The 'San Andreas' Global Economy: What To Do Now To Protect Your Wealth Against The 'Locked And Loaded' Global Markets

LA TIMES, MAY 5, 2016: The San Andreas Fault Is ‘Locked and Loaded and Ready to Go,’ a Leading Seismologist Warns. “The springs on the San Andreas system have been wound very, very tight.”

 

Having lived in California for over 30 years, nearly everyone here is well aware of the San Andreas Fault and the devastating Great San Francisco Earthquake of 1906. The thought of the next ‘Big One’ looms deep within your subconscious here for you know that it is not a question of if, but when.

As for all things that people fear the most, the most common human response has been scientifically proven to do nothing! That’s right. Most people simply avoid unpleasant thoughts or thinking about potentially devastating outcomes because it is literally part of our human DNA.

Cognitive dissonance is the term most often used within the human psychology academia as a term that defines the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, values, or ideas at the same time. In the investment industry, investors can also experience cognitive dissonance, which could best summed up by the following Charley Ledley quote below from Michael Lewis’s bestselling book, The Big Short. Ledley’s quote took cognitive dissonance a step further. With investors not thinking about bad things happening, it was likely that the possibility that bad outcomes were largely mis-priced in the marketplace. Mis-priced assets, either expensive assets or cheap assets create financial opportunity. As a rule, the bigger the mis-pricing, the bigger the opportunity. The Dotcom/technology stocks of 1999 and mortgage debt of 2007 were both great examples of this phenomenon.

 

                            

“People hate to think about bad things happening, so they always underestimate their likelihood.”

 

No one, including me, likes to think about bad things happening. In fact, I am quite confident that I would have made a lousy life insurance salesman should I have chosen another career path.

For the moment, however, reflect upon those fortunate investors back in 2007 who invested in Michael Burry’s Scion Capital Fund from the ‘The Big Short’. They collectively put their own cognitive dissonance aside and acted upon the likelihood that the housing bubble was indeed a mis-priced bubble, and that subprime debt was in fact ‘not contained‘.

Eight years before, back in 1999, reflect upon those fortunate investors who were selling company stock and/or shorting technology stocks because they too had put cognitive dissonance aside and acted upon the likelihood that the Internet Bubble was indeed a mis-priced bubble, and that the former Fed Chairman Greenspan’s December 1996 ‘Irrational Exuberance’ speech was early, but would eventually be right.

Fast forward to today, now 8 years past the last great financial crisis. I’d ask that you put aside for the moment your own ‘cognitive dissonance’ and behavior biases. I’d ask that you’d consider the possibilities that the global economy and global markets are indeed cyclical, and with an open mind consider the plethora of escalating and dangerous ‘signposts’ of a major change underway in our global economic and market landscape. I’d ask that you not only consider the potential of a very ‘unpleasant’ outcome ahead, but consider the possibility that a once-in-a-lifetime investment opportunity may be presenting itself to those prudent investors paying attention and have the courage to take action.

                           

Major Market Trends Are Changing, Correlating,
And Hiding In Plain Sight

 

They say that history rarely repeats, but often rhymes. The same can be said of the major market trends. In isolation, each trend can tell a different story which at times can be misleading to investors. However, history has proven that when these major market trends correlate together, and correlate globally, the significance of the cycle change ahead can be amplified and should not be overlooked by the astute investor. Major market trends are correlating globally now, and as a result these major signposts are likely telegraphing that a significant change is now likely close at hand.

Listed below is a brief summary of the ‘correlating’ global market signposts that are now ‘flashing red’ together and picking up momentum:

 

  • ECONOMIC – The global economy is dramatically slowing, with the former emerging economies of China, Brazil, and Russia nearing their slowest economic output in 25 years. Advanced economies like the US, Eurozone, and Japan are now at or near recessionary levels

 

  • FINANCIAL – Global stock markets across both Asia and Europe have experienced major volatility over the several quarters, with China’s turbulent Shanghai Stock Market falling and rising over 50% over a few short months. Energy and commodity prices too have fallen inside of a deflationary cycle, with crude oil diving over 50% in the second half of last year before bouncing back nearly 75% this year. Global currency wars have been quietly underway for over a year now, with more sovereign interest rate cuts and indirect currency devaluations in 2015 that ever before.

 

  • POLITICAL & SOCIAL – Global political and social trends are alarmingly dangerous. Populist/Nationalist/Anti-Establishment political movements are growing fast and approaching a representative majority in Germany, France, and the United Kingdom. These parties seek to close borders and return to national sovereignty – putting the European Union, Euro currency, and European economy at great risk.  As for the USA, look no further than the unprecedented rise of Republican Donald Trump and Democratic Senator Bernie Sanders, both anti-establishment candidates. Great Britain is set for a national vote to exit the EU in June (Brexit) with major political power changes now possible with elections in Germany and France next year. As a result of all of the above, and a growing wealth gap and disappearing middle class in many countries around the world, social unrest is on the rise.

 

  • GEOPOLITICAL – From the Middle East, to the heart of Europe, to the Korean Peninsula, to the South China Sea, and even to the Arctic Circle (Russian North Pole military base), it is becoming clear to virtually everyone that global geopolitical risks are now higher than at any time since WWII.

 

  • GLOBAL FISCAL AND MONETARY POLICIES – I have written on many occasions regarding the coming end of the global credit expansionary super cycle. From the fiscal programs of ‘TARPs’ to ‘Cash for Clunkers’ to the monetary policy evolution of multiple QEs to Operation Twist, to low interest rates, to no interest rates, and now negative interest rates – the world’s politicians and central bankers are running out of schemes to kick start the global economy from its deflationary spiral. In fact, many economists are now publicly professing that negative interest rates are likely having a negative effect on global economic output. Both public and private debt-to-GDP levels across the globe have now ballooned to unsustainable levels, while unfunded liabilities are likely well past the point of no return. Although the US is the world’s ‘least dirty shirt’, it should be noted that US Federal tax receipts have grown 35% from 2006 to today ($2.31T to $3.2T) while US Federal debt has exploded 135% over the same period ($8.5T to nearly $20T by the end of this year). Has US economic growth over the same period kept up with with all of the above? Forget about it. US government debt has been growing at a compounded rate of ~11%; a figure far outstripping the slow economic growth (~1% compounded) reflected in our dismal US GDP. This is a not only a US problem however, but a worldwide phenomenon; clearly an unsustainable and precarious trend by any financial solvency metric.

 

                              

What Does It All Mean?

“Traditional investors will take the traditional approach to the global economic downturn ahead by selling stocks and buying bonds; a fatal mistake given the bubble is in bonds.”

Not dissimilar to the Credit Crisis of 2008, it is the collective ‘underestimating’ of the likelihood of another bad outcome ahead as a result of unprecedented, unsustainable, and ineffective global fiscal and monetary policies that we believe will greatly challenge the preservation of wealth through traditionally managed portfolios alone.

This time the global bubble going bust is much different as the global bubble is actually the bond market. That right, the traditional ‘risk-free return’, that is the government sovereign bonds themselves, are now THE bubble. The enormity of our predicament ahead is that the global bond bubble is larger than the Internet stocks, larger than the housing market, and larger than all of the global stock markets and total market capitalization – combined.

 

“I don’t think there’s anything (bubble) on the scale of the housing bubble or the Internet bubble right now. The only candidate is bonds, government debt, and other kinds of debt. I’m not counting that, I guess, because that’s us!”

– Jame Bullard, President, St. Louis Federal Reserv

With over $26 trillion in global government bonds trading below 1%, and nearly $8 trillion government bonds trading at negative interest rates, the impending pinprick of the global bond bubble will soon send monumental shock waves through the San Andreas Global Economy and the global markets.

 

 

                            

The Federal Reserve And World’s Central Bankers Are In A Box, And The Box Is Shrinking Fast

The US Federal Reserve and the world’s central planners have a huge dilemma – much bigger than in 2008 with severe and unpleasant consequences to the global economy and marketplace. Their binary conundrum is the following:

  • Continue to keep interest rates at record low-negative yields and completely destroy nearly every public and private pension fund, insurance company, and retiree and ‘saver’ – a vital constituent of our global economic society that survives only by funding long term liabilities with a positive fixed income cash flow. A cash flow that is now impossible to create with yields on bonds so low for so long.

 

  • Raise interest rates (kindly referred to as ‘normalizing rates’) and completely destroy nearly every sovereign nation’s ability to fund their bulging budget deficits and/or keep their outstanding government bond portfolios from going into default. Raising rates on government issuers now would likely kill the golden geese in short order.

 

                            

What Every Investor Should Do Right Now?

“Policymakers have no end game, but markets do.”

 I would strongly suggest that every investor that cares about preserving wealth and purchasing power do the following now before it’s too late:

  • Ask your current financial adviser, broker, and/or money managers to provide for you with quantitative report on exactly what would happen to your current portfolio’s total net asset value should we experience another Great Credit Crisis of 2008 again. The professionals call it scenario analysis, portfolio back testing or ‘shocking’ your portfolio, but whatever you call it, it will tell you how much of your portfolio is at risk. Any adviser or broker worth their salt should be able to tell you what would happen to your net worth if history repeats or even rhymes with the 2008-9 market period. If you can withstand 30%, 40%, 50%, or possibly more declines, then good luck. But if you’re interested in taking to higher ground before the next financial tsunami arrives, then ask your financial adviser how your might re-allocate your current portfolio assets to better weather the storm ahead.

 

  • Augment your traditionally managed portfolio with non-traditional, alternative investment managers and/or non-correlated investment managers with the objective of opportunistically exploiting the global crisis ahead. Ultra high net worth investors and institutional investors are looking to diversify not only their asset allocation, but they are looking to diversify their portfolios with different investment management strategies as well. Adding professional managers with non-correlated approaches to a traditionally managed portfolio, if executed properly, can provide important risk diversification and performance to an overall wealth strategy; particularly late in an economic and market cycle. To be sure, like the Big Short guys of 2008, the coming global crisis ahead will also provide huge rewards and unprecedented financial opportunity for those talented investment managers implementing the well-executed investment strategy with trading experience to withstand the emotional swings across global markets.

 

  • Don’t let your own ‘Cognitive Dissonance’ prevent you from taking action on #1 and #2 above. Ask the tough questions. Interview investment managers that can bring expertise in alternative, non-correlated strategies that can complement a balanced, traditionally managed approach. Don’t settle for a Wall Street corral of group thinkers and closet indexers – most were wrong in 2007 and most won’t help you survive the next Great Recession. Preparation will be the key to your success.

 

In the end, do your homework and heed the lessons of 2008 and 2000. We may be out of those woods, but there is a redwood forest dead ahead. Major financial earthquakes, like their geological counterparts, are already underway in regions of the world and are fast approaching the US markets. Global ‘tremors’ across many markets are happening right now – in plain sight. These tremors are actually bold clues in answering the all-important question of ‘when‘ the next major downturn will begin. The next downturn and major cycle change is already underway.

Whether investors heed these warnings and prepare for the inevitable, or simply ignore them by submitting to the complacency of their own cognitive dissonance, their actions or inactions will determine the ultimate fate of their financial health and security.

 

Kirk D. Bostrom
Chief Portfolio Manager
Strategic Preservation Partners LP – A Global Special Situations Alternative Investment Fund For Qualified, Accredited Investors Only http://sppfund.com

 

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. 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.

The Most Dangerous Bubble In History Is HereImportant Investor Advice From One Of The World’s Greatest Market Timers