FREE WHELAN: There's simply too much risk out there to be overweight equities

In this legendary Stockhead series, investment manager James Whelan from VFS Group offers his insights on the key investment themes and trends in domestic and global markets. From macro musings to the metaverse and everything in between, Whelan offers his distilled thoughts on the hot topic of the day, week, month or year, from the point of view of a damn fine professional money manager.

Another brilliant episode of the BIP Show podcast in which we call out some people in the financial commentary space who have a tendency to speak outside their areas of expertise. Beware these people, especially now that there is so much cataclysmic risk perceived in markets.

Have a listen here. New format. Sounds great.

Re: that cataclysmic risk…

Here’s the setup for a Clarke & Dawe sketch if ever I’ve seen one:

“The US market rallied last night. Why?”

“Because the Fed might need to pause rate hikes.”

“Why would they do that?”

“Because the banking industry is imploding.”

“…and that’s a reason to buy stocks?”

“It’ll do.”

“Banks rallied last night.”

“Because of the Fed pause?”

“So they’re no longer a risk?”

“…no they’re imploding. I just told you that!”

“So why are they rallying?”

“I JUST TOLD YOU!!”

And you get the idea of where the market is balanced at the moment.

Hyperbole aside, I don’t see a huge reason to get into the US banks here when there’s still so many cockroaches around. I heard it whispered that Charles Schwab was a potential candidate for “the next one”. Keep in mind that is purely market rumour from a few weeks ago so a huge grain of salt.

Then you see a chart like this:

And you pause a little bit yourself…

It’s the Credit Default Swap for Schwab. Insurance against them defaulting. If the cost of someone’s insurance goes up that’s normally not a good sign.

Note: there’s always more behind every one-tweet wonder but it does show you how easy it is to stoke fear in this environment. When all you have is a hammer all you see are nails or something like that.

But here’s the big story.

Two weeks ago we had to be experts on banking solvency and collateral. Last week we had to be experts on Additional Tier Bonds and their priority.

This week we have to be experts in US commercial real estate.

Don’t touch it. Simply put, US regional banks are suffering huge outflows of deposits, therefore leaving less to lever up and invest, regulations are getting tighter (obviously) and risk tolerance much lower (again, obviously) on investments. But they’re only regional banks right?

Wrong.

70-80% of commercial real estate lending is by regionals. There’s $270 billion worth of commercial mortgages set to expire this year as well.

Rising outflows, declining share prices, more leverage to a depreciating asset, and the work from home life here to stay. Recipe for disaster.

There is simply a lot of risk there and it should be brought to attention.

Shorting the regionals, or at least commercial real estate, sounds like the way forward.

This is the next thing we’ll have to get across as the retraction continues. Companies just able to pay their interest. There’s more of them. A retraction destroys them.

Be aware of that too.

There is simply too much risk out there to be overweight equities.

Choices

Long bonds as a default this year.

Finally, I love me some confirmation bias.

As this FT chart shows, copper is going to run out in a few months.

Just. Stay the course.

WIRE (Global X Copper Miners ETF) is the best access we have in the ETF space and I’ll be taking opportunities to add to it where possible.

Aside from that I see nothing amazing to get too excited about. Adding to quality tech and letting the bond holdings continue to shine is the strategy of the week.

All the best and stay safe,

James

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