This time it's different

As a keen observer of financial news. It does appear that we are approaching startling times. People have a very low aversion to the risk in the market and when that is normally the case, we may expect corrections and bear markets to precede.

Here are 3 key observations that are at the top of my mind:

1. The bond king's warning of recession in the next 15 months:
Jeffrey Gundlach is the guy who predicted the housing bubble, Donald Trump's 2016 win and most recently the likely spike in gold prices (and even bitcoin).

His track record has almost been prescient in all the times. Maybe a bit late or early but generally right. This is because he avoids listening to others and instead tunes in to the facts and financials that are actually happening.

Howard Marks once said, many scenarios could happen but only one would happen. So which is it?

I believe the flashing signs of all companies world wide reporting falling earnings, increasing bank jobs cut and coordinated world wide central banks cut does indicate this economic cycle is ending.

Winter is coming and we should be ready. The probability is 40% before the next presidential election (Ray Dalio) and probably 100% after the next USA presidential election.

2. The blackswan which is Hong Kong protests:
As someone who use to own HK stocks through the index fund and Mapletree NAC. I was ignoring lots of signs when the protests happened. Some HK people reportedly asking how to move to Singapore. About a million troughed the street and even professionals like civil servants and lawyers and teachers joined in.

What really got my attention was when Steve eisman called it the potential blackswan of this Moment. For those who aren't familiar, Steve was the hedge fund manager featured in the big short who got the reading right on the last financial crisis.

With share prices falling and no abating of the protests. I spoke to a more experienced friend of what would happen. He said this time it's different from 2014. Business owners and most of HK is supporting this movement. It will not end well.

That was enough for me to call it quits as I exited all HK positions. The risk of having 6% yield and 10% index gain no longer make sense when a rubber band stretched beyond a certain point is held there for too long.

HK's chapter is unfolding and certainly the country will likely be changed by what is to come.

Yet HK still features brightly as the gateway to China and as a location with great financial talent and smart people. It pays to revisit this story once the dust settles. But certainly I don't think the entire risk has been properly priced in currently.

3. The falling yield worldwide including Singapore bonds:
Singapore controls inflation via foreign exchange. This recently led to USA branding us as a currency manipulator. Whether it's true or not is up for debates. I for one think each country must do what it can to make life better for its own people.

But more interestingly, we saw the inversion of the yield curve in usa where 10 year yield fell briefly below that of the 2 year.

DBS analysts also said SG will benefit from this low yield environment. Very true. We can borrow money to invest in our infrastructure such as airports, property, digital hubs, new roads etc.

Conversely, as a fan of SSB - some people say the rate now 10 year rate being below 2% is very unattractive. I think this is a fallacy.

What I see right now is that it is going to be lower for longer. 10 year sgs currently trades close to 1.69%. which gives all investors in Singapore an opportune window to buy SSB right now to get 1.95%.

After all, the magic of SSB is not meant to be in just savings but the put option and capital protection where you can sell it back anytime at par.

At some point in the future, I expect yield to spike especially when the trade war leads to inflation. In that case, SSB is shielded from capital losses.

Recommendations and picks

1. I believe Kep Infra Trust being shielded from business cycles will do very well. Add on the falling interest rates of SG and AU, they will flourish and investors will appreciate this in time. I expect a 20-25% return inclusive of dividends.

2. Hard metals are good forms of insurance. Yet gold has moved quite a bit already. I believe silver has an opportunity and I expect a potential 30% upside in silver.

3. The CEO of L Catteron Ravi Thakran once said the best hedge against economic cycles is a quality business with quality management. I believe so. That why I think Berkshire Hathaway with its quality art pieces in the form of companies as well as an excellent management team, solid cash flow and big pile of cash at 130bln has placed it in the ultimate deal making position. Even Bill Ackman believes in him right now.

Conclusion:
3 stories tell of the ending of this economic cycle.
My position right now is that we should invest in defensive themes, local growth stories and always keep a keen eye for bargains.

Regards