What Is Safe & What Is Scary In Investment Markets – Fright Night by IceCap Asset Management
With Halloween right around the corner, it’s the time of year to analyze what is safe and what is scary in investment markets.
And, the scariest investments in the world will become a complete surprise to many.
A Look Back At Warren Buffett’s Best and Worst Oil & Gas Investments
In this IceCap Global Outlook we detail what to be afraid of and why, and better yet – where you should hide.
What Is Safe & What Is Scary In Investment Markets: Fright Night
We’re gonna need a bigger boat
Jaws (Stephen Spielberg, 1975) – This iconic movie single-handedly scared the crap out of beach goers everywhere. The combination of the music and the mere presence of a gigantic man-eating fish still haunts swimmers and boaters to this day.
In the end, the shark, the boat and Quint meet their demise setting up an endless cycle of shark themed terrors forevermore.
The Shining (Stanley Kubrick, 1980) – Talk about slowly scaring the pants off you. Many movie aficionados are adamant that this Stephen King adaptation is the scariest film in the history of the world.
After all, the slow burn that transformed Jack Nicholson’s character into an unpredictable psychopath was scary indeed.
In the end, Jack’s character and the audience got what they deserved – a very chilling finale.
The Rise of the Interest Rate (central banks, 2016) – This real-life suspense thriller has bond investors, home owners and bankers wetting their pants.
It’s bound to happen. Sooner or later, long-term interest rates will rise. And when they do, fear will be unleashed across the money world.
The ending will be gruesome and gory. Yet investors who properly understand the plot, can comfortably sit back, grab some pop corn and enjoy the show.
When it comes to investing, practically everyone is quick to know stuff about the stock market. Investment advisors routinely rhyme off fancy anecdotes about “investing for the long haul”, “never time the market”, and the grand daddy of them all – “no one saw this coming”.
Of course, what is missing here is perspective or most importantly – an impartial perspective.
We speak with people across Europe, Asia and North America and continue to be amazed about the lack of depth emanating from the very large banks who control the majority of investment funds around the world.
The reason you are hypnotized with such creative expressions as “Enriched Thinking”, “Calmly Create Wealth” and “Be a Smarter Investor” is for one reason and one reason only – investment firms want your money.
Yes, it is fact. All investment firms need clients. Yet the difference between asset gathering focused firms and deep thinking focused firms is as wide as Jack Nicholson’s grin.
Many say there’s a direct negative correlation between the amount of assets managed by a firm and their success in correctly navigating the risk-return waters of the investment world.
Which of course, leads to the number 1, the biggest, and the most feared risk in today’s investment universe – a rise in interest rates. And what happens next with interest rates will have an incredible effect on all investments and strategies.
We’ve all seen bad movies…
At this point you’re asking why is IceCap sounding the alarm bell for bond investors, home owners, and bankers.
The reason is simple – a rise in long-term interest rates is devastating for all of them.
First off all, you must know and understand that the upcoming rise in long-term interest rates will not be of your “let’s hold hands and go for a nice walk in the park” variety.
Instead, when it happens (and it will) long-term interest rates will surge upward in several quick, sudden jolts enough to scare Jaws out of the water.
And, when long-term rates rise by as much and as quickly as we expect, the price of bonds drop like a stone with many never recovering.
This will have three effects on the market place:
- Everyone holding bonds of any type, will experience significant losses. This means pension funds, balanced mutual funds, and especially the flaw-fully designed Target Dated mutual funds will give all investors nightmares.
- Mortgage interest rates shoot upward as well, which means housing markets weaken.
- Banks around the world are required to hold sovereign bonds as regulatory capital. As this crisis develops, banks everywhere will begin to experience weakness in their investment portfolios which is akin to having the rug pulled out from underneath you.
Yes, this is very frightful and you should be afraid.
However – for every bad there is a good. And when this crisis accelerates, investors will run away from the bond market and seek safety in stocks, USD currency and gold.
It will be a scene, unlike any you’ve seen before and understanding why it will happen and having the correct investment strategies will not only make you happy and calm – it will also make you the star at dinner parties.
And when others ask you how did you know, you begin with the least talked about factor in the investment world – interest rates.
Admittedly, the entire interest rate complex is complex. But once you understand this rather nebulous concept, all clouds of confusion will part and you’ll see clearly for miles.
To get started, the first thing you have to do is to ignore most everything you are hearing, reading and seeing about interest rates.
The unfortunate truth is that those who really understand the dynamics of the entire interest rate spectrum are tucked very far away from the average investor.
And since most people do not have access to this very defined group, all perspectives about interest rates and their impact on markets is being signed, sealed and delivered mostly by industry personnel who either do not understand the entire picture, or worse still – by industry personnel who’s firm is unable or unwilling to share the entire picture.
Either way – you are watching a bad movie with out even knowing it.
The next thing you have to know is this: when interest rates are declining, they create a very powerful wind in the sails of all fixed income and bond investments. In fact, there’s nothing else in the entire universe that comes close to helping your bond investments soar in value.
Mind you, there is one other important factor that while not as powerful as interest rates, can also help your bonds do well and that is a strong economy – we’ll take a closer look at global economic growth starting on page 12.
One of our primary observations is that the investment industry tends to suffer from long-term memory loss. Today most analysis grips onto several months of data.
Even the longer dated back-tested products gravitate to only 10 years of data. Worse still, most research cherry-picks it’s start date to do one thing and one thing only – prove it’s point.
And yet, the longest dated research models only begin after WWII. This is based upon the false belief the world entered a wonderful new financial paradigm and that everything that occurred before the end of the war has somehow become irrelevant.
This is wrong.
The world’s economy and financial markets move in cycles. Some cycles are quite short and often difficult to see and discern. While others are super long, also making them difficult to see and discern.
We share this with you because the current risk with interest rates and bond markets has reached extreme levels, yet due to the interest rate cycle being so long, most of the industry cannot see the risk.
To help you see better, our Chart 1 shows how long-term interest rates have moved over time.
First notice how rates increased from the early 1960s to a high in 1982, and then proceeded to decline to today’s level.
This is normal, it is a part of a cycle.
Next, notice how quickly rates increased from 1980 to 1982.
See the full PDF below.