The sky is falling
There is a video on Livewire you should watch in their top trending articles from a chap called Donald Amstad from Aberdeen Standard Investments. You may not have heard of Aberdeen Standard Investments, but they are a large global fund manager with their roots in Scotland where they started out as Aberdeen Asset Management and Standard Life Investments.
They now manage £583 billion globally in eighty countries with fifty offices. Both of the original fund managers used to be my clients when I was a stockbroker in London in the eighties. They were known for their ‘canny’ Scottish independence of mind and this is an example.
If good writing is the art of being able to express what everyone knows to be true but cannot express themselves then Mister Amstad does just that as he has a stab at explaining what is wrong with the Western World. We all know there is something wrong, the conundrum of negative bond yields is telling us that something unorthodox is going on, and the recent pick up in stock market volatility tells you that the markets have begun to pick up on something being wrong as well. Mister Amstad nails it, and it’s not good news.
He concisely pulls together all the threads and makes ‘obvious’ all those things we know to be true but no-one has expressed this well. The source of all evil he tells us has been money printing by the West, an event that ‘shocked’ Asian countries. The Asian crisis in the 1990’s could have been solved by money printing but Asian governments refrained, because the IMF warned them they would become the next Zimbabwe if they did, with their currencies and economies destroyed by currency devaluation and hyperinflation. Instead they ‘took their medicine’, re-set their balance sheets, went through the pain and emerged years later better for the process.
But come the financial crisis in 2008, which Amstad notes was a Western financial crisis, not a global financial crisis, the US and Europe took the easy route, they didn’t take their medicine, they printed money and a decade later, with all the new money swilling around, the consequences are clear to see, interest rates are hyper low or negative and going lower.
He says this ‘bond bubble’ has put the Western World on the ‘edge of a cliff’, that habitually printing money at any sign of financial market stress cannot continue and that the Western Central Banks are now almost out of ammunition. After the final rate cuts and the recommencement of quantitative easing, the inevitable will happen.
When the music stops
The bond market will burst and when it does the money printing governments will lose the ability to endlessly fund themselves as no-one will want to buy their bonds anymore, plus the bonds they have already issued will become unrollable.
On top of that, and more relevant to us as investors, the money that had been finding its way from the printer, through the bond markets, into the investment banks and then into the stock market, the money that has put $25 trillion worth of S&P 500 companies on a fantasy world multiple of 21 times earnings, will end. Equity markets will inevitably fall and so-called risk-free assets will be revealed as being anything but.
At the corporate level the Western banks that rely on a rising yield curve, high interest rates and asset price inflation will see the opposite of that. They will not be able to find a margin, to make money, let alone grow. Some will go out of business. Pension funds will not be able to pay their liabilities and insurance companies will go bust.
Meanwhile the US government which is running an economy worth $20 trillion will have to manage their way out of $125 trillion of unfunded promises they have made which they simply, without the luxury of a healthy bond maket, will not be able to deliver on. That mismatch in liabilities versus funds available will create a social unrest as the government has to pick, choose, and isolate, the promises that it can and cannot fulfill. The UK is in a similar position, with unfunded liabilities.
The West is verging on catastrophe says Mr Amstad and the markets are only just beginning to wake up to this as evident from the rising financial market volatility in the last couple of weeks. ‘We are at the end of the game’ and the West ‘has to take its medicine’ and when it does you’ll need a financial markets blindfold because ‘it's going to be a pretty scary ride’.
Donald Amstad is not a perma-bear
As a market commentator watching other market commentators, I can tell you that there is a piece of financial market commentary real estate that is occupied by a few individuals, most notably names like Nouriel Roubini, or Marc Faber. Commentators who stand permanently at the very negative end of the Normal Distribution Curve of opinion telling us at all times that the "Sky will Fall".
They do it so they can stand out, it is a desolate spot, but their own bias aside, they serve a purpose because they balance out the rest of the financial market that is infested by financial institutions that are commercially biased to optimism for their own survival.
We need these canaries in the mine, but the scary thing is, Donald Amstad is not one of them. Donald works for one of the financial institutions that are commercially biased to optimism for their own survival. And that makes his dissertation all the more credible.
Of course, the problem with all financial disaster scenarios is timing. It’s no good being the only person that was right in the end if you miss a decade of bull market gains on the journey. So the question for all of us is not only “Whether” Donald Amstad is right, but “When” and with the whole financial system set up to protect itself, and with the equity market so pathetically responsive to central-bank utterances and with the tweeting President so set on supporting it, this oblivious bull market could perpetuate itself for a lot longer.
The thirty-five million dollar fund I run went to one hundred percent cash three weeks ago. Not on this thesis, but because of the rise in volatility, the market’s whipping around felt like last October all over again. But maybe there is something deeper and Donald Amstad may have explained it for the first time in a language we can understand.
I was looking to time my re-entry to the stock market, but looking at how viral his interview on Livewire is going... I’m in no rush.
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Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.
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Marcus Padley founded Marcus Today in 1998 and leads the team of analysts and market commentators that publishes a daily stock market newsletter, presents four podcasts and runs an $80m Australian equity fund. He is passionate about educating and...