From the Crow’s Nest – September 2016 Edition

Welcome to Views from the Crowsnest. Surprisingly little has been happening in broad equity markets in North America since my previous missive in July. That is noteworthy, per se. In several ways, this feels like the calm before the storm, so we’d better enjoy it while it lasts.

The same cannot be said for the political landscape in Europe and the U.S., where everything seems to be pushing further and further, reaching hitherto “impossible” levels of bizarreness, bloodiness, and willful blindness – believe me!

Leading up to the Brexit vote, the establishment warned the great unwashed (that’s us) that a “Leave” vote would bring about the destruction of the UK economy. While our managers were vigilantly on their screens in the aftermath of the historic “Leave” decision, and were able to take rapid defensive measures, they quickly had to shift gears as markets declined sharply for under three trading days, then reversed quickly. Predicted doom and gloom turned out to be a tempest in a proper teapot. Bloody hell, those Oxford & Eaton chaps were wrong – possibly a first for many of them!

The absence of a meaningful downward summer swoon in stocks has been a welcome relief from the usual seasonal patterns, but has many folks wondering when we’re due for a pullback or even a correction. Concerns about this are NOT irrational, given the market valuations, the state of the global economy, etc. The longer we go since the last notable downward move in equities (January and February 2016), the more likely the next air-pocket comes along sooner.

From our vantage point high in the Crowsnest, we certainly see a gathering storm, but it’s mostly behind us rather than blocking our planned journey. The developing storm is primarily in the government bond markets, which our clients have had very little exposure to, except for a smattering of very short duration positions. Avoiding major capital destruction in the “safe” long-term government bond markets is a critical part of our forward-looking investment thesis.

The waters ahead show some “moderate swells” in the near term, followed by smoother waters and strong tailwinds. Our managers are mindful of the potential for a sharp drop in stocks over the coming weeks, and are prepared with their defensive measures should the realized volatility be greater than the anticipated volatility. Marty’s Socrates system is already extremely helpful; as of this writing, major indices have not violated any major support or upward trend channels…but we continue to watch carefully.

In investing, there are periods of volatility that simply need to be tolerated as part of generating a better return than a GIC, and there are periods when it makes sense to take significant defensive actions so that your ship doesn’t get swamped. Discernment between these two types of volatility is one of the most important “intangible” qualities of great portfolio managers. Patience and discipline are a big part of the value that our team of money managers provide.

We’ve been delighted with their judgement so far, and they’re not resting on their laurels, either: 3 of our Portfolio Managers have been learning on the Socrates Preview for several months, and are committed to acquisition and utilization of the full version of Martin Armstrong’s Socrates system, which is expected to go live by mid-October 2016. One of our managers (so far) has also committed to attending the next World Economic Conference in Orlando with me. We’re looking forward to the insights at the Institutional and Technical Analysis conferences on November 10 and 11.

In Continental Europe, markets are not quite so rosy. While broader equity markets are about flat since the Brexit vote, their banking sector is still lower, with German mega-bank Deutsche Bank (DB) plummeting to fresh new lows today – down over 30% since the Brexit vote, and down over 60% in the last 12 months.

With a U.S. style bail-out apparently not forthcoming from embattled Angela Merkel’s very unpopular government, I cannot help but wonder if DB will be the Lehman Brothers event for Europe. Their entire banking system is too fragile to withstand its largest player getting into real trouble. A crumbling European financial industry would likely accelerate the flight of capital from Europe to the U.S. and (possibly and ironically) the U.K. as well…and we’re ready for it.

Earlier I mentioned bizarreness, bloodiness and willful blindness. First things first: the bizarre and surreal U.S. Presidential Elections, with the much anticipated first debate set to kick off tonight…complete with marching bands and pep rallies at Hofstra University. Be on the look-out for baseball players eating apple pie with their moms.

The nonsense, deception, prevarication and re-direction coming out of both campaigns, combined with the constant on-air spin, half-truths (on a good day), and bombast are a recipe for headaches and nausea – literally. The threads of credibility previously attributed to mainstream media have been shorn. There’s not even a pretense of objectivity or fairness from the networks, major cable news channels, mainstream print or Facebook.

Despite these major headwinds, the unthinkable is happening: Donald Trump and Hillary Clinton are essentially in a dead heat, with Trump currently enjoying the all-important momentum, with a path to 270 Electoral College votes starting to take shape in the very early dawn. Who knows what sunrise will bring?

I stand by my previous published comments in respect of the winner being the candidate whom the majority of US voters fear and hate the least. Whoever wins, one thing is certain: America loses. I don’t relish the dilemma of American voters, charged with the unenviable responsible of picking the flavor of their poison pill. Is it any wonder that confidence in government is in free-fall? If I had to choose the flavor, it would be orange…similar to the hue of Mr. Trump’s spray tan.

The bloodiness is much more distressing. Europe is being overwhelmed by wave after wave of small-scale violent attacks including rape, beheadings, shootings, machete attacks, arson and rock-throwing. Mysteriously, the vast majority of these attacks are perpetrated by young to middle age men who are “new to the area.” Victims are being targeted for such horrible behavior as being young and female, wearing shorts in public, practicing their religion inside churches, and now for being blonde in Sweden.

The willful blindness amongst the mainstream media, the PC academic-classes, pandering politicians and Social Justice Warriors who troll social media (apparently full-time) defies belief. It’s even in the European court system. Specifically in respect of the media, to deliberately avoid reporting of material facts related to the motivations of these jihadists is to play into the hands of the perpetrators.

Being a truth-teller is not racist, xenophobic, bigoted, or Islamophobic. It’s unpleasant, unpopular, and impolite (to some) but it’s also very necessary. I don’t know how much good my mentioning this issue will actually do, but I know for certain that evil prevails where good people do – and say -nothing.

How do we start a reasonable conversation (see video at the BOTTOM of this link) here in western Canada focused on solutions, so we can preserve our safety and security, freedom of speech and our social fabric? As a father of four daughters and uncle of many more, including 3 members of the LGBT community, I am profoundly concerned. Are we going to wait until the violence reaches Europe’s level before this becomes an honest mainstream area of discussion? Ignoring this reality has deadly consequences. I’m writing this calmly, but I feel like yelling.

And then when we look south at the escalating violence, it’s so very easy to become discouraged and frightened. The frequency of violent deaths in the U.S. is highlighting the deep rifts in their society, pitting economically-desperate communities against themselves and against law enforcement when inevitable situations arise.

Again the mainstream media fails to address the core issues, preferring the circus of hysterical commentators and graphic video. It’s pretty obvious that a great many of these violent outbursts end up being the government against the citizens…with both sides being heavily armed and trigger happy. With recent civil unrest, it’s pretty easy to envision a full-on break-down of their fragile social order. Again, it may not make any difference, but we can’t all remain silent and simply hope the trends will change.

Given all that is happening in the world politically, economically, and socially, our team is extremely grateful for the great team of Fiduciary Portfolio Managers we have working for our Clients. Between their patience and discipline and the new tools like Socrates that are becoming available, we are quietly confident that we are on the right path to protect and grow our Clients’ financial wealth.

Patience, discipline and compassion are accretive to your wealth, health and happiness – so focus on these.

Cheers,
Andrew H. Ruhland, CFP, CIM
Founder, Integrated Wealth Management Inc.