IceCap July 2018 Global Outlook – “Eruption”VW Staff
Similar to volcanic lava flows, financial contagions start slowly at first and then end by destroying many things in its path.
In between the beginning and the ending, is a baffling experience that can only be understood from afar.
Once the eruption begins, people everywhere want to look, see and feel this infrequent experience.
Yet by the end, few actually recognise how the crisis spreads before subtly engulfing everything in its path and ending in a full-on, blow-out contagion.
The financial lava flow has started.
Emerging market bonds and currencies are already experiencing the scorching effect of a capital outflows.
Next up will be the European experience.
The culmination of the end of ECB money printing, the end of Angela Merkel's grip on power, and the end of strict German austerity policies will see the financial lava flow first through Italy, then Spain and then before you realise it - France too.
From there, the contagion spreads far and wide. Few bond markets will be spared and few interest rate sensitive equities will be safe.
All investors, including pension funds, bank owned mutual funds and individual investors have a tremendous opportunity - anticipate and proactively embrace the financial lava, or do nothing and claim ignorance.
We know which action we are taking.
Well, it has happened. IceCap made a significant strategy change to our portfolios – we INCREASED our allocation to equities.
Those that know us well, are fully aware of our cautious, meticulous, and OBJECTIVE approach to managing clients’ hard earned wealth.
Those that are just getting to know us, will come to understand, embrace and look forward to hearing, and reading our rationale for our long-term view, and how it reconciles with short-term market fluctuations.
Whereas descriptions and announcements of strategy changes will be included in our IceCap Global Outlook, clients benefit from these changes immediately in their portfolios.
When we make a strategy change it is always based upon objective decisions driven by data dependent analysis – we check subjectivity at the door.
One thing we are very proud of here at IceCap is that we have unequivocally demonstrated an ability to change our mind, change our view and most importantly, change our portfolio strategies.
In other words – we do not stick our heads in the sand. We never dig in our heels, and it would be absolutely shocking if we ever refused to entertain the thought that maybe our strategy, outlook and perspective is wrong.
Back in 2011, our portfolios held a 20% allocation to gold bullion. The reasons for holding gold were astonishingly clear, and when prices tipped $2000/oz, these reasons seemed even more clear.
For those that remember, gold hit the $2000 ceiling and started a sharp, excruciating and painful decline to $1280 levels.
Recognizing trend and technical support levels were broken we quickly sold all of our positions with the last sale at $1648.
Even though the fundamental reasons for holding gold had not changed – the technical/market reasons for holding gold had changed.
We share this with you to demonstrate that although all investment managers have long-term views on various markets, many do not have the ability, or the inclination to re-wire their brains and produce independent thoughts to enact significant change.
Unfortunately, “same-old-same-old” actually is a very popular
investment philosophy. But not at IceCap.
We haven’t been back into gold since. Yet we have a very clear vision as to how the gold re-entry path will look, and until the time when markets guide us in that direction, we’ll sit on the sidelines.
During the same time frame (2011-2012) our portfolios were positioned to protect client capital from the potential of a sharp decline in equity markets.
Again, the fundamental reasons for expecting this event to occur were quite strong – and today, many bearish managers continue to shout and scream the same fundamental reasons as to why stocks should collapse.
But they haven’t.
Back around that time, our thinking and perspective changed to better understand not why stock markets were avoiding collapse, but instead to understanding why they were going higher.
Now, there is a subtle difference in what we just said. And our approach to solving the riddle was to change our perspective.
Instead of beginning with a thesis that all bad things in the world
eventually create a crisis, which is then always reflected in a stock market crash – we took a different perspective.
And this perspective led us to understand two crucially important things:
- the risks in the world today are not in equity markets – instead they are in sovereign debt markets;
- the reason few have correctly diagnosed this disease, is due to no one in our (limited) lifetime ever having the displeasure of experiencing a crisis in government bond
Put another way, all the bads that we experienced over the past 50 years have always been a result of excess largess from companies and individuals.
And every single time, governments and central banks have come running to the rescue of financial markets.
Which have culminated in the rather odd and peculiar situation the world finds itself in today.
One turned upside down by zero and negative interest rates. One pushed offside's by preventing bad banks from going under. And one dominated by 180 degree turns in the political arenas.
From our perspective, it is crystal clear that the majority of investors, are completely uneducated towards the current global financial environment.
In some ways, you can’t blame them. After all, for many, their informational world is completely monopolized by domineering media, big banks, and perhaps, most harmful of all – social values which force and expect you to behave, eat, sleep and breath “correctly.”
And this brings us to today and our latest decision to increase equities.
We’ve been very transparent and very consistent with our view that we expect the US Dollar and equities to go higher due primarily to a growing crisis in bond markets.
We’ve also been very transparent and very consistent with our view that corrections will occur and unless serious technical support has been broken, we’ll continue with our holdings and strategies.
As an investor, you are well aware that equity markets declined sharply in January 2018 and have largely remained range-bound ever since.
In our February 2018 IceCap Global Outlook we wrote that none of our models were indicating a serious downturn was unfolding and it was very likely that the bottom has been reached and if it was confirmed by our research – we would add to our equity positions.
Well, over the last few weeks our models did in fact turn positive which provided us with a green light to do exactly as we indicated – buy more stocks.
Article by IceCap Asset Management
See the full PDF below.