IceCap Asset
Management's Monthly outlook on global investment markets: October 2017,
Submitted
by Keith Decker
IceCap Asset
Management's Monthly outlook on global investment markets: October 2017,
submitted
by Keith Decker
[[ Here the parasite elite
who profit from neoliberalism –investors- confess their guilt’s ]]
... the
global adoption of Quantitative Easing/Money Printing meant the entire price
discovery process would become suspended
….
After all, avoiding
near-certain losses should be the most important goal for every investor.
Yet, the confusion
today is that practically every talking and writing head has declared
everything to be at extreme risk levels. In reality, everything cannot decline
at once – money and capital just doesn’t move that way.
Yet, as chaos
continues to engulf our world, traditional investment metrics seemingly make
less and less sense.
The Stock Market
What can we say –
there’s an awful lot of people out there saying an awful lot of awful things
about the stock market. The central theme or reason for these negative views
is entirely based upon stock market valuation.
.. Many
of these bearish investors have shockingly been out of the stock market since
the 2008 crash, with others selling out just a few years later.
INVESTMENT
MANAGERS CAN BE SLOTTED INTO 3 GROUPS:
Group 1 – This manager
works for a mega-big investment firm, that is typically a part of an even
bigger firm – a bank. These firms
are devoid of dynamic thinking. .. These
managers have no market view, and if for some strange reason they possessed a
market view, the compliance and enterprise risk management departments would
sniff it out and exterminate it faster than a speeding macchiato. These
firms did not see the tech bubble breaking until it was too late.
Group 2 – these managers
were burnt badly by the last crisis and therefore continue to fight the last
war. In many ways - these managers
are to be commended. They understand risk. They understand how the loss
of capital can be devastating for their clients.
These managers have
really nice intentions. Yet their deepest concerns about another stock
market crash has kept them out of stocks during one of the largest rallies in
stock market history.
These managers are so geared towards another market crash
that they epitomize confirmation bias. .. The
confirmation bias first begins with showing how stocks are more expensive today
than they were immediately before the 2008 crash and immediately before the
2000 crash.
And since stocks are more expensive today than compared
to immediately before the 2000 and 2008 bubbles, then
stocks must therefore be on the verge of crashing yet again.
But they haven’t.
Another commonly trolled chart shows the VIX or market
fear index:
And since this data point shows current markets are also
at the exact same level as they were prior to the 2000 and 2008 bubbles, then stocks therefore must also be on the verge of cracking
again.
But they haven’t.
Next, the stock bears whip out charts showing the
deterioration in Consumer Credit,
the effect of Stock Buy Backs on Earnings per Share, record high profit
margins, lower trending GDP, Donald Trump, Brexit, Marine Le Penn, North Korea,
Russia, and the beat goes on.
Yet, stocks continue to defy
gravity.
Then there’s the money printing, zero interest rates,
negative interest rates, financial oppression, and the socialized bad debt.
And yet, stock markets just won’t
go down. In fact, not only will stocks not go down, but they continue to
go up.
Yes – it’s confusing. But it’s
only confusing for those using linear thinking, one-dimensional
perspectives, and the refusal to consider that maybe there’s something else a
foot.
Group 2: They absolutely
refuse to even consider for a moment that their analysis of risk is correct BUT
maybe the risk will not be reflected in the stock market.
And since, none of these managers
in Group 2 believe a major risk can ever occur outside of the stock market –
then it is completely missed and dismissed.
Group 3 – in many ways,
these managers are similar to those in Group 2. They also have terrific
intentions, possess a laser-like attention to avoiding capital losses, and a strongly held belief that markets can be pushed and pulled
into extreme positions.
Managers in Group 3 believe that at different times, any market can be either good or evil. What we mean by
this, is that these managers in Group 3 never fall in
or out of love with any investment market. Just as there are times to
embrace and avoid stocks, the same is true for bonds, gold, currencies and
different commodities. When market conditions change,
so too will the investment view of these managers. But their key point
is: all markets are interconnected.
In other words, stock markets
cannot move in isolation without impacting other markets. And of the
utmost importance – other markets cannot move in
isolation without impacting the stock market.
And, perhaps the single,
biggest revelation of all and commonly missed by many – the financial world does not revolve around the stock market.
Yes, the global stock market is
big. But it is dwarfed by bond markets, interest rate markets and
currency markets. Walk onto the trading floor of any major bank and you’ll see
that over 75% of the floor is dedicated to bond,
interest rate & currency trading.
The remaining sliver is for the stock market. ..
Believing the stock market is the king of the hill, is akin to believing
the tail wags the dog.
Here at IceCap, we clearly see
that today’s global financial world contains risk unlike anything we’ve seen
before in our lifetime. After all, 35 years of accumulated effects of
central bank policies, bailouts, fiscal deficits, and excessive borrowings have culminated in today’s rather awkward financial position.
Yet, the culmination of these awkward moments, lies in the fact that central banks and their craft have finally hit
rock bottom. And in the confusing world of bonds, interest rates, debt
and currencies – hitting rock bottom is really the opposite of what you’d expect.
It is bad.
The reason it is bad, is because
when interest rates are falling – the bond market zooms higher and higher.
Reality is also true. When
interest rates begin to zoom higher – the bond market drops like a stone. And
because this stone is multiple times bigger than the
stock market, the ripples turn into waves that will gush investors out of the bond market seeking safety. And contrary to every manager in Group 2 – this safety zone will be the USD, gold and yes, the stock
market.
So, to answer the classic question from The Clash about the stock market – absolutely stay.
The ride will be a bit rough, but it will be nothing
compared to what is about to happen in the bond market.
The Bond Market: It’s coming.
And when it hits, it is going to
be a doozy. The global bond market is on the verge of doing something
never before seen in our lifetime. Of course, the trick to seeing and
understanding this certain risk is simply acknowledging the length of your
current investment experience. Just because something
hasn’t occurred over the last 35 years, doesn’t mean it can never happen.
The near-complete lack of
acceptance of a bond bubble is partly due in course to the fact that over the
past 35 years, the investing world has only ever seen crises in the stock
market. To understand why investors see it this way, see Chart 1 below.
The chart shows the history of
long-term interest rates in the United States from 1962 to 2017. Note
how from 1962 to 1982, long-term interest rates increased from 3% all the way
up to 16%. During this 20 year period of rising
long-term rates, financial markets were a disaster. No one made money. Stock
investors lost money. And bond investors lost a lot of money.
If I go, there will be trouble
Life was so bad – especially for bond investors, that by the time 1982 rolled around you couldn’t give a bond
away. If you were an investor or working in the investment industry at
the time – you were painfully aware of the bond market and you were schooled to
never, ever buy a bond again.
Of course, 1982 was actually the
best time ever to buy a bond. With long-term rates dropping like a stone
over the next 35 years, bond investors and bond
managers became known as the smartest people in the room. But, that was then and this is now.
Interest rates are secular. And with
interest rates today already hitting the theoretical 0% level – they have
started to rise. And when long-term rates begin to rise, (unlike
short-term rates) it happens in a snapping, violent
manner. Neither of which is good for bond investors.
Of course, there’s another
important point to consider, the rise in long-rates
from 1962 to 1982 occurred when there wasn’t a debt crisis in the developed
world.
And since 99% of the industry has only worked since 1982
to today, then 99% of the industry has never
experienced, lived or even dreamt of a crisis in the bond market.
This of course is the primary
reason why all the negative stories about the stock market are alive and well
played out in the media – they simply don’t know any better. And this is wrong. Very wrong. After all, the bond bubble dwarfs the tech bubble and the
housing bubble.
Think about it.
And if I stay it will be double
To grasp why the bond market is
on the verge of crisis, and why trillions of Dollars, Euros, Yen and Pounds are
about to panic and run away, we ask you to understand how free-markets really
work.
For starters, all free markets have two sides competing
and participating.
There are natural buyers and there are natural sellers. The point at which they meet in the middle is the
selling/purchase price and the entire process is called price discovery.
Price discovery is a
wonderful thing. It always results in the determination of a true price for a
product or service. However, a big problem arises when there is an imbalance between the buyers and sellers, and when one of the
sides isn’t a natural buyer or seller.
This is what has happened in the bond market. And this is why bond prices (or yields) have become so
distorted; the true price of a bond hasn’t existed now for almost 9 years.
When the 2008-09 housing crisis crippled the world, central
banks decided they would help the world recover by providing stimulus.
The stimulus to be provided was in the form of
Quantitative Easing, or money printing.
What happened next has
long been forgotten by the majority of the market, and is the prime reason why so
few today understand and appreciate the magnitude of the
stress that has been created in the bond market.
When the central banks printed
money, they actually used this printed money to buy government bonds. And with central banks suddenly
becoming “buyers” of government bonds, the
number of “buyers” in the bond market had instantly increased.
And with the number of buyers
increasing, the price of bonds increased – which caused long-term interest
rates to come down. [note that in the bond world, when prices go up,
interest rates go down, and vice-versa].
In effect, the global adoption of Quantitative
Easing/Money Printing meant the entire price discovery
process would become suspended.
And with a suspended price discovery process, the real or true price for bonds, has not been seen for 9
years. The big point here, and it’s especially big in Europe – the elimination of the price discovery process has resulted
in all countries paying lower rates of interest when they borrow.
So come on and let me know Which, to the average person may seem good. After all, paying lower rates of interest has to be a good
thing.
But it isn’t.
Instead, the manipulation
of the global yield curve has created an interest rate
environment that has become so stretched, shredded and tattered – that even the
slightest hint of an end to this financial nirvana is enough to send investors
off the deep end.
Case in point - over the last
year, we’ve seen the most significant market reaction in the history of the
bond world, not once but twice. Yet, the talking heads, the big banks
and their mutual fund commentaries, and the stock market focused world have
completely missed it.
Almost a year ago in November
immediately after the American Election, over a span of 54 hours – the bond
market blew up.
To put things into perspective, Chart 2 shows what
happened during those fateful days. Ignoring the why’s, the how’s and the who’s
– the fact remains that this tiny, miniscule increase in
long-term interest rates caused the bond market to vomit over itself.
Yes, a +0.7% increase in the US
10-Year Treasury market yield created chaos, havoc and over $1.7 Trillion in
losses around the world.
This +0.7% increase in long-term
rates caused this bond behemoth to go down for an 8-count. Folks – this
is not reassuring.
…
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