Investors should not be fooled by the recent buoyancy of stock markets and should immediately move their money into cash and ultra-safe bonds, a leading global banker warned.
The global economy is forecast to go into the biggest recession in nearly a century with no firm predictions a recovery, while governments have responded with unprecedented wave of printing money and stimulus spending.
“This is the ending of Rome. This is the time where the Romans started to dilute the amount of silver that was in the coins,” says Steen Jakobsen, Chief Investment Officer for Danish investment bank Saxo Bank.
In AD 64, Roman Emperor Nero began a policy of debasing coins with copper, a practice that eventually gave way to inflation after centuries of economic stability. As modern governments pour newly printed money into economies to prop up valuations and cover up their own economies’ weakening fundamentals, Jakobsen expects a similar outcome.
While those long-term effects still loom in the distance, the short-term moves made by governments to prevent wholesale job losses have largely worked, keeping investor sentiment strong as markets have slowly rebounded instead of plunging further down past the lowest markers since the 2008-9 financial crisis.
The FTSE 100 Index, based in London, has been trading above 5700 points after hitting a low below 5000 points on 23 March, the lowest it had been since 2009. The S&P 500 Index, based in the United States, has recovered at a similar trajectory.
According to Jakobsen, investors have got it all wrong. Top investors he knows are selling their stocks and putting money in one of the world’s safest investments—US Treasury bills, known in the industry as ‘T-Bills’, a short-term debt obligation, among other low-risk instruments.
“The really, really smart guys I know went to T-Bills and the like very, very early in the crisis, and just bought a huge amount,” Jakobsen told Al Arabiya English, speaking from Saxo Bank’s head office in Copenhagen.
These investors, however, are not in the majority. Most investors have rushed to purchase stocks that have fallen, following the old axiom of ‘buy low, sell high,’ believing a full recovery is right around the corner, a move Jakobsen warns against.
“Desperate cash was very much part of the first three weeks of the crisis. Some investors have ‘FOMO’—fear of missing out—more than anything, but it's not the smart money that are chasing this, this is not chased by people who understand the world in my opinion,” he said.
More investors need to notice that this crisis is unlike any other, he added. Retail investors, industry parlance for an individual investor, were burnt earlier this week by the historic drop of US oil prices in negative, and this dynamic may play out again.
“I think I have to make people aware that this is not good. I can't sit here and say, like some are, that ‘this is the best ever,’ and we're having new highs in the stock market. Even if we have more new highs in the stock market, I couldn't give a hoot because society is falling apart around me,” he said.
The fantasy island
Jakobsen compares Wall Street to a fantasy island, often free from the issues of the “main street” or the real economy, and able to continue growing even when signs elsewhere are negative. This disconnect is already in the process of coming to an end, as the “main street” issues will be too great for the island to ignore.
“Very, very soon there will be a bridge built on a permanent connection between the real economy and the island. The Federal Reserve are supporting what goes on, keeping the party on the island going, but the real economy ultimately will have to be connected because the island still needs water and food that is only grown on the mainland, by which I mean essentially credit and consumer demand,” Jakobsen explained.
The very top, most elite, investors in the GCC are already very nervous, he added, and have a distinctly different approach to the positive sentiment that the majority of institutional and retail investors seem to share.
“I’ve been speaking to very smart investors in the Middle East, including investors who are all the way up to the top. They're all very nervous… It's the worst I've ever seen. This is worse than 2007-2008. They are all numb from not knowing what to do next,” he concluded.