Stock Markets – Journey To The Center Of The Earth by IceCap Asset Management
Stock markets – Running to safety
And just like that – the three explorers were in a tough spot. Ascending through the collapsed cave would most certainly trigger additional falling rocks, and if that didn’t end their day, the bone rattling, teeth crackling electrical storm outside would.
The only way to avoid certain danger was to journey further down – to the center of the earth. Yes on its own, the center of the earth did look bad – how could it not, but compared to the alternative it had to be better.
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And it was better, much better. Arriving at the center of the earth provided safety, comfort and relief.
This was the reward for avoiding the dangers above.
* * *
English mountaineer Joe Simpson, also found himself with a difficult decision. After summiting the unclimbed west face of the Siula Grande, the climber found himself trapped, hurt and alone in an unclimbable crevasse. Attempting to climb out of the crevasse was both physically impossible and a near certain cause of death.
To save himself, Joe did the unthinkable – he ventured further down into the crevasse towards the center of the earth. He too made the decision to avoid certain danger and it too paid off. Upon reaching the core, Joe found a way out to sunshine, warmth and friends.
This was his reward for avoiding the dangers above.
* * *
Today, our financial world is fraught with trouble. And if you step back just far enough, you’ll see that just as explorers and adventures avoid certain trouble, so too will foreign capital.
And when foreign capital sees trouble everywhere, it too runs for safety towards the center of the earth – which to the chagrin of many, is the United States of America and the US Dollar.
Of course, there are many skeptics about the USA being the financial center of the earth. After all, the Americans also have their financial backs up against the wall.
However, what these skeptics are missing is the fact that the rest of the world is in worse shape, and the USD is the only market big enough on the entire planet to absorb these types of capital movements.
The Roller Coaster
Well, that escalated quickly.
Since our last IceCap Global Market Outlook, it seems like every market has boarded a hand basket on its way to that very hot and unpleasant place.
Another word for…
We’ve been told that no investment was safe:
- American stocks plummeted -14% – Italian stocks crashed -22%
- Chinese stocks collapsed -28
- Canadian stocks plunged -13%
- High Yield bonds dumped -7%
- Emerging Market bonds stooped -5%
- Oil tumbled -37%
Tough numbers and tough synonyms indeed.
Yet, claiming no one escaped is not entirely true at all. In fact, many different parts of the market did escape the long, overdue correction.
The USD increased against virtually all currencies. Currencies from Canada, Australia, Mexico, Russia, and South Africa were especially hit hard.
Should investors from these countries be alarmed? Yes and no.
Yes, in that the sharp currency moves means these local economies are almost certainly headed for recession (if they are already not there).
No, in that investment portfolios could be protected by holding USD. If they held USD, then these local investors likely enjoyed positive returns – but only if they invested in US Dollars.
IceCap has written, spoken and tweeted (@IceCapGlobal) many times about the importance of getting the currency call correct AND positioning it properly in your portfolio.
Of course, it’s funny how seemingly everyone in the investment business has perfect hindsight.
Over the last 2 years, IceCap has been on record with our very strong expectation for a surging US Dollar. We’ve said no currency will be safe, and that the best way to play this would be to hold your US Dollar exposure OUTSIDE of your stock holdings.
Our reason for this is that holding US stocks exposes you to two completely different market risks:
- Currency risk
- Stock Market risk
And based upon what has happened in the stock market over the last few months, the reason should be perfectly clear.
Yet, every time over the last two years when IceCap very clearly stated our expectation for the USD to rise, the reactions usually consisted of disbelief and denial.
Today however, investors and advisors everywhere are all too familiar with the strong USD story, with many claiming that they saw this coming, or that their client portfolios were well protected.
Not your fault
Yet, with year-end investment statements hitting kitchen tables many investors are feeling their jaws hitting the table.
It turns out, the stock market is a lousy place to hedge currencies.
If you’ve been hurt by the sharp market movements over the last few months, there’s no need to fret – there will be plenty more opportunities to climb out of trouble, or towards safety.
And it all starts with finally recognising and admitting that yes, the financial, economic, political and social world is changing very quickly. Once you embrace this perspective, you’ll at least have the opportunity to avoid the near-certain risk zones, and quite possibly finding safety at the center of the earth.
Stock markets – Bullish or Bearish?
We find it interesting how people view stock markets. For starters, most people are inherently bullish, or optimistic.
After all, positive thinking is inspirational. It’s contagious. It’s enriching. It’s fun!
On the other hand, negative thinking can only drag you in one direction – down. We’re told to shed negative thinkers out of our lives. Negative thinking is wrong, it brings everyone down.
On many levels, this makes sense – except in stock markets.
Unfortunately, our investment world isn’t always fun. Yes, sometimes our world is a drag and recognizing when this is happening, is the key to investment management.
To demonstrate the truth behind this fact just recognize that if you lose 50% of your investment, you need to make 100% to get back to where you started. Obviously, avoiding these sharp downturns is desired by every investor.
Of course, this inherent bullishness is really not your fault. After all, the single biggest and best bull market of all time started in 1982 and dazzled everyone until the year 2000.
And with the stock market zooming +1099% higher during these golden years, one cannot really be faulted for believing that stocks always shoot to the moon – the trick is to simply hold tight, never sell, and most important of all, ALWAYS remain positive.
This positive or bullish thinking also dominated the bond market. Just as the stock market was soaring higher, so too was the bond market scoring a +592% return during the same time.
This settled it – positive and bullish thinking was a pretty awesome way to make money.
Or was it?
Interestingly, if we were all born 20 years earlier and told people to be bullish and optimistic about the stock market, you would have received a whack in the head.
See full PDF below.