Financial Markets: Chaos Or Harmony – July 2016 Outlook by IceCap Asset Management
Don’t Look Back in Anger
ENGLAND (Knebworth Park, 1996) – Owning the front of the stage, Liam Gallagher closed his eyes and liked what he saw. Thousands of screaming, pushing and kicking fans positioning themselves for the what would be THE concert of the year.
For Liam, it was total chaos and he loved it.
Twenty feet away, Noel Gallagher also closed his eyes but what he saw wasn’t chaotic at all. Instead of small pockets of rebellious concert goers, Noel saw a sea of 250,000 people strong. They ebbed and flowed and sang together – all eyes and hearts were focused on the stage gifting Oasis the energy to make THE concert of the year.
For Noel, it was total harmony and he loved it.
The concert turned into an instant classic in the music world. Both Liam and Noel, strummed together one of the best evenings of 90s rock ever to be recorded.
As for the evening being chaotic or harmonious – it really depended upon your perspective.
Today, the Gallagher brothers no longer speak to each other, let alone play music together.
Perhaps Liam was right after all – the entire Oasis experience was complete chaos. Or maybe, Noel was correct – when all of the chaos was combined, the ending was both harmonious and predictable.
As music imitates life, today many people are trying to make sense of the chaos swamping the world.
Yet, if one looked at the world from a slightly different perspective, perhaps you too will see a world of harmony and one with a certain outcome.
Dynamic thinking has left the room
We tell the story how 1.5 years ago we were approached to buy a European bank fund for our clients. We were told the investment managers only invested in banks and were therefore experts in identifying the best bank stocks to own.
The persuasion continued – European banks were incredibly cheap from a Price/Book, Dividend Yield, and ROE perspective. Better still, not only were these banks rock solid, but Europe had completely recovered from its debt crisis.
We responded as follows: “this fund is a disaster in the making. European banks are filled to the brim with bad debt, their regulatory capital will go up in smoke and Europe wasn’t even close to recovering from their crisis. To be clear– there are no good reasons to hold European banks.”
Fast forward to today and the fund is now down almost 50%.
Slip inside the eye of your mind
We share this story partly because it shows our approach to viewing markets but mostly to demonstrate that the investment management industry creates products to sell to the unsuspecting public. There is no dynamic thinking whatsoever……caveat emptor.
In fact, we are often shocked with the industry’s very clear lack of dynamic thinking. We hear economists from extremely well known global financial services firms talk nonchalantly about negative interest rates believing it will actually help with the recovery.
Worse still, We see countless new products and funds created that are completely focused on long term government debt.
Even worse (yes, it’s possible), others continue to proclaim that Canadian banks are the safest stock in the world.
Just so you know – dynamic thinking clearly shows that long-term government bonds and bank stocks will become one of the worst investments in your lifetime.
The reason we share this with you is to demonstrate that the lack of forward thinking is creating incredible opportunities. Those that can see it will benefit significantly. Everyone else will be stuck with losses and songs about the good old days.
For those that are firmly attached to their advisor and an investment rear-view mirror, we kindly suggest you buckle up, strap on your helmet and substitute your fuzzy dice for a horseshoe – cause you’ll need it.
For everyone else, we proclaim you to be a dynamic thinker and we invite you to follow us and very soon you too will see that yes, the world certainly is full of a lot of chaos. Yet, if you adjust your sight and focus just a touch, you’ll become clairvoyant and see how all of the chaos is actually creating a harmonious picture.
Everything in the world is connected – political, social, economic, fiscal, monetary and financial markets are all intricately linked. Yet, what’s extremely interesting today is that for the first time in our lifetime, they are all converging toward extreme levels simultaneously.
And once you see it, be prepared for a champagne supernova smile to wrap around your face and all your troubles to be half the world away.
Chaos or Harmony
To really grasp the enormity of the chaos around the world today, spend a few minutes on our Chart 1.
As we’re an investment management firm, we ultimately focus on the net effect of the chaos on financial markets. We must remain objective and remove any political or social bias and simply accept the current environment as is – anything less would be a failure on our part as fiduciary investment manager. After all, that’s the ultimate bottom line for all of our clients.
Investment managers must never fly with blinds wrapped around their heads – understanding how and why financial markets move will not only help protect your clients’ savings from losses, and provide opportunities for gains, but more importantly we can empower clients with the knowledge of how markets really work.
Nowhere in this publication will you find us referring to certain companies as being cheap, or just stay invested for the long term – that mouth speak only applies during markets with very specific dynamics. And unfortunately, those dynamics are from the 80s and 90s. Yes, those days were awesome but unless you are a hippie, it doesn’t pay to live in the past.
As we dive into the chaos you’ll begin to see and understand why you cannot rely upon your past experience and worse still the past wisdom of the big bank investment machines.
But first, most know that IceCap is fully expecting a crisis in the government bond market and it will have ripple effects around and within the world. As we inch ever closer to the crisis tipping point, we continue to see more and more evidence to support our view.
The other critical point to understand – and this precisely why the world has been jammed into this peculiar position – the majority cannot see and distinguish between the problems and the symptoms.
Sadly, this rather easy, simple concept has been completely lost in the industry. Time and time again, we hear a complete misdiagnosis of the world’s problems. Instead of identifying the problems, most only see the symptoms – and, they are unable to decipher the difference.
Our Chart 2, clearly shows the difference between the problem and the symptom.
It’s rather to easy to see that the problems in the world today isn’t low growth, high debt and a rise of anti-establishment political parties.
Instead, these are the symptoms of perceived corruption with the established political system and the horrible stimulus