The Risk That Most Are Missing

Featuring Keith Dicker

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.

Published on
25 July, 2018
Topic
Macro, Monetary policy, Recession
Duration
29 minutes
Asset class
Bonds/Rates/Credit, Equities
Rating
103

Comments

  • ii

    ida i.

    12 8 2018 09:57

    0       0

    what? when he decided to add to equities in May .. he completely removed valuation from the equation??? just like everyone else ...

  • DS

    David S.

    2 8 2018 19:47

    0       0

    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 8 2018 19:32

    0       0

    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 7 2018 18:47

    7       0

    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.

  • tk

    theo k.

    30 7 2018 09:22

    1       0

    so you are bearish and added equities in May before the summer lull. Really.....

  • ML

    M L.

    29 7 2018 22:24

    1       0

    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.

  • WM

    William M.

    28 7 2018 14:20

    6       0

    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.

  • my

    moy y.

    27 7 2018 17:47

    1       1

    thanks for the subtitles

  • Nv

    Nick v.

    27 7 2018 14:36

    6       0

    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

  • SB

    Stephen B.

    27 7 2018 14:11

    19       0

    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.

  • MG

    Matteo G.

    26 7 2018 16:44

    6       0

    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

  • ml

    michael l.

    26 7 2018 15:25

    6       1

    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 7 2018 12:36

    1       0

    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 7 2018 09:56

    4       0

    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...

  • BT

    Brian T.

    26 7 2018 03:00

    5       0

    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.

  • DH

    Daniel H.

    25 7 2018 21:48

    3       0

    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 7 2018 21:48

    3       0

    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.

  • DK

    Daniel K.

    25 7 2018 21:04

    1       1

    Please have Keith Dicker on again!

  • MD

    Mario D.

    25 7 2018 20:27

    3       1

    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.

  • DS

    David S.

    25 7 2018 20:22

    11       0

    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 7 2018 20:22

    2       0

    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.

    25 7 2018 18:43

    2       0

    Nice work Keith. Always enjoy hearing your view. Plus I agree...

  • mx

    markettaker x.

    25 7 2018 18:40

    1       1

    Oh man, had been waiting for RV to get this guy on. Love the IceCap notes.

  • MM

    Mike M.

    25 7 2018 18:36

    1       0

    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.

  • JL

    James L.

    25 7 2018 18:29

    3       0

    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.

  • FA

    Frank A.

    25 7 2018 18:21

    0       0

    The biggest risk in the market is that most don't understand the plumbing -- the same as in 2007

  • HJ

    Harry J.

    25 7 2018 18:03

    1       2

    Did I miss something?
    Where are the great investment opportunities?
    Cash...Gold...laddered bonds???

  • Jc

    Justin c.

    25 7 2018 17:40

    4       0

    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.

  • MM

    Michael M.

    25 7 2018 16:49

    4       2

    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 7 2018 15:06

    0       0

    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

  • YB

    Yuriy B.

    25 7 2018 12:54

    13       1

    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%?

  • BK

    Brian K.

    25 7 2018 12:49

    12       1

    Without a timeline this opinion isn't worth very much.. I've heard people say the same thing 4 yrs ago with conviction.

  • JV

    James V.

    25 7 2018 12:45

    9       2

    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.

  • SD

    Sebastien D.

    25 7 2018 12:38

    2       0

    Seems he has everything figured-out...

  • BD

    Bruce D.

    25 7 2018 12:34

    3       0

    Exceptional analysis that makes complete sense.....thank you Keith. Dodging bullets will become an art form. Wondering about time frame though?

  • SH

    Steve H.

    25 7 2018 11:58

    4       0

    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....??