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Investors face their own Breaking Bad moment

Market liquidity is typically thin over the annual holiday period as investors and asset allocators seek a change of scenery for a week or two. This year, even that change of scenery will need to be virtual. Investors reduced to taking their mental break via streaming could do worse than (re)watching the AMC series “Breaking Bad”. Aside from being rated as one of the top TV series of all time, the series’ story arc takes viewers on a journey that could be prophetic for global investors.

Breaking Bad’s narrative innovation was to take the protagonist on a journey. The show’s creator, Vince Gilligan, told Newsweek: “Television is historically good at keeping its characters in a self-imposed stasis so that shows can go on for years or even decades. When I realised this, the logical next step was to think, how can I do a show in which the fundamental drive is toward change?” The five seasons of the show tell the story of high school chemistry teacher Walter White responding to hardship by “breaking bad” and ultimately transforming from downtrodden hero into violent, hard-boiled villain.

Savers are also on a journey as they undergo a transformation from sober, cashflow- and value-focused investors towards more flamboyant, risk-taking speculators. What has prompted this change and how far along are we?

In Breaking Bad, the transformation starts when Walter White discovers he has advanced cancer and starts taking more risks to provide for his family. The health scare for savers was the Global Financial Crisis, when market falls gave investors a shock to their net worth. Their efforts to rebuild their wealth by investing in assets that had traditionally provided solid returns were hampered by the arrival of the policy-led era of low interest rates, which came to be known as “lower for longer”. Yield compression across all asset classes began to rapidly boost asset values and diminish income. This meant that by late 2019, the only remaining lens through which equities looked like attractive value was “relative to bonds”.

Then in early 2020, just as investors might have begun to hope that policy rates would start to rise, allowing yields to rebuild and equities to offer a better entry point, the pandemic struck. Counterintuitively, asset values - across stocks, bonds, property and bitcoin - have taken another leg up. Why? Because of the most significant behavioural impact of the pandemic on financial markets: savers have gone from reluctantly edging out the risk curve, to beginning the capitulation into outright speculation.

So where does this end? By the end of Season three, Walt is faced with the choice of bowing out of the drug trade on which he is now reliant, or murdering his erstwhile apprentice Gale. While much less extreme, investors have also been wedged into a corner. So long as interest rates were expected to “eventually” go up, then investors needed to be careful to not fully price low interest rates into asset valuations. But 2020’s shift of mindset from “lower for longer” to “lower for forever” - the belief that policy rates can “never” go up - means that risk discount rates will keep coming down towards zero. Mathematically, this means that asset values must keep going up.

The combination of a dearth of assets offering anything above a peppercorn yield, and the prospect of asset values disconnecting from traditional cashflow-focused metrics, means that assets will now be priced on what tomorrow’s greater fool might pay for them. Savers increasingly face Walt’s choice: do they bow out, leaving behind the life of riches they have become accustomed to? Or do they take the next incremental step in jettisoning their previous standards?

Obviously the analogy falls down in that (spoiler alert) Walt chooses the illegal and immoral course of action, whereas there is nothing illegal or immoral about the way investors are behaving. That difference aside, anecdotes of profligacy abound, from the customer who told a bank CEO that he was “saving” for a mortgage deposit by day trading tech stocks… to the wealthy Australians who have concluded that buying luxury property is the only way to earn a return on their capital… to index investors buying Tesla at a valuation greater than that of the entire Japanese auto industry...


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We look back on the 1920s and marvel at their folly to believe that “stocks had reached a permanently higher plateau”. As my colleague Anthony Bolton says, there’s always a story that drags markets to an extreme - and these days “lower for forever” is it. However, Anthony also cautions that once the narrative is fully priced in it loses its power. There comes a point where everyone who can or will buy stocks to chase the narrative has done so. At that point, markets peak and then fall.

Currently, savers are making small decision after small decision that leads them further away from investing and closer to outright speculating. We’re somewhere around the end of Season 3. Time will tell if we will head towards the bloody climax seen in Season 5 or follow a new narrative.

 

Kate Howitt is a Portfolio Manager for the Fidelity Australian Opportunities Fund. Fidelity International is a sponsor of Firstlinks.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity International. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on our website www.fidelity.com.au.

For more articles and papers from Fidelity, please click here.

© 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. FD18634.

 

6 Comments
Lisa M.
February 01, 2021

Very interesting analogy Kate. I was an avid Breaking Bad viewer. Your article is proof that we need to (a) accept lower returns long term and (b) ensure we have diversity in our portfolio.
One vital note to remember: just like Walter, we all need to draw on our assets at some point: let’s not leave it all until we’re too old to enjoy – and share with close ones – some of our nest egg.
All the very best.

Geoff
January 31, 2021

Hmmm! Perhaps an answer lies in "re-thinking" your plan.
Firstly choices are still the same - no change (cash, govt sec, equity/blend, property, precious metals / stuff, do nothing). What has changed is ROI. Imo, (and in my particular case) this is what requires the rethinking.
My plan and hence my strategies are geared towards retirement (of course), because that is where I am. This is not necessarily everyone's immediate concern, but this action works for the majority of plans.
1. Do something! What is your plan? I am not going to "get rich" but I can aim at being comfortable. I accept this as my base.
2. Understand your assets and their conversion! Have some sort of idea for the unexpected! E.g. What happens when cash gets cancelled and purchasing / payment system is electronic! It will. When you hear/read something from "them" - unless you personally know it to be true - immediately start thinking the opposite! There is still a currency (cold) war, continuing ... interest rates are ammunition! Volatility will arrive much sooner than you think. Check you are on that email list! (sarc). No, you are not! Stay short term.
3. Comfort = modest lifestyle with little stress or concerns. Try and ensure you have somewhere to live and provide for daily expenses including health care. Commence downsizing, liquidating unnecessary assets / exposures. Convert to income generation.
4. Attractive yields do exist. Yes! But everything has risk now, including doing nothing or finding a car park. Learn how to spread it and keep it short too! I am not smart enough or on that email list to know that any market is "overvalued". Markets will continue until they don't! (see 2. above) So, until then I can earn approximately 8-9%+ with a reasonable diversification and management (equity / blends). $500k := $50k pa .... Yep I can live on that ... and still take a cruise! Maybe a bit more if you are a pair and she collects handbags or he has a shed!
5. If you are not saving, then something is wrong with your plan! or see 1. above.
6. For what it is worth ... I blew up my super and my savings just a few years ago with Cancer treatment. I am well into my 60's, and remission and started over from scratch. Haven't murdered anyone yet ... but those car parks !! But I do have determination, an income stream (wages) and a plan. You can do it too!
Thank you for your interest, time and perseverance. Stick to a good plan.
... just my 2c worth

Ruth
February 01, 2021

Hang in there Geoff

Geoff
February 02, 2021

I will ... I have a plan !! thank you for your wishes, Ruth

Steve
January 31, 2021

You could replace stocks with property and come to the same conclusion. The property market has been riding the falling yield theme for decades now. So much so that the person on the street will see it as a one way bet. Even in recession prices don’t go down any more!!! If yields revert in any meaningful way over the next decade stocks will likely be a much better bet than property.

Alison
January 29, 2021

Thanks, Kate, I like the Breaking Bad analogy. It's all i can do to resist jumping into a strong market even when I know it's overvalued and I know FOMO will be Bad for me.

 

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