Blog

winui/Shutterstock

Time To Toss The Playbook

In uncharted territory, flexibility & open thinking are key
Wednesday, February 25, 2015, 9:07 AM

Just when you thought the world could not spin much faster, global monetary events in 2015 have picked up speed. 

Buckle up.

Begun, The Currency Wars Have

A key macro theme of mine for some time now has been the increasing importance of relative global currency movements in financial market outcomes.  And what have we experienced in this very short year-to-date period so far?  After years of jawboning, the European Central Bank has finally announced a $60 billion monthly quantitative easing exercise to begin in March.  Switzerland “de-linked” its currency from the Euro, China has lowered the official renminbi/US Dollar trading band (devalued their currency), China lowered its banking system required reserve ratio, the Turkish and Ukrainian currencies saw double digit declines, and interest rate cuts have been announced in Canada, Singapore, Denmark (4 times in three weeks), India, Australia and Russia (just to name a few).  All of the above occurred within five (!) weeks.

What do all of these actions have in common?  They are meant to influence relative global currency values. The common denominator under all of these actions was a desire to lower the relative value of each country or area’s currency against global competitors. As a result, foreign currency volatility has risen more than noticeably in 2015, necessarily begetting heightened volatility in global equity and fixed income markets.

If we step back and think about how individual Central Banks and country specific economies responded to changes in the real global economy historically, it was through the interest rate mechanism.  Individual Central Banks could raise and lower short term interest rates in order to stimulate or cool down specific economies as they experienced the positive or negative influence of global economic change upon them.  Country-specific interest rate differentials acted as pressure relief valves.  Global short term interest rate differentials acted as an intentional relative equalization mechanism.

But in today’s world of largely 0% interest rates, the interest rate “pressure relief valve” is gone.  The new pressure relief valve has become relative currency movements. 

This is just one reality of the historically unprecedented global grand Central Banking monetary experiment of the last six years.  Whether for good or bad, it is simply the environment in which we find ourselves today.  And so we must deal with this reality in ongoing investment decision-making.

Pressure Is Mounting

There has been one other event of note in early 2015 that directly relates to the potential for further heightened currency volatility to come.  That event is the recent Greek elections. 

We all know that Greece has been in trouble for some time.  Quite simply, they have borrowed more money than they are able to pay back under current debt repayment schedules.  The New York consulting/banking firm Lazard recently put out a report suggesting Greek debt requires a 50% “hair cut” (default) in order for Greece to remain fiscally viable. The European Central Bank (ECB), largely prompted by Germany, is demanding 100% payback.  Herein lies the key tension.

Of course the problem with a needed “haircut” in Greek debt is that major Euro banks holding Greek debt have not yet marked this debt to “market value” on their balance sheets.  In one sense, saving Greece is as much about saving the Euro banks as anything.  If there is a “haircut” agreement, a number of Euro banks will feel the immediate pain of asset write-offs.  Moreover, if Greece receives favorable debt restructuring/haircut treatment, then what about Italy?  What about Spain, etc?  This is the dilemma of the European Central Bank, and ultimately the Euro itself as a currency.  This forced choice is exactly what the ECB has been trying to avoid for years.  Politicians in the new Greek government have so far been committing a key sin in the eyes of the ECB – they have been telling the truth about fiscal/financial realities. 

What does the last minute late February stick save in again kicking the can down the road another four months for Greece really accomplish?  Absolutely nothing.  The exact thing that has been accomplished over the last 2.5 years since Mr. Draghi uttered his infamous “whatever it takes” commentary.  At least the Euro area has been 100% consistent in accomplishing zero in terms of real reforms and reconciliation, right?  But we all know time is running out.  We need to watch the capital markets carefully. 

Time To Toss The Playbook

What does this set of uncharted waters circumstances mean for investment decision making?

It means we need to be very open and flexible.  We need to be prepared for possible financial market outcomes that in no way fit within the confines of a historical or academic playbook experience. 

This may sound a bit melodramatic, but it's something I have been anticipating for some time now, ever since a very unique occurrence took place in Euro debt markets in early February. Nestle´s shorter term corporate debt actually traded with a negative yield. Think about this. Investors were willing to lose a little bit of money (-20 basis points, or -.2%) for the “safety” of essentially being able to park their capital in Nestle’s balance sheet. This is a very loud statement and may be a very important “signal” for what lays ahead.

Academically, we all know that corporate debt is “riskier” than government debt (which is considered “risk free”). But the markets are “telling us” that may not be the case at the current time when looking at Nestle´ bonds as a proxy for top quality corporate balance sheets. Could it be that the balance sheets of global sovereigns (governments) are actually riskier than top quality corporate balance sheets? And if so, is global capital finally starting to recognize and price in this fact? After all, negative Nestle´ corporate yields were seen right alongside Greece raising its hand suggesting Euro area bank and government balance sheets may not be the pristine repositories for capital many have come to blindly accept. This Nestle´ bond trade may be one of the most important market “signals” in years.

As I’ve stated many times, one of the most important disciplines in the investment management process is to remain flexible and open in thinking. Dogmatic adherence to preconceived notions can be very dangerous, especially in the current cycle.

As such, we cannot look at currency movements and investment asset class price reactions in isolation. This may indeed be one of the greatest investment challenges of the moment, but one whose understanding is crucial to successful navigation ahead. In isolation, who would be crazy enough to buy short term Nestle´ debt where the result is a guaranteed loss of capital in a bond held to maturity? No one.

But within the context of deteriorating global government balance sheets, all of a sudden it is not so crazy an occurrence. It makes complete sense within the context of global capital seeking out investment venues of safety beyond what may have been considered “risk free” government balance sheets, all within the context of a negative yield environment. Certainly for the buyer of Nestle´ debt with a negative yield, motivation is not the return on capital, but the return of capital.

If we think about what this cycle has been up until now, things we’ve never seen in our lifetimes (let alone in history), now seem familiar. ZIRP, QE, etc. Ho Hum.

It’s this very premise that keeps me up at night when translating this philosophical question to equities and other private sector assets (corporate bonds, etc.). Again, I’m simply forcing myself to abandon preconceived ideas and contemplate what may appear the impossible. Will things we’ve never seen before in private sector assets (equities, corporate credit, etc.) seem familiar before this cycle is over?

In Part 2: Investing In The Age Of Anomalies, we examine the heightening importance of global capital flows in today's market environment. As the system becomes more unstable, capital seeks safety -- and that can lead to non-intuitive outcomes, at least in the short term.

For example, despite their obviously stretched valuations, US equity prices may power higher from here for longer than many expect, as capital suffering from negative interest rates elsewhere in the world is attracted to the relative safety and higher return of 'blue chip' stocks.

The analysis and understanding of these capital flows may well be more important than any other factor in determining investment performance during this next phase of the markets. As they say: Follow the money.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

15 Comments

RoseHip's picture
RoseHip
Status: Silver Member (Offline)
Joined: Feb 5 2013
Posts: 147
True transformation

Doesn't require hope and happens even in despair. 

I have noticed most of the articles I read today (in the alternative sense) have a strong correlation in explaining the authors views in how things are changing, in 3-dimentional terms. 

They are steeped in the story of old and hint mostly thru our shadowy selves at the changes happening, regurgitating the same old habits of struggle. The only way out is to confront the true version of what you have made of yourself. 

I don't think technology is driving the pace of change yet I do think it's the pace of change that is the driving the choice of technology and its application. This time period could also be spent, more constructively in my opinion, close(r) to the what's familiar or rather unfamiliar. Just trying to say when I get really really dizzy the only thing I can do that helps is hugging the closest and most stout biological life form.

Welcome to chaotic node uncertainty and it's precarious emotional positions. This is not a space to go light hearted or under prepared. Which is why I see most people that still find solace and escapism in debt based currencies so alluring. Once a grounding force is now a slippery path into self destruction. And by self I mean us. 

"Follow the money" I recommend this only to the strongest of stomachs or to those that understand True transformation. Best of luck to everyone's adventures into profound creativity, may it allow you to see and do things in a completely different way.

kaimu's picture
kaimu
Status: Silver Member (Offline)
Joined: Sep 20 2013
Posts: 160
CAN WE AGREE?

Aloha! Start with the basics like they do in Alcoholics Anonymous(AA). The first "basic" step is to admit you have a problem. But there is an even more important event that needs to take place even before admitting a problem exists. You cannot truly see the problem until this event happens, even before you walk into your first AA meeting. Anyone know what that major event is?  Every recovering drunk know this event. In AA it is known as "hitting bottom"! I think 100% of all adult Americans in the work force senses something is wrong whether they admit it openly or not, but most carry on with life as if uncharted waters are the norm, as Chris points out. Some have complete confidence that government knows best and will avert any and all disasters and save us. Some think that America should have hit bottom in 2008. Once again human nature takes control. Just as it is in "beauty" it seems "bottoms are in the eye of the beholder"! Has government and central banks duped us? Has technology provided government and central banks the means to cure economic ills or has technology only provided a more efficient means to cover the truth and "extend and pretend" beyond anything thought possible in the 1960s?

Many who understand and see we have a problem are extremely frustrated that nothing is being done. I see some of those types here at this website and other similar websites. You can go over to Martin Armstrong and read the same message as Chris has written in this article. In fact Martin Armstrong is all about cycles and capital flows and he even went to prison back around 2000 fighting the status quo that still exists today. The internet has served to make it easier for all those who are frustrated with the status quo to form a community, not unlike a cyber Minute Men group from the 1700s. I think this causes the current status quo in government and banking to have a great deal of fear.

Who wrote this?

Taxes are a joke. Regardless of what a political candidate "promises," they will increase. More taxes are always the answer to government mismanagement. They mess up. We suffer. Taxes are reaching cataclysmic levels, with no slowdown in sight. Is a Civil War Imminent? Do we have to shed blood to reform the current system? I hope it doesn't come to that. But it might.

Certainly this person  and this post could have been seen at any number of Peak Prosperity type websites. It could have even been posted as a comment at Seeking Alpha or Yahoo Finance. I see those kinds of comments all the time.

Have you guessed who wrote that comment yet? It was a person we all saw on TV every minute of every day back in April 1995. He and his deed ... his "bottom", have been largely forgotten now. It was Timothy McVeigh's comment in a local newspaper back in 1992. In case some of you have forgotten who he is he blew up the Federal(IRS) building in Oklahoma City back in 1995. He was executed in prison in 2001. He wrote a letter to the editor in 1992, three years prior to the bombing, and the entire letter can be read HERE. If you read it you can see clearly that he could have easily been a member of this community. He has all the right buzzwords.

Just remember Timothy McVeigh decided to blow up a government building killing 168 people back in 1995 before the Iraq War and before the 2008 Financial Crash and even before 9-11. Who here who goes to that link and reads that letter cannot agree with a lot of his comments? There will be more Timothys all over the world. It is a natural consequence of corrupt government begotten by corrupt money. Look at the Ukraine now! Like George Orwell wrote in 1984, " ... the clocks are striking thirteen."

To me the solution to survival of these types of dark eras in human history cannot be a global one. It has to be individual. The solution has to start inside each one of us. Certainly "sanity" is a rare commodity in global government today. Just  like in all past times of hardship we must all turn back to the basics of life on Earth. Those are food, water, shelter and clothing. First spend your time and money on creating that safety net for yourself and your family. Start with "debt". If you have a mortgage you will never be "safe". You really do not have to "hit bottom" to figure that out. Basics first ...

macro2682's picture
macro2682
Status: Platinum Member (Offline)
Joined: Sep 3 2009
Posts: 539
Hitting Bottom

I like the AA analogy.  But what if losing your job, friends, and loved ones doesn't happen.  What if your friends/enablers keep telling you things are OK and they keep giving you money to pay your rent, and they prevent your boss from firing you.  Can you really hit rock bottom in this environment?

slowly increasing the number of people on food stamps, giving them homes, jobs, healthcare, etc... Will we ever really hit that flashpoint that forces dramatic change? 

im sure we will.  But only at the moment those "friends" let you glide on your own.  I see two scenarios:

1.) collapse 

2.) pure socialism (for several years/decades) followed by collapse

 

 

aggrivated's picture
aggrivated
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 527
virtually hitting bottom--a new forum for discussion?

I think most of us on this site are in agreement that-yes we have a problem.  But we also agree that to know the future in exact detail is impossible. What will the bottom look like when it comes?  So many possibilities exist.

 For those who have hit bottom in some area of life you know it takes effort and time to take the 12 steps (or more) back up.  What are the steps back from an economic bottom?  Anyone willing to go first?  The dilemma is that no one really wants to voluntarily hit bottom if it is avoidable. 

The beauty of humanness is the ability to project mentally and plan--even to the point of advanced training.  I would love for those who have the knowledge and have spent some time thinking through this to put out specific scenarios of what the 'bottom' might look like.  From these virtual bottom scenarios we can all interact to discuss steps to get back up.

There have been many discussions on this site that deal with some of these issues.  Chapters 19 and 20 of the Crash Course start into it, but many of the solutions are scattered all through this site.  We know that 'the end is near' or well-- at least nearer than yesterday, so a more focused place in the site for solutions would be welcomed at least by this member.

With this in mind I would like to suggest to Chris and Adam to open a section in the Discussion Forums focused on posing various scenarios for all of us to discuss.  Our efforts to find solutions will provide a virtual training ground to build our armamentarium for whatever actual bottom comes.  If such a forum already exists I will suffer 'the shame of the face' and gladly accept direction to it.

David Allan's picture
David Allan
Status: Bronze Member (Offline)
Joined: Nov 15 2009
Posts: 99
Hitting bottom??

Hitting bottom??? Folks we've barely hit the top. Peak oil, peak energy, peak technology, peak healthcare... peak civilization.  The infrastructure is all here still.  If I choose I can travel half way round the world, in comfort, in about a day. On the whole we still live like kings.

One of my themes is to appreciate the 'Peak' while I can. This is often simple things like a meal at a restaurant, a trip to the beach, getting a ton of fertilizer delivered, even a visit to the dentist.

In terms of role model for preparation it is hard to go past Chris and Beccas example. A new life along those lines is what now provides a positive focus for us.

We've all got front row seats on the Big Dipper Roller Coaster but it hasn't yet hurtled over the crest. There's still time to enjoy ... and time to prepare.

Dutch John's picture
Dutch John
Status: Bronze Member (Offline)
Joined: Oct 10 2008
Posts: 50
Prepare or transition?
davidallan wrote:

There's still time to enjoy ... and time to prepare.

Depends on preparing for a sudden change or preparing for a sustainable way of life. Stacking up food to overcome a temporary collapse is easy. Growing a food forest in order to secure your food for a life time takes a lot of effort and time. You should have begun years ago. And food is only one item in transitioning away from todays unsustainable world. Normally such moves take several generations. Now probably one generation (us) has to fix most of it in years, if we are lucky one or two decades.

Btw, permaculture is also a very enjoyable and relaxed way of life. Another reason not to wait.

Regards, DJ

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Careful there Patsy

McV. was a patsy. This false flag thingy is getting boring. Banal even.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5070
money is the symptom, not the root cause

Kaimu-

There will be more Timothys all over the world. It is a natural consequence of corrupt government begotten by corrupt money.

I submit that you have the causality backwards.  A corrupt system ends up with corrupt money.

Back in 1971, we had "sound money" - yet what happened to it?  It was done away with by the corrupt system then in place.  Money is only as good as the government behind it - be it gold, or fiat.  If the government and overall system is corrupt, money will not remain sound for long.

 

Bankers Slave's picture
Bankers Slave
Status: Platinum Member (Offline)
Joined: Jul 26 2012
Posts: 519
I sumit that once you are awake

you never go back to sheep!

lambertad's picture
lambertad
Status: Silver Member (Offline)
Joined: Aug 31 2013
Posts: 171
You don't diagnose symptoms

I work in the healthcare field and I really like the direction that Dave is going with his argument. The contrast between symptoms and causes in healthcare or any other field is of utmost important. For example, I work in a cardiac unit and we often see patients with chest pain/arm pain/jaw pain. The first thing lay people may think is 'holy cow this guy is having a heart attach'. But, what we ultimately look for is the cause of the pain, not the symptoms the patient is exhibiting. Symptoms are indications, but the cause can be diverse: maybe a clot blocking an artery in the arm, maybe classic angina due to narrowing of a coronary artery, the heart could be stressed due to fluid overload in a congestive heart failure patient without any blocking of the coronary arteries, etc. Ultimately, we know the patient is not healthy, but we have to determine the cause of the symptoms before we can fix the underlying problem.

In the case of the economy/debt/structural issues, I am very grateful for people like Chris and Adam and their cohort of authors/bloggers/podcast guests/members on this forum for helping me to understand the complexities. From my limited understanding, the majority of the stuff that is going on in the world today are symptoms of an unhealthy economy based on the wacky dynamics that can be perpetuated under unsound money. But, as Dave rather astutely points out - is the unsound money a 'cause' or is it itself a symptom of an underlying cause?

Sound money is a limiting factor for the corrupt regimes that inevitably arise from a concentration of power into corporations/banks/govt. So, as soon as they can, they do away with sound money, you know, 'for the good of the people'. For our situation, sound money - be it a gold exchange standard or a gold standard preceded the corrupt politicians. We had a gold/gold exchange standard for two centuries before it was abolished and during that time the country experienced incredible prosperity and wealth creation. Sound money had other features attached to it that would have limited credit growth, adjusted trade imbalanaces, etc., but we don't have it anymore.The founders of this country set us on a path to become the greatest country the world has ever known, but the politicians since the turn of the last century have reduced us to impending disaster. While politicians are not solely to blame, I also blame central bankers, bankers, corporate leaders, and the citizenry. We are but months/years/decades away from collapse on a scale not one of us can imagine. None of us know if this collapse would have been inevitable, but the pace of 'growth' coupled with malinvestment/malconsumption will make us wonder long into the future.

So, in essence, we don't diagnose symptoms in healthcare and we shouldn't diagnose symptoms in the economy. We should look beyond current symptoms to the root cause, so that one day we may perhaps rebuild/treat the cause when the inevitable implosion occurs.

David Allan's picture
David Allan
Status: Bronze Member (Offline)
Joined: Nov 15 2009
Posts: 99
Prepping vs transition (reply to #6)

Dutch John, That is a valuable distinction you make. Personally I've never thought hoarding food and ammo was a solution for anything. And, from comments I've read on this site I think quite a few others have made major meaningful shifts themselves.

For us at least it was a radical transition, new property, new area, new challenges, much less income. But the benefits go deeper than just getting a property set up along permaculture lines, gaining knowledge and learning skills. There is also a shift in core identity - for example from business professional to small block farmer; and even more fundamentally from watcher to participant - from someone caught up in vast forces beyond their control to someone who takes action and backs them-self as a survivor/ thriver.

In the event of a collapse taking place those who have already made some sort of genuine transition  must be better equipped to cope with the situation on a number of levels.

kaimu's picture
kaimu
Status: Silver Member (Offline)
Joined: Sep 20 2013
Posts: 160
CORRUPT MONEY

Aloha! Is this the chicken or the egg? Dave ... the beginning of America started with the least corrupt monetary system free of a central bank. Does that mean that the humans running the government in 1776 were less corrupt? I would say that given human nature the answer is no. I would say that if you gave a politician, or any human, a blank check in 1776 that he would spend as much as possible the same as politicians and humans do now. That monetary system in 1776, we'll call the Gold Standard, lasted a long time by US standards officially ending in 1971, 195 years. We are now into the 44th year of the official "Debt Standard" and the entire US financial system and economy nearly completely crashed in year #9(1980+)! Then again in year #36(2007) each crash being more and more devastating to the middle class and creating more and more corruption not less. Can this current debt monetary system last another 152 years "as is" without a profound overhaul?  

I believe that if we had a more honest monetary system, meaning a system that supported the 99% more than the 1%, then corruption would abate. Not to zero, because it has never been zero, but like a cycle back to the historical norm. If you could chart "modern corruption" it probably officially started in 1913 with the third US central bank. None of the other two US central banks ever got rid of the Gold Standard. The third was the charm!

Look at the stark difference in morals and government. The Coinage Act of 1792 made debasing the currency punishable by death. That same Act in 1792 made the US Mint Director put up a $10,000 bond to work there and he was only paid $2,000 per year salary. With a more honest monetary system it begot more honest government and more honest government employees. I would say that 1792 was a year of more honest money and government than 2015 is! Since 1971 it is political suicide if you DON'T debase the currency! That is what the Plaza Accord in 1985 was all about. If the Coinage Act of 1792 were still in effect nobody at the US Mint or Treasury would be left alive. Those US officials attending the Plaza Accord would have been hung for treason. Could or would Congress pass a similar Coinage Act today? Doubtful after 100 years of living under corrupt money from the Federal Reserve.

There is nothing 100% "sound" or "safe" once politicians get hold of it. I contend that the process to end the Gold Standard and transition to the Debt Standard unofficially began just before 1913 at Jeckyl Island, Florida in 1910. I consider that 1971 was the last remnants of a Gold Standard like 1933 was the last remnants of Prohibition and like 1975 was the last remnants of the Vietnam War. 

Here is the key I think. If you look at the history of US Budgets (see Table 1.1) you notice that the US Treasury from its inception always started to return to a budget surplus shortly after major warfare. That includes the American Revolution and the War of 1812 and the Civil War and WW1 and WW2 and Korea, but where that trait ends is after the Vietnam War in 1975. Is that due to the fact that government is corrupt or is it due to the fact that Congress no longer has to adhere to any sort of fiscal "standard" now that the monetary standard is debt? Now that a central bank owns us? Human nature has never changed since caveman days, yet periods of relative honest money and government have existed in cycles. We are far from any sort of "honest cycle" now! We are closer to Rome burning ...

Bankers Slave's picture
Bankers Slave
Status: Platinum Member (Offline)
Joined: Jul 26 2012
Posts: 519
Time to toss the history books!

Sorynn's picture
Sorynn
Status: Member (Offline)
Joined: Oct 23 2011
Posts: 17
David, I am one of the folks

David,

I am one of the folks that you reference. I have left behind 20 years of accounting and finance, joined into a permaculture community and started a small farm.

There is an incredible shift happening, as my perspective moves in the direction of connectedness and balance.

darleneortiz's picture
darleneortiz
Status: Member (Offline)
Joined: Mar 26 2014
Posts: 17
The investment measures must

The investment measures must take into account for making more transparent outcomes. The pressure is obvious as well.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments