First, the punchline:  $40-50T is going to evaporate from global equities over the next 12-18 months (the end date depends on effectiveness of central bank ammunition that is yet to be deployed). FYI we’re still down $10T from the peak in January 2018.  The crash that will unfold in 2019-2020 is going to introduce a significant opportunity for investment strategies that profit (or that lose a lot less than their peers) and that provide a means to deliver superior risk adjusted returns in the future.

Indexed equity and unhedged long only equity (the vast majority of the equity fund space) are going to lose assets at an unprecedented rate -both from investment loss and from clients liquidating.  The investment styles/strategies that worked magnificently well since March 2009 are going to experience severe pain in 2019-2020 then remain problematic for years to come. Retail investors have watched their portfolios decimated in two previous crashes via traditional investment strategies.  Losing big for the third time will cause millions of investors to abandon traditional investing approaches forever and seek something with better risk-reward profile.

Why the traditional investment style has worked so well since March 2009:

  • The Fed and the other major central banks (ECB, BoJ, PBoC, BoE, SNB) have repeatedly saved your strategy from market forces inflicting heavy losses. Look to no further than Fed Chair Powell’s capitulation this week.
  • Fiscal policy profligacy. National budget deficits have blown-out, making sovereign debt to GDP ratios far worse than they were prior to the last big crash (2007).
  • Accounting regs for banks. Because many (most?) of the global systemically important financial institutions (SIFIs) were insolvent in 2008-2009 from toxic assets being valued at market prices, banking regs were changed to permit banks to mark their assets at model prices.  Thank you mark to model accounting, and thank you IFRS9, and (pending) CECL. More than any other force, the accounting change from mark to market stopped the crash of 2007-09 and provided the catalyst for an epic rally.

What’s different now (2019 onwards):

  • The Fed and every other major central bank has gradually painted itself into a corner over the past 20 years. The Fed now has 2.5% of Fed Funds room, and can reduce /stop its QT program. Not enough. The previous two economic slowdowns required more than twice that amount of rate cuts plus $Ts in new balance sheet expansion.
  • Here’s an inconvenient fact for the Fed: the size of the U.S. banking system has grown from 74% of GDP in 2007 to 96% now. it will need larger firepower than it deployed in 2007-2009 to stop this crash)

banks equal GDP copy

  • It is likely that central bankers are now aware their policies have been a major driving force contributing to a myopic misallocation of capital –to share buybacks and corporate balance sheet debt loading.
  • There is no chance of a new major fiscal policy blow-out from Washington because neither party can get new bills passed that have significant spending attached (thank goodness).
  • Europe is in an existential crisis with Germany trying to stop eurozone perpetual overspenders from doing what they’ve been doing. It will be difficult to see any new large budget blow-outs from Europe.

 

How we can know this crash will happen in 2019-2020

If you are new to this site, you should know that the time between Greedometer sequences has been following an exponential decay over the past 20 years and reached 0 in January 2015. It has remained there since.  Translation: central banks have repeatedly stopped crashes over the past 20 years. Each time there was a supportive monetary (or fiscal) policy action a shorter period of debt-fueled growth was purchased. We’re now at a point where a central bank supportive action will not stop a stock market crash but delays it.  Powell’s migration/capitulation from 3 rate hikes to 0 will not stop the pending crash but it will extend the topping out period and slow the overall pace of decline.

time between Greedometer sequences copy

The Greedometer algos generate a model that characterizes the S&P500 and puts into context what is going to happen this year.

The next few years will see an acceleration in growth of funds from the ashes of traditional investment strategies in 2019 and 2020.  The 2019-2020 period will be game changing for the asset management and fund industry.

If you are in the fund industry and want to have a conversation about licensing the Greedometers to help your funds -or launch a new fund- please use the contact form to get in touch.