Escolar Documentos
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December 2014
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December 2014
The belief and hope (theres that word again) that the world will
continue along a upward trend with a few bumps here and there has
been grossly miss-sold. Instead, the pendulum is changing direction
and this change in direction will create untold losses for the Euro
currency, government bonds, and banks & insurance companies
around the world.
Yet, the brighter side of the investment world will see untold gains for
the US Dollar and US stocks.
The key to understanding this paradigm shift is respecting Newton
and his Third Law of Motion. As Europe further disintegrates down its
rabbit hole, private sector money will seek safety. And, the only
market big enough in the world to absorb this kind of capital
movement is the US Dollar.
The world is riddled with many untruths, and none compare to those
perpetuated by the investment industry and its staunch belief that
economic growth is the driver of stock market growth.
On the surface, it is a nice story after all, if a company makes
profits, pays out dividends and then makes more profits and pays out
even more dividends, it has to be good for the stock price.
Yet, if any half-respected investment analyst sharpened their pencil
just a little, and researched economic growth and stock market
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December 2014
1954
1984
30 years
= 0% return
2014
30 years
= 400% return
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December 2014
Chart 2
Now, there are always people who will say this 87 year time period is
too long WW1, the Great Depression, WW2, the baby boomer
years, the Vietnam War years, the Star Wars 80s years, the Tech
bubble years and the housing crash years shouldnt count. For those
market seers, we offer Chart 3 (next page) which shows economic
and stock market growth for the last 12 months.
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December 2014
GDP Last 12
months
UK
France
USA
China
2.9%
0.4%
2.4%
8.4%
Stock Market
Last 12
months
2.5%
6.6%
17.3%
3.2%
and youll find students analyzing GDP models and then allocating
their investment decision to the fastest growing economies.
This is wrong of course. Because if you think about it, this would
mean your investments should always be allocated to the Chinas and
Indias of the world. After all, these countries have consistently
created faster growth than any of the western world countries, yet
their stock markets have certainly not been the best performing.
Now, this isnt to say you cannot make money in faster growing
economies. Yes, you absolutely can but you have to be the business
owner. The one who earns and receives the profit. The distinction of
course, is that success in growing your business isnt necessarily
reflected in your stock price.
Still not convinced? The next time your advisor tries to justify their
sales commission, ask them about correlation and causation and how
it relates to the stock market and economic growth. The most likely
response will be the one full of confusion and misdirection. In other
words, your question doesnt reconcile with what theyve been
taught and fed throughout their career, or worse still you are paying
a whole lot of fees for nothing.
December 2014
If youre into numbers, this means that out of the last 7 recessions, this
un-eclectic group of big bank economists expected none of them to
occur. This is serious stuff even the worst teams in sports win a game
every now and then, but not the big bank economists.
What we mean by this is that there are times when yes, the economy
does strongly influence the stock market. But as we have already
demonstrated, there are also times when the economy can have the
complete opposite effect on the stock market.
To make matters even more confusing, there are periods when other
factors have a greater influence on stock prices. In fact, there are
many times inflation, interest rates, politics and military conflicts can
be the dominant driver of your wealth.
Now, when you think about it this way, perhaps it is no wonder the
global investment industry has steered investors into believing that a
singular, tunnel-visioned factor is the key to achieving stock market
success.
Yet, when we think of it this way, the industry fascination with the
belief that economic growth creates stock market wealth still doesnt
make sense. After all as Chart 4 on the next page shows, over the
past 44 years, professional economists as a group, employed by the
very same investment firms who proclaim that economic growth
produces stock market growth, have never, ever predicted that a
recession would occur.
And, we know for a fact that despite numerous stock market drops of
50% or more, most investment advisors have never recommended,
suggested or even hinted that you should make appropriate
adjustments to your portfolio.
Now, if the industry were on trial and they were sitting in the witness
stand, it is at this point their attorneys would be screaming objections anything to distract you from the truth.
We suggest you re-read this again, because as the worlds financial
pendulum begins to change direction, and all of the energized actions
create equal and opposite reactions do not expect the vast majority of
the investment industry to understand nor correctly communicate what
is happening. History shows they simply do not understand it, it isnt in
their DNA and you shouldnt expect this to change.
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December 2014
Since 2001
professional
economists have
been accurate
12.7% of the time
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December 2014
Over the next 12 months, the world will see a see-saw battle
between those believing and hoping that America can pull the rest of
the world out of its economic funk.
And during this period, we expect the US Dollar and US stock markets
to continue to march higher relative to practically every other
currency and stock market. However, do not attribute better currency
and stock market performance to better economic growth this will
be a mistake.
We have already demonstrated that economic growth has no bearing
on financial market performance, yet this show of US strength will
incorrectly be attributed to investors seeking to maximise their
investment returns. Instead, the strength in American markets should
be attributed to international capital seeking safety.
Note this distinction, because the end result will have booming
consequences that will be both unexpected and highly unusual.
The investment world has taught most people that that returns are
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December 2014
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December 2014
FAILED
prostitution as strong contributors to the economy. While this move
didnt quite earn the label as being innovative, it did demonstrate
how the folks in Brussels can whip out new policy papers on a
moments notice.
Today of course, no-one is talking about any of these programs
anymore. Yes, they still exist but they have obviously been rendered
useless against this tsunami-wall of debt that continues to both
accumulate and cause people (and their money) to flee the Eurozone.
Two months ago, the ECB announced that interest rates will now be
NEGATIVE. Yes, negative. Americans, Canadians and the British
complain about getting next to nothing on their bank cash balances
and deposits. Imagine for a minute that you had to pay the bank to
hold your cash and deposits. Well, that is exactly where Europe is
headed.
The hope (theres that word again) of course, is that people and
companies will start to spend their savings, instead of hoarding their
savings. It is also hoped that European banks will lend money to
these same people and companies. The trouble is, these people and
companies have no interest in borrowing any money. As a result the
ECBs negative rate strategy is akin to pushing on a string or worse
still leading a horse to the water.
The fact that the ECB continues to create new and more aggressive
policy plans, validates our view that all previous plans have failed to
Chart 5
FAILED
FAILED
FAILED
FAILED
FAILED
IceCap Prediction: will FAIL
solve the debt crisis. Chart 5 above details previous strategies, our
grade as well as details for future plans.
Next up for the ECB, is the one plan every central banker has been
dreaming of since the entire debt crisis started money printing. It will
happen in Europe, and well have more comments and analysis as the
old world ventures down this path.
Meanwhile not to be outdone, the European Commission in Brussels
has also embarked on their latest stimulus program. As usual, it
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December 2014
More debt
sounds absolutely brilliant on the face of it. Yet, simply peel away a
few layers of the European onion and youll discover that once again
Europe is trying to solve its debt crisis by issuing more debt.
The European Fund for Strategic Investments is being promoted as
a EUR 315 billion fund which will create 1.3 million jobs over 3 years.
It sounds and reads great, yet the devil is once again in the details
which shows the Fund will receive EUR 5 Billion in cash and then, get
this, borrow an additional EUR 310 Billion.
This is the latest perfect example of how Europe is treating the
symptoms of their debt crisis. Once again, the strategy of using more
debt to fix a debt crisis seems a bit odd, but thats exactly what their
financial doctors have prescribed.
The situation in Europe has not occurred anywhere of this magnitude
over the last 100 years, let alone the past 30 years. IceCaps view
hasnt changed unless the Eurozone is willing to form a single
country, with a single government, with a single financial plan where
everyone is responsible for everyone elses debt, then it will fail.
This slow motion failure is happening before our eyes, with each
passing day seeing increasingly more Europeans moving their wealth
to safer markets. The good news is that there will be an equal and
opposite reaction in US markets this is where investors can benefit.
Of course, not everyone sees it this way. Case in point, consider the
worst investment idea ever.
11
December 2014
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December 2014
Reason 2: and this is the main concern for everyone involved with
European finance, the banks losses might actually be coming from
one of the European governments.
This is the scenario where one of the Eurozone countries decides to
leave the Eurozone. As for which country could leave, simply close
your eyes and pick. Any or all of Spain, Portugal, Italy, Greece, France
etc could leave on a moments notice.
To demonstrate the danger, assume for a minute that Italy decided to
leave the Eurozone and return to using the Italian Lira as their
currency. Immediately, Italy would announce that that all of the
money it owes will now be owed in Lira and not Euros. But there
would not be a fair market conversion. To make matters simple, Italy
owes investors over EUR 2.1 Trillion. If Italy left the Eurozone, it
would then tell investors they will be paid back LIRA 2.1 Trillion which
would be significantly less than the original EUR 2.1 Trillion.
Anyone doubting the scenario of Italy leaving should really go back to
2012 when then Prime Minister, Silvio Berlusconi told French
President Sarkozy and German Chancellor Merkel that he was pulling
Italy out of the Eurozone. What happened next was the political
assassination of Berlusconi and therefore demonstrating the
seriousness of the situation in Europe.
So, this brings us back full circle to several important points. First of
all, banks are leveraged and small losses have the potential to
snowball throughout the entire industry.
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December 2014
Our Strategy
Currencies: Throughout the year, weve been adding more and more
exposure to the US Dollar within our currencies strategy. This has
been the correct call and although the US Dollar has recently
appreciated strongly relative to all other currencies, we believe this is
just the beginning of a major move upwards. As result, well likely be
adding even more money to USD as we enter 2015.
Equities: Since mid-year, weve also been increasing our exposure to
the stock market with a big emphasis on the US markets and
momentum strategies. This too has been value-added, and as long as
markets remain in the current uptrend, well continue with a focus on
momentum strategies, with specific allocations to the US.
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