The Risk That Most Are Missing

Published on
July 25th, 2018
29 minutes

The Risk That Most Are Missing

The Expert View ·
Featuring Keith Dicker

Published on: July 25th, 2018 • Duration: 29 minutes

Keith Dicker, the founder and chief investment officer of IceCap Asset Management, has a provocative thesis for how the next economic crisis will play out. He discusses the likely drivers, and explains why U.S. equities could actually perform impressively amid the turmoil. He also provides a warning on who stands to be hit the hardest. Filmed on July 19, 2018 in New York.


  • IP
    IDA P.
    12 August 2018 @ 09:57
    what? when he decided to add to equities in May .. he completely removed valuation from the equation??? just like everyone else ...
    • IP
      IDA P.
      12 August 2018 @ 10:16
      it is an excellent interview, but I find it scary that everyone has become a momentum investor
  • SB
    Stephen B.
    27 July 2018 @ 14:11
    This view seems to be indistinguishable from Martin Armstrong’s view, which goes: (i) global bond markets are set to crash, the most likely trigger point being the Euro and Italy; (ii) private investors (that have the freedom to sit on cash) are a tiny portion of the market. Institutional investors must stay invested and there is therefore a potential ~$100T wall of cash, seeking a safe haven; (iii) this will likely be accompanied by distress in non-US equity markets and therefore a further $50T of funds might be looking for a safe haven; (iv) newly issued bonds will be attractive for investors but the rate of new issuances is too small to digest this scale of avalanche; (v) that only leaves the US stock markets, at ~$20T, as potential recipients of this avalanche. I am not sure I am ready to bet the farm on this strategy, as it assumes that whereas global (including the US) bond markets are all synchronized, somehow global stock markets are not. Moreover, even if the theory does hold, and there is a seismic flow of funds, it may only hold for half a trading day, given modern computer driven trading. Either way, Keith Dicker has added his voice to the view that something big is around the corner. His view may be correct, but a fast-moving economic crisis will surely be like modern war – unpredictable in its outcome and where even the best laid plans can be rendered meaningless.
    • AA
      Aaron A.
      27 July 2018 @ 19:08
      Excellent points. He also underestimates the potential sell-off in equities as managers -not to mention retail investors- try to cover bond losses.
    • CH
      Connor H.
      28 July 2018 @ 04:13
      wow; great summary!
    • WM
      Will M.
      28 July 2018 @ 15:01
      Good summary. key is only the US will offer the liquidity sink as foreign investors flood out of their currencies, this will drive the dollar up sharply. However it willingly be a temporary effect. World debt collapse will encompass the US as well. At least some equities will actually have value whereas eventually treasuries, especially 5Y and out will be risky. Of course remember that high US bond demand would also drive down US rates sharply. If you think hard about it, there are lots of implications and unknowns. I am not smart enough to figure them out, but figure about some dammed approach to stay out of the poor house and retain a reasonable standard of living I must. Thats why I am here on RVT, to try to get ideas!
    • sB
      sylvain B.
      6 August 2018 @ 07:11
      why would Euro bond crash ? it could have say the same about Japan decades ago. it is not a highly probably scenario that the ECB would let the bond market to fully crash. I tend to concur with his view that US asset are likely to outperform in the coming months and has a results US should be supported.
  • SH
    Steve H.
    25 July 2018 @ 11:58
    Well-argued piece - but then I would say that because I agree with the path Mr. Dicker sees ahead of us. Trouble is, that path has been pretty obvious for several years. What's that they say about being early....??
    • JT
      Jimmy T.
      25 July 2018 @ 12:24
      They say if you are early you are wrong.
    • @F
      @HoodRichFABIO F.
      2 August 2018 @ 22:37
      markets can stay irrational longer than most can stay solvent. if u stay solvent long enough u might win...Gary A. Shilling's book Age of Deflation from 2010 had an interesting chart which simulated staying short US equities long term and it produced the best return, but realistically it's the least likely portfolio choice b/c of human nature---most people are not able to stay solvent or sane for 10,20,30,40+ yrs.
  • DS
    David S.
    25 July 2018 @ 20:22
    Well-presented and an interesting point of view. Unlike a portfolio manager who must be invested, I run the world's smallest family office. Since my primary goal is to preserve capital and I believe the market is near a critical point, I am mostly in cash, a little gold, and a few low-leveraged stocks. I will not win big, but I will preserve capital until the risk/reward is much better. DLS
    • DS
      David S.
      25 July 2018 @ 20:24
      Sorry for the double hit. Maybe Milton can delete duplicate comment. DLS
    • @F
      @HoodRichFABIO F.
      2 August 2018 @ 22:25
      Bravo family office man. Humble, rational, effective thought-process
  • DS
    David S.
    2 August 2018 @ 19:47
    The middle class cannot subsidize the wealthy forever with QE to infinity (Wealth Socialism). I wish Mr. Dicker would have spoken more about sizing. When the market turns it will be nasty and unpredictable. Now is the time to figure out those companies that have the best chance of weathering the plunge. Size small or just keep a watch list and wait for the opportunities. Someone will always make a lot of money in turbulent times. Portfolio managers do not have this privilege, as they have investment requirements. DLS
  • NG
    Nick G.
    2 August 2018 @ 19:32
    Proviso: I have not made markets in bonds in nearly 30 years. But in those days I would take down a yard of 30s from a client at the drop of a hat. Tough to see how you can state that there is no liquidity in bonds and also state that there is a global yield curve, implying very interconnected markets in FI round the world. The last part I would agree with. The first...not so much. But a very enjoyable interview nonetheless. Much to agree with.
  • AB
    AJ B.
    30 July 2018 @ 18:47
    One of those videos you hit the thumbs up bottom in the middle of the interview. Very clear headed. I disagree with his hiding in US equities with strong balance sheet approach. I think he is missing the ETF angle, and that fact that when investors head for the exits they cannot sell individual companies, but must sell everything.
  • WM
    Will M.
    28 July 2018 @ 14:20
    I thought Keith was spot on with his discussion about the socialization of debts which has destroyed the bond markets. There is NO market, it is totally rigged. The true yield for sovereign debt is completely unknown. Who truly believes that the real rate of interest is only 2 or 3 percent higher than current? Everything is cyclical so when the "safe" bond market turns those rates will soar. Just an extra 5% on rates will destroy the world bond market and cause global government chaos. The US dollar provides world liquidity, if the US dollar climbs due to demand, dollar debt owned by foreign countries/entities will cause both debt default AND debt liquidation generating high dollar demand and soaring USD exchange rates. Its simply a question of confidence, once lost panic will spiral and the Great Recession part 2 will be in full force.
    • WM
      Will M.
      28 July 2018 @ 14:33
      His later point that government will raise taxes substantially, (and blame others for the need), is 100% correct IMO. Martin Armstrong provides some great commentary on the coming bond collapse and tax raising tsunami that will follow....
    • GL
      Geoffrey L.
      30 July 2018 @ 15:50
      William - you listen to that Macro Voices podcast too? So good.
  • tk
    theo k.
    30 July 2018 @ 09:22
    so you are bearish and added equities in May before the summer lull. Really.....
  • GL
    G L.
    29 July 2018 @ 22:24
    Interesting interview, however he is wrong about the yield curve. It was flat heading into the great financial crisis, long before QE started. Therefore one does not need QE to flatten the yield curve. A flat curve is quite normal. It is the level of the curve that is the issue.
  • YB
    Yuriy B.
    25 July 2018 @ 12:54
    Keith seems to understand capital markets infinitely better than I do, so probably I am just missing something. But one of his arguments seems to be simultaneous acceptance of the following 2 statements: (1) bonds are illiquid while stocks are liquid; (2) during the next crisis, people will be stuck holding collapsing positions in long-duration bonds and will thus flee to stocks as a result. How are statements (1) and (2) reconcilable? If I'm stuck holding an illiquid bond that I cannot sell, wouldn't I reflexively try to panic sell my stocks to salvage myself? Also, I suspect the demographic crisis in Europe and Japan will drive older savers to plow into euro- and yen-denominated bonds once yields in these areas spike. Why would a Japanese retiree continue to keep their money in the Japanese stock market when their government bonds suddenly yield 2%?
    • RM
      Ron M.
      25 July 2018 @ 12:57
      Totally. And how do corporates (equities) not get whacked when their balance sheets are at the highest levels of leverage ever?
    • JA
      John A.
      25 July 2018 @ 14:23
      It seems to me that Keith’s thoughts on bonds are absolutely correct. With interest rates at their lowest in history (bond prices the highest in human history), that is the center of the storm. My disagreement, though, is that during crisis, stocks will be the beneficiary. During the GFC, we saw correlations go to 1. During crisis, people sell everything, and especially, not what they would like to, but what they can. Is there any reason that cash is not considered a beneficiary? Or those things that have intrinsic value, like gold, real estate, and maybe even commodities? I’ve read all the books, and been worrying about this for years. There is no point in history that we can point to as a reference point for where we find ourselves. The distortions created by ZIRP and NIRP are massive, but at every other point in history, there was somewhere for capital to fly to for safety (I.e. over the border). This mess is global, and we can’t point to any clean balance sheets. As much a I appreciate Keith’s opinions, I read all of his newsletters, I’m not sure that anyone can point us in the right direction ahead of time. My guess is the cross-currents will be many, and strong. Managing money is going to be like balancing on a surf board. We are in new, uncharted territory, and the future is very unclear.
    • GH
      Gary H.
      25 July 2018 @ 16:56
      When a crisis hits everything becomes correlated and the panic to sell will be evident in stocks and bonds with the exception being Treasuries I suspect
    • RG
      Ryan G.
      25 July 2018 @ 18:23
      His basis for bond liquidity is premised on the lack of a centralized exchange? This makes no sense, I've traded bonds on both the sell and buy-side for my career. More notional value changes hands in a single bond contract than the entire S&P. In this era of false liquidity, it can evaporate from equities just as it can for bonds. This concept of relative liquidity based on the mechanism of exchange is an inaccurate representation of the market. Liquidity is ample in bonds, its simply requires knowledge of how to effectively transact, not much different from institutional equity traders who simply can't hit the bid on the exchange. Just because you can't 'see' the exchange doesn't mean there isn't a vast depth of liquidity, you're simply not looking at it correctly.
    • WM
      Will M.
      28 July 2018 @ 14:46
      I think the key will be capital will bless to the dollar and perhaps treasuries and US stocks. Its most other places that will have the problem.
    • WM
      Will M.
      28 July 2018 @ 14:47
      sorry not bless.... "flee"
    • PV
      P V.
      29 July 2018 @ 02:33
      I think is the flaw in the argument “bond markets are illiquid” is the assumption that in case of a crisis central banks will not step in and start massive bond buying to keep rates low. It has been happening already (Japan, EUR and UK) and it is far more likely than sovereigns raise taxes, which in many countries is a political suicide.
  • BK
    Brian K.
    25 July 2018 @ 12:49
    Without a timeline this opinion isn't worth very much.. I've heard people say the same thing 4 yrs ago with conviction.
    • WM
      Will M.
      28 July 2018 @ 14:43
      Brian I am very sympathetic to your comment, however I think the world political change underway coupled with the destroyed sovereign debt markets and "Europe on the brink" have substantially increased the risk of a coming big bang in the last 18 months.
    • WM
      Will M.
      28 July 2018 @ 14:47
      sorry "flee"
  • JV
    James V.
    25 July 2018 @ 12:45
    Wait a minute...interest rates, taxes, the Dollar, pension plan contributions are all headed higher, and the stock market which is already at record valuations is going to go up? I don't think so.
    • TB
      Tim B.
      25 July 2018 @ 13:25
      I agree with your sentiment, but other great thinkers on RV have put out that thesis as well. Search RV on "milkshake".
    • TB
      Tim B.
      25 July 2018 @ 13:25
      Re: dollar and stock market valuations...
    • DB
      Douglas B.
      25 July 2018 @ 16:31
      Martin Armstrong is of the same opinion; equities could double from here. The amount of money in sovereign debt eclipses that of the equity markets, when rates spike those seeking yield could easily run to equities; with US equities, especially the DOW, being the most attractive to foreign capital.
    • WM
      Will M.
      28 July 2018 @ 14:40
      James, how many times have some of us thought the market could never go any higher. Me in 1997, me in 2011/12 and look where that got me. I am with Martin Armstrong, the US market will become a safe haven for a while, likely soar along with the dollar and the gold and silver may be the only game in town as the world financial system collapses. I suggest you broaden your reading.
  • SD
    Sebastien D.
    25 July 2018 @ 12:38
    Seems he has everything figured-out...
    • ns
      niall s.
      25 July 2018 @ 14:29
      Yes but he admits being totally wrong during 2011/12 , fair play to him for honesty. Bottom line he could be either wrong or right , take your pick . He at least laid our a scenario to follow as the crisis unfolds which is helpful.
    • JM
      Jim M.
      25 July 2018 @ 17:32
      He was wrong but didn't STAY wrong.
    • WM
      Will M.
      28 July 2018 @ 14:36
      To quote the apocryphal quote from Keynes..... "When the facts change sir I change my mind. What do you do?"
  • BT
    Brian T.
    26 July 2018 @ 03:00
    There is very little link given between WHY he bought equities in May because he goes on to say that equities in the U.S. will fall first. If he believes this, then why buy now? He seems all over the place, with no specific timelines and nothing actionable. And I concur with others that with no timing attached, it's just a thesis that has been around for years. I saw very little new here. He sounds like Martin Armstrong in a lot of ways.
    • CH
      Connor H.
      28 July 2018 @ 04:21
      I enjoyed the larger historical macro summary but totally agree that timeline is not just vague but flat out nonexistant in his thesis. Certainly nothing remotely actionable for Joe Retail.
  • my
    moy y.
    27 July 2018 @ 17:47
    thanks for the subtitles
  • Nv
    Nick v.
    27 July 2018 @ 14:36
    Welcome to the most crowded trade in the world - long US equities and USD US equities = 54% of MSCI All World which is FULL RETARD US technology is sensitive to higher rates as higher discount rates applied to distant profits = much lower DCF
  • MG
    Matteo G.
    26 July 2018 @ 16:44
    maybe I am wrong, but if rates go parabolic in Europe I think we will see a melt down in global equities, in particular in Europe but not only in Europe. so i struggle to see US equities as a safe heaven
    • DS
      David S.
      26 July 2018 @ 17:14
      I agree. US equities will be the cleanest shirt after the melt down, DLS
  • ml
    michael l.
    26 July 2018 @ 15:25
    Enjoyed listening and like the IceCap presentations, but I really struggle with the idea that U.S. equities will act as a safe haven, even a relative safe haven, in a coming financial crisis. Maybe that wasn't the message, but that is what I heard. I keep coming back to something I read 10 years ago - in a crisis, the value in US treasuries is that value is destroyed elsewhere before the destruction turns its attention to US treasuries...
  • CB
    C B.
    26 July 2018 @ 12:36
    What evidence is available to support the claim that no private investor is buying European sovereign debt? A reference would have been nice in this regard.
  • ph
    patrick h.
    26 July 2018 @ 09:56
    Thank you for the video. I am struggling a bit to understand how you can be so optimistic about the opportunity in that crisis scenario. Surely the current state of the central banks put them in a really difficult spot when it comes down to facing the next crisis and bail-outs. In that context, I never see any one talking about systematic default and counter-party risk. Even if we get it right on the equity leg down and the currency moves, what is the risk that you cannot cash-in as systemic risk is spreading and defaults are everywhere from your pension, your banks to potentially even your state...
  • MD
    Mario D.
    25 July 2018 @ 20:27
    Great to see Keith on RV! I have been a reader of his very entertaining presentations for years and highly recommend it. Great fun! 2 points to consider imo: 1) If you are right in your sequence, the timing of this seems quite tricky. The first move is clearly very negative for equities as stated. We've got a taste of that positive correlation in February. Then, there may or may not be this rally in equities, at least in the ones with solid B/S and therefor low interest expenses, which also do not rely on public spending for their top line (very few left probably). And then, at some point, the equity rally has to stall due to bond yields that will be relatively juicy. But I can certainly see that the idea of bonds as a "safe investment" will go away and cause a sea change. 2) On the pension plans: aren't higher rates exactly what they need? The liabilities shrink due to higher discount rates and they finally get higher yielding investments again. Granted, there may be a period where the asset values fall fast and hit the sponsors and/or members, but then everybody will be in the same boat and rules will be changed or temporarily suspended. Germany, for instance, temporarily changed the bankcrupty law to accomodate depressed asset values during '08/'09. This has served them well and surely every western government has looked into such "tools" by now. We will see rules changing pretty fast if millions of voters suddently worry about their pesions. Keep up the great work, Keith, and thanks for the video.
    • CD
      Christine D.
      26 July 2018 @ 04:25
      Agreed on the pension and further, if rates rise why wouldn’t capital flow into the primary bond market for some secure 5-6%?? Understandably the asset prices on the secondary bond market will fall but that has nothing to do with the primary market does it?
    • CD
      Christine D.
      26 July 2018 @ 04:25
      Agreed on the pension and further, if rates rise why wouldn’t capital flow into the primary bond market for some secure 5-6%?? Understandably the asset prices on the secondary bond market will fall but that has nothing to do with the primary market does it?
  • DH
    Daniel H.
    25 July 2018 @ 21:48
    I truly enjoyed listening to Keith, but being short bonds implies being short dollars, and being long equities implies being short dollars. There seems to me to be a disconnect in his logic. That said, I believe he is right about the dollar, but wrong about US Treasuries. The long bond will go to 1% before this cycle is over, and I will be very surprised if TYX gets to 3.25%. The global economy is weak, and weakening.
    • WS
      William S.
      25 July 2018 @ 23:04
      He mentioned the US will not be immune - simply that it would be the last domino. As the crisis unfolds, in the first stage(s) money will flow into the US as a whole, meaning the dollar gets stronger AND equities. I also want to point out that a few smart people have stipulated that the crisis will unfold with gold AND the dollar going up at the same time to kick things off. Global capital flows matter, and although rare...the dollar can go up while US equities rise, ditto gold. His argument here is about the consequences of FLOW, albeit for only a short-medium timeframe.
  • DH
    Daniel H.
    25 July 2018 @ 21:48
    I truly enjoyed listening to Keith, but being short bonds implies being short dollars, and being long equities implies being short dollars. There seems to me to be a disconnect in his logic. That said, I believe he is right about the dollar, but wrong about US Treasuries. The long bond will go to 1% before this cycle is over, and I will be very surprised if TYX gets to 3.25%. The global economy is weak, and weakening.
    • DH
      Daniel H.
      25 July 2018 @ 21:51
      RV TV -- I need a delete button to get rid of this duplication. The web interface was too slow and made me think the click did not take. So now I have two comments where I only intended one.
  • DK
    Daniel K.
    25 July 2018 @ 21:04
    Please have Keith Dicker on again!
  • JL
    James L.
    25 July 2018 @ 18:29
    Whenever I hear this argument about bonds vs. stocks, I can't help but revert to the fundamental that governments can survive (and even grow) in the face of a falling stock market, but they cannot survive a disastrous bond market in circumstances where sovereign debt is >100% of GDP. If there is a choice, governments will save their source of financing even at the cost of the equity market or, to a large degree (barring hyperinflation), the value of its currency.
    • MD
      Mario D.
      25 July 2018 @ 20:36
      I completely agree with you on the preference function of governments (and politicians). Not sure how this is reflected Keith's thesis, but I cannot imagine he doesn't think about it. Probably it's the difference in timing and the sequence across different currencies he is referring to. While the Euro system falls apart, USD and US equities may benefit. Although one would think that the US 10y will still be a good place to be in that scenario. But I guess to some extent this is his whole point: Everybody is hard-wired to think that way and if it doesn't happen, people fall off their chairs.
  • HJ
    Harry J.
    25 July 2018 @ 18:03
    Did I miss something? Where are the great investment opportunities? Cash...Gold...laddered bonds???
    • NI
      Nate I.
      25 July 2018 @ 20:24
      You didn't miss it. Conspicuously absent.
  • DS
    David S.
    25 July 2018 @ 20:22
    Well-presented and an interesting point of view. Unlike a portfolio manager who must be invested, I run the world's smallest family office. Since my primary goal is to preserve capital and I believe the market is near a critical point, I am mostly in cash, a little gold, and a few low-leveraged stocks. I will not win big, but I will preserve capital until the risk/reward is much better. DLS
  • BJ
    Brent J. | Contributor
    25 July 2018 @ 18:43
    Nice work Keith. Always enjoy hearing your view. Plus I agree...
  • my
    markettaker y.
    25 July 2018 @ 18:40
    Oh man, had been waiting for RV to get this guy on. Love the IceCap notes.
  • MM
    Mike M.
    25 July 2018 @ 18:36
    Thank you Justin, go right ahead. We are sellin when they are yellin and buyin when they are cryin. It is the second mouse who get the cheese IOHO.
  • FA
    Frank A.
    25 July 2018 @ 18:21
    The biggest risk in the market is that most don't understand the plumbing -- the same as in 2007
  • Jc
    Justin c.
    25 July 2018 @ 17:40
    So I go on the Bloomberg and plot the biggest 6-month ROC in 10-year yields over the last 30-years. The equity market performs exceptionally well in just about every case. The 3 biggest moves up this cycle were early 2009, late-2013, and the 2016 election. Check out the stock market folks. Straight up. The prior peaks were early 1994, 1996, and 1999. Again, not a time to be bailing on the stock market. The higher rate headwind is all noise. Stocks should be worried if rates are rolling over. If the 10-year is at 3.5% or 4% next year you want to own stocks right now.
  • Cb
    Chris b.
    25 July 2018 @ 16:49
    The risk most are missing when theses investment officers speak about the markets and their view is what has their track record been and how has their view changed. He has been a bond bear since 2015. Nothing new here.
  • WB
    Wes B.
    25 July 2018 @ 15:06
    The question is how big is that first hiccup stocks see when the crisis he speaks of emerges. US equities may be the big relative winner when all is said and done but I struggle to see how you win on an absolute basis in the scenario he envisions Just seems to me that everything goes down with maybe the exception of USD and USTs
  • BD
    Bruce D.
    25 July 2018 @ 12:34
    Exceptional analysis that makes complete sense.....thank you Keith. Dodging bullets will become an art form. Wondering about time frame though?