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Cavelti Research

 

Cavelti & Associates helps institutions and  individuals stay abreast of geopolitical and demographic changes. About Cavelti & Associates Ltd.


Twenty years...

 

Below is a repository of our comments and predictions during the past decade and a link to our archives, giving you access to more of our work. 


October 2018, "Unstable World, Robust Markets"- Client Letter

It’s ten years since Lehman Brothers collapsed and the financial world unravelled. We entered the crisis with cash reserves that seemed alarmist, but helped us weather the storm and be able to stock up on quality equities after their precipitous drop. Once again, we are extremely cautious, with cash positions between 40% and 50%. And once again, our posture appears exaggerated, at least when we listen to the messages produced by the presidential tweet machine and Wall Street’s hype factory. Yet, we prefer to look at substance over media spin and, when we do that, we’re deeply concerned. Let us explain.

To read on, click here


July 2018, "Toward a Multipolar World"- Client Letter

A new world order, without America at the head of the table, is in the making. We examine why even Washington’s allies are finding it difficult to relate to the world’s lead power. We trace America’s multi-decade transformation from admired nation to a bizarrely inconsistent and unreliable one and conclude that it spanned both Republican and Democrat administrations. To be sure, President Trump has managed to considerably speed up the process, but the root problems are deeply systemic and cultural.
Before turning to markets and providing advice for the difficult times ahead, we’re exploring who America’s most likely rival will be.

To read on, click here


April 2018, "An Important Change in Narrative"- Client Letter

Inflection points in narrative are highly important markers. Technically, the stock market is still in a bull market and no one can know when a deeper correction will unfold. What is certain is that the reassuring storyline that’s been with us for so long is dead. That doesn’t mean the talking heads on financial TV channels and their followers will embrace the new reality immediately, but it makes a more defensive portfolio strategy imperative. With two years of considerable outperformance behind us, we explore what may lie ahead and how you can safeguard your portfolio.

To read on, click here


January 2018, "Events, Trends and Catalysts"- Client Letter

With two years of considerable outperformance behind us, we explore what may lie ahead. For now, the prevailing narrative persists: motivated by the belief that central banks won't allow a meaningful correction in equities and that there are few attractive places for money outside the stock market, investors feel that broad overvaluation is justified. Yet, a challenging geopolitical landscape, looming social policy issues and economic imbalances all suggest 2018 may be turbulent. We look at potentially disrupting events and contemplate how they may derail the many unsustainable trends.

To read on, click here


Holiday Season: Peter's Lifetime Voyage Through the Charitable Universe

For most of us, the practice of charitable giving is not something that follows a defined set of rules, but rather something that continuously evolves. Peter Cavelti wants to share his journey with you-how he was first taught to give, how his perceptions and attitudes changed, and why he eventually ended up with a very small number of causes to support. He explains why one of them, Doctors Without Borders, continuously inspires him.

To read on, click here

 

October 2017,  “The Elusive Correction ” – Client Letter

How risky is the broad stock market? It depends how you look at it, but there is plenty to worry about. To begin with, valuations are high by any yardstick; in the U.S. for example, the S&P500 cyclically adjusted price-to-earnings ratio has only been higher once—in the late 1990s. Then there is the fact that during the past decade S&P500 corporations have spent more on dividends and share-buybacks than they’ve earned. That, in turn, has boosted corporate indebtedness to close to $9 trillion, which is a third higher than it was at its previous peak in 2008. U.S. corporate debt is now at 46% of the country’s GDP, a historical high. In short, America’s companies are more highly valued, less profitable and more indebted than they’ve been in years. Unfortunately, none of this gives us a clue as to when exactly the inevitable correction will unfold. All it provides us with is a historical marker. A number of prominent hedge fund managers have exited markets, some by liquidating their holdings and returning cash to the clients. Our approach has been different: we believe that the key central banks have no alternative but to keep interest rates at extreme lows, and that politicians fully support that stance. Of course, the continuous use of stimuli to counteract economic challenges is extremely imprudent—eventually, a much bigger crisis will force creative destruction and bring this folly to an end. But when that happens is completely unknowable.

To read on, click here


July 2017,  “Deviations from the Norm” – Client Letter

We examine several recent events that threaten to overthrow the social, economic and political order. As a general rule, when the unknowns starts to crowd out the predictable, it’s best to be cautious. We find it absurd that, in the face of that, most investment professionals still stick to fairly dogmatic ‘themes’ and ‘styles’. As we’ve tried to explain for several calendar quarters, we believe an open-minded approach works much better. Our flexible strategy, along with paying attention to downside risk and occasional retreats into cash, has helped us to considerably outperform during the past three years.

To read on, click here


April 2017,  “Age of Discontent” – Client Letter

The majority of people in the industrialized world feel disenfranchised. Their life appears to be in the hands of an unaccountable elite, where corporate, political and academic leaders collude. They can vote for the major parties, with the outcome that a profoundly unsatisfactory status quo is perpetuated, or they can vote for a fringe party that promises to shake things up, but typically brings with it elements of extremism and lack of experience. The U.K. Brexit vote and the election of President Trump were a warm-up for the upheaval this year and beyond.

Turning to the markets, we believe there is a huge disconnect between the world’s economic, social and political challenges on the one hand, and the pricing of financial assets on the other. Given this dilemma, we continue to believe in a diversified and pragmatically managed stock portfolio that combines growth and income objectives and targets different macro outcomes. You should also hold gold, ideally in physical, segregated form.

To read on, click here


January 2017,  “On America” – Client Letter

So far, financial markets have welcomed Donald Trump’s victory with exuberance, focusing primarily on his promise of lower taxes and less regulation. But, for several reasons, Wall Street’s party may prove premature. All the more reason to enter the new year with a dose of caution.

To read on, click here

January 2017,  “Three Tests for Gold” – Client Letter

Because the recent fall in gold prices begs for a comprehensive reassessment, we subject the yellow metal to three tests. How does gold look as a currency alternative, how does it stack up in terms of commodity fundamentals, and how does it look when viewed through the lense of technical analysis?

To read on, click here


October 2016,  “The Delta Factor” – Client Letter

The recent suspension of all Delta Air Lines flights highlights the drastic need to overhaul our badly impaired infrastructure. The eventual cost of overhaul will be high, and other areas of governance, such as health care, education and social welfare, demand equal attention. Yet the decades of high economic growth and swelling tax revenues are behind us, while central bank efforts to reverse economic stagnation have failed.

An  inflection point appears close, but timing it is impossible. Given these circumstances, we continue along our course of retaining market exposure, but with an eye on vastly different possible outcomes.

To read on, click here


July 2016,  “On Arrogance” – Client Letter

We comment on the arrogance of the political class, the misguided and desperate actions of central bankers attempting to fix a broken system, Brexit and the future of Europe, and our conviction that investors have no choice but to resort to an approach of extreme pragmatism and flexibility.

To read on, click here

 

April 2016,  “The Central Banks, Again” – Client Letter

The positive effect of central bank shenanigans is that equity values, for now, are being propped up, which boosts the wealth effect and in turn makes consumers a bit more confident. The negative is that our monetary authorities have managed to distort every conceivable link between the pricing of financial assets and their underlying fundamentals. In doing so they have also undermined the ethics complex that governed the successful operation of society during the past many centuries.   Working hard and saving for a rainy day no longer seems like a smart idea; consumption in excess of production is what is being systemically promoted instead.

Given the many uncertainties ahead, it seems to us that a strategy recognizing various outcomes, and diversifying accordingly, may make the most sense.

To read on, click here

 

January 2016,  “Annus Horribilis” – Client Letter

Considering the weighty issues overhanging the global economy and social order, it seems a fair bet that financial assets markets will be marked by growing volatility. Our view is that what lies ahead is unknowable and, because of that, the only strategy that makes sense is to keep an eye firmly on downside protection. For Melissa and me that means we maintain exposures to assets that will flourish under various possible scenarios, while also maintaining a robust liquidity reserve.  This has been our core belief for the past two years and will continue to guide us into the future.

To read on, click here

 

December 2015,  “Gold Offers Solid Value” – Client Letter

As I’ve noted before, gold’s commodity fundamentals are strong, with supplies being challenged both as a result of low prices and sharply fewer gold discoveries, and demand likely to remain brisk, as geopolitical uncertainties abound, investors almost everywhere in the world look for hedges against depreciating paper currencies, and central banks continue to shore up their gold holdings.  

The mechanics of financial markets frequently defy logic, which means that we cannot forecast the timing or extent of gold’s next movements. What we can do is attempt to seek the best relative value among a large array of offerings. And in line with that approach, we feel it is very advisable to continue holding a meaningful percentage of overall assets in physical, segregated gold. 

To read on, click here

 


October 2015,  “On Chaos” – Client Letter

As investors are coming to understand, chaos is frequently present in the economy, whose functioning and success is dictated by two forces: the mindset of its participants and the policy actions initiated by politicians and monetary authorities. To say the least, that makes for an extremely complex construct. In recent years, central banks have made available to the economy trillions of dollars, while politicians have continuously reassured us that all is under control, and economists and the financial industry have echoed this optimistic sentiment. But people aren’t buying it. Consumers are extremely cautious and businesses are hesitant to make productive investments.

 

It’s difficult to determine exactly when public sentiment changed. Maybe the 2008 financial crisis provided a catalyst, or maybe the policy responses to that crisis (such as the mega bailout of patently reckless banks and incompetent enterprises) were responsible. Or perhaps negativity built in small increments, over time. Few people have the knowledge or analytical tools to investigate economic and social developments, but everyone is touched on some level as they unfold. What is not grasped through intellectual reasoning is still deeply understood at an intuitive level.

To read on, click here

July 2015,  “Countdown to Lift-Off” – Client Letter

Central banks try to be “precise” in timing a rate increase, but fail to understand the overall context—politically, economically and culturally. What’s needed is a return to a world where productivity and thrift is rewarded.

Absent that, the question on everyone’s mind is when a “riot point” will arrive and what form it will take. Will it come in the form of social unrest, a policy error by a key central bank or government, a foreign military adventure gone wrong, a banking crisis, or will the catalyst be something entirely unforeseeable? No one can know, but it seems clear that the default force of the American-run world, organized money, is no longer serving us well. Unfortunately, the transition to a different system will most likely be messy and inconvenient.

To read on, click here

 

 

April 2015,  “On A Wing And A Prayer” - Client Letter
Richer valuations, a super strong dollar and policy paralysis make financial markets vulnerable. Add to that a monetary regime that is out of control and a deteriorating geopolitical climate.

We expect volatility to increase throughout this year.

To read on, click here

 

 

January 2015, “More Unintended Consequences” – Client Letter

The dramatic decline in the price of oil will have serious unintended consequences. Expect the Middle East to be further destabilized and oil producers everywhere to be plunged into budget deficits. The U.S. will not be spared—the shale miracle will turn into shale bust, banks will be pressured, and unemployment will start to rise again.
To read on, click here

 

 

October 2014

The loop in which we’re caught is by now brutally transparent: central banks, led by the U.S. Federal Reserve, are forced to keep interest rates at virtually zero or numerous mainstream economies face ruin. We don’t need to economically define what that means: given the precarious state of the Eurozone, or Japan, or the bubble characteristics of U.S. stocks or Chinese or Canadian real estate, even a hiccup in interest rates could lead to economic pneumonia. It won’t take much to send the global economy into deep recession, massively swell the ranks of the unemployed, and thus even further aggravate the problem of wealth disparity.


Is there any asset class that offers value? The massive debasement of the world’s key currencies suggests that a gold holding, ideally in physical and segregated form, makes more sense than ever—especially at these prices.

 

July 2014

What would we have said a few months ago if we’d known that U.S. corporations would post another poor earnings quarter, that Japan’s economy would continue to swoon and that much of mainstream Europe would see anti-EU parties make huge gains? And how would we have reacted if we’d known to what extent the U.S. would escalate its conflicts with Russia and China and how Moscow and Beijing would react? Consider that just during that past six weeks Russia and China have signed a $400 billion energy deal, decided to move toward non-dollar settlement of their commercial transactions, sold a considerable quantity of U.S. Treasury securities, ordered reductions in the use of U.S. technological goods, and conducted joint military drills. Frankly, if we’d known half of all this, we would have guessed that financial asset markets would be in for a rough ride. Yet, instead, by early summer, bond prices were strong and stocks kept rallying. Maybe it’s time to take some money off the table.

 

April 2014
Economically, the first quarter of 2014 presents an image of disparity. In the U.S., despite one of the most brutal winters, the economy muddled along much as it did in the two previous quarters. In Europe, a multitude of structural inefficiencies continue to take their toll, making it the slowest growing region. In Japan, meanwhile, Abenomics is being touted as an unrivalled success on an almost daily basis, but the reality is strikingly different. The stock market has slumped, trade is contracting and business and consumer sentiment remains poor. Expect a massive depreciation in the Euro and the Yen later this year.

 

February 2014
The showdown over Ukraine threatens an already frail economic and political balance. By immediately embracing a Kiev regime whose legitimacy is suspect, the European Union (aggressively pushed by Washington) is engaging in an adventure that will prove extremely costly, both in terms of money and credibility. After all, Russia is the union’s fourth-largest export market and EU banks have huge exposures to both Russia and the Ukraine. Where is the Ukrainian crisis headed? It seems to us that there are two possible outcomes. One is a tense but relatively peaceful move toward a de facto split of the country, mostly along ethnic lines. The other is a drawn-out showdown in which Russia will restrain itself, but inflict harsh financial punishment on “Western” Ukraine and its European and American friends, until it gets control of territories that are strategically important and have significant Russian ethnicity. There are those who predict an all-out military confrontation, but we believe Russia is not interested in risking a war over a Western Ukraine that has historically been hostile and would prove very difficult to govern. We also believe that U.S. attention will soon be diverted by other crises.

 

January 2014
With stock prices at new highs, how worried should investors be? Our views vary considerably from the sentiment of most investors. We are less concerned with a dramatic change in central bank policy, but see
anemic economic growth and overly stretched stock valuations as a key challenge. The reason we aren’t overly worried about the Fed is because even with two months of slightly more reassuring economic data under its belt, the central bank decided to cut back only by $10 billion (out of $85 billion) a month. More importantly, the Fed’s bond program is only a very small part of its overall support operations. Finally, the Fed and other central banks continue to signal that they are committed to keep short-term interest rates near zero for considerable time. The bottom line: fears of a change in Fed policy will sporadically ignite and ease off through 2014, as the central bank continuously adjusts its rhetoric. We believe a defensive multi-asset strategy, bolstered by a high degree of liquidity, will continue to generate decent returns.

 

December 2013
In the U.S., the rapidly building currency crisis in the emerging markets is hardly noticed.
Countries like Brazil, India and numerous others experienced huge capital inflows and attendant currency appreciation, as the U.S. Federal Reserve administered its multi-year massive stimulus programs. Now, as the Fed is talking about withdrawing some of its monetary support, the opposite is happening. The Real, Rupee and other emerging markets currencies are falling so precipitously that central banks are forced to sharply raise interest rates at a time of economic weakness. This has led to sharp complaints against Washington, but American policy makers refuse to engage. That position will backfire—before long, badly deteriorating economies in the emerging countries will seriously undermine earnings at America’s increasingly globalized companies, at which time far-away problems will turn into a major U.S. problem.

 

 October 2013
The U.S. government shutdown is behind us, but eroding U.S. credibility will continue to be a big theme.
Increasingly, policy-related uncertainty subverts business and consumer confidence and forces central banks to perpetuate dangerously accommodative monetary experiments. Unfortunately, the problem of ineffective government is equally acute in the European Union and in Japan. So far, thanks to central banks both bonds and stocks have survived the political paralysis well. But, as we wrote in August, an eventual return to sustainable economic practices will bring instability to financial assets. The longer the current state is perpetuated, the more chaotic the readjustment will be.

 

August 2013
Our recent comments have mostly dealt with central bank policies and how they continue to distort markets. We also repeatedly pointed to the folly of ‘paradoxical thinking’ that had taken hold: bad economic news emboldened market participants, because they felt reassured that central banks would be forced to continue supporting markets. By mid-year, increasingly many investors believed that bad news equaled strong stock and bond markets.  

The past few weeks have blown a few holes into such thinking. Bond yields have risen sharply, major stock indices have been under growing pressure and gold has rallied against all currencies. There are numerous theories of why this happened and why it happened at this time—we view it simply as the beginning of an inevitable return to a state of normalcy. Manipulation can have a large impact on assets values, but no matter how massive the manipulation is, eventually a return to the natural order of things must occur. And what is the natural order by which financial markets function? It’s simple: interest rates must be allowed to serve as a pricing mechanism for risk, yields must reward productivity, equity values should reflect current and prospective corporate success, and the value of currencies should mirror the economic and monetary integrity of their issuers. The path toward such a state of normalcy will be extremely difficult and disruptive, and may take place over many years.

 

July 2013
As U.S. stock indices make new highs, the U.S. economy may be drifting back toward recession. Second quarter economic statistics make for frightening reading. If it weren’t for the housing sector, the economy would have posted negative growth. And on the corporate earnings front, the only major segment that achieved growth was the financial industry. At best, it seems, the U.S. economy will crawl along at subpar growth—at worst the recovery is near its end. And all this after trillions have been spent by the Federal Reserve to rescue, stabilize and stimulate.

 

April 2013
This month will be remembered for the initiation of the most reckless monetary intervention yet. In articulating the specifics of the Bank of Japan’s asset purchasing program, Governor Kuroda went even beyond what the recently elected government under Premier Shinzo Abe promised, vastly surpassing it. After winning the election, Abe promised a considerably lower Yen, continued low interest rates and a 2% inflation rate. Kuroda, head of the supposedly independent central bank, on April 4 outlined a plan that shocked even the most cynical critics of central bank largesse. To put his outline in perspective, the Bank of Japan will be printing sufficient new money to buy up assets at 75% of the rate of the U.S. Federal Reserve, on an economy that’s one-third the size of America’s! The idea is to devalue the currency so decisively that Japanese exports will roar again, while keeping interest rates where they are. Economically, this is not realistic—while exports will experience an enormous boost, interest rates will in our opinion soon explode. Remember that Japan ended 2012 with the G10’s highest indebtedness of over 200% of GDP. The size of the government debt was 997 trillion Yen, or 23 times annual revenues. That’s the equivalent of an individual earnings $100,000 a year and being in debt to the bank to the tune of $2.3 million! We believe the consequences are easy to foresee. In domestic terms, some Japanese exporters will excel, while Japanese Government Bonds will fall victim to a sharp selloff. Internationally, the bid to lower the yen may trigger another round of global currency wars.

 

March 2013
Europe’s finance ministers should be congratulated: in dealing with Cyprus, they’ve managed to undo the European Central Bank’s hard work of the past year in one week. Even the revised deal, which includes the closing of a major bank, huge deposit and bond losses, as well as capital controls, sends an unmistakable message to people across the continent: EU guarantees to depositors and fixed income investors are essentially meaningless. In the future, any whiff of trouble in Greece, Portugal, Spain, Italy or even France will cause bank-runs and aggressive bond selling. The bottom-line: Europeans have always kept a part of their savings under their mattress. The bureaucrats have now confirmed that it’s the prudent thing to do.

 

January 2013
During the past four years, central bankers were clearly the star performers on the global stage. By administering veritable oceans of liquidity, they’ve kept their economies from collapsing and prevented irreversible damage to their banking systems. Yet, much as we recognize these achievements, we are gravely concerned with the consequences. Low interest rates have robbed armies of savers from a decent income on their accumulated assets and have deprived markets of a pricing mechanism for money and debt. In addition, the trillions in economic stimulus have dramatically debased the world’s key currencies and introduced a significant risk of inflation. The challenge for central bankers in 2013 will be to push politicians toward badly needed structural changes. In the United States, it is the political establishment that will have to make fundamental reforms to avoid a perpetual fiscal crisis and an eventual meltdown in the bond market. In Europe, politicians need to introduce an array of incisive reforms that can be speedily implemented across the EU’s 27 member nations; and in Japan, the new government will have to urgently address the developed world’s largest debt/GDP ratio and one of the world’s most negative demographic profiles.

Can politicians be pushed in the right direction? We remain extremely skeptical on Europe and Japan, but harbor modest hopes for the United States. It is not the U.S. administration or Congress that inspires us, but rather the gradual economic improvement and the relatively better social preconditions. As has been the case so often in the past, when observed on a stand-alone basis, America looks a mess—but when viewed relative to the EU or Japan it’s almost attractive. Even so, our overall expectations for the year ahead are limited. The many uncertainties and the speed at which critical events unfold mandate vigilance and above-average cash reserves.

 

November 2012
Following the recent rally in global stock markets, the prevailing mood is one of dangerous complacency. Markets are so enamored by the prospect of continued and escalating stimulus that they forget the desperate economic circumstances that make bailouts, stability funds and other support operations necessary. There are two things we find particularly troublesome with this perception. First, the mantra that “conditions are so poor that policy makers will have to continue to stimulate, and therefore poor conditions are good for my portfolio” is deeply flawed. If it continues to enthrall investors, capital will be misallocated in ever greater amounts—instead of flowing to productive purposes, it will create price bubbles in various asset classes. This could initially be good for quality stocks, but their explosive appreciation would likely be followed by a spectacular crash. The second thing that worries us is that a return to more prudent policies, in which deep structural reforms might replace mega-stimulus, would cause a serious market correction. Right now, armies of professional and amateur investors perversely hope that growth will somehow stay weak enough to spur more government action. If policy makers decided to abandon the bailout approach, despite low economic growth, panic could easily ensue. These reasons, and a host of political uncertainties which could alter the fiscal and monetary background further, mandate a significant liquidity position.

 

September 2012
The summer unfolded much as we thought, as politicians remained stuck in paralysis and central bankers were forced to pick up the pieces. European Central Bank President Mario Draghi was in the worst position, as the continent’s banking system threatened to seize and investors stayed away from sovereign bond auctions. To its credit, the Draghi-led ECB has been bold and imaginative in its actions. But even so, keeping insolvent banks liquid and buying “unlimited quantities” of bonds to keep mismanaged governments functioning is not a sustainable solution.

To be sure, Europe is not the only place with seemingly insurmountable problems, but for the time being it is at the greatest risk of collapse. In the U.S., meanwhile, the “fiscal cliff” threatens to throw the economy back into recession and in China, formerly the world’s economic engine, the economy’s slowdown is proving more painful than expected. With the global economy challenged and political uncertainty dominating every continent, we expect the 4th quarter to be very volatile. The gold price appears to anticipate this and may well continue to advance, perhaps to new highs.

  

June 2012
Ten years ago, we stated that Europe’s experiment with a common currency was doomed to failure. Last year, as the EU’s political elite dithered over rescue packages of thirty and forty billion Euros, we wrote that a mere stabilization of the Euro–crisis would require at least 2.5 to 3.5 trillion. Today’s situation is significantly worse than what we anticipated, mainly because an escalating fiscal crisis is now accompanied by severe banking problems. We fear for Europe and cannot sum up our feelings better than we did last fall, when we said “Sadly, if $3.5 trillion were pumped into the system to “stabilize” the crisis, things wouldn’t look much better. This is because the money would be used to prop up cascading bond prices and bail out banks, while the real part of the economy would be subjected to severe austerity. All this will do is turn a financial calamity into political turmoil, which will before long threaten the tradition of democracy

itself.”

 

May 2012
The rejection of austerity by most of Europe’s electorates does not come as a surprise to our readers, nor does the accompanying turmoil in financial markets. Sadly, Europe’s woes are deepening as China, Brazil, Russia and India experience economic difficulties of their own. Only North America can claim a gradually expanding economy, which is why the dollar rally may continue for several more months. For the moment, this may keep gold and commodities under pressure, but we firmly believe that the uptrend will soon resume. We also like top-quality U.S. stocks: valuations on many companies with global reach are reasonable, dividends are attractive, and in numerous cases balance sheets are in the best shape they’ve been for decades.

 

April 2012
Easy money prevails around the world, which has led to robust gains in equity markets and may continue to sporadically boost investments. Yet, we believe that caution and distrust will periodically reassert themselves. The key reason is that massive fiscal imbalances remain unaddressed and, worse, continue to grow. This will act as a drag on the economy, causing it to grow at anemic rates at best, or, at worst, slump back into recession.

 

March 2012
Our current assessment of the world’s key economic areas are as follows. In the U.S., massive stimulus has fed through to employment creation, allowing the economy to gradually recover. But major challenges remain and the nation’s fiscal position is precarious. During the past year, 61% of newly issued Treasury debt has been bought by the Federal Reserve. In Europe, meanwhile, all bets are off. Although the European Central Bank has thrown $1.1 trillion at the continent’s dysfunctional banking system and thereby removed the risk of a systemic collapse, the EU’s prescription for tough austerity will throw much of the continent into recession, which will further aggravate deficits and only add to mounting debts. Also of concern is the deepening slowdown in China, which could create nasty feedback loops. For example, lower growth in China may hit exports of machinery and automobiles from Europe and Japan hard; in turn, the resulting damage to the European and Japanese economies may cut into imports of finished goods from China. The bottom line: to prop up the global economy will require increasingly larger sums from central banks. That, in turn, will cause a sizeable rebound in inflation and leave the world’s currencies utterly debased. With that in mind, adding to physical gold positions may be a smart idea.

 

February 2012
Europe’s brutal austerity prescriptions for countries like Greece are hypocritical and ineffective. Western Europe’s governments and banks threw billions at countries like Greece, fully knowing that fiscal prudence and repayment of granted loans was last on their priority list. This largesse was driven by the Brussels-based Eurocracy’s pipedream of aggressively expanding a structure (monetary union without fiscal concordance) that was utterly unworkable. The bankers, meanwhile, saw an opportunity in recklessly lending to “underdeveloped” peripheral nations, because they understood that the political elite was committed to perpetuating this shell game and would see them safe. What’s even worse is that the punishing measures that have now been imposed on Greece have no chance of working. The most likely scenario is that Greece will now be subjected to ongoing social unrest and destruction, as hundreds of thousands will be thrown from a middle class existence to poverty. In the end, a very likely outcome is that the country will end up defaulting on its debt anyway. 

 

February 2012
Chances of deflation are falling. The main reason is the growing commitment by the world’s key central banks to extend the low-interest era and administer additional monetary stimulus. The U.S. Federal Reserve’s most recent policy statement projects extremely low interest rates until late 2014 and opens the possibility of further quantitative easing. The European Central Bank has found creative ways to boost liquidity too: it allowed its banks to access 3-year loans aggregating EUR489 billion and is working on expanding this facility. The Japanese, Swiss and Brits, meanwhile, have all engineered their own versions of quantitative easing—all with the result that deflationary pressures are countered at the cost of debased currency values.

Does this means that the “risk on” trade is comfortably restored? We are not sure, nor do we believe that anyone can make such a call. While the gradual debasement of money should over time boost the nominal values of things like commodities, gold and quality equities, the deflationary momentum is only starting to ebb and any serious hiccup in Europe or a geopolitical shock could quickly derail the party.

As to bonds, we remain convinced that they are the least attractive asset class. As Jim Grant recently commented, “Instead of risk-free return, government bonds now offer return-free risk.”

 

January 2012
Where to invest in the year ahead?  The only thing we can say with certainty is that 2012 will be a key year. Forced by political, social and economic turmoil, Europe will need to decide on a roadmap to stability or face disintegration. In the U.S., the economy is doing better, but a deteriorating fiscal position is posing ongoing risks, which could easily be accentuated by flare-ups in partisan rhetoric as we approach the presidential election. Fortunately, the outlook for the emerging economies is better, with growth likely to stabilize and recover. But that one positive could easily be offset by geo-political conflict. Our largest fears concern the escalation in Iran’s hostile attitude and its growing regional dominance, especially in the wake of America’s withdrawal from Iraq. As Yogi Berra once said, “The future ain’t what it used to be.”

As long as all these uncertainties persist, we will stick to our conservative multi-asset strategy. We remain committed to top-quality equities (quality meaning global scope, squeaky clean balance sheets and superior dividend support), a robust holding of investment grade corporate bonds, and a mix of first-rate commodity and emerging markets proxies. And, because governments will be forced to keep real interest rates super-low, we advocate a healthy holding of physical gold.

  

December 2011
The current correction in the gold price is a direct consequence of Europe’s severe liquidity crunch. As the survival of key European banks is questioned and the Eurozone’s stock markets swoon, everything is being liquidated. Yet the crisis that’s playing itself out is precisely what will extend and significantly boost gold’s fortunes, because the only way to stabilize Europe’s economy and banking system will be continuous and massive bailouts. A recovery in European stock prices will be the signal that the liquidity crunch is receding; it will also mark the resumption of gold’s uptrend.

 

November 2011
Gold will continue to benefit as the world’s key currencies are debased and uncertainty deepens. The U.S. dollar, the Euro, the Swiss franc (which is now pegged to the value of the Euro), the British Pound and the Yen are all currencies that we would rate as fundamentally undesirable. Together, they make up a huge percentage of the world’s currency float. When we search history for comparisons to the current monetary ease, there is no precedence, particularly because the scope of today’s experience is so global. But history does teach us that the debasement of money is eventually followed by an explosion in real asset prices. We believe that gold is for now the most logical proxy; real assets that have less liquidity will follow later.

 

November 2011
The recent run on Italian debt vindicates our negative view on Europe. Italy is Europe’s third largest economy; it is both too large to fail and too large to be bailed out. Unless Europe’s politicians soon come up with a plan both bold in scope and size, the crisis will deepen further. Unfortunately, decisiveness is not Europe’s hallmark, which means that a healthy dose of skepticism is justified. Are European assets cheap? Absolutely. Would we buy them? No, because we believe the chaotic conditions on the continent will go on for a long time and will severely limit the rebound potential. We prefer top-quality Canadian and U.S. assets, which are not inexpensive, but at least fairly priced. While the U.S. faces some serious fiscal challenges too, the economic conditions are at least stable and valuations are fair.

 

October 2011
The EU’s latest decision to back a far larger stability fund and to leverage it adds to the global debasement of money. Since 2008, numerous stimulus packages and QE1 and QE2 have seriously undermined the integrity of the dollar. In the past few weeks, both the Swiss National Bank and the Bank of England have introduced their own versions of quantitative easing, and now the EU is going down much the same path. In our view, if a EU bailout if actually possible, it will take between $2.5 and $3.5 trillion. If such an effort is not made, the European Monetary Union will implode. Sadly, if $3.5 trillion were pumped into the system to “stabilize” the crisis, things wouldn’t look much better. This is because the money would be used to prop up cascading bond prices and bail out banks, while the real part of the economy would be subjected to severe austerity. All this will do is turn a financial calamity into political turmoil, which will before long threaten the tradition of democracy itself.

 

August 2011
Europe is now rapidly becoming the focal point for investor disenchantment. During the past decade, in numerous published articles, we have steadfastly criticized the concept of unleashing a common currency on vastly divergent cultures without simultaneously introducing a joint fiscal regime. The results of this grand folly are now becoming apparent to all. Unless EU politicians manage to contain the debt crisis to small economies like Greece or Portugal, Europe and the world economy will spiral toward a repeat of the 2008 crisis.

 

August 2011
Investor sentiment continues to be tormented by acute uncertainty. It is important to understand that those directing monetary and fiscal policy in the U.S. and the European Union are no longer in control—they are forced to react to market forces which are, in turn, overwhelmed by a steadily mounting economic challenges. In Europe, there recently were comprehensive attempts at stabilization, but the huge structural uncertainties that have beset the EU for some time were left unaddressed. In Washington, meanwhile, debt negotiations continue, but even if there is an accord severe longer-term problems remain. In this climate, we believe it is prudent to minimize bond exposure and concentrate on equity investments in three areas: globally active companies with good sales exposure to the emerging markets, solid balance sheets and good dividend support; select emerging markets stocks; and high-quality commodity producers. In addition, we continue to like physical gold.  

 

July 2011
Gold continues to be in a sweet spot. The global economy is once again slowing, which is not a climate in which interest rates will be raised. And as to central banks, we believe they are far more likely to add to gold reserves than dispose of them. China, Russia, Brazil and a host of other countries who are accumulating foreign exchange reserves, have not only stated that they will add more gold, but have actually done so during the past months. Finally, investors the world over are losing confidence in the U.S. dollar, the Euro and the Yen—and these three currencies comprise a huge part of the global currency float. We project continued strength for the yellow metal, as we look ahead at an economically and politically difficult period.

 

May 2011
Will a weakening in the U.S. economy push down commodities? We offer five thoughts on this topic:
-While current U.S. fiscal and monetary trends are clearly unsustainable, we believe fears of an imminent swing toward austerity are overdone. As Fed Chairman Bernanke reiterated in his late-April policy comments, his institution is committed to provide continuing support to the economy, to keep its recovery on track.
–When it comes to commodities, it is important to note that the sector enjoys massive medium and longer-term structural advantages. Supply uncertainties will continue to be aggravated and coincide with steadily growing demand from the emerging economies.
-Many segments in the commodity spectrum are sporadically influenced by factors like weather (agriculture), geopolitics (energy), or financial dislocations (gold). These factors can significantly boost prices at any time.
-We advocate investing almost exclusively in the stocks of companies producing natural resources, not commodities themselves (notable exception: gold). Our belief is that the valuations of most stocks we own are not reflective of current elevated commodity prices, but instead discount a return to more moderate price levels.
-We emphatically believe that high-quality physical reserves of raw materials will continue to be seen as a hedge against the debasement of most major currencies.
Given this confluence of positive fundamentals, we feel the prudent thing to do is to maintain a robust exposure to the natural resources sector.

January 2011   
We believe the emerging markets complex will be a big winner because growth there will average at least three times what can be expected in the developed world. That should benefit companies that have a solid presence in the emerging economies or supply what these economies need. Providers of natural resources will continue to play a key role in this dynamic.

 

December 2010
Geithner’s decision not to seek confrontation with China for currency manipulation is prudent. Not only is there global consensus that what has happened in the U.S., the European Union and Japan is not China’s fault, it is also clear that the largest-scale manipulation of a currency in world history is being conducted on U.S. shores—by the Treasury and the Federal Reserve.

 

October 2010   
The fortune of the United States during the postwar period has been that whatever chaos ill-guided policies in Washington created, Europe and Japan could be counted on to do even worse. And so it is again this time. The European banking system is in worse shape than America’s and the EU’s fiscal challenges are every bit as bad. Japan’s government, meanwhile, is even more deeply indebted than America’s or even Greece’s.

 

October 2010
Governments have created money on such a scale that the currencies of most major economies are inherently untrustworthy. Moreover, governments from the U.S. to Europe to Japan have vowed to fight further threats to their economies with quantitative easing, i.e the creation of more money. No wonder then, that gold, an asset who is not backed by someone’s promise but is tangible, universally recognized, mobile and liquid, is highly sought after by a concerned public. There are other reasons for gold to hold its value or move even higher. Central banks (particularly those with high foreign exchange reserves, like China or Brazil) are net buyers of gold, the mining supply of gold is shrinking, and there are hundreds of millions of emerging markets consumers who are joining the ranks of potential buyers.

July 2010    
At the most fundamental level, investors can no longer plan for the medium or even longer term. We are destined to live in a world where the focus is firmly on today and almost anything is possible tomorrow. Similarly, concepts like “capital preservation” are becoming meaningless. In a world where formerly speculative holdings like gold, oil or fertilizer producers arguably offer more integrity than the bonds issued by governments and some of the biggest banks, how are investors supposed to behave? The answer is probably that diversification is still a major guidepost to prudent investing, but due to the constant change, portfolio composition will need to be adjusted much more frequently.

July 2010    
We now have several parts of the world economy in disarray. In the U.S., Europe and Japan, we also have numerous social policy segments in chaos. Health care, social security, education, the justice system, immigration, environmental sustainability (to name just a few), are all financially challenged and in need of massive overhaul. In today’s interconnected world, we will increasingly see one crisis in a given sector or part of the world trigger another, with the result that volatility will pose ever larger threats to social, political and financial stability.

May 2010
We are becoming even more bullish on gold. The main reason is that the global economic situation continues to deteriorate—most industrialized nations are now all in a horrendous fiscal mess, which is likely to get worse at a fast clip. The countermeasures instituted by various governments and central banks, meanwhile, border on the fraudulent. The U.S., Europe and Japan have lost their ability to raise interest rates without plunging their economies into even deeper chaos. These are fundamentally superb preconditions for a continued rally in gold.

January 2010   
From a global viewpoint, the world can now be divided into two pods. On the one side, America, Europe and Japan, which are fiscally and economically impaired; on the other, emerging markets and commodity exporters, which are fiscally and economically strong. We must always remember that the macro trends that made this happen are still young. The weakening of the mainstream economies and the concurrent strengthening of places like China, India, Brazil, Australia and Canada will unfold over a period of decades.

 

May 2009
The policies being implemented now will guarantee a sharp decline in the value of the United States dollar. The most likely currencies to appreciate sharply over the next year or two: The Australian and Canadian dollars and the Brazilian Real. Gold, too, will be a major beneficiary.

 

April 2009   
The odds that the Federal Reserve will be able to steer the U.S. economy into sustained recovery without massive debasement of the currency and significant inflation are receding fast.

March 2009   
Obama’s and Geithner’s assessment that only those who got Wall Street into such trouble could get it out of trouble marks the wholesale betrayal of their constituents: the democratic voters. What will follow now is that the very predators who nearly brought down the country will end up enriching themselves once more, this time in the name of recovery.

 

January 2009  
Much work needs to be done to put in place the cornerstones for a sustainable recovery, and of course an enormous amount of money will have to flow from ordinary citizens to the coffers of government to pay for all the damage. Still, the vital mission, to prevent a free fall in prices and economic output—a Depression—has by all appearances been accomplished.

October 2008   
The meltdown in financial markets does not come as a surprise to our clients. But it is nonetheless tragic. The reckless practices by U.S. and European banks will now lead to the wholesale destruction of those who behaved most ethically—millions of workers who practiced what capitalism’s founding fathers preached: production and thrift. Worse, when the world economy recovers from chaos, it will find itself amidst a huge demographic challenge. Japan and Europe are in the worst position.

July 2008   
Banks are far too leveraged, mostly so in the United States and Britain. Also at tremendous risk are the large Swiss banks, whose balance sheets surpass the GDP of the country. The safest banking system is Canada’s.

August 2007   
A major financial dislocation appears imminent. I have extensively written about the three catalysts that could unleash calamity:
-the reckless granting of low quality real estate loans;
-the intransparency of trillions of dollars in outstanding derivatives;
-and the lack of regulations of hedge funds.
I have no idea on which of these fronts the crisis will be unleashed, but the odds of a crisis are mounting.

 

Spring 2007
Avoid debt wherever you can. The “debt is your friend” mantra that characterized much of the past fifty years is about to end. The new reality will be “debt destroys!” And, while I’m at it, avoid real estate. I am not talking about your ownership of your house, but the mentality that real estate is a good place for speculation. The coming debt crunch will devastate that notion and wipe out hundreds of thousands of excessively leveraged second and third homeowners, along with the banks that hold the mortgages.

 

October 2006
The most frequent question I receive from clients is this: “Why hold a cash position?” Unfortunately, today’s investor is so used to large and trouble-free returns that the idea of capital preservation is scoffed at. The question I would ask back is, “Why, with so many uncertainties on the horizon, would you not want to hold a meaningful cash reserve?” Remember, cash is an asset class. And when things turn bad, it is the most important asset class.

 

 

Peter Cavelti's essays have been printed and quoted in countless papers, magazines and newsletters in several nations, including The Wall Street Journal, Barron's, The Financial Times, the Financial Post, The Globe and Mail, Money, Personal Finance and World Link.

Until 2006, we published Perspectives, a weekly internet-based review of geopolitical, economic and social policy developments. Perspectives was designed to benefit charity—in lieu of paying us a fee, subscribers had to support Doctors Without Borders. We had many thousands of subscribers in 41 countries.

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