Casting one’s mind back to the S&P low of March 2009 when most the family office’s wealth had halved since the Nov 2007 high. Diversification had provided no protection against the collapse, as every asset had become correlated. On those dark days near the lows the global financial system as we know it, felt on the brink of failure.
Over ten years later, the S&P has risen 435% percent from the low, but only 80% from the Nov 2007 high, for those who chose inactivity as an investment strategy. For those that were forced to sell near the lows, their net returns would have been much more marginal. Now imagine if one had taken all the chips off the table in Nov 2007 and then re-invested near the lows of March 2009. They would have made generation returns.
After ten years of one of the most powerful US stock market rally’s for decades, that has been propelled by debt rather than fundamental economic growth. We should now seriously consider that we are on the cusp of the next great financial upheaval i.e. that the US stock market is at or near its peak for the next decade. However this time the risk is that the financial drugs used to save us in 2008 will be ineffective and that the lows will be even lower than in 2008. Of course, there would be a recovery. But what if the new and powerful geopolitical drivers meant that that recovery begats a new less liberal capital structure?
In that case, taking the decision to go to cash today, could create generational wealth on a scale rarely seen in history. With the options to invest at the start of a new cycle. So what might be the signs that now is the time to exit?
- The S&P has peaked in the past few weeks just below 3050. Any declines from here sub 2800 will provide confirmation that potentially long term high is in place.
- The Printing of money over the last decade has failed to reignite real growth in the US and especially Europe.
- The Shift of geopolitical power away from America. In 2008 America was the world’s only super power, giving it the ability to manage its financial crisis with relative freedom and tacit support of most other nations. Today China is also a super power, especially economically and it has locked horns with America in a strategic challenge. As such Americas room to manoeuvre will be restricted in the next crisis.
- The US China Trade war, is a symptom of the level of strategic completion as Trump attempts to slow down the rate of Chinas economic growth, and thus its military and geostrategic challenge to American Power. As such it will not recede but only increase in ferocity. In all probablity it will become a debt war that could then accelerate the market decline. The ultimate expression of this completion will be a new cold war type bifurcated world into American and Chinese spheres of influence and a coincident arms race on the scale of the build up to 1914, with a high risk of conflict in 2025-27 unless America can keep military pace with China.
- The EU’s economic morbidity and break up. Whilst the US stock market has been rocketing skywards, the European stocks have been falling. This is a dangerous signal as when the US turns downwards in all probability EU stocks will collapse and trigger a political crisis across the EU that will result in its break up leaving a core northern group, and orphan nations scattered across Europe, venerable to China and Russia
Robotics and AI changing society will change our society over the next decade and create huge unemployment that will have to be supported by a universal wage. This could require a new model of wealth distribution across even the most capitalistic of nations.
- Climate change impacts are accelerating and are a very real and present threat that will require huge national resources to mitigate as littoral cities become flooded.
- Commodity inflation. The stock markets recovery has been coincident with a downward cycle in commodities from 2010 to 2019. However we expect this cycle to bottom in the next 18 months and then be replaced with one of the most powerful inflationary cycles for decades, that will inhibit the growth of any consumer nation, especially America.
The scenario could best be described as a line of dominos, and once the markets start to fall there are a host of reasons why they will continue to fall and stay low for many years afterwards unlike previous recovery’s. So step one is to cash ones chips in. Step two would be to invest in safe havens to preserve one capital during the collapse and step three would be to invest in the right assets at the next lows post the great financial upheaval.