February 2019 –“Surprise Party”icecapassetmanagement.com/wp-content/uploads/2019/02/...February 2019 The Surprise Party Item 2018 2028 % Change Gross Federal Debt (billions)

Our view on global investment markets:

February 2019 – “Surprise Party”

Keith Dicker, CFAPresident & Chief Investment Officerkeithdicker@IceCapAssetManagement.comwww.IceCapAssetManagement.comTwitter: @IceCapGlobalTel: 902-492-8495

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Surprise!MarketsUnless you’ve been off-grid, all investors know by now that recentmarket movements have been generating those eye-ball scratching,media-dreaming headlines emblazed with horrific words includingCRASHING, DEVASTATING, and PLUMMETING.

With these headlines generated by real news networks, surely it mustbe true and it should give you a cause for concern.

However, as the brain works in different ways, sometimes it’s betterto visualize these CRASHING, DEVASTING, and PLUMETTING markets.

Here’s a chart showing the US Dow Jones Industrial Average – we askyou to spot the CRASHING.

No worries if you cannot see the CRASHING – we can’t see it either.

They can be a lot of fun.

Your closest friends, family and loved ones become giddy withexcitement of the thought and hope of springing the ultimate surpriseon you during your very special day.

Appreciated only by the surprise planners is all of the work put intoplanning the perfect moment to make your heart race, your eyeswiden and your smile stretch to maximum lengths.

Surprise parties can also produce an unwelcomed surprise.

These are the parties where the intended surprise is nothing like theactual surprise.

In the financial world today, nearly 40 years of continuously declininglong-term interest rates, combined with 10 years of zero and negativeinterest rates, added to 10 years of money printing, 10 years ofgrowing zombie banks and lifetimes of governments overspending, isvery close to launching the ultimate surprise party.

The question of course – will it be a happy, champagne supernovaparty? Or will the party produce the ultimate financial surprise?

Understand, everyone in the world will be attending this party – youhave no choice. And those who are smart and prepared will actuallyhave a really nice time. Everyone else will not.

February 2019 The Surprise Party

US Dow Jones Industrial Average

Hard to see…And then we have the hysteria created by the gold bulls – or goldbugs as they dislike to call each other.

In the minds of these shining investment experts, Gold Bullion is nowsurging higher than a kite and will once again (any day now) soar intothe stratosphere.

Here’s a chart showing Gold – try to spot the SURGING and SOARING:

No worries if you cannot see this either.

Next, considering the US Federal Reserve completely reversed itscourse on interest rate hikes AND the government in Washingtonfought and bickered over the budget – then obviously the US Dollarshould be crashing as well.

Here’s a chart showing the US Dollar – this time, we ask you to spotthe DEVASTATION:

No worries if you cannot see the DEVASTATION – we can’t see it either.


US Dollar (DXY Index)

Gold Bullion

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Don’t read headline newsSeemingly everyone agreed - with stocks declining aggressively, withPresident Trump shutting down the federal government and notreaching any trade deals with China, and with the Federal Reserveputting a complete halt to interest rate hikes – the USD was about tohit the fan and splatter from sea to shining sea.

But it didn’t.

We like to remind investors that today’s financial markets have beenoverwhelmingly influenced, supported and simultaneouslysuppressed by 10 years of unorthodox, never-before-tried, andfantasy-like monetary policies by the world’s biggest central banks.

At IceCap we have consistently communicated that this environmenthas started to unravel, and the result will be a crisis across bonds,currencies and interest rates that will drive enormous amounts offoreign capital to seek safety in the USD.

THIS is why, despite the current sharp movements in many markets –the USD fails to crash as the majority expect.

Something else that catches our eye and should catch EVERYONE’Seye is the performance of European bank stocks.

Chart next page shows the performance of European bank stocks.

In a normal functioning economy, banks do VERY well.

So, just to be clear:- Stocks are not crashing- US Dollar is not plummeting- Gold is not surging

Naturally, we know these factual and truthful observations are hurtingthe feelings of many investors.

After all, we know of investment managers who have been completelyout of the stock market for the last 6 years. And with stocks decliningsharply on Christmas Eve – these managers were absolutely[prematurely] popping the cork.

Gold investors too have been taking it on the chin for a few years now.And every single time the shiny rock bounces from lower lows, it’sinevitable for them to email me with anecdotes over their investmentprecognitions. No doubt the current bounce convinced these investorstoo, to pop the corks over their recent success.

And then we have the single, most important investment in the worldtoday – the USD.

And due to a myriad of reasons – it is also the most hated currency inthe world. Seemingly every investment expert, novice and weekendwarrior has developed a spectacularly strong dislike for the greenback.This dislike is borderline impractical, unhealthy and most importantly –unrealistic.


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For a dose of reality see European Banks

There will be a European Bank Stock Crisis – once Euro banks start to go, capital will rush to USD for safety

In a normal functioning economy, banks have strong demand forlending, and most importantly – yet never talked about by thetalking heads, banks also experience fewer and fewerpeople/companies reneging on their loans.

This type of economy is a bonanza for banks – and since banksoperate in quasi-monopolies with the benefit of being leveraged,bankers love this kind of economy.

In fact, they love it so much, for most bankers, late mornings quicklyspill into liquid lunches followed by gelatos and then finish the daywith a great pint with their great banker mates.

Those are the days.

Except in Europe these days, the opposite is happening.

Early mornings begin with spreadsheets that won’t balance.Followed by never-ending calls from the regulators, rapidly meanslunch being cancelled once again.

The afternoons are no better. Instead of enjoying that ice cream,these bankers are being creamed by senior management overincreasing non-performing loans, decreasing lending and worst of all– demands by the government to buy even more sovereign debt.



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POSITIVE Returns are importantOf course, the end of day pint still occurs. But instead of toastingrecords profits, record bonuses and record boondoggles – thebankers commiserate.

European bank stocks are not only scraping the gutters – collectively,they are back to levels previously reached in the 1990s.

This is yet another crystal clear sign that Europe’s financial troublesare no where close to being resolved.

The European financial and banking system is rotten to the core.Recognizing and accepting this will provide enormous opportunities.

And speaking of opportunities – 2018 was a perfect opportunity topreserve capital.

In 2018, IceCap clients all earned positive returns.

We are acutely aware that many investors in Canada and elsewheredid not have enjoyable performance experiences. Most lost money inemerging market stocks and bonds, high yield bonds, preferredshares, various equity markets and most importantly by bettingagainst the US Dollar.

2019 is a new year. And it will absolutely create new opportunities toboth make and lose money on your investments.

Our over riding themes have not changed – we remain incrediblybullish on the USD, and remain quite fearful of many parts of the bondmarket and non-USD currencies.

Currently, we are neither fearful nor exuberant about the stockmarket. While our equity market models have improved considerablyover the last 2 months, we fully expect the likelihood of marketsperhaps retesting the lows is a lot higher than we would like to see.

And with gold – we remain with zero holdings. We believe stronglythat gold will become an investment destination of choice, however aslong as our expectation for a surging USD continues, we’re afraid tosay that gold inevitably has one more leg down.

The good news is that this will give gold bugs yet another opportunityto time the market perfectly.

The King is Dead, Long Live the KingFamed American bond legend Bill Gross is known as the Bond King andhe has called it a day – The King has decided to retire from theinvestment world and ride off into the sunset.

After earning his bond skills, stripes and scars in the 70s, Gross’ careerreally took off in the early 80s.



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The King

Year after year he began to bang out brilliant returns from theunloved bond world.

In fact he was so good, from 1987 to 2013, his PIMCO Total ReturnBond Fund grew into an unheard of $300 BILLION fund.

Since then however, all hasn’t been rosy for the Bond King: “I lookback on it and the performance of the unconstrained fund in the past


Bill Gross’ career takes off

Bill Gross becomes

Bond King Legend

Bill Gross ends career

Interest rates peaked

Interest rates bottomed

Interest rates bottomed

four years with Janus has been unsatisfactory, no doubt.” said Gross.

Yes, investment managers will ALWAYS have ups and downs – it’s thenature of the beast.

Yet, to fully appreciate the incredible success of Bill Gross over his 40year career, spend a few minutes on the above chart.


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Savvy or lucky?The Chart of course is one we’ve shown a million times – it shows thehistory of long-term interest rates in the United States overlaid withBill Gross’ career.

As a reminder (all else being equal) – as long-term interest ratesDECLINE, the price of bonds INCREASE, and the opposite is also true.

We know by now, long-term interest rates peaked in 1982 and thenover a 34-year period declined all the way down to near 0%.

Yes, by now you should see that the Bond King, just happened to bestarting his career when long-term rates peaked, and naturally finishedhis career when long-term rates troughed.

Of course, his recent struggles have begun in a period where long-termrates have started to rise once again.

We’re certainly not here to pick on Bill Gross. Not only was Mr. Grossan investor extraordinaire, he has also been extraordinarily charitableand giving – yes, he’s a real nice person.

However, the reason we are highlighting The Bond King and hisexperience is due to the (very obvious) overlapping/high correlation ofhis career with the global yield curve and specifically, the trend andchange in long-term interest rates.

Was Gross expertly savvy at managing fixed income strategies?


Or was he simply the benefactor of living his career at the exactmoment in time which just so happened to be the perfect time tobecome a bond manager?

From yet another perspective, 10 years from now will IceCap’sreputation as being an expert currency and global macro manager be afunction of our intelligence and witty writing?

Or maybe it will simply be the fact that we lived our careers during theperfect time to become a global macro and currency manager.

For IceCap, it’s quite obvious how market trends over the last 40 yearshave falsely shaped future expectations.

Think about this – over a nearly 30 year period, Bill Gross’s averageannual return from his fund was approximately 7%.

And since that is over a nearly 30 year period, and 30 years is a longperiod of time – many investors, consultants and mutual fund salespersons are telling the unsuspecting that this average return willhappen again in the bond market.

We’re telling you they are completely wrong, and this is why:

Uniformitarianism is the misguided belief that conditions always wereand always will be as they are now, and any natural changes will occurover long periods of time (encyclopedia.com).


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UniformitarianismIn other words, in the future when people ask why few predicted the“Great Bond Crisis”; the response will simply be – uniformitarianism.

Yes it is true. The majority of investors, managers, consultants, andmedias have all been lead astray. Since no one today has everexperienced a crisis in the bond and currency world, then by nature –no one is expecting one to occur now – which is of course, the classicdefinition of uniformitarianism.

The problem of course – is that the financial world, and the interestrate world, and the government spending world, is significantly olderthan 34 years.

Long-term interest rates have clearly bottomed – the likelihood oflong-term rates going higher is 100%.

Yet, the big banks, big consultants, and big mutual fund salesmachines continue to absolutely believe in absolute terms thatanticipating future market movements is for chumps.

Instead, the majority of investment firms today simply accept thecurrent market conditions, never ask any thoughtful questions andsimply plough ahead as if one day is the same as the next.

Put another way – most investment firms today know only onespeed. And that speed is always full steam ahead, always search forgrowth, always search for yield and most importantly, never questionthe game.


The game of course, is to come up with fancy ideas, fancy brochuresand fancy ways to get you, the investor, to fancy these firms.

Case in point, consider the table next page which shows a fancy newproduct from a major big bank.

As you can see, this bank has created, developed and back tested abrand new way to manage their investors’ hard earned savings byinvesting it in the bond market.

Clearly, this bank recognizes times have changed in the bond world.

Yet, instead of concluding that the exponential increase in risk levelshas reduced opportunities in the fixed income world – this bank hasconcluded the opposite.

Yes, they believe investment opportunities in the bond world haveactually increased!

Their solution is to do the unthinkable and reach for yield by investingin junk bonds and emerging market bonds.

To put this into perspective – consider that current bond marketdynamics changed so much that it forced the Bond King to quit.

Yet, this entity who has never come close to achieving the same iconicstatus as the King – has proclaimed that they have it all figured out.


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Fancy gamesConserva)ve Bond Pool Core Bond Pool Core Plus Bond PoolThrowing Darts

Bond Strategies have become a fancy game


What they have figured out are two things:1) Current interest rates are so low that investing in regular

government and high quality corporate bonds will not produceacceptable returns for their clients.

2) The only way to possibly produce returns acceptable for theirclients is to reach for yield – or put another way, take onconsiderably more bond market risk.

When we put it this way – what should immediately jump off the pageis “take on more risk”.

Yes, the only way to meet the expectations of the most conservativeinvestors is to put them into increasingly riskier and riskierinvestments.

In the professional world of portfolio management, it is well knownthat the easiest way to increase potential returns, is to simply add riskto the portfolio.

Most investment management firms would do this by increasing theirallocations to equity markets.


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Stuck in a momentYet, this big bank is doing it through their bond strategies. Why?

It certainly isn’t due to the bank expecting equities to perform poorly– if that’s their expectation, then emerging market bonds and highyield/junk bonds would also perform poorly.

The real answer is they recognize the need to do something to maketheir bond strategies more attractive relative to their competitors

Of course, this also means they have virtually no fear whatsoever ofany escalating risks in the bond world.

And as no one ever truly expects a crisis to occur – when it doesoccur, it is a complete surprise.

The SurpriseIt is fact – most financial crises in history have always been associatedwith a large and sustained increase in borrowings.

Face it. If you borrow too much and then you cannot pay it back –bad things happen.

Yet, the snap that causes the pop isn’t always what it seems.

Obviously, a point is reached when one cannot produce enoughincome to pay previous debt.


But what happens immediately before this moment in time issomething else – in order to maintain debt payments:1) you reduce other spending,2) and/or you try to earn more income with new or additional jobs.

And it is this moment that we face today.

Except, instead of individuals facing the moment of truth – we arestarting to see governments or sovereign states face the moment oftruth.

And during this moment of truth:1) Governments will definitely NOT do #1.2) Governments will ABSOLUTELY do #2

Now, when it comes to Governments, the way they try to earn moreincome is not through new jobs, but rather through new and highertaxes.

Looking at specific countries, there is no question – as a sovereignstate, America’s outstanding debt is at its highest point in history.

But the same is also true for Japan, Italy, France, Canada, Australia,China and the beat goes on.

Yes, we’ve all heard this story before – yet this time it really is differentand we’ll tell you why.


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So many things affected by ratesChart this page, shows the growth of global debt since 1950.

FIRST, you’ll notice that debt REALLY begins to accelerate in 1982.

SECOND, you’ll recall that 1982 was the year when long-term interest rates peaked (see previous chart on page 6).

THIRD, you’ll begin to understand and appreciate that nearly 40 years of aggressive borrowing, has been consistently enabled by the COST of borrowing consistently declining.

Therefore, the reason why TODAY, investors should absolutely be quite concerned about global debt levels is rather obvious and creates the rather obvious question – what happens when long-term interest rates go higher?

The reason debt fears should matter NOW (and not BEFORE) is that interest rates/cost of borrowing have declined to 0% AND have been at 0% now for almost 10 years.

Obviously, the primary result of 0% rates is more people, morecompanies and more governments have all borrowed more.

But the secondary result – and the one few talk about, is the interestrate on these new borrowings is at rock bottom rates.

As soon as rates go higher (and we are not talking about central bank


In 1982, global debt started to accelerate.This also happened to be the exact point in time when long-term rates peaked and then started to decline.


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Pay your fair sharerates – instead we are talking about long-term rates) the debt bubblesnaps, cracks and pops at the same time.

The reason a crisis emerges is due to borrowers paying increasinglyhigher rates of interest on their debt which has the effect of clawingaway money that was previously used for spending in other areas.

The 2008-09 Global Financial Crisis was ignited when interest rateson mortgages re-set to higher levels.

This produced a cascading effect of increasingly more and morepeople being unable to afford their new mortgage payments at thenew (and higher) interest rate.

As all crises are different – and this next one will be very different;the cascading effect of surging long-term rates will be especiallydifficult for several reasons.

1) Bond prices everywhere will decline.2) The cost of borrowing will increase.3) A higher cost of borrowing will create larger deficits for

governments.4) Larger deficits will absolutely result in higher taxes.

The last point is the surprise that few are talking about and it will prove to be prescient.


And unfortunately, the seeds are already being sowed to make this an easy forecast.

Regardless of your political affiliation – understand that left leaningpolitical parties and movements are being supported by the fact thatthe divide between the wealthy and poor has reached stratosphericheights.

“The rich are not paying their share” has become an anthem acrossthe growing belief in socialist-leaning groups.

From this perspective – there’s really only one easy way to create aremedy AND get elected at the same time.

Tax the rich.

And tax them they will.

With the 2020 American Presidential Election beginning to ramp up –the candidates for the Democratic Party are tripping over themselvesto launch a tax the rich political platform.

Yet, there is one considerable challenge with taxing the rich – how doyou define rich?


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Ae you rich?


Currently across the developed world, top tax rates of 50% and greater

are triggered on annual incomes ranging from $200,000 and higher.

Of course on top of this, each country also charges additional taxes or

user fees on basically everything purchased for consumption, as well

as annual property taxes.

Putting aside your political view, one would agree that overall tax rates

are already high.

Yet, despite overall tax burdens already at high levels – governments

(Democratic/Republican/Liberal/Conservative etc) still cannot escape

the deficit trap.

Consider that during the 1940s the top tax rate in the USA was 94% -

one can see that based upon the past, there’s still plenty of room for

more taxes.

Of course, the other tax component that is being championed by the

Democratic front runners is the “wealth tax”.

This concept is to tax the mega rich 3% annually of their total net

worth. Considering the IMF has already wholeheartedly engaged and

accepted the concept of a 10% global wealth tax – the Democrats are

actually a little behind the curve on this one.

As investment managers, we shed our political and social views at the

door. It’s irrelevant what we think should happen. Instead, it’s infinitely

more valuable to understand what will happen.

And we can tell with a very strong conviction that talk of all these tax

increases will happen.

The reason for this is completely due to governments starving for

additional tax revenues.

Without it, governments believe it’s impossible for them to provide

the services and spending required to run their countries.

Sadly, none of these governments have ever demonstrated any fiscal

responsibility in the past – expecting it to occur in the future is a

guaranteed disappointment.

So, higher taxes are coming. And they are coming at exactly the

moment in time when governments will have to increasingly borrow

more at higher rates - just to simply maintain the status quo.

And based upon increasing deficits and debt loads, we know that the

status quo doesn’t work either.

Europe, Canada and Australia have long advocated a high tax regime in

order to provide strong social safety nets for its peoples.

Most should agree this is correct.

Except, there’s just one problem with this progressive, taxing approach

– it doesn’t work.


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Simple math

The Wall Street Journal has noticed this challenge and states “Risinglevels of debt have long been a concern to policy makers. But lowinterest rates in the years after the recession made those costscheaper for the government to bear.

What makes this chart even more frightening and is never written,talked, or communicated in any way by the majority of the medias,banks, advisors, and investment managers - is the rate of interestused AND its exponential effect.

Data for the above chart was prepared by the United StatesCongressional Budget Office (CBO). This is a non-partisan and not for

And the reason it doesn’t work is due to the following equation:

Put another way, the government spending side of the equationalways exceeds the tax received/income side of the equation.

Therefore, when it comes to fiscal policies, our governments onlypossess the ability (or willingness) to only see tax revenues as neverbeing enough.

If only our governments were able to see that maybe, just maybe, thereason practically every country, state, province and city are runningdeficits, is due to unrealistic spending levels and policies.

From an investment perspective – this is where one needs to shedtheir political, social and patriotic beliefs. The fact is that not onegovernment today is going to change their spending policies – unlessof course, they are forced to change their spending policies.

And it is this moment in time which will surprise governments andinvestors who are unable to see this clear path towards bond marketmayhem.

To visualize the impact of deficits and its exponential effect on debt,consider the following chart which shows how the % of tax revenuesallocated for interest payments on debt is set to surge higher.

Govt Spending

Govt Taxes



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Higher rates = Higher Troublerates and government fiscal imbalances have reached the point of noreturn – it should be extraordinarily easy to see why a crisis re-escalates across bond markets and currencies.

To really understand exactly how low interest rates have fallen,consider the table/chart on the next page.

Practically all of Europe currently has negative or near 0% interestrates.

As well, when you consider the following:1) These negative and near 0% interest rates have been artificially

created by the European Central Bank.2) Practically every country is running deficits3) Practically every country operates in a ultra-low growth economy.4) Practically every country is experiencing a sharp rise in ultra left

vs ultra right politics.You would have to be daft to believe Europe escapes a bond andcurrency crisis.

And when it happens, it shouldn’t be a surprise to anyone.

profit group meaning they are not trying to impress anyone.

If you dig deep enough into the data, you’ll find the “surprise” that willcertainly create that “moment in time” we are discussing.

For the 10 year period from 2018 to 2028, the CBO has calculated theirprojections based upon interest rates on debt increasing from 2.3% to3.5%.

Effectively, this means long-term rates in the United States will remainrelatively flat over the next decade.

Now here’s the kicker – this small increase in estimated long-terminterest rates has the effect of TRIPLING the interest payable on debtoutstanding.

Which should lead everyone to ask; what happens if interest rates risefaster and higher than expected?

The answer will be a complete surprise to many.

When one combines this perspective with the fact that global interest


Item 2018 2028 % ChangeGross Federal Debt (billions) 21,461$ 32,588$ 52%Average Interest Rate on Debt Held by the Public 2.3% 3.5% 47%Net Interest (billions) 325$ 876$ 170%

Source: CBO, IceCap Asset Management Limited


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Visualize this



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USD RulesOur StrategyBondsNo changes. Our primary concern remains focused on the probabilityof long-term rates surging due to re-escalation of sovereign debtcrises. We see emerging market debt, and high yield as beingespecially vulnerable.

StocksWe continue to have significant allocations to equities. Yet retestingthe recent December lows is possible. Currently, we do not have astrong expectation in either direction. Technically, we are remainingneutral for now.

CurrenciesDespite the plethora of fundamental bad news for the US Dollar – itcontinues to remain strong. We continue to hold a very favourableview towards USD over all other currencies.

CommoditiesWe have no positions in oil or gold at this time. Gold has rallied offrecent lows which is absolutely encouraging. However, for us tobecome structurally bullish on gold, we need to see it break throughseveral resistance levels and withstand an initial surge from the USD.

As always, we’d be pleased to speak with anyone about ourinvestment views. We also encourage our readers to share our globalmarket outlook with those who they think may find it of interest.

Keith earned the Chartered Financial Analyst (CFA) designation in 1998and is a member of the Chartered Financial Analysts Institute. He hasbeen recognized by the CFA Institute, RealVision, MacroVoices,Reuters, Bloomberg, BNN and the Globe & Mail for his views on globalmacro investment strategies. He is a frequent speaker on thechallenges and opportunities facing investors today, and is available topresent to groups of any size.

Our Team:

Keith Dicker: [email protected]

John Corney: [email protected]

Haakon Pedersen: [email protected]

Andrew Feader: [email protected]

Conor Demone: [email protected]

Keith Dicker, CFA founded IceCap AssetManagement Limited in 2010 and is the ChiefInvestment Officer. He has over 25 years ofinvestment experience, covering multi asset classstrategies including equities, fixed income,commodities & currencies.








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February 2019 –“Surprise Party”icecapassetmanagement.com/wp-content/uploads/2019/02/...February 2019 The Surprise Party Item 2018 2028 % Change Gross Federal Debt (billions)