Jan 10, 2023
Assets, Interest Rates & Bubbles - Market Recap for 2022 w/ Drew Niv
BRT S04 EP02 (164) 1-8-2023
What We Learned This Week
Guest: Drew Niv, Trader Tools & former Forex Trader
Drew Niv had a 20 year career in trading and FX (currency) markets. He founded one of the largest Forex trading companies on Wall Street, took it public (IPO), managed hundreds of staff, and oversaw $ billions in daily trading.
Currently he runs a bank software company called Trader Tools, that specializes in FX markets. - https://www.tradertools.com/
Drew Niv is a Strategic, Technology Savvy, and Detail-Oriented Board Member and Global Business Executive with a history of award-winning performance as a visionary leader. Founded company that disrupted the FX industry, resulted in retail FX becoming a major factor of the global FX market.
Developed breakthrough technology that enabled customers to transact spot FX at 70–90% less cost than the largest exchanges and ECNs. He has forged strategic partnerships with 1,000 institutional customers, including major hedge funds, all large banks, and other brand name financial institutions, both domestically and globally.
Drew possess a unique understanding of market microstructure - the inner plumbing of trade matching, how technology intersects with business, and how to grow a business from a small startup through an IPO. Well versed in managing through a crisis and positioning a mature business to meet the unique challenges of a shrinking industry. Experienced in software product development; able to design and build trading software that people want to use; and experienced in managing a diverse, international workforce remotely.
Drew Niv - 20 year Wall Street career & former forex trader
Currently sells financial software to banks – he used to fight the Wall Street wars, now he arms them, less stress, and an easier business
Review of the Markets 2022
Market is very sensitive to interest rates. The Fed establishes interest rates. Interest Rates set the tone for the entire financial industry, from business lending, to stocks, bonds, banking, insurance, investments, mortgages, etc.
Market Fundamentals are always valid, and post 0% rates, and current high inflation, become even more valid.
Pension plans and insurance company’s returns will be affected by interest rates. They are looking at minimum rates of 4 to 5%. Interest rates have been low, near 0% for a number of years.
It is tough to get Treasury bills when only at 1%. Companies were forced to chase return and take on more risk by acquiring corporate bonds and stocks. Investor mentality was not challenged at times for the last few years.
Hard to know what a good investment is at 0% interest rates. Money was cheap, so people were investing in numerous things, borrowing $, and taking chances.
We saw the rise of the Pandemic stocks in 2020 with companies like Carvana, Peloton, and different crypto assets. These all turned out to be bubbles, and wound up flopping in 2022. The crypto market has seen 90% shrinkage. Some companies go bankrupt, while others are acquired at $.10 on the dollar.
Investment philosophy 101 - you compare all investments that have risk to a risk-free investment. Treasury Bills are considered risk-free investments where with very little risk, you can get 3 to 5%.
If you are going to buy a stock by comparison, and take on more risk, you have to be paid for taking on that risk. A stock could have 10 to 20% downside risk, vs a T Bill which has almost no downside risk, the government is a good bet. The two-year treasury bill is at 4% annually.
Professional investors always look at the risk/reward ratio. Whenever you look at an investment, you have to consider the duration, the type of asset, and what you want to benchmark it against.
Example: you invest in Apple, are they a credit risk? What is the ROI? The return on an investment should be better than treasury bills, accounting for the potential downside risk of 10% (or more).
Inflation causes the economy to weaken. Housing prices decline like other assets. In 2023, inflation should go down. This assumes the Government doesn’t spend too much money, in which case inflation stays the same.
The Fed is raising rates to bring asset values down. In the current environment, 2023, savers will be rewarded. This is similar to from the 1980s to the 1990s where you could actually earn interest on saving money.
With low interest rates from 2005 to 2020, savers were punished. 2023 will be the return of the saver. Cash will be king. Valuations are collapsing, see tech stocks, crypto, and maybe housing?
Psychology of the Investor – The investor currently still remembers the highs of the last few years. As they sell off and get out of the market (expecting a recession), their viewpoint slowly changes. Typically recessions last 2 years, and this is considered short. But it takes years for investors to regain confidence and jump back into the market.
Historically market timing is tricky. In the current environment you want to reduce exposure to assets. Go to the Federal Reserve website to look at the history of housing prices. The last decade has seen an unprecedented climb in the price of housing assets - https://www.stlouisfed.org/
Mean Reversion is setting in, this happens with assets. What goes up, must come down. A retracement in valuations of assets. When you look at housing and regional markets some values are even higher, ie: the Sun Belt like Florida or the southwest.
Things that are illiquid assets, lower to the reset value, it’s different than last time. Illiquid is the state of a security or other asset that cannot quickly and easily be sold or exchanged for cash without a substantial loss in value.
Non-bank lenders will be hurt. Examples of this might be an insurance company, mortgage co., venture capital or private equity.
Oil demand is up, despite the government trying to stop it. Supply is decreasing, and oil prices are going up with inflation. Commodities in general are on the uptick as an asset class.
With regard to energy, there are risks of rising prices. China is on the rebound and it is the second largest consumer of oil in the world.
Currently with US Gov’t strategy, there is no cohesive policy to drill for oil. Cannot replace the oil reserves that have been used. The market has changed, demand is up. The government will try to keep the price of oil at $70, and refill the strategic reserve.
Energy companies understand all of this, and are operating a lot more efficient than in the past. They have lowered production costs, and can actually make money at $20-$30 a barrel. Bottom line they are leaner and meaner. Natural gas is very important, and the preeminent energy in Europe.
Crypto does not have good utility. There is no real regulation and the price has been based on speculation the last few years. Investors buy crypto and then look for the value to go up, to sell to the next person. The classic ‘greater fool’ theory.
Many of these exchanges have turned out to either be run poorly, having bad books, and bad management - not experienced enough, or outright frauds like FTX.
Crypto, specially Bitcoin, will still exist in the future. It is already being used in the black market and may even grow with use there. There are still too many countries with bad currency and bad banking, plus worse government.
Citizens will use crypto in the black market to get around this. Usage will be to move money, do banking, get goods, and even smuggle money. This is why when you have seen multiple crypto coins collapse, both Bitcoin and Ether have not gone to $0 because of the black market.
There is some usage as a payment method. Also in regards to Blockchain technology / Ethereum, there may be technological utility in the future.
Forex (FX or currency trading) is not typically understood by most investors. It is very transparent and has low fees.
Student loan crisis is very real. College costs are rising way too much. There is no disclosure for the ROI on the cost of tuition and the degree that major colleges give out. Not uncommon for a college to cost $200,000+ for a 4 year degree. Then the student graduates and can only get a $30,000 a year job. It’s a negative ROI on many college majors.
The top 10 professions for degrees and pay revolve around a few major themes. Math, engineering, and programming degrees are important and provide for good jobs now This will only get more important in the future. Compare this vs other degree like English lit or languages that are a poor investment and do not get good jobs. K - 12 prep schools are not preparing kids properly for college and careers.
O/T Seg 5
Regarding school and recommended careers. Technology, science, and math are the themes of sectors to pay attention too. Further breaking it down, bio engineering, any type of engineering programming or construction, programmers and anything with tech or computers.
Future is AI, software, and coding. VCs / venture capitalist looking for the next curve to fund and find the winners. What is the next tech revolution?
Every major company now is a tech company. All the big fortune 500 corporations and beyond are using AI and algorithms - a.k.a. data science as part of their daily function and running many operations in the business.
Not just tech companies anymore, there is a requirement in most companies to have a tech division. Understanding how to use big data, programming, AI and algorithms.
JP Morgan Chase has a tech team which is small, that runs all of the AI trading. They have more volume, more transactions, creating fees and more ROI for the bank. Example: ATM that replaces tellers, and works 24/7
There is an arms race in finance which has really become a tech race. Same goes for other industries – Sales, Oil, marketing / advertising and customer service.
Tech is permeating the future of many industries. So programmers, coders, and data engineers are all going to be in demand. They will be able to get a king’s ransom for pay. The average programmer can make a lot of money as demand continues to be high. Working in boring fields like math, is very lucrative.
Reminder, if you haven’t learned anything from the show, don’t fight The Fed. Don’t get cute with your investing. Invest for good returns and understand what type of return to expect versus risk-free assets.
2023: we will see reality set back in.
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