2019.02 Icecap Global Outlook

Our view on global investment markets:
February 2019 – “Surprise Party”
Keith Dicker, CFA
President & Chief Investment Officer
keithdicker@IceCapAssetManagement.com
www.IceCapAssetManagement.com
Twitter: @IceCapGlobal
Tel: 902-492-8495

IMPORTANT: An investment in any strategy, including the strategies
described herein, involves a high degree of risk. There is no guarantee
that the investment objective will be achieved. Past performance of
these strategies is not necessarily indicative of future results. There is
the possibility of loss and all investment involves risk including the loss
of capital.
The opinions and views expressed in this publication are those of the
firm and the author.
Disclaimer

1www.IceCapAssetManagement.com
Surprise!
Markets
Unless you’ve been off-grid, all investors know by now that recent
market movements have been generating those eye-ball scratching,
media-dreaming headlines emblazed with horrific words including
CRASHING, DEVASTATING, and PLUMMETING.
With these headlines generated by real news networks, surely it must
be true and it should give you a cause for concern.
However, as the brain works in different ways, sometimes it’s better
to visualize these CRASHING, DEVASTING, and PLUMETTING markets.
Here’s a chart showing the US Dow Jones Industrial Average – we ask
you to spot the CRASHING.
No worries if you cannot see the CRASHING – we can’t see it either.
They can be a lot of fun.
Your closest friends, family and loved ones become giddy with
excitement of the thought and hope of springing the ultimate surprise
on you during your very special day.
Appreciated only by the surprise planners is all of the work put into
planning the perfect moment to make your heart race, your eyes
widen and your smile stretch to maximum lengths.
Surprise parties can also produce an unwelcomed surprise.
These are the parties where the intended surprise is nothing like the
actual surprise.
In the financial world today, nearly 40 years of continuously declining
long-term interest rates, combined with 10 years of zero and negative
interest rates, added to 10 years of money printing, 10 years of
growing zombie banks and lifetimes of governments overspending, is
very close to launching the ultimate surprise party.
The question of course – will it be a happy, champagne supernova
party? Or will the party produce the ultimate financial surprise?
Understand, everyone in the world will be attending this party – you
have no choice. And those who are smart and prepared will actually
have a really nice time. Everyone else will not.
February 2019 The Surprise Party
US Dow Jones Industrial Average

Hard to see… And then we have the hysteria created by the gold bulls – or gold
bugs as they dislike to call each other.
In the minds of these shining investment experts, Gold Bullion is now
surging higher than a kite and will once again (any day now) soar into
the stratosphere.
Here’s a chart showing Gold – try to spot the SURGING and SOARING:
No worries if you cannot see this either.
Next, considering the US Federal Reserve completely reversed its
course on interest rate hikes AND the government in Washington
fought and bickered over the budget – then obviously the US Dollar
should be crashing as well.
Here’s a chart showing the US Dollar – this time, we ask you to spot
the DEVASTATION:
No worries if you cannot see the DEVASTATION – we can’t see it either.
US Dollar (DXY Index)
Gold Bullion
2www.IceCapAssetManagement.com

3
Don’t read headline news
Seemingly everyone agreed - with stocks declining aggressively, with
President Trump shutting down the federal government and not
reaching any trade deals with China, and with the Federal Reserve
putting a complete halt to interest rate hikes – the USD was about to
hit the fan and splatter from sea to shining sea.
But it didn’t.
We like to remind investors that today’s financial markets have been
overwhelmingly influenced, supported and simultaneously
suppressed by 10 years of unorthodox, never-before-tried, and
fantasy-like monetary policies by the world’s biggest central banks.
At IceCap we have consistently communicated that this environment
has started to unravel, and the result will be a crisis across bonds,
currencies and interest rates that will drive enormous amounts of
foreign capital to seek safety in the USD.
THIS is why, despite the current sharp movements in many markets –
the USD fails to crash as the majority expect.
Something else that catches our eye and should catch EVERYONE’S
eye is the performance of European bank stocks.
Chart next page shows the performance of European bank stocks.
In a normal functioning economy, banks do VERY well.
So, just to be clear:
- Stocks are not crashing
- US Dollar is not plummeting
- Gold is not surging
Naturally, we know these factual and truthful observations are hurting
the feelings of many investors.
After all, we know of investment managers who have been completely
out of the stock market for the last 6 years. And with stocks declining
sharply on Christmas Eve – these managers were absolutely
[prematurely] popping the cork.
Gold investors too have been taking it on the chin for a few years now.
And every single time the shiny rock bounces from lower lows, it’s
inevitable for them to email me with anecdotes over their investment
precognitions. No doubt the current bounce convinced these investors
too, to pop the corks over their recent success.
And then we have the single, most important investment in the world
today – the USD.
And due to a myriad of reasons – it is also the most hated currency in
the world. Seemingly every investment expert, novice and weekend
warrior has developed a spectacularly strong dislike for the greenback.
This dislike is borderline impractical, unhealthy and most importantly –
unrealistic.

4
For a dose of reality see European Banks
There will be a European Bank Stock
Crisis – once Euro banks start to go,
capital will rush to USD for safety
In a normal functioning economy, banks have strong demand for
lending, and most importantly – yet never talked about by the
talking heads, banks also experience fewer and fewer
people/companies reneging on their loans.
This type of economy is a bonanza for banks – and since banks
operate in quasi-monopolies with the benefit of being leveraged,
bankers love this kind of economy.
In fact, they love it so much, for most bankers, late mornings quickly
spill into liquid lunches followed by gelatos and then finish the day
with a great pint with their great banker mates.
Those are the days.
Except in Europe these days, the opposite is happening.
Early mornings begin with spreadsheets that won’t balance.
Followed by never-ending calls from the regulators, rapidly means
lunch being cancelled once again.
The afternoons are no better. Instead of enjoying that ice cream,
these bankers are being creamed by senior management over
increasing non-performing loans, decreasing lending and worst of all
– demands by the government to buy even more sovereign debt.

5
POSITIVE Returns are important
Of course, the end of day pint still occurs. But instead of toasting
records profits, record bonuses and record boondoggles – the
bankers commiserate.
European bank stocks are not only scraping the gutters – collectively,
they are back to levels previously reached in the 1990s.
This is yet another crystal clear sign that Europe’s financial troubles
are no where close to being resolved.
The European financial and banking system is rotten to the core.
Recognizing and accepting this will provide enormous opportunities.
And speaking of opportunities – 2018 was a perfect opportunity to
preserve capital.
In 2018, IceCap clients all earned positive returns.
We are acutely aware that many investors in Canada and elsewhere
did not have enjoyable performance experiences. Most lost money in
emerging market stocks and bonds, high yield bonds, preferred
shares, various equity markets and most importantly by betting
against the US Dollar.
2019 is a new year. And it will absolutely create new opportunities to
both make and lose money on your investments.
Our over riding themes have not changed – we remain incredibly
bullish on the USD, and remain quite fearful of many parts of the bond
market and non-USD currencies.
Currently, we are neither fearful nor exuberant about the stock
market. While our equity market models have improved considerably
over the last 2 months, we fully expect the likelihood of markets
perhaps retesting the lows is a lot higher than we would like to see.
And with gold – we remain with zero holdings. We believe strongly
that gold will become an investment destination of choice, however as
long as our expectation for a surging USD continues, we’re afraid to
say that gold inevitably has one more leg down.
The good news is that this will give gold bugs yet another opportunity
to time the market perfectly.
The King is Dead, Long Live the King
Famed American bond legend Bill Gross is known as the Bond King and
he has called it a day – The King has decided to retire from the
investment world and ride off into the sunset.
After earning his bond skills, stripes and scars in the 70s, Gross’ career
really took off in the early 80s.

6
The King
Year after year he began to bang out brilliant returns from the
unloved bond world.
In fact he was so good, from 1987 to 2013, his PIMCO Total Return
Bond Fund grew into an unheard of $300 BILLION fund.
Since then however, all hasn’t been rosy for the Bond King: “I look
back on it and the performance of the unconstrained fund in the past
Bill Gross’ career
takes off
Bill Gross becomes
Bond King Legend
Bill Gross
ends career
Interest rates peaked
Interest rates bottomed
Interest rates bottomed
four years with Janus has been unsatisfactory, no doubt.” said Gross.
Yes, investment managers will ALWAYS have ups and downs – it’s the
nature of the beast.
Yet, to fully appreciate the incredible success of Bill Gross over his 40
year career, spend a few minutes on the above chart.

7
Savvy or lucky?
The Chart of course is one we’ve shown a million times – it shows the
history of long-term interest rates in the United States overlaid with
Bill Gross’ career.
As a reminder (all else being equal) – as long-term interest rates
DECLINE, the price of bonds INCREASE, and the opposite is also true.
We know by now, long-term interest rates peaked in 1982 and then
over a 34-year period declined all the way down to near 0%.
Yes, by now you should see that the Bond King, just happened to be
starting his career when long-term rates peaked, and naturally finished
his career when long-term rates troughed.
Of course, his recent struggles have begun in a period where long-term
rates have started to rise once again.
We’re certainly not here to pick on Bill Gross. Not only was Mr. Gross
an investor extraordinaire, he has also been extraordinarily charitable
and giving – yes, he’s a real nice person.
However, the reason we are highlighting The Bond King and his
experience is due to the (very obvious) overlapping/high correlation of
his career with the global yield curve and specifically, the trend and
change in long-term interest rates.
Was Gross expertly savvy at managing fixed income strategies?
Or was he simply the benefactor of living his career at the exact
moment in time which just so happened to be the perfect time to
become a bond manager?
From yet another perspective, 10 years from now will IceCap’s
reputation as being an expert currency and global macro manager be a
function of our intelligence and witty writing?
Or maybe it will simply be the fact that we lived our careers during the
perfect time to become a global macro and currency manager.
For IceCap, it’s quite obvious how market trends over the last 40 years
have falsely shaped future expectations.
Think about this – over a nearly 30 year period, Bill Gross’s average
annual return from his fund was approximately 7%.
And since that is over a nearly 30 year period, and 30 years is a long
period of time – many investors, consultants and mutual fund sales
persons are telling the unsuspecting that this average return will
happen again in the bond market.
We’re telling you they are completely wrong, and this is why:
Uniformitarianism is the misguided belief that conditions always were
and always will be as they are now, and any natural changes will occur
over long periods of time (encyclopedia.com).

8
Uniformitarianism
In other words, in the future when people ask why few predicted the
“Great Bond Crisis”; the response will simply be – uniformitarianism.
Yes it is true. The majority of investors, managers, consultants, and
medias have all been lead astray. Since no one today has ever
experienced a crisis in the bond and currency world, then by nature –
no one is expecting one to occur now – which is of course, the classic
definition of uniformitarianism.
The problem of course – is that the financial world, and the interest
rate world, and the government spending world, is significantly older
than 34 years.
Long-term interest rates have clearly bottomed – the likelihood of
long-term rates going higher is 100%.
Yet, the big banks, big consultants, and big mutual fund sales
machines continue to absolutely believe in absolute terms that
anticipating future market movements is for chumps.
Instead, the majority of investment firms today simply accept the
current market conditions, never ask any thoughtful questions and
simply plough ahead as if one day is the same as the next.
Put another way – most investment firms today know only one
speed. And that speed is always full steam ahead, always search for
growth, always search for yield and most importantly, never question
the game.
The game of course, is to come up with fancy ideas, fancy brochures
and fancy ways to get you, the investor, to fancy these firms.
Case in point, consider the table next page which shows a fancy new
product from a major big bank.
As you can see, this bank has created, developed and back tested a
brand new way to manage their investors’ hard earned savings by
investing it in the bond market.
Clearly, this bank recognizes times have changed in the bond world.
Yet, instead of concluding that the exponential increase in risk levels
has reduced opportunities in the fixed income world – this bank has
concluded the opposite.
Yes, they believe investment opportunities in the bond world have
actually increased!
Their solution is to do the unthinkable and reach for yield by investing
in junk bonds and emerging market bonds.
To put this into perspective – consider that current bond market
dynamics changed so much that it forced the Bond King to quit.
Yet, this entity who has never come close to achieving the same iconic
status as the King – has proclaimed that they have it all figured out.

9
Fancy games
Conserva)ve Bond Pool Core Bond Pool Core Plus Bond Pool
Throwing Darts
Bond
Strategies
have
become a
fancy
game
What they have figured out are two things:
1) Current interest rates are so low that investing in regular
government and high quality corporate bonds will not produce
acceptable returns for their clients.
2) The only way to possibly produce returns acceptable for their
clients is to reach for yield – or put another way, take on
considerably more bond market risk.
When we put it this way – what should immediately jump off the page
is “take on more risk”.
Yes, the only way to meet the expectations of the most conservative
investors is to put them into increasingly riskier and riskier
investments.
In the professional world of portfolio management, it is well known
that the easiest way to increase potential returns, is to simply add risk
to the portfolio.
Most investment management firms would do this by increasing their
allocations to equity markets.

10
Stuck in a moment
Yet, this big bank is doing it through their bond strategies. Why?
It certainly isn’t due to the bank expecting equities to perform poorly
– if that’s their expectation, then emerging market bonds and high
yield/junk bonds would also perform poorly.
The real answer is they recognize the need to do something to make
their bond strategies more attractive relative to their competitors
Of course, this also means they have virtually no fear whatsoever of
any escalating risks in the bond world.
And as no one ever truly expects a crisis to occur – when it does
occur, it is a complete surprise.
The Surprise
It is fact – most financial crises in history have always been associated
with a large and sustained increase in borrowings.
Face it. If you borrow too much and then you cannot pay it back –
bad things happen.
Yet, the snap that causes the pop isn’t always what it seems.
Obviously, a point is reached when one cannot produce enough
income to pay previous debt.
But what happens immediately before this moment in time is
something else – in order to maintain debt payments:
1) you reduce other spending,
2) and/or you try to earn more income with new or additional jobs.
And it is this moment that we face today.
Except, instead of individuals facing the moment of truth – we are
starting to see governments or sovereign states face the moment of
truth.
And during this moment of truth:
1) Governments will definitely NOT do #1.
2) Governments will ABSOLUTELY do #2
Now, when it comes to Governments, the way they try to earn more
income is not through new jobs, but rather through new and higher
taxes.
Looking at specific countries, there is no question – as a sovereign
state, America’s outstanding debt is at its highest point in history.
But the same is also true for Japan, Italy, France, Canada, Australia,
China and the beat goes on.
Yes, we’ve all heard this story before – yet this time it really is different
and we’ll tell you why.

11
So many things affected by rates
Chart this page, shows the growth of global debt since 1950.
FIRST, you’ll notice that debt REALLY begins to accelerate in 1982.
SECOND, you’ll recall that 1982 was the year when long-term interest
rates peaked (see previous chart on page 6).
THIRD, you’ll begin to understand and appreciate that nearly 40 years
of aggressive borrowing, has been consistently enabled by the COST
of borrowing consistently declining.
Therefore, the reason why TODAY, investors should absolutely be
quite concerned about global debt levels is rather obvious and
creates the rather obvious question – what happens when long-term
interest rates go higher?
The reason debt fears should matter NOW (and not BEFORE) is that
interest rates/cost of borrowing have declined to 0% AND have been
at 0% now for almost 10 years.
Obviously, the primary result of 0% rates is more people, more
companies and more governments have all borrowed more.
But the secondary result – and the one few talk about, is the interest
rate on these new borrowings is at rock bottom rates.
As soon as rates go higher (and we are not talking about central bank
In 1982, global debt started to accelerate.
This also happened to be the exact point in
time when long-term rates peaked and then
started to decline.

12
Pay your fair share
rates – instead we are talking about long-term rates) the debt bubble
snaps, cracks and pops at the same time.
The reason a crisis emerges is due to borrowers paying increasingly
higher rates of interest on their debt which has the effect of clawing
away money that was previously used for spending in other areas.
The 2008-09 Global Financial Crisis was ignited when interest rates
on mortgages re-set to higher levels.
This produced a cascading effect of increasingly more and more
people being unable to afford their new mortgage payments at the
new (and higher) interest rate.
As all crises are different – and this next one will be very different;
the cascading effect of surging long-term rates will be especially
difficult for several reasons.
1) Bond prices everywhere will decline.
2) The cost of borrowing will increase.
3) A higher cost of borrowing will create larger deficits for
governments.
4) Larger deficits will absolutely result in higher taxes.
The last point is the surprise that few are talking about and it will
prove to be prescient.
And unfortunately, the seeds are already being sowed to make this an
easy forecast.
Regardless of your political affiliation – understand that left leaning
political parties and movements are being supported by the fact that
the divide between the wealthy and poor has reached stratospheric
heights.
“The rich are not paying their share” has become an anthem across
the growing belief in socialist-leaning groups.
From this perspective – there’s really only one easy way to create a
remedy AND get elected at the same time.
Tax the rich.
And tax them they will.
With the 2020 American Presidential Election beginning to ramp up –
the candidates for the Democratic Party are tripping over themselves
to launch a tax the rich political platform.
Yet, there is one considerable challenge with taxing the rich – how do
you define rich?

13
Ae you rich?
Currently across the developed world, top tax rates of 50% and greater
are triggered on annual incomes ranging from $200,000 and higher.
Of course on top of this, each country also charges additional taxes or
user fees on basically everything purchased for consumption, as well
as annual property taxes.
Putting aside your political view, one would agree that overall tax rates
are already high.
Yet, despite overall tax burdens already at high levels – governments
(Democratic/Republican/Liberal/Conservative etc) still cannot escape
the deficit trap.
Consider that during the 1940s the top tax rate in the USA was 94% -
one can see that based upon the past, there’s still plenty of room for
more taxes.
Of course, the other tax component that is being championed by the
Democratic front runners is the “wealth tax”.
This concept is to tax the mega rich 3% annually of their total net
worth. Considering the IMF has already wholeheartedly engaged and
accepted the concept of a 10% global wealth tax – the Democrats are
actually a little behind the curve on this one.
As investment managers, we shed our political and social views at the
door. It’s irrelevant what we think should happen. Instead, it’s infinitely
more valuable to understand what will happen.
And we can tell with a very strong conviction that talk of all these tax
increases will happen.
The reason for this is completely due to governments starving for
additional tax revenues.
Without it, governments believe it’s impossible for them to provide
the services and spending required to run their countries.
Sadly, none of these governments have ever demonstrated any fiscal
responsibility in the past – expecting it to occur in the future is a
guaranteed disappointment.
So, higher taxes are coming. And they are coming at exactly the
moment in time when governments will have to increasingly borrow
more at higher rates - just to simply maintain the status quo.
And based upon increasing deficits and debt loads, we know that the
status quo doesn’t work either.
Europe, Canada and Australia have long advocated a high tax regime in
order to provide strong social safety nets for its peoples.
Most should agree this is correct.
Except, there’s just one problem with this progressive, taxing approach
– it doesn’t work.

14
Simple math
The Wall Street Journal has noticed this challenge and states “Rising
levels of debt have long been a concern to policy makers. But low
interest rates in the years after the recession made those costs
cheaper for the government to bear.
What makes this chart even more frightening and is never written,
talked, or communicated in any way by the majority of the medias,
banks, advisors, and investment managers - is the rate of interest
used AND its exponential effect.
Data for the above chart was prepared by the United States
Congressional Budget Office (CBO). This is a non-partisan and not for
And the reason it doesn’t work is due to the following equation:
Put another way, the government spending side of the equation
always exceeds the tax received/income side of the equation.
Therefore, when it comes to fiscal policies, our governments only
possess the ability (or willingness) to only see tax revenues as never
being enough.
If only our governments were able to see that maybe, just maybe, the
reason practically every country, state, province and city are running
deficits, is due to unrealistic spending levels and policies.
From an investment perspective – this is where one needs to shed
their political, social and patriotic beliefs. The fact is that not one
government today is going to change their spending policies – unless
of course, they are forced to change their spending policies.
And it is this moment in time which will surprise governments and
investors who are unable to see this clear path towards bond market
mayhem.
To visualize the impact of deficits and its exponential effect on debt,
consider the following chart which shows how the % of tax revenues
allocated for interest payments on debt is set to surge higher.
Govt
Spending
Govt
Taxes

15
Higher rates = Higher Trouble
rates and government fiscal imbalances have reached the point of no
return – it should be extraordinarily easy to see why a crisis re-
escalates across bond markets and currencies.
To really understand exactly how low interest rates have fallen,
consider the table/chart on the next page.
Practically all of Europe currently has negative or near 0% interest
rates.
As well, when you consider the following:
1) These negative and near 0% interest rates have been artificially
created by the European Central Bank.
2) Practically every country is running deficits
3) Practically every country operates in a ultra-low growth economy.
4) Practically every country is experiencing a sharp rise in ultra left
vs ultra right politics.
You would have to be daft to believe Europe escapes a bond and
currency crisis.
And when it happens, it shouldn’t be a surprise to anyone.
profit group meaning they are not trying to impress anyone.
If you dig deep enough into the data, you’ll find the “surprise” that will
certainly create that “moment in time” we are discussing.
For the 10 year period from 2018 to 2028, the CBO has calculated their
projections based upon interest rates on debt increasing from 2.3% to
3.5%.
Effectively, this means long-term rates in the United States will remain
relatively flat over the next decade.
Now here’s the kicker – this small increase in estimated long-term
interest rates has the effect of TRIPLING the interest payable on debt
outstanding.
Which should lead everyone to ask; what happens if interest rates rise
faster and higher than expected?
The answer will be a complete surprise to many.
When one combines this perspective with the fact that global interest
Item 2018 2028 % Change
Gross Federal Debt (billions) 21,461$ 32,588$ 52%
Average Interest Rate on Debt Held by the Public 2.3% 3.5% 47%
Net Interest (billions) 325$ 876$ 170%
Source: CBO, IceCap Asset Management Limited

16
Visualize this

17
USD Rules
Our Strategy
Bonds
No changes. Our primary concern remains focused on the probability
of long-term rates surging due to re-escalation of sovereign debt
crises. We see emerging market debt, and high yield as being
especially vulnerable.
Stocks
We continue to have significant allocations to equities. Yet retesting
the recent December lows is possible. Currently, we do not have a
strong expectation in either direction. Technically, we are remaining
neutral for now.
Currencies
Despite the plethora of fundamental bad news for the US Dollar – it
continues to remain strong. We continue to hold a very favourable
view towards USD over all other currencies.
Commodities
We have no positions in oil or gold at this time. Gold has rallied off
recent lows which is absolutely encouraging. However, for us to
become structurally bullish on gold, we need to see it break through
several resistance levels and withstand an initial surge from the USD.
As always, we’d be pleased to speak with anyone about our
investment views. We also encourage our readers to share our global
market outlook with those who they think may find it of interest.
Keith earned the Chartered Financial Analyst (CFA) designation in 1998
and is a member of the Chartered Financial Analysts Institute. He has
been recognized by the CFA Institute, RealVision, MacroVoices,
Reuters, Bloomberg, BNN and the Globe & Mail for his views on global
macro investment strategies. He is a frequent speaker on the
challenges and opportunities facing investors today, and is available to
present to groups of any size.
Our Team:
Keith Dicker: keithdicker@IceCapAssetManagement.com
John Corney: johncorney@IceCapAssetManagement.com
Haakon Pedersen: haakonpedersen@IceCapAssetManagement.com
Andrew Feader: andrewfeader@IceCapAssetManagement.com
Conor Demone: ConorDemone@IceCapAssetManagement.com
Keith Dicker, CFA founded IceCap Asset
Management Limited in 2010 and is the Chief
Investment Officer. He has over 25 years of
investment experience, covering multi asset class
strategies including equities, fixed income,
commodities & currencies.

2019.02 Icecap Global Outlook

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