The Global Central Banking Bubble And Bust Of 2016-2020: Its Time To Rethink Your Traditional Approach To Investing

“Nothing is more suicidal than a rational investment policy in an irrational world.” John Maynard Keynes

The Great Global Central Banking Bubble of 2016 is now in full bloom and reaching a crescendo. This historic global monetary policy ‘experiment’ now nearly 8 years in duration of perpetually holding the risk-free interest rate near 0% in the USA and negative in Europe and Japan, has led to a dangerous mispricing of virtually all global assets.

To note, there are over $13 trillion in bonds now trading at negative yields, meaning that investors that buy these securities are locking in losses from day one. Sounds like insanity? No doubt, but we’ve seen similar bubbles and their insane valuations in two different asset classes over the past several decades – from NASDAQ stocks (1999) to median housing prices and subprime mortgage debt (2007) trading in the stratosphere.

To make matters worse, global government deficits over the same period have ballooned to record levels with nearly a decade of increasingly ineffective ‘borrow & spend’ fiscal stimulus programs. To quote the late Margaret Thatcher, former prime minister of Great Britain who said it best: “Socialism works fine until you run out of other people’s money.” Let’s be clear; that time has come and even the printing presses of the global central banks aren’t going to save us.

Attention Investors: It Really Is Different This Time

More importantly for the global investor community, these unsustainable and increasingly unproductive credit expansionary policies are forcing global investors into a precarious dilemma of choosing riskier assets to survive (i.e. stocks). Historically ‘safer’ assets such as fixed income securities (i.e. bonds) are being purchased for capital appreciation only as their income stream has ‘run dry’. The largest investor class in the world, the $36 trillion global public and private pensions (not including the retiree and ‘savers’ community) are being wiped out.

 

 

Said in another way, there has never been a time in recorded history where both US stocks and US bonds were at/near all-time highs at the same time. Prior to the Housing Bust of 2008, virtually every economist on the planet would have believed it to be an impossibility that a booming, ‘inflating’ stock market, historically an indication of a strong ‘inflationary’ economy could persist while bond prices were near record highs and corresponding bond yields were near record lows, historically an indication of a slowing, ‘deflationary’ economy.

In fact, one could argue that the low to negative yields we are witnessing in bond markets today is more indicative of an economic depression with a ‘D’, if not at the very least an economic recession with a ‘R’.

Either the stock market is telling us the truth about the economy, or the bond market is more accurate. They both can’t be right at the same time. Or maybe both markets are wrong at the same time, misleading investors over a financial cliff. We think it’s the latter and investors should take notice.

In simple terms, like the great market downturns of the past this one too will not end pretty. Economic, financial, political, social, and geopolitical risks around the world are rising faster than at any point since World War II. Being early with regard to a personal investment plan is critical to protecting wealth and/or opportunistically capitalizing on the turmoil ahead. If you’re late to take action, like most complacent investors will be, you can bet on asset markets and your personal net worth moving against you with breath-taking speed as they did in 2008-9.

Investors Still Live In A Cyclical World

The economy and markets are cyclical. From economic ‘booms-to-bust’ and from bonds and interest rates to currencies to commodities to tulip bulbs to the South Sea Company stock (1711) to tulip bulbs (1634), cycles have been evident since the beginning of time. The best explanation for the cycle phenomenon that I have uncovered is that mankind has always shared a common thread all throughout the ages. History repeats itself because the passions of mankind have remained constant throughout the ages, including the passion for power, fear, and greed. This has led to markets cycles of boom and bust, of overbought and oversold.

With recent history as our guide, it is a fact that US investors have experienced a major cyclical downturn and economic ‘recession’ every 6 – 8 years since 1973. Each cycle has been interconnected with multiple asset class performance (and under performance) and is intensifying in their wealth destruction, with losses of -(27% / SP500) in 1980 to losses of nearly -(80% / NASDAQ) in 2001. The Great Recession of 2008-9 heralded in losses of nearly -(59%) and included for the first time real estate and housing investments.

A Traditionally Managed Portfolio Alone Won’t Protect You

Although the Modern Portfolio Theory (MPT) originated in the 1950s, MPT is still the universal benchmark for traditional portfolio management and asset allocation today. MPT conveys that it is possible to construct an ”efficient frontier of optimal portfolios offering the maximum possible return for a given level of risk. By investing in more than one asset class, an investor can reap the benefits of diversification, and a potential reduction in the riskiness of the portfolio.

From 10,000 feet, the Modern Portfolio Theory dictates the importance of diversification, primarily through stocks, bonds, and cash. Stock prices and bond prices have historically been negatively correlated to each other, providing a traditional portfolio with a cushioning effect to both risk-on and risk-off. As mentioned previously, both stock and bond prices have never both moved in the same direction and been positively correlated to each other over our lifetimes. However, this longstanding correlation turned dangerously positive back in 2012, with both stocks and bonds moving in the same direction. With stock and bond markets near all-time record highs, many traditionally managed portfolios may be in for a rude awakening. (See below)

 

 

Don’t be fooled by fancy asset allocation pie charts and the false sense of security of a ‘well-diversified’ wealth portfolio. Portfolio losses could be catastrophic for many traditionally managed, diversified investors through the next market downturn and bursting of the Global Central Banking Bubble. (See below)

 

 

Many investors saw each downturn coming in advance, but very few took action. If you could identify an imminent global downturn of the current cycle and could potentially implement a strategy to neutralize it devastation to personal wealth, why wouldn’t you take action before its too late?

Government Bonds Are Not Always ‘Risk-Free’

No one alive has ever experienced a Global Central Banking Bubble and Bust nor have they ever experienced the most severe distortions we are facing in today’s global investment marketplace. Investors finding reassurance in their traditionally-managed diversified portfolio of ‘stocks, bonds, real estate, and cash’ will find their wealth greatly exposed to principal erosion and loss of liquidity in the Global Central Banking Bubble to Bust in the short years ahead. Throughout history, there have been many instances where government bonds (including municipal, corporate, or mortgage-backed bonds as well) have not always ‘risk-free’. (See below)

 

Investors Should Pursue Non-Correlated Investment Strategies

Global investors today will need to augment their traditionally managed wealth with non-correlated, long volatility investment strategies that stand to benefit from rising interest rates in a slowing global economy. We believe strongly that adding non-conventional, actively managed global investment strategies will be critical to protecting your wealth.

For prudent investors and money management professionals that do their homework and due diligence on credit expansionary periods and government (sovereign) debt bubbles of the past, the investment challenges ahead may provide the opportunity of a lifetime.

Kirk D. Bostrom, Founder and Managing Partner

Strategic Preservation Partners LP ( http://sppfund.com ) is a private investment firm managing the Strategic Preservation Fund LP (The Fund), a US domiciled global special situations investment fund. The Fund offers qualified investors the opportunity to build and protect real wealth by exploiting the volatile ending of the Global Central Banking Bubble.

 

Disclaimer: The views expressed are the views of Kirk Bostrom and are subject to change at any time based on market and other conditions. This material is for informational purposes only, and is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, the author does not guarantee the accuracy, adequacy or completeness of such information.

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