Submitted by Keith Dicker of IceCap Asset Management, October 2015 letter to Clients Newsflash Newsflash # 1: A few short weeks ago, Canada’s self-proclaimed biggest and best bank told clients: “much of the negative news from Europe is firmly rooted in the past” and that there is “more potential for upside for markets.” Result: European Stocks subsequently declined -13.5% Newsflash # 2: America's biggest and best bank bragged: “global developed market equities should remain attractive”. Result: Global Stocks subsequently declined -11.3% Newsflash # 3: Britain’s biggest and best bank was all squiffy over markets, proclaiming: “Economic growth is gaining momentum” and “overall, we continue to prefer risk assets such as equities, high yield credit and EM debt.” Result: Global stocks subsequently declined -11.3%, High Yield Bonds subsequently declined -4.7%, and Emerging Market Debt subsequently declined -3.2% By now, most people are once again painfully aware that stocks, high yield bonds and emerging market bonds can actually go down as well as up. For stock investors, it has been a brutal 5 weeks with most markets dropping -10% or more. As a reminder, a -10% decline needs a +11.1% rebound to get back to where you started. Or from a more serious perspective, a -50% decline needs a +100% rebound to get back to where you started. The reason we share these very simple and obvious mathematical facts is due to the following intelligent investment insight: avoiding and limiting downside losses is a crucial aspect of investment management. Yet, as you can see from the market wisdom from the biggest Canadian, American and British banks – they completely ignore this very simple rule of investing. Instead, millions of investors are constantly bombarded with the seemingly innocuous market wisdoms: Buy the dip Invest for the long term Know your time horizon Invest regularly And in our opinion, this is a real shame – a very, real shame. There certainly are times when these are words of wisdom. But, there are also times when they are not. By now, clients, non-clients, and peers are all familiar with our big view of the World. Our experience, perspective and research continues to conclude that global financial markets, the global economy and government fiscal balances are all converging to make everyone’s investment experience very different than that painted by the very big banks. Yet, the big banks continue to shamefully respond as if all is well. Considering the fact that central banks have kept interest rates at 0% for 7 years and the global economy continues to decline is the clearest of clear messages that the financial World isn’t quite right. And if that isn’t clear enough, just know that now many countries have begun to implement NEGATIVE interest rates to help stimulate their economies. Yet, we rarely read or hear any of these facts from the big banks. This of course can mean several things – none of which are complimentary: 1 – the big banks feel the average investor isn’t intelligent enough to understand what is happening 2 – the big banks cannot articulate the true state of the money World to their millions of clients 3 – the big banks truly believe all is well, and that the World will always see a few bumps every now and then. As we all know, investment managers will ALWAYS make a few wrong decisions – it’s inevitable. Managing other people’s wealth can be a stressful responsibility. The good times are awesome. The bad times, not so much. However, if anyone has any aspirations to be an investment manager – this is THE most perfect time to realise your dream. Let us explain why. As of today, 100,000s of investment professionals around the World are following the age-old adage of buy and hold, buy the dip, stocks always outperform bonds, and never invest in currencies. Just steer the course and you’ll be fine, just fine. Unless of course, the ship you are in doesn’t have a rudder, a mast, a jib, a boom, a tiller or a keel. In truth, these ships are not really investment managers at all, instead they are asset gatherers. The difference being is that real investment managers are very focused on making investment decisions to preserve your capital during volatile times, while growing your capital during the good times. Asset gatherers on the other hand, are very focused on winning new clients and receiving new money to manage – after all, investment management IS a business. At these firms, the focus is on marketing and sales. They razzle and dazzle you with very nice commercials, brochures and presentations, as well as a splendid array of investment options. Yet, if you open your eyes and ears just enough, you’ll notice the difference and it mainly starts with investing for the long-term, buy and hold, and invest regularly – sadly, it ends the same way as well. In other words – investors hear the same old story, time and time again. This would be perfectly acceptable IF we lived in a linear World. The problem of course is that we DO NOT live in a linear World. While it is human nature to think and expect along linear lines, our World just doesn’t work that way. Instead, everything moves in cycles, some short and shallow, while other cycles are long and deep. What we are experiencing today is the likely turning point in a very long cycle of borrowing, borrowing and then borrowing some more. The capacity to borrow has reached the limit for many, yet our governments and central banks are desperate to keep the party going. Yes, despite foggy heads, tired legs and full bellies; governments and central banks continue to pour more drinks, dish out more food, all while playing even louder music. In some ways, the real question to ask your mutual fund sales person is whether the party has ended or is it just getting started? The real difference between the investment managers and asset gatherers is in their ability to truly understand market conditions, identify the key driving points, reposition your strategies and then to easily communicate the entire process. Let’s be honest here – the calm sailing and the good times ended in March 2000. That was the end of the most beautiful simultaneous bull market in both stocks and bonds ever known to mankind. For 18 stunning years prior to March 2000, financial markets everywhere, charmed everyone into believing that life as an investment manager was as difficult as a sail into a gentle, onshore breeze. And considering markets produced an average annual return of +15%, how could anyone not be happy? This was the way life should be. However, since March 2000, stocks plummeted -50%, then soared +100%, then crashed -56%, only to zoom +215%. So since March 2000, 16 years of buying the dip, investing for the long-term, knowing your time horizon, diversifying your portfolio, and investing regularly netted you a handsome annual return of +2%. This wasn’t the way life should be. So which is it? Do you expect stocks to always perform like they did from 1982 to 2000? Or, do you expect stocks to perform like they did from 2000 to 2015? Judging by their investment commentary, the big banks obviously believe in the 80-90s era. In reality however, the big banks believe in gathering your assets, and investing for the long-term, buying the dip... Collision Time Make no doubt about it – our economy and our debt loads have created a very uncomfortable environment for those in governments and central banks. Over the years, individuals, companies and governments of all kinds have borrowed to their hearts content. Subsequently, all of this borrowing gushed new money into our economies and swirled around, around and around. The good times became so great, they turned awesome. Politicians promised a chicken in every pot – yet, by borrowing and borrowing they delivered entire farms to their voters. Companies promised steady hours with steady pay – yet they delivered more jobs, more pay and more pensions. Not to be outdone, individuals goosed the system too, and enjoyed golden eggs year after year after year. It happened during the hippy-days of the 60s, and during the disco-days of the 70s. Of course, bumps also happened during the metal-days of the 80s and then again during the grunge-days of the 90s. Then American Idol took over and all was lost – well, all except the ineffective vision of our leading central bankers and government treasuries. While some people began their careers in the 1970s, even more started their investment careers in the 1980s; with more still in the 1990s and 2000s. Worse still, many of today’s investment young guns started their careers after the 2008 crisis. We share this perspective because every market expert today draws upon their years of wisdom to make very important investment decisions for you, your family and your pension plans. This would be great if everyone lived to be 300 years old and shared this much longer, and much richer experience with the World. Instead, our minds are trapped within a very narrow place in time which limits our ability to think and see things from a much broader and clearer perspective. Today, we have 3 enormously important market drivers steam rolling towards each other and when they collide, the distortions will be leave everyone dazed, confused, asking questions – and demanding answers. Sadly, the answers will be completely unsatisfying entirely due to an industry focused on linear thinking and obsessed with gathering assets. Fortunately, the key to understanding why the World has reached a precarious point in time is actually quite easy to achieve – just shed your mind of your tunnel visions and linear thinking, and open it to a World that is crystal clear. For starters, knowing and accepting that every market, every economy, and every society is interconnected will allow you to understand the events that are unfolding around us. Next, ignore the drivel from the talking heads and asset gathering machines. Then, know that every single time our World has experienced an economic bump, our governments and centrals always responded by: 1) Borrowing more money to spend on special projects 2) Cutting interest rates to make it cheaper for individuals and companies to borrow The result of 1) and 2) would be more money pumped into our economies which would inevitably help us recover from the little bumps. This happened like clock work in the 60s, 70s, 80s, 90s, and 2000s. Unfortunately, this clock has suddenly become broken. Yes, broken clocks are correct twice a day, but right now our global financial World is over 11 figurative hours away from that effusive goal. Over 60 years of borrowing and 35 years of cutting interest rates has left us with the mess we have today: 1) Excessive debt loads for practically EVERY country 2) ZERO and NEGATIVE interest rates Collision Time Linear thinkers not only see these as two separate market dynamics, but they also view it as two markets factors within every single, separate country and market. To proclaim that Greece doesn’t matter is tunnel vision. To believe China is an economic miracle is gullible. To conclude that lower interest rates and money printing will create a better World is pretty weak. Instead, we’ll show you how to liberate your mind and see the World as one continuous flowing market, where capital, ideas and innovation always seeks safety and avoids excessive risks and losses. We cannot stop what is coming, however if you escape the traps caused by linear thinking, the opportunity for your own personal schadenfreude is right around the corner. And it all starts with a collision: Here comes the recession Recently someone told us that if everyone simply acted with more optimism, then all of this gloom and doom would disappear. In one way, this is 100% correct. Positive thinking is great for a positive economy which leads to positive everything – more jobs, more bonuses, more raises, and more spending, and then rinse and repeat. Yet, all of this optimism can only carry an economy so far. Eventually mathematics take over, and soon thereafter one realises positive thinking doesn’t automatically give you a new job with more bonus, more raises which creates more spending. It’s funny how the loss of a bonus, or worse still, the loss of a job really affects the ole’ optimism gene by affecting it with something very different – pessimism. Suddenly, that vacation in Europe becomes a stay-cation. That new dream kitchen remains a distant dream. And the weekly eat-outs, turn into home pizza night (not that there’s anything wrong with home pizza night). As you can see, eventually mathematics always trumps optimism and pessimism too for that matter. Unfortunately, today’s market cycle - has the World sliding downwards and not upwards. Eventually the day will come when the opposite is happening, but we have to slump into the financial valley first – that’s just the way it works. * * * Continue reading in the full letter below: