Author : John E. Charalambakis
Date : March 3, 2016
In this commentary, and in future postings, neither do we intend to outline all possible scenarios regarding the unfolding of geopolitical and geoeconomic events, nor do we suggest that the anchoring of portfolios is the only thing that investors should do. Rather, we want to reiterate that while the markets seem to be stabilizing and erasing some of the year’s losses, we would not be surprised if a significant drop takes place following recent gains, (see also http://blacksummitfg.com/3385 – especially the last two paragraphs – as well as http://blacksummitfg.com/3392 ).
Over the course of the last quarter century, the world has experienced some magnificent events and overcome significant challenges. The peace dividend that came from the collapse of communism and the opening of the former Soviet republics, besides advancing freedom and democracy (in most but certainly not all countries), created a myriad of opportunities and advanced standards of living. The opening of China moved millions out of poverty, created millions of jobs, elevated incomes, and advanced the interests of hundreds of millions of persons and businesses. At the same time the world had to deal with the disaster of the Balkan wars in the 1990s, the Southeast financial crisis in 1997-’98 that spread into Russia and S. America, the bursting of the tech bubble, the terrorists attacks of 9/11, the financial crisis of 2008-’09 (whose core causes we never addressed), the EU debt crisis of 2010-’11, and the Arab Winter of 2011-’12, to name a few of those challenges.
As 2015 was coming to a close, we thought that policy makers would be capable of designing policies that could address some of the debt and derivatives issues that undermine growth prospects, and thus avoid another major crisis as we previously wrote about (see http://blacksummitfg.com/1953 http://blacksummitfg.com/1920 , http://blacksummitfg.com/1767 , http://blacksummitfg.com/1822 , and many more).
On November 2, 2013 we wrote: “The essence of this commentary is twofold: First, to explain how and why the rising levels of financial lubrication are expected to generate and support a rally in equities and to a lesser extent in bonds. Second, to discuss how those elevated lubrication levels may become the source of a market downfall which in combination with endemic problems in the EU, China, and Japan could become the cornerstone of the next crisis in two-three years, which crisis may surpass in depth and length the one of 2008. Maybe at that time the words of Cardinal Consalvi (who later ended up being the ultimate ruler of Rome) spoken at the Vienna Peace Conference in 1814 will echo again in our ears: “The demon is not far from us, and the gates of hell are always open”.
My fear is that unless some policy changes take place within the next several months, we may be facing a major crisis that would look like a perfect storm. Here are the elements that could make up that perfect storm:
We could certainly go on and we may elaborate on some of the above in the future; however our message to investors nowadays is that portfolios need careful deployment (opportunities will abound whether the crisis materializes or not), effective diversification, the exploration of dormant assets, and a strategy of hedging and anchoring that paid so well during the last financial crisis of 2008-’09.