IceCap Global outlook for the month of June 2019 , titled, “Threading the Needle.”
Q1 hedge fund letters, conference, scoops etc
For many, the investment world can be a confusing place. Banks, mutual finds, stocks, bonds, currencies, insurance, inflation, taxes, economies – it’s no wonder the majority have glossed eyes.
And sitting on top of this confusion pie are central banks.
Each country has its own central bank which is responsible for setting overnight interest rates and the amount of money in that country’s financial system.
Yet, there is one central bank that is the most important, sits on top of the world, and all of its actions impact not only their local country, but also every other country in the world.
This central bank is the US Federal Reserve.
In this latest IceCap Global Outlook we share how actions by the US Federal Reserve are always reactive to a crisis which, ironically, it helped create in the first place.
Today’s central banks are once again, trying to thread the financial needle, and rescue us from the crisis that was born from the depths of the 2008-09 Great Financial Crisis.
The crisis is happening, yet there is good news – the crisis is creating opportunities to not only preserve your hard earned savings, but to capitalize too.
It’s easy!
In the world of knitting, stitching and crocheting; threading the needle is easy. Line-up your thread, needle and a good cup of tea and you’re all set.
In most other worlds – it can be tricky.
If executed perfectly – threading the needle can be rewarding, exhilarating and thrilling all at the same time.
If executed imperfectly – it can end in disaster.
In American football, 49ers quarterback Nick Mullens expertly threaded the football between 4 different Raiders players, landing it perfectly in the hands of his teammate George Kittle, who then galloped 60 yards for a touch down.
That was thrilling.
Sporting a human-wingsuit, Jeff Corlis dove off a 12,000 foot mountain and expertly threaded the needle known as “The Crack” in the Swiss Alps.
That was exhilarating.
Unknown to many, threading the needle is also being attempted in the high stakes game of global finance.
Leaders at the world’s central banks are all trying to steer their domestic economies through a small opening while avoiding the pitfalls created by a lifetime of excessive borrowing and ill-fated policy responses.
In the minds of these financial maestros, they have the tools, the doctorate degrees and the blessings of governments to thread the financial needle.
In an effort to resolve any financial crisis, the world’s central banks have always tried to thread the needle by changing interest rates and/or changing the amount of money in the system.
The central banks and their supporters all claim that only through their actions, was a serious crisis resolved allowing everyone to live happily thereafter.
What the central banks and their supporters do not tell you, is that the actions to save one crisis, have always sowed the seeds for the next crisis.
In the minds of investors with common sense and objectivity – we expect the exact same outcomes that have occurred every other time central banks tried to thread the needle.
After all, expecting anything else would be the classic definition of insanity.
The needle is a sharp tool. Yet, if the user is not careful – a simple prick can cause an awful lot of damage.
Send in the clowns
Unfortunately for most investors, the majority of the investment industry either refuse, are unable or simply not allowed to share with investors how all financial events are linked together.
And what is even more alarming, the industry is once again shepherding investors into the very markets that are about to experience the after-effects of central banks once again trying to thread the needle.
The Needle
The foundation necessary to truly understand the movements of global capital markets is knowing the USD is the world’s reserve currency. And by default, financial actions by the US Federal Reserve affect the entire world.
This of course is quite different from every other central bank in the world. The actions of central banks in every other country primarily affect their local, domestic economy only.
Actions by the Bank of England are never talked about by the Japanese.
Whenever the Reserve Bank of Australia makes a significant change, it won’t even cause a yawn in Brazil.
The Bank of Canada is an unknown entity to the Americans.
Meanwhile, it is true that the European Central Bank (ECB) is more widely known around the world. Yet, it is also true this fame has been achieved due to clownish-type behavior from the supposedly sharpest financial minds in Europe – not due to their actions causing ripples in international economies.
The US Federal Reserve however is a different story. And despite anyone’s subjective feelings towards America’s current debt, fiscal, political, or social states; understanding and respecting the power of the Federal Reserve and the USD is paramount to your financial success and security.
To better appreciate how and why the US Federal Reserve is the Financial Needle of the world, one needs to simply observe the actions and reactions in the recent past.
Let’s first start in 1996 Asia, and what was sold as the Asian Miracle.
The economic hitman
In the mid-90s, investors everywhere were screaming for opportunities to invest in the roaring tigers.
I started my career during this time, and I was instantly attracted to the Asian Growth Mutual Fund which just finished the year up +86%.
Asking my mentor at the time whether clients should still invest in this fund, the fella responded “even if the fund does ¼ of what it did last year, clients will still make 20%+.”
Three years later, this happened:
This was my first real lick of a financial crisis and it didn’t taste good.
It turns out, the Asian Miracle was no miracle at all. Instead it was simply the powerful concoction of exponential domestic borrowing, combined with a flood of foreign investment.
This combination can only cause markets to go in one direction – and that’s up.
Of course, when capital starts to leave, the opposite is also true. And this is where the US Federal Reserve came into play.
In early 1997, the US Federal Reserve increased overnight interest rates by 0.25%. Now on the surface, this tiny increase may not seem like the tiger killer – but it was.
In fact, it was just enough to frighten stock markets. And just enough to get the first wave of foreign investors to begin withdrawing their capital from the by now – very debt heavy Asian region. And just enough for them to reallocate their capital to America.
It was this first outflow of foreign capital that really loosened up the olives in the jar. And as you know, once that first olive moves, the rest tumble out very quickly.
At the time, the US Federal Reserve was trying to somewhat reduce the extreme level of exuberance in US stock markets.
What it actually managed to reduce was the entire Asian currency and bond markets.
See the full PDF here.
