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Post Quality
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Post Quality
A quick recap of a recent conversation on Telegram that revolved around capital allocation in a zero-interest rate environment.
Capital Allocation [Telegram]
Recap: Quick overview of economic backdrop and investment landscape backdrop - how do you allocate capital in a 0% interest rate environment
Comment: Clearly varies by person/risk tolerance. The Fed is forcing people to shift portfolios out on the risk curve, and attempting to get people to spend vs. save (otherwise GDP collapses). We likely need to see a big insolvency event to drive a sustained risk-off environment.
Highlights:
With its policies, the Fed has effectively ‘crowded out’ investment opportunities:
Cash: no yield
Government Bonds: ~0.50% (10Y)
Corporate Bonds: ~3% (IG); ~8% (HY)
Equities: ~2% dividend yield; valuation near all-time high (but unknown “E”)
Commodities: varies
Real Estate: mortgage rates near lows; large dichotomy between cap rates across industries (retail, leisure, industrial, data center, etc.)
*Gold: *no yield
Alternative (PE/VC/HF): varies
The Fed’s goal: get you to SPEND, not SAVE… and push everyone out on the risk curve
The economic backdrop is not particularly pretty:
~35M in US unemployed / filing unemployment
Government is printing money to help
$1200/person - one-time payment
$500/person - ~est. Of weekly unemployment (pending state)
Company visibility is low
Economic data is the worst ever
Banks tightened loan standards
Consumer confidence is low
1 Comments
Only thing I have to add to this is that over the last six months, equity and crypto returns have become incredibly correlated—it’s really strange considering crypto evangelists like to say that Bitcoin is uncorrelated with everything else. Since the Fed has broken any semblance of free markets, it seems like both equities and crypto (and prob many other asset classes) have totally shaken out of price discovery and value mode into purely risk on/off and trend seeking mode. This is exactly where algos can pick up signal best and all markets are trading in lock step with each other.
That said, it seems like we're waiting for rationality, price discovery, and value to kick back in. Would expect this correlation to break at some point soon.