Dollar and the Euro. But, on the other hand, with the right timing, commodity investment funds and stocks also have the potential to perform well.

Inflation is likely to be only temporarily close to 6-7% in the US. From the second half of 2022, the consumer price index may gradually return to close to 2-3 percent, based on expectations.

If it is predicted that there will be higher inflation on more of a permanent basis, you may want to choose the following forms of savings.

Raw materials

If we turn to the universe of risky investments, commodity investment funds can perform well in a high inflation environment.

In the post-coronavirus period, many governments around the world are invigorating with improved infrastructure measures. Meanwhile, the supply side faces a capacity shortage and supply chains are faltering. After the closures, a significant demand hit the construction industry worldwide, but trade and geopolitical tensions also pushed up the price of raw materials.

Moreover, the supply chain is relatively inflexible. For example, it takes a good two years to create a modern sawmill, while opening a new mine may take up to a decade.

Through their bond-buying and liquidity-enhancing programs, central banks have injected huge sums into the banking system and economy on the demand side of things. This money is present as a demand, raising the price of commodities. This links to the increasing number of wage increases.

This environment has led to significant price increases in the raw material markets.

After the prices of many raw materials have doubled in recent times, the question is whether or not it’s worth entering trades or investments after such a significant increase and buying, for example, a commodity fund.

Suppose China could avoid a slump in its real estate market and a significant slowdown in its economy. In that case, commodity price increases may continue for some time to come, although the pace is likely to moderate. The significant price increases may be behind us.

Shares

Domestic, German and U.S. stock markets are at historic highs.  Stocks have traditionally performed well in higher inflation environments. If inflation is too high, it can be harmful. In this case, central banks will have to make significant cuts.

Higher inflation is particularly concerning for the U.S. Federal Reserve (FED).

In the United States, the rate of economic deterioration rose to a 13-year high of 5.4 percent. One-year inflation expectations jumped to 5 percent, and 3-year inflation expectations, which better capture longer trends, jumped to 4 percent overseas.

As a result, the FED could phase out its bond-buying program entirely by the middle of the year and even begin a cycle of rate hikes. However, this can trigger a negative correction in equity markets.

In light of this, it is advisable to buy shares in the form of several positions (known as dollar-cost-averaging), with more of a long-term view. This technique can reduce the risk at the time of purchase.

If a 10-15% correction were to develop in the equity markets, it could be another possible point of entry.

In this case, the extreme optimism in the markets could be tempered, investors’ cash holdings could recharge, while the pricing of equity markets would also return from the current very high levels.

IS THERE A LINK BETWEEN DUMB MONEY AND THE FUTURE PROFIT OF THE EQUITY MARKET? (Household Equity shares)

7 minutes to read
THE LINK BETWEEN DUMB MONEY AND THE FUTURE PROFIT OF THE EQUITY MARKET

Often referred to as silly money, dumb money is in reference to the average investor managing the investment steps of their own portfolio’s capital. A well-known platitude of the stock market is your average investor buying high and selling low. It is because of this trend that, at the peak of the stock market rise, the average investor portfolio holds a high number of shares. The question here would be;

“is there a link between dumb money and the future profit of the equity market?”

In this article, we will discuss how to track a portfolio’s level of equity exposure, as well as studies that have examined the reliability of this correlation trend. Household equity shares.

The topics covered in this article are:

  • What does dumb money do in the stock market?
  • Why is household equity exposure important?
  • The relationship between household equity exposure and future returns

What does dumb money do in the stock market?

Dumb money indicators are often referred to as ‘mom & pop’ indicators, referencing the fact that the average investor invests their money generally uninformed, are less skilled, and are generally more likely to make more irrational decisions. It is only named this because, if we have enough skill to know how to read and apply the indicators that are most relevant to our portfolio, we can more easily – and more accurately – make market predictions for the future. Practically, it is based on this principle of households, housewives, methods of following silly money. To follow the steps of housewives, you can use several different indicators.

The most well-known of these indicators are:

  • Dumb Money Stock Confidence Index
  • Equity / Money Market Asset Ratio
  • Retail Money Market Ratio
  • NYSE Available Cash Interpretation
  • AIM indicator
  • Rydex Ratio
  • AAII Investor Sentiment Index
  • Households equity exposure

From those shown in this list, the AAII may be a popular topic but it doesn’t get all of the airtime. Another prevalent indicator from this list would be Household Equity Exposure, which we discuss in the following section of this article.

What makes household equity exposure important?

In recent years, there have been regular reports in the economic media (You can see those reports here, here and here) that U.S. households hold a record ratio of shares. When we say record ratio we mean that these households collectively hold at least 40 per cent of relative investment vehicle shares.

In the image below, we can – in a slightly more credible/comprehensive way than the articles quoted above – track the ratio of the value of shares held by U.S. households to all investment vehicles.  Furthermore, according to this, 40% of US household assets are currently in equities. News has shown us the index had a higher value even before previous economic crises, an extraordinary situation that hasn’t been witnessed since Second World War. 

Household equity shares
households stocks graph

Anyone who has noticed that, even before major crises (see 2008 crisis, 2001 dotcom bubble), the value of the indicator peaked (see red arrows), it committed a bias in retrospectives.

In hindsight, it’s easy to mark the tops because we can have a good understanding of where they may lie in the future. However, if we couldn’t loosely predict the future, we wouldn’t be so confident since, for example, in the three years before the dotcom bubble, household equity exposure was at a historic high (above 30%), and the collapse didn’t happen for another 3 years. Therefore, it is possible to show with significantly more accurate statistical studies than visual inspection whether there is any link between the equity exposure of households and the future returns of stock exchanges.

Let’s look at the details of this further.

The relationship between household equity exposure and future market returns

The research, published under the title The Household Equity Share and Expected Market Returns, specifically looked at whether there was any correlation between household equity exposure and future return on the stock market spanning the period of 1953 to 2015.

To carry out the study, the household equity share (HEShare) indicator was created, which shows how household equity exposure changes over a given period of time compared to money market instruments. According to this, Household Equity shares varies from 0 to 1, where for value 0, 0% of household wealth is in shares and 100% in financial assets.

At the other extreme (A Household Equity shares value of 1), household equity is entirely in shares and no financial assets are held. Of course, as we have learnt that the fluctuation of equity exposure lies between 55-80%, we cannot show these extreme values in reality.

When looking at the history of the Household Equity shares indicator, particularly over the period of 1950-2015, we can easily gain great insight. Immediately we can observe that this indicator fluctuated between 55-80%. Meanwhile the corresponding chart of the FED (Federal Reserve) only shows a fluctuation of 10-40%. The reason for the difference is that the Household Equity shares indicator looks at the ratio of shares, strictly that of financial assets, and the FED’s chart shows the ratio of shares to all investment vehicles.

How to follow the Household Equity shares indicator?

There are multiple factors that are attributed to this indicator, which make it such a great tool for all.

Let’s take a look at the main elements of the indicator in the section below.

Household Equity Shares Interpretation

Household Equity shares represents all shares held by households, which is the sum of shares directly owned by households and shares purchased through investment funds. The exact data can be found in the FRED (Federal Reserve Economic Data) database and in the federalreserve.gov database:

  • Direct shares, under the name FL153064105.Q
  • The value of shares purchased through investment funds under the name FL153064245.Q.

Household Credit Assets Interpretation

Household Credit Assets represent the financial assets of households, which is the sum of three data sources:

  • Article FL154022005 Q – mortgage bonds
  • FL154023005. Q – bank deposits
  • FL153064235. Q – bonds

The above data can be obtained from the FRED and federalreserve.gov database.

In summary, the research discussed did in fact find a correlation between household equity exposure and future returns on the stock market. According to this, if household equity exposure increases, then the 5-year future return on the stock market can be expected to be lower.

It is important to see that this indicator does not have the capacity to time the market in the short term, it’s task is to predict the future yield of 5 years. But don’t forget, even though it predicts with a high reliability at this level, it is not infallible and can potentially be incorrect. There wasn’t always a close relationship between Household Equity shares and the yield for the next 5 years, this was particularly true in the 1980s.

Further to this, the correlation of Household Equity shares also in fact coincides with other correlations as well. 

Of these, the correlation coefficient with, quite popular, CAPE is 0.4, which assumes a medium linear relationship (explanation of the correlation coefficient here). In fact, this means that in addition to CAPE, the role of the Household Equity shares indicator can also be a strengthening one.

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Egypt: New hosts of the 2036 Olympics?

3 minutes to read
Egypt is building a new capital city

As previously reported, Egypt is building a new capital city, and now it has also signed up to be the new hosts of the 2036 Olympics.

Just in case you haven’t read our previous article, here is a catch up:

Construction of Egypt’s new administrative capital began in the sands of the Sahara, 45 kilometres (25 miles) from Cairo, in 2015. The new city is not yet anonymous and the application for the name has not yet been completed. The first eight quarters with a population of two and a half million were completed by early November 2021, and in December, government offices, embassies and ministries began moving from Cairo to their new location.

According to the plans, the New Administrative Capital will be the place of the best – the themed districts will be powered by a huge solar park, the lampposts will give a wifi signal next to the light, a modern railway will connect the town and its new airport with the old capital. In the middle of the new city there will be a public park called the “Green River” the size of six Central Parks. In addition to the 20 skyscrapers of the business district, a world record building, 1 km high, is planned to make the settlement truly imposing.

Egypt’s largest mosque and largest Christian church is already standing here. The new presidential palace, which is eight times the size of the White House in the United States, has also been completed.

The intention to apply was made public by the Arab country’s sports minister, the insidethegames.biz page, which is familiar with the five-ring cases, reported.

Egypt to be new hosts of the 2036 Olympics

Speaking to Sky News Arabia, Asraf Sobhi said Egypt would be standing for the host officer with a formal request to the International Olympic Committee (IOC). He added that a comprehensive feasibility study – which carefully considers the technical, logistical and financial aspects – is currently being worked on, but work is already underway in the new administrative capital, for the multimillion-dollar sports complex, which will include a 90,000-seat stadium, an Olympic-sized swimming pool, several tennis courts and an indoor hall.

IOC President Thomas Bach has previously said he wants the Olympics to reach Africa and is determined to ensure that African nations can apply for the Games, as it is the only inhabited continent that has not yet hosted an Olympics. The sports minister said the African National Olympic Committees association supports his country’s ambition.

IN ADDITION TO EGYPT, INDIA, RUSSIA, SPAIN, TURKEY, GERMANY AND UKRAINE HAVE SO FAR EXPRESSED INTEREST IN HOSTING THE 2036 GAMES.

Next summer’s Olympics will be hosted in Paris in 2024, Los Angeles four years later and Brisbane in 2032.

New hosts of the 2036 Olympics
Modern Cairo

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The fate of 2022 could be determined by the battle of two global giants United states and China.

2 minutes to read
the two super power flags

Strained relations between the United States and China over Taiwan could be one of the biggest challenges in Asia in 2022, CNBC writes.

One reason, according to the head of longview global advisors, is that Beijing treats every single American manifestation in Taiwan as if it were harming its interests.

An expert directly compared the relationship between the two great powers United States and China to the conditions of The Cold War.

United States and China
United States and China

This was only made worse by the National Defense Authorization Act passed late last year (2021) which set aside, among other things, $7.1 billion for the Pacific deterrent. They also adopted a congressional declaration expressing U.S. support for Taiwan. China considers the island, which has had its own self-government for decades, as part of its own territory and its often stated goal is to unify the country.

In the midst of the rivalry between Washington and Beijing, the most difficult situation will be those Asian countries that seek to balance the two major powers. The big question from this point of view is what the scales of this year’s Winter Olympics in Beijing will look like. The United States has already indicated that it will boycott the event at a diplomatic level, meaning that its athletes will be present, but no one will represent Washington in an official capacity. It is not yet clear whether other countries can follow the example of the United States, but the Chinese advance in recent years has infuriated several countries in the region.

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EGYPT IS BUILDING A NEW CAPITAL DISTRICT

6 minutes to read

Why does Egypt build a new capital district, and is this a good thing for their economy?

Why was a new Egyptian capital needed?

The explanation of this $40 billion project’s necessity is the simplest part of the whole thing, more space for an ever-growing population.

For the past decade, the country and its facilities had been at the mercy of a rapid average annual population growth of around 1.5 million people. The majority of these numbers are more densely spread across the upper part of the country and the immediate vicinity of the Nile. In 2020 the population exceeded 100 million and it wouldn’t be unreasonable to expect potential numbers of 128 million to be reached by 2030. 

In short, the increasingly crowded metropolis capital and its infrastructure will not be suitable for the number of millions of people predicted for 2030.

Other new cities had been built over the last 50 years, with 22 new ones being erected between 1977 and 2000. Although these are still being developed and standards are being kept to this day, it had unfortunately been found that these cities weren’t the answer to the problem. Therefore the cities were not completely fit for purpose with the number of people that had relocated to these places at the time were far below expected projections.

With confidence in the ‘suitability to needs’ of this build, it is planned to be able to accommodate SIX AND A HALF MILLION PEOPLE!

So, what will it look like?

Multiple themed districts, powered by a gargantuan solar park. Lampposts that emit WiFi signals for the inhabitants to use at will, as well as a modernized railway connecting the new build and its airport to Cairo.

All this already seems spectacular but there’s more, keeping in line with generally accepted ecological standards ‘The Green River’ – a public park placed in the city’s centre – is set to cover the equivalent of six Central Parks. In juxtaposition with this, the Business District is to break world records with its largest building reaching 1km high, add this to the 20 planned skyscrapers and that truly is an imposing image to imagine.

More about the new city itself:

The building of this new, more administrative capital started in the Sahara desert back in 2015, shortly after being first announced on March 23th of that year – the construction had been placed 45 Kilometers (25 miles) from Cairo, the already existing capital city.

As far as what can be found, no name has yet been given, nor applied for and because of this, it has been commonly referred to as ‘The New Administrative Capital’.

The first true stage of completion was set for the first part of November ’21, which meant it was ready for its first 2.5million inhabitants – a massive undertaking.

In the following month, after more preparations were made, government offices, ministries and embassies began their change of location from Cairo and so began the true legacy of this newfound administration capital.

Both Egypt’s largest mosque and its largest Christian church are already standing, as is the new presidential palace – this building alone surpasses the size of the United States‘ White House, eightfold.

So, will the build be a help or hindrance to the Egyptian Economy?

It is hard to say good or bad exactly as anything said now would be nothing but a vague prediction.

Let’s look at some key points and you can decide for yourself.

As we previously mentioned, ministries and officials are now well underway with the move over to the new city and all governmental duties will now be directed from the capital.

On top of this, from what we know, we can say that construction brings multiple topics to the surface:

The Army’s key role, the elite’s separation, how important the relationship with China is, as well as the new statehood;

  • Continued population growth will be greatly boosted as none of the 6.5Million places will be offered to the poorer of the community and Cairo’s overcrowding will be much less with the more affluent making the move over.
  • Administrative Capital for Urban Development – an Egyptian military-owned company is overseeing the entire project. Guardianship of the economy and the country as a whole, not just the borders, has always been a part of the military’s calling.
  • External relations have been exercised, using credit from China to boost available funding. As well as the fact that the implementation of plans is being shared with the China State Construction Engineering Corporation
  • The size of the buildings in the New Administrative Capital, inspired by ancient Egyptian architecture, makes the new settlement a symbol of power, meaning the historic capital, Cairo, will become more of a tourist attraction, filled with the poorer side of the locals.

Is the population issue a regional theme? A look outside this Egyptian city.

In Africa and the Middle East, the design or construction of futuristic cities began in several places. In 2017, Saudi Arabia announced a plan for an ultra-modern line-city in the desert called Neom, where there will be no roads and cars, artificial intelligence will run the infrastructure of the ecologically fully sustainable city. Similarly, Senegal (Diamniadio), Nigeria (Eko Atlantic) and Kenya (Konza Technopolis) are planning new metropolises.

This seems strangely megalomaniacal in a region where the average annual GDP growth per capita has been just over 1.5 per cent over the last thirty years. However, as populous grows, by more than 80 per cent in North Africa and the Middle East – from 254 million to 465 million, the result of 30 years in the region is 200 million more people and two and a half times as many economies – there is a basis for seemingly incredible plans, there is something, and some people, to build cities for.

So what do you think of the Egyptians’ Administrative Capital? Do its projected uses make it vastly better than the other new structures put up before it? Or will it once again leave the locals scratching their heads for more solutions to the population crisis? And what about the regional outlook?

NEW CAPITAL DISTRICT

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