Collision: Negative Rates, Deteriorating Growth And Soaring Debt by IceCap Asset Management
The trouble with tribbles
Hitting warp 9.8, the USS Enterprise NCC-1701 was screaming through space. It’s goal – hitting a worm hole just big enough to knock it out of its latest dangerous predicament and into a far safer World.
“Captain! I’m giving it all she’s got!” shouted Scotty.
Calmly, yet firmly, Kirk responded “Spock, will our collision be powerful enough to break us through the time-space continuum?”
Yarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More
Spock pondered for just a moment, and then with one eye brow raised responded “Captain, there’s only been one other collision known to mankind that has generated enough force to produce our desired outcome.”
Captain Kirk: “what collision was that?”
Spock: “The 2015 Global Bond Bubble.”
Newsflash # 1: A few short weeks ago, Canada’s self-proclaimed biggest and best bank told clients: “much of the negative news from Europe is firmly rooted in the past” and that there is “more potential for upside for markets.”
Result: European Stocks subsequently declined -13.5%
Newsflash # 2: America’s biggest and best bank bragged: “global developed market equities should remain attractive”.
Result: Global Stocks subsequently declined -11.3%
Newsflash # 3: Britain’s biggest and best bank was all squiffy over markets, proclaiming: “Economic growth is gaining momentum” and “overall, we continue to prefer risk assets such as equities, high yield credit and EM debt.”
Result: Global stocks subsequently declined -11.3%, High Yield Bonds subsequently declined -4.7%, and Emerging Market Debt subsequently declined -3.2%
By now, most people are once again painfully aware that stocks, high yield bonds and emerging market bonds can actually go down as well as up. For stock investors, it has been a brutal 5 weeks with most markets dropping -10% or more.
As a reminder, a -10% decline needs a +11.1% rebound to get back to where you started. Or from a more serious perspective, a -50% decline needs a +100% rebound to get back to where you started.
The reason we share these very simple and obvious mathematical facts is due to the following intelligent investment insight: avoiding and limiting downside losses is a crucial aspect of investment management.
Don’t worry about it
Yet, as you can see from the market wisdom from the biggest Canadian, American and British banks – they completely ignore this very simple rule of investing. Instead, millions of investors are constantly bombarded with the seemingly innocuous market wisdoms:
1) Buy the dip
2) Invest for the long term
3) Know your time horizon
4) Invest regularly
And in our opinion, this is a real shame – a very, real shame. There certainly are times when these are words of wisdom. But, there are also times when they are not.
By now, clients, non-clients, and peers are all familiar with our big view of the World. Our experience, perspective and research continues to conclude that global financial markets, the global economy and government fiscal balances are all converging to make everyone’s investment experience very different than that painted by the very big banks.
Yet, the big banks continue to shamefully respond as if all is well. Considering the fact that central banks have kept interest rates at 0% for 7 years and the global economy continues to decline is the clearest of clear messages that the financial World isn’t quite right.
And if that isn’t clear enough, just know that now many countries have begun to implement NEGATIVE interest rates to help stimulate their economies.
Yet, we rarely read or hear any of these facts from the big banks. This of course can mean several things – none of which are complimentary:
1 – the big banks feel the average investor isn’t intelligent enough to understand what is happening
2 – the big banks cannot articulate the true state of the money World to their millions of clients
3 – the big banks truly believe all is well, and that the World will always see a few bumps every now and then.
As we all know, investment managers will ALWAYS make a few wrong decisions – it’s inevitable. Managing other people’s wealth can be a stressful responsibility. The good times are awesome. The bad times, not so much.
However, if anyone has any aspirations to be an investment manager – this is THE most perfect time to realize your dream.
Let us explain why.
As of today, 100,000s of investment professionals around the World are following the age-old adage of buy and hold, buy the dip, stocks always outperform bonds, and never invest in currencies.
Just steer the course and you’ll be fine, just fine.
Razzle dazzel 1-2-3
Unless of course, the ship you are in doesn’t have a rudder, a mast, a jib, a boom, a tiller or a keel. In truth, these ships are not really investment managers at all, instead they are asset gatherers.
The difference being is that real investment managers are very focused on making investment decisions to preserve your capital during volatile times, while growing your capital during the good times.
Asset gatherers on the other hand, are very focused on winning new clients and receiving new money to manage – after all, investment management IS a business.
At these firms, the focus is on marketing and sales. They razzle and dazzle you with very nice commercials, brochures and presentations, as well as a splendid array of investment options.
Yet, if you open your eyes and ears just enough, you’ll notice the difference and it mainly starts with investing for the long-term, buy and hold, and invest regularly – sadly, it ends the same way as well.
In other words – investors hear the same old story, time and time again. This would be perfectly acceptable IF we lived in a linear World.
The problem of course is that we DO NOT live in a linear World.
While it is human nature to think and expect along linear lines, our World just doesn’t work that way. Instead, everything moves in cycles, some short and shallow, while other cycles are long and deep.
What we are experiencing today is the likely turning point in a very long cycle of borrowing, borrowing and then borrowing some more.
The capacity to borrow has reached the limit for many, yet our governments and central banks are desperate to keep the party going. Yes, despite foggy heads, tired legs and full bellies; governments and central banks continue to pour more drinks, dish out more food, all while playing even louder music.
In some ways, the real question to ask your mutual fund sales person is whether the party has ended or is it just getting started?
The real difference between the investment managers and asset gatherers is in their ability to truly understand market conditions, identify the key driving points, reposition your strategies and then to easily communicate the entire process.
Let’s be honest here – the calm sailing and the good times ended in March 2000. That was the end of the most beautiful simultaneous bull market in both stocks and bonds ever known to mankind.
For 18 stunning years prior to March 2000, financial markets everywhere, charmed everyone into believing that life as an investment manager was as difficult as a sail into a gentle, onshore breeze.
See full PDF below.