IceCap Global Outlook October 2018

IceCap Global Outlook October 2018 – “The Devil’s Slide”Fundamentally Nothing Has Changed, But…

South of San Francisco lies a small stretch of the famous California Highway 1 notoriously known by locals as The Devil’s Slide.

Q3 hedge fund letters, conference, scoops etc

The stunning view along this road is supported by a weak and steep foundation of loose rock, and porous soil that has been increasingly eroding away over the years sweeping cars, pavement and lives into the sea below.

Naturally, rock slides from the erosion reached a point where the road has been deemed unsafe and closed. In the end, the Devil in the details was a weak foundation supported by illogical engineering.

Today, the Financial Devil has watched patiently, as the world’s central banks and political leaders built a financial debt and interest rate structure on a foundation consisting of theories, acronyms and worst of all – hope.

Since 1982, the financial world has enjoyed a thrilling ride – one zoomed around the world by 36 years of bailouts and declining long-term interest rates.

In this issue of the IceCap Global Outlook we help you see how a pattern of minor financial stresses will culminate into a major financial stress.

And more importantly, how to identify the opportunities that will be created as the majority of the industry continues to ignore the Financial Devil.

IceCap Global Outlook October 2018

It’s a Ride

Talk about a slippery slope.

California’s famous Highway 1 infamously squirrels its way up, down, and around the steep coast all to the delight of motorists from afar.

It’s a thrilling ride until it is abruptly stopped dead in its tracks by none other than the Devil himself.

Despite being only one mile in length, a picturesque stretch known as the Devil’s Slide, was supported by a foundation of quick draining, 50% gradient slopes which frequently did what all shoddy foundations
eventually do – break away.

Yes, it was risky – but the risk was assumed away by studies, and models that would eventually prove to be not only wrong, but very wrong.

The first tragic landslide occurred in 1942. The damage was patchedup and the thrill ride continued.

Additional landslides rocked the road in 1951, 1952, 1977, 1982, 1983, 1995, and then the final straw that broke this back – 2006.

Finally, after numerous deaths, countless rescues, and excessive incalculable costs – the Devil’s Slide was closed and replaced with a tunnel through the (ironically) very same hillside. Which of course, makes the Devil grin evenmore.

The experts at the time should have known better.

Physics and mathematics will always confirm that everything built upon a shoddy, weak, and inconsistent foundation eventually fails. Failure is a certainty. It is illogical to expect anything else.

In the world today, the financial Devil is alive, well and grinning once again.

The Devil has watched patiently, as the world’s central banks and political leaders built a financial debt and interest rate structure on a foundation consisting of theories, acronyms and worst of all – hope.

Since 1982, the financial world has enjoyed a thrilling ride – one zoomed around the world by 36 years of bailouts and declining long-term interest rates.

Over these years, the financial experts should have known better.

These experts should have known, the 1997 bailout of the LTCM Hedge Fund would create an unstable foundation eventually resulting in the 2000 Technology Bubble.

When the same experts were confronted with the 2000 Technology Bubble, they should have known their bailouts would create even more stress on the world’s financial foundation, and eventually producing the 2008 Global Financial Crisis.

Ignore or Respect

And when these same experts were smacked in the head with the 2008 Global Financial Crisis, they should have finally learned their lesson and expected that another, larger land slide would soon emerge yet again.

But they haven’t.

Predictably, just as the Devil’s Slide deceived and disparaged the day’s engineering experts, today’s financial experts have also fallen prey.

Fortunately for the minority, the majority of consultants, big banks and media cannot comprehend the instability created by years of monetary mismanagement.

Losses from this mistake will overwhelm those from the Global Credit Crisis, dwarf those from the Tech Bubble and swamp those from the LTCM Crises.

While ignoring the financial Devil will create losses for the majority; respecting the financial Devil will be enormously profitable for the minority.

Cracks in the global financial foundation are occurring all around us. Financial landslides have begun across different currencies, bond and equity markets.

One thing is clear; the financial Devil is near – ignore him at your peril, or respect him and enjoy the ride.

Stock Market

It was swift. It was brutal.

As of writing, broad based equity markets around the world declined approximately ‐5%.

Now, a ‐5% market decline should not be unexpected – it happens.

But when it happens over 2 days, and it happens at a time when most investors are on edge to begin with – fear and contagion drives anxiety levels to levels that would normally not be associated with a ‐ 5% decline.

IceCap is asset class agnostic – meaning we are neither perpetual lovers or haters of any investment market, or asset class.

Therefore, while most managers are singing soothing, don’t worry about the market songs – IceCap takes a pragmatic approach.

Our primary model for guiding us through allocations to stock markets has turned negative.

This means we are reducing our allocations to equities.

During the ‐10% market correction in January/February 2018, our model did not turn negative and kept us invested while others were selling.

Stay Objective

The current sell‐off however, has produced a different result.

To be completely fair and transparent – there is a 100% probability of us changing our equity allocation again when our main model changes.

This could happen again next week, or maybe not until next year.

The point we make is that IceCap will never dig our heels in and refuse to understand and respect markets when they break key support levels.

As for the reason why markets corrected so swiftly?

Media and other talking heads are trying to identify fundamental reasons for the market correction.

This is a mistake.

Fundamentally, nothing has changed from one week to the next.

Instead, our view is that stresses across several fixed income and currency markets finally resulted in several (and then many) managers going offside and having to cover leveraged, margin positons.

Then, once the selling starts – it really starts.

As investors, remove your subjectivity and always stay objective.

See the full slides below.

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