Monday , 17 June 2024

How to Increase Returns in This Environment

The economic outlook for most major economies has deteriorated rapidly meaning we’ll almost certainly see more shocks in the financial markets. Given the nature of the current economic crisis — one defined by unsustainable debt — history suggests those shocks [could] come in the form of sovereign debt defaults and currency devaluations. This possibility has increased the specter of risk for every region of the world and dampened investment returns for the entire global economy. [What should we do?] Words: 631

Lorimer Wilson, editor of, provides below further reformatted and edited [..] excerpts from Bryan Rich’s ( original article* for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Rich goes on to say:

With the above backdrop in mind and with asset prices and bond yields falling, [here are two ways to prepare for such ‘tail-events’]:

1. Cash
We’re experiencing a balance sheet crisis and it has left consumers, companies and governments trying to climb their way out of a hole of debt. That’s why it’s becoming abundantly clear that deflation is a big threat, despite all of the money printing. You can flood the world with paper currencies, but you can’t make those who have been buried by debt spend or borrow again.

There’s obvious and significant deflation in some key areas of the economy – housing, for example – and other broader price measures are poised to follow and in a deflationary environment cash is king because as prices fall, while your money buys more that money tends to be harder to earn. Raising cash can help you avoid being exposed to the tail-events likely in store for financial markets.

As for returns, it’s important to pay attention to real returns. Real returns are returns after the effect of inflation, or in this case, perhaps deflation. It’s the true measure of whether or not your purchasing power (or wealth) has increased. For example, if consumer prices decline by 3 percent, the purchasing power of your cash would increase by 3 percent … the equivalent of earning a 3 percent return.

2. Opportunistic Trading
While tail-events, as mentioned above, represent a lot of risk, they only do so if you are on the wrong side. Positioned correctly, they represent opportunity. With the increasing probability of a double-dip recession and more emergency policy responses likely to come, the risks of traditional buy and hold strategies clearly outsize the potential rewards. Instead, the better reward-to-risk profile is more likely found on the short side, i.e. positioning for a fall in stocks, commodities and many foreign currencies, especially those relative to the safe-haven favored U.S. dollar, as markets adjust to a protracted period of depressed demand. Investors could profit handsomely from struggling foreign currencies and an even better payoff could come if tail-events, like sovereign debt defaults and currency devaluations, materialize.

The deflation threat has clearly caught many people by surprise and, with the reality that yields will remain at record lows for the foreseeable future, achieving investment returns by traditional strategies and asset classes has proven to be difficult [but, hopefully, the above suggestions will help you] to generate return in this environment. [In conclusion, however, please] remember that a return OF capital can be every bit as important a concern as return ON capital in this crisis period.

* (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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