How to invest during weak EUR, high inflation, and meek interest rate?

[brendaj63]

@kcnalp I'd stick with what you're doing but....

1. Hedge might work if you're convinced the EUR is in for a tough winter (if energy supply works out there will probably be a quick rally though) so it's a directional bet with little certainy.
2. DTLA is something worth watching but technically it is still on its way down.
3. Gold doesn't like high-interest rates and on a technical basis, it hasn't found support yet.
4. The DXY is at 113 and will probably face a lot of resistance at its 30-year high of 120 (Jan '02) so I think the USD has limited upside. The Fed can't push it up too far or it will cause a lot of issues in Emerging Markets so despite their hawkishness they may need to retreat if something breaks.

The whole point of DCA investing is to continue buying as markets go down. The weak Euro will hurt your returns in USD assets (S&P 500) but the Euro isn't necessarily all that weak against other currencies at the moment.

Unfortunately, I'm not aware of any UCITS All-World excluding US ETFs but that could be another option, or just focusing on EMVL, ZPRX, VJPA, etc. until the USD loses strength again (at which point the S&P 500 will probably also rally).

 

[kcnalp]

@brendaj63 Hey, thanks for the insight!

Hedge might work if you're convinced the EUR is in for a tough winter (if energy supply works out there will probably be a quick rally though) so it's a directional bet with little certainy.

You mean somehow Putin lets some gas through Nordstream? Currently it looks like it's both tough financial and physical winter. Rationing isnt fun.

1. DTLA is something worth watching but technically it is still on its way down.

So you are saying wait a bit before entering?

1. Gold doesn't like high-interest rates and on a technical basis, it hasn't found support yet.

I see. How do you see the currency risk with gold? Buying with EUR is really expensive now, it kinda cancel the drops of price.

The DXY is at 113 and will probably face a lot of resistance at its 30-year high of 120 (Jan '02) so I think the USD has limited upside. The Fed can't push it up too far or it will cause a lot of issues in Emerging Markets so despite their hawkishness they may need to retreat if something breaks

I'm not too sure about ETF for USD leverage from tax point of view. Unlike naked currency, I dont get to have it tax free after 1 year.

Also Powell said something about "even if it hurts the economy". Nevertheless, what is your idea of "too far"?

The whole point of DCA investing is to continue buying as markets go down. The weak Euro will hurt your returns in USD assets (S&P 500) but the Euro isn't necessarily all that weak against other currencies at the moment.

Precisely, with MSCI World having >50% US company...

excluding US ETFs but that could be another option, or just focusing on EMVL, ZPRX, VJPA, etc. until the USD loses strength again (at which point the S&P 500 will probably also rally).

I will look into those, thanks.

 

[brendaj63]

@kcnalp

You mean somehow Putin lets some gas through Nordstream? Currently it looks like it's both tough financial and physical winter. Rationing isnt fun.

More about how the storage holds up, how cold the winter, and for how the conflict goes. If India or China step up pressure on Putin to end it or Ukraine makes another big gain there will be a lot of upside to the Euro. On the other hand, a lot could go wrong.

My feeling is there's too much negative sentiment to Europe built in and still too much positive sentiment in the US.

So you are saying wait a bit before entering?

I'd prefer to buy it when it's on its way up than "catch a falling knife". Sentiment might change in the next month though so it's worth watching - I am!

As the dollar strengthens Gold will weaken.

As you say, with a weak Euro you're not getting a lot for your money either.

I'm not too sure about ETF for USD leverage from tax point of view. Unlike naked currency, I dont get to have it tax free after 1 year.

Also Powell said something about "even if it hurts the economy". Nevertheless, what is your idea of "too far"?

Out of curiousity, what country are you in that doesn't pay tax on forex gains?

Too far is when things break. I don't know where it will be but usually the Fed pushes things too far and then need to backtrack. They may push housing too much (i.e. too many foreclosures), they may cause emerging economies to default on their US$ debts which could cause contagion throughout the world, there could be liquidity issues in the banking system, he might cause unemployment to spike massively.... Who knows.

Powell is doing his best to convince people there's no longer a "Powell Put" but as soon as credit markets implode he'll be forced to ease up. When and where it happens is anyone's guess. We have 14 years of excessive buildup since the GFC so there's a lot of air to be let out of this bubble....

 

[kcnalp]

@brendaj63

On the other hand, a lot could go wrong.

I sure hope not. It's already bad!

My feeling is there's too much negative sentiment to Europe built in and still too much positive sentiment in the US.

Yeah, conflict in Ukraine and energy price...

I will sleep on the bonds and gold. Likely bond though.

Out of curiousity, what country are you in that doesn't pay tax on forex gains?

Germany, the forex is treated as private sale rather than capital gain. Just like cryptocurrency, hold one year then it's tax free.

Too far is when things break. I don't know where it will be but usually the Fed pushes things too far and then need to backtrack.

Yeah, it sounds to me dollar is not weakening anytime soon. The gaps still increase.

 

[karebrown]

@kcnalp Option 1 doesn't seem that great, because EUR could continue to fall, along with the stock market too.

There is a case for option 2, many people are saying that with bond valuations this low it's starting to become really attractive. The thing is at some point these rates will have to go down during the next recession, so at some point people should see some nice gains on their bonds if they buy now. I wouldn't go all in though because there might still be some downside, maybe DCA into some bonds.

Gold doesn't go up when interest rates go down, it's the opposite. Gold goes up when inflation is high and people don't have anywhere else to park their cash. If rates go down it means inflation is not going up, a scenario like that would be bullish for many things but not gold, because people would just go back to more risky assets like the stock market. You could get some gold now if you think things will worsen from here, it's not a bad choice.

Personally I'm going for a risk parity portfolio with All world stocks, long term bonds, long term TIPS, gold and energy commodities at this point.
If you want to make directional bets, there is really not much you can do in a rising inflation and falling growth environment. Just gold or go short obviously not good things in this environment like growth stocks, reit, ecc.

 

[kcnalp]

@karebrown Well, if EUR continue to fall, that is what the hedged ETF are for, can't help with the stock market itself falling, though.

For bonds, you mean EU bond? Because if it's USD we face the same dilemma as buying normal unhedged S&P, the EUR is weak ATM. Nevertheless, I'm considering DCA-ing bond ETF yes.

You missed the cause-effect relation, Interest rate is high because the govies want to curb high inflation. Gold is non-interest-bearing asset. Historically, the demand for gold is low when interest rate is high. People rather park their money on interest-bearing bonds. Take a look at gold price when the feds announced the interest hike. When interest rate goes down (it has to at some point, lest there will be recession), yet inflation is still relatively high, gold should go up.

In any case it's moot, I'm not expecting gold to return profit/going bullish, rather I hope it's keeping up with inflation, a.k.a store of value. That I doubt with interest hike, but in terms of EUR the direction is unpredictable.

Personally I'm going for a risk parity portfolio with All world stocks, long term bonds, long term TIPS, gold and energy commodities at this point.

Energy commodity? Interesting, don't you think it's risky with geopolitical event like Ukraine and push for renewable in general? Curious.

 

[kbhit]

@kcnalp In terms of commodities, miners stocks are particularly low right now and with the Russian market closed and politics pushing to EV ( which require much more metal than traditional cars ) there is a bright outlook, see:

Lithium, Cobalt, Copper, Aluminium, Nickel

Energy stocks such as Oil and Gaz have decreased but are still historically high in terms of valuation, however I don't foresee an increase in production nor decrease in demand as we're underproducing because of ESG regulation. Because Oil is bad and shipping LNG is hard, many developed Western countries will have no other choice than to build new nuclear reactors which should prop-up Uranium at new highs if you have a 10 years horizon ( building new plants take a decade so recent hikes in Uranium were more related to speculation than increase in demand )

 

[kcnalp]

@kbhit

In terms of commodities, miners stocks are particularly low right now and with the Russian market closed and politics pushing to EV ( which require much more metal than traditional cars ) there is a bright outlook, see:

Lithium, Cobalt, Copper, Aluminium, Nickel

Those are energy commodity? I thought it means oil and gas. I'm out of the loop, but sure it makes sense, EV and renewable needs battery..

I agree with oil/gas/uranium. Though oil/gas has a penchant of surprise comeback despite push for renewable. Who knows what war will come next, and when China exits covid curbs out.

It's a worth thinking, rn I will have to stick with the world equity and how to hedge my income.

 

[karebrown]

@kcnalp If the Euro continues to fall, buying a Hedged ETF will do you nothing good. Hedged ETFs would be advantageous if the local currency appreciates compared to the currency of the ETF. If on the other hand the foreign currency continues to appreciate, the hedged ETF does nothing good and you lose all the currency gains.

There is not a clear historical relationship with interest rates and gold, one way or the other. There is a much clearer relationship with high inflation and falling growth though. I doubt it's keeping up with a 8.3% annual inflation, but it could do better than most other assets and better than cash.

The risk parity portfolio is agnostic in terms of economic environment, it's structured so that for any environment there are parts of it that do well, and overall there is a positive expected return. The industrial commodities would do well in a rising growth and rising inflation scenario, which is not exactly what we have now because growth is falling. In the current scenario the two things that would somewhat work are TIPS and gold. However, accurately predicting the future is not easy so who knows what happens to growth/inflation/EUR-USD.

 

[kcnalp]

@karebrown

If the Euro continues to fall, buying a Hedged ETF will do you nothing good. Hedged ETFs would be advantageous if the local currency appreciates compared to the currency of the ETF.

Wait wait, I don't follow you. When we DCA hedged ETF on devaluing EUR (excluding effect of the stock itself), then I get to keep more position. Of course we are speculating EUR will go up again, but if and when it goes up, then it is advantageous, or am I missing something?

If on the other hand the foreign currency continues to appreciate, the hedged ETF does nothing good and you lose all the currency gains

Yes, if Invest in lump sum, see above. Nevertheless, I feel like I might miss something, please be gentle with the correction.

There is not a clear historical relationship with interest rates and gold, one way or the other.

But, there is.

There is a much clearer relationship with high inflation and falling growth though.

Yes, and there is even clearer relation between inflation and interest rate. So we can have intermediary correlation.

I doubt it's keeping up with a 8.3% annual inflation, but it could do better than most other assets and better than cash.

Yeah I agree, it very much speculating to make gold weather 8.3% inflation. However note that gold is priced in USD, if our cash is in EUR, with the USD keep going up against EUR suddenly the gold return needs adjustment. Anyway I dont want to speculate that much, so probably gold is not the choice.

The risk parity portfolio is agnostic in terms of economic environment, it's structured so that for any environment there are parts of it that do well, and overall there is a positive expected return. The industrial commodities would do well in a rising growth and rising inflation scenario, which is not exactly what we have now because growth is falling. In the current scenario the two things that would somewhat work are TIPS and gold. However, accurately predicting the future is not easy so who knows what happens to growth/inflation/EUR-USD.

Yeah, I see your point. What is the recommended/classical proportion if we are to hold Equity+bond+Commodity+Gold? (I rather have normal hedged bond rather than TIPS bonds, now that interest rate is hiking).

 

[karebrown]

@kcnalp You aren't missing anything with the hedged ETF scenarios. If you buy a hedged ETF with underlying US assets, if the USD keeps appreciating you have outsized losses because you miss out on all the currency gains (and you add on top of that the hedging costs). If on the other hand the EUR strengthens, then yes the hedged version will do you much good. You are essentially betting on the direction of the EUR-USD, which is really not a given at this point with all this uncertainty, but the costs of hedging are a given.

You were saying that historically demand for gold is low when interest rates are high, which doesn't really sound correct because many times that interest rates are high it's because inflation is high and growth is slowed by interest rates, so gold is doing well. If there is any correlation, it's that when interest rates are rising, gold is rising, and when interest rates go down, gold goes down. Also that correlation chart doesn't go that far back to important decades for gold and inflation like the 70s, I'd like to see if the correlation holds up in the very long term.

As for the risk parity approach, I really recommend reading "Risk Parity" by Alex Shahidi. It's not too long of a book and explains in detail what asset classes do well in what environment and why, and it illustrates how to build a risk parity portfolio that is gonna do well in pretty much all scenarios. It's probably the one book you'd want to read over and over to understand why assets behave a certain way, written in a way that any investor can understand regardless of their background. Check it out if you can, it will help you a great deal I think

 

[kcnalp]

@karebrown

You aren't missing anything with the hedged ETF scenarios. If you buy a hedged ETF with underlying US assets, if the USD keeps appreciating you have outsized losses because you miss out on all the currency gains (and you add on top of that the hedging costs). If on the other hand the EUR strengthens, then yes the hedged version will do you much good. You are essentially betting on the direction of the EUR-USD, which is really not a given at this point with all this uncertainty, but the costs of hedging are a given.

I re-read several time, it still looks to me this is true for lump sump investment, but not DCA. When EUR keep falling independent to the stock fluctuation, I get to buy the same or more number of positions over time. EUR-USD direction is not given, but at some point US Fedreserve gonna bring down interest rate to not hurt their economy, and ECB has to increase inflation to curb inflation. Those are kind of given, we just not know when.

What is really given is my income will be in EUR on any foreseeable future and it's not going to jump in these sort of climate to make me not requiring DCA and diversify meaningfully (i.e., with meaningful amount of capital).

I also checked the hedged ETF vs unhedged ETF tracking difference, I don't see where the signficant hedging cost coming from if you exclude the currency effect. For example: S&P 500.

that historically demand for gold is low when interest rates are high, which doesn't really sound correct because many times that interest rates are high it's because inflation is high and growth is slowed by interest rates, so gold is doing well. If there is any correlation, it's that when interest rates are rising, gold is rising, and when interest rates go down, gold goes down.

I gave you multiple links that suggest the opposite or at least try to explain that the partial correlation has external factor that doesn't always apply. Maybe these people are wrong, but the correlation for sure does not come from me..
You can Google gold price now, when the inflation is high, and interest rates are rising, and growth isn't exactly good (Ukraine war, post covid).

Also that correlation chart doesn't go that far back to important decades for gold and inflation like the 70s, I'd like to see if the correlation holds up in the very long term.

Sure: here you go https://www.sunshineprofits.com/med...14/real-gold-prices-real-interest-rates-1.png
On 70s Nixon removed the gold standard, I'd call that external factor. My understanding is Gold price is influenced directly by supply/demand, and the market depends on interest rate, inflation, and other factors with different weighting. I dont have any qualification for financial analysis, but now it seems interest rate hike carries some weight.

As for the risk parity approach, I really recommend reading "Risk Parity" by Alex Shahidi.

Thanks, these days I have attention span of a fly, (lol) but I need to look into risk parity concept a bit further if I want to be safe.

 

[karebrown]

@kcnalp If it's true for lump sum then how is that different for DCA. DCA is just a way to spread risk, not change your headwinds or tailwinds, those stay the same, just diluted over time. Even with DCA, if the dollar keeps strengthening, with a hedged ETF you are losing out on currency gains. Whether you do DCA or not, your are still betting the Euro will regain ground, with DCA you are just making many smaller bets over a longer timeframe rather than just making one big one. You are right that you should probably do DCA in times of uncertainty though, you are spreading your risk. Hedging is an extra 0.10-0.20% of annual expenses, it's not much but it all adds up, and it's an unnecessary extra cost unless you believe the EUR will strengthen. If you have a strong feeling it will, sure go for hedging. If you buy hedged assets you are essentially making a bet the EUR will regain ground in the future, which is really not guaranteed, who knows where we end up. We might freeze all winter with war at our doorsteps for all we know at this point.

I'd detach the gold performance from interest rate cycles because in general it's not that correlated with normal market conditions, what is way more important for its performance is the inflation rate. It does best in periods with high sustained inflation and low growth like the current one (aka stagflation). It does well when people don't really know what else to buy because everything is losing value, and that's about it. If you do a planned and slow rate hike because the economy is strong gold won't not do much good at all, but if inflation jumps from 2% to 9% and all assets take a massive hit, then gold is the best of the few options you have left. You are right its price is just supply and demand. Right now it seems like a good time to hold gold if you think we will stay with high inflation for longer, it's not a good time if you think this will get sorted out soon.

 

[kcnalp]

@karebrown

Whether you do DCA or not, your are still betting the Euro will regain ground,

I do not know if I call it betting, I'd call it waiting indeterminately. Again Feds gonna dial down at some point with the rate, and ECB has to keep up with this stupid sub 9% inflation.

with DCA you are just making many smaller bets over a longer timeframe rather than just making one big one.

For me, it's not exactly a choice, if dont want to DCA then I have to save and hold EUR for the sizable period. With inflation and EUR-USD I dont want to do that. Unless there are better alt?

Hedging is an extra 0.10-0.20% of annual expenses, it's not much but it all adds up, and it's an unnecessary extra cost unless you believe the EUR will strengthen.

It's OK cost for me.

It does best in periods with high sustained inflation and low growth like the current one (aka stagflation).

But why is it now at 52w low..? Where is the demand? You still havent answered the question, you refer to historical data, correlation this, but what about now?

Right now it seems like a good time to hold gold if you think we will stay with high inflation for longer, it's not a good time if you think this will get sorted out soon.

Is it? gold price is low in USD, but high in EUR again when we buy gold we face the same dillema as buying USD ETF. In your word, when we buy and hold gold, we are "betting in the direction of EUR-USD".

 

[karebrown]

@kcnalp

I do not know if I call it betting, I'd call it waiting indeterminately. Again Feds gonna dial down at some point with the rate, and ECB has to keep up with this stupid sub 9% inflation.

They won't be able to hike as much as the US because there are many countries in the EU that wouldn't be able to service their debt anymore if they hiked too much. Also the fact the USD is so strong isn't only due to interest rates, it's also because it's seen as the world reserve currency. The EU has huge energy and growth issues, and there is a long way before the EUR can regain ground on the US in my opinion.

But why is it now at 52w low..? Where is the demand? You still havent answered the question, you refer to historical data, correlation this, but what about now?

If I had to bet a huge part of it might be that Russia has been mining and selling to friendly countries like crazy to fund their expenses. They had a huge stockpile that were building up going into the war, and are some of the largest miners, so they also ramped up production.

https://www.grid.news/story/global/...de-the-billion-dollar-business-of-blood-gold/

Is it? gold price is low in USD, but high in EUR again when we buy gold we face the same dillema as buying USD ETF. In your word, when we buy and hold gold, we are "betting in the direction of EUR-USD".

I don't know, nobody knows. I know there would be objectively much worse options right now. You either buy TIPS or Gold, go short the stock market/bonds or make a bet things will get better relatively soon. Your choice, there are no good or bad answers.

 

[kcnalp]

@karebrown

The EU has huge energy and growth issues, and there is a long way before the EUR can regain ground on the US in my opinion.

Long way, therefore I'd call it indeterminate waiting. I will lose some in the hedging cost, but I hope it's not >20% gap like that of EUR-USD now..

I know there would be objectively much worse options right now. You either buy TIPS or Gold, go short the stock market/bonds or make a bet things will get better relatively soon. Your choice, there are no good or bad answers.

I'm a bit wary considering gold as in the textbook case rn, you mentioned the external factor (Russia).

There is this open question on buying unhedged gold or TIPS with EUR-USD gap. Not a problem if you invest and earn in USD as a lot of book author are.

Anyhow yeah, nobody knows for sure. Let see..