While the coronavirus may be the biggest global story of 2020, the merger of the US Treasury and US Federal Reserve will also have a far-reaching economic effect.
This merger opens the door for US government spending to take off in the coming decade. The debt jubilee will be enormous and obvious. At the end of the last cycle, the narrative was ‘too big to fail’. This time around, think ‘too big to hide’.
The CARES Act directs the Fed to oversee $454bn in stimulus from the US Treasury department. All that money sloshing around will create a noticeable divergence between winners and losers.
In addition to providing loans, the Fed is also using off-balance-sheet mechanisms, like special purpose vehicles (made famous in the 2001 Enron Corporation scandal), to fund US Treasury bids in distressed assets.
These include assets the Fed is not technically allowed to buy directly, like investment grade credits and junk bonds.
The free market — as it was previously understood before the coronavirus outbreak — is no more.
“That is why my investment theme of the decade is to be long on tangible assets over intangible assets"
In the new regime, more people will question the intrinsic worth of all assets, as collective faith in fiat currencies dissipates.
That is why my investment theme of the decade is to be long on tangible assets over intangible assets.
Here are ways to express the theme:
About 40% of US-listed firms have negative tangible book value, more than double the percentage from 20 years ago.
A secular shift favouring asset-light business models has created a compelling relative value opportunity in industries levered to ‘physical’ capital.
of US-listed firms have negative tangible book value
Gold and gold miners
Gold is the ultimate ‘hard-asset’ with a 5,000-year track record as a reliable store of value.
A major benefit is supply constraints. All the gold ever mined could fit into just two Olympic-sized swimming pools.
“Gold is the ultimate ‘hard-asset’ with a 5,000-year track record as a reliable store of value"
These can serve as a status symbol while also helping preserve wealth. Examples include art, wine, rare coins, jewellery and high-end automobiles.
Michael Cannivet is the president and chief investment officer of Silverlight Asset Management. Based in the US, he started out at Fisher Investments after university, where he studied political science and government at Georgetown University. He founded Silverlight in 2016.