IceCap November 2016 Special Portfolio Update – American ElectionVW Staff
On November 8, 2016 Donald Trump was elected as the next President of the United States. His election is a negative shock to many people from all over the world, and a major surprise throughout the main stream media.
Just as we placed a high probability on the recent Brexit referendum, we also placed a high probability of a Trump victory.
It’s important to understand that our expectation for Brexit and a Trump Presidency is not based upon any personal political, or economic beliefs. Instead, both Brexit and now Trump simply reaffirms our global view remains on track and the direction within and across all financial markets will have significant implications.
Our Global Outlook is focused on a convergence of political, economic, social and monetary factors reaching extreme limits. And as these extreme limits reach their pinnacle, tremendous change occurs.
Politically, the majority of voters across the Western World have become completely disenchanted by the political establishment. This majority is not participating in the growth of wealth and assets. While the fortunes of this group trend lower, they see the opposite is occurring for the financial and political elite.
Just as the Brexit Remain campaign was seen as a continuation of a rotten system, so too was the Clinton campaign. Just to clarify, our expectation of Trump winning is not based upon our own personal views.
The Trump win is actually the second significant political event (Brexit was the first). Next, we have a December referendum in Italy, followed by elections in France and Germany next summer. For all three events, we place a very high probability of the anti-establishment parties winning.
In other words, the political snowball has begun to roll and it will only get bigger.
We next combine these political factors, with economic, monetary and social factors. We have previously written about each and we are available to discuss them in person. For now, we share that nothing has occurred to cause us to change our view. Significant changes continue to shift across these factors, and they will have significant effects across financial markets.
Although these shifts have occurred before, they have not occurred simultaneously during our lifetimes.
To reiterate, the Trump win does not change our market view and expectations. The IceCap view remains as follows:
- The political establishment across the Western World has reached its limit, and major changes should be expected.
- The global economy remains in a downtrend, and actions by central bankers and governments cannot alter the direction.
- In response to stresses directed at the political establishments, and the lack of a recovery – central banks have adopted extreme monetary policies including 0% and NEGATIVE% interest rates, and money printing. Neither of which are stimulating global economies.
- As a result of the above factors, fissures are cracking across societies which is creating tension amongst different socio-economic groups.
- The Western World has reached the tip of a massive debt bubble, and when it breaks it will create incredible investment opportunities.
- As the bond bubble breaks, investors all over the world will shift their assets away from risky markets and towards safer markets.
Market shifts occur all the time. Yet, the difference with this upcoming shift is that over the last 80 years, every other major risk was rooted within the stock market or housing market. And when it occurred, money always ran away from stocks and towards safety in the government bond market.
Today’s crisis is the exact opposite and investors should therefore expect the opposite market reaction.
To conclude, we expect the following:
- US Dollar to surge relative to all currencies. Euro currency is the most risky – we fully expect the Euro to not exist in its current structure and we strongly recommend everyone reduce and avoid Euro and other EU currencies as much as possible.
- Stock markets (except for bank and insurance stocks) will do very well.
- Long-term interest rates will sling shot higher and this will create severe stress across bond markets with many producing permanent losses. High Yield Bonds, Emerging Market Bonds, and bonds with long-term maturities are very vulnerable.
- As long-term interest rates spike higher, bank and insurance stocks will do very poorly.
As a result, our portfolios continue to shift towards higher allocations in equities and US Dollars, and minimal exposure to bonds and interest rate sensitive equities.
We are always available to discuss these issues in more detail.
Keith Dicker, CFA
President & Chief Investment Officer
IceCap Asset Management Limited