Juggling Dynamite

Danielle was a guest today with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here.

The commodities super cycle and Canada’s rock solid (rocks and trees that is)economy were two of the greatest stories ever sold to the investing public over the past decade. And the Canadian dollar was a huge benefactor as capital flows poured into the country from 2003 to 2008. But then just when it was least forecast by the consensus, the capital tides turned with the bursting of the global credit bubble and demand turned down. The trouble is too many people, companies and business models were heavily invested in the belief of a never-ending up cycle. When QE mania began in 2010, resources and the Canadian dollar rebounded quickly on speculation that liquidity could cure demand demise. When it clearly did not, investment money began to leave again by 2011, even as investment banks and hedge funds merrily manipulated, stockpiled, ‘played’ in commodity, currency and futures markets free from meaningful controls or regulation.

Recently, a surge of interest and outrage at “market makers” and their speculative activities has spawned a new round of regulation and restrictions, prompting many participants to pack up their algos and go home. If they cannot lever up unrestrained and unaccountable, then they aren’t keen and the Loonie has fallen along for the ride–down more than 12% in the past 2 years, more than 16% since the bubble peak in 2008.

This week it failed to hold the next level of key support as shown in the chart below, making further downside likely. This will help some of Canada’s manufacturers, but not most commodity producers(as a strengthening U$ moves commodity prices lower, and some input costs higher) nor businesses or investors who are unable to recognize and navigate the deflationary dynamics of the post-consumer-credit-bubble world.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

There is no doubt that some major developed ecomomies saw stellar equity gains in 2013. But careful risk management does not place all capital eggs in one asset type, and as shown in the chart below, most other asset classes–like emerging markets, precious metals, commodities, bonds, non-US currencies and alternative funds–mostly lost money over the last 12 months. Some lost a lot.

Infact overall in diversified portfolios, huge gains made on developed market equities were not enough to outweigh the losses in the other asset classes, making portfolio returns for many investors negative to flat on the year–notwithstanding tons of capital risk and all the QE-hype in the world.

Of course, those who were heavily concentrated in US equities and Canadian banks in 2013, with little to no exposure to other asset classes, showed high double digit returns on the year (although not over the past 5 or 14 years as most were really just making back the money they lost in the 2000 and 2008 bear markets, but who wants to fuss over math?).

The trouble is that those same “winners” from 2013 now find their net worth (and worse, their borrowed margin accounts) precariously perched once more near the summit of the most over-valued assets in the world coming into 2014. And the plan is????