You Can Thank Uncle Sam for the Volatility!

Tim Fortier  |

The media continues to roar about the overhang of sovereign debt and how the current debt load is economically unsustainable.  The big ratings agencies are also jumping into the fray with their downgrades, watch lists, and various “outlooks”.  As usual they are a bit late to the party and only seem to add to the media noise.

So what does all this media “debt” noise really mean? Intuitively we all know that prolonged, exorbitant debt is unsustainable—for anyone—even countries. But the more immediate question for the equity investor is how will excess government debt affect my portfolio going forward?

Recently KKR’s Global Macro & Asset Allocation Team came out with an interesting whitepaper showing three phases of debt over the last decade.  While corporations and Wall Street have worked to deleverage their balance sheets, the federal government has gone in the opposite direction.

The Federal Government recently exceeded 100% leverage.  And history shows that higher government leverage leads to shorter economic cycles.  Over much of the last 20 years we have experienced economic expansions lasting 75 months or more.

Going forward we can expect economic cycles of 30-40 consecutive months.  These economic cycles are more in line with what was experienced from 1945 to 1960 when government debt was persistently above 60%—a Phase III environment.  And this shortened cycle will continue to make these markets more volatile than what we’ve experienced over the last 20 years.

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Henry McVey of KRR had this to say about the volatile markets going forward …

“In broad view, the environment that we are forecasting has significant implications for almost anyone who allocates capital. Demand for hedging features will almost certainly continue to increase in the foreseeable future, while the ability to thoughtfully consider the timing of capital deployments and realizations becomes increasingly critical to sustaining superior long-term returns in a Phase III environment.”

The most important point to recognize … is the entire context of investing has changed.  What may have worked during the past ten … twenty … or even fifty years, is not likely to work in the same way in a world attempting to deleverage itself.

The good news is there are plenty of trading opportunities in this Phase III environment.  But … there will be a continued need to employ hedging strategies that can help you profit from the volatility while also protecting your existing portfolio.  I discussed this a bit more detail in my last article … How to leverage Volatility to Maximize Portfolio Returns.

Click here for additional tools at Portfolio-Café for profiting in this Phase III environment.

Feel free to leave a comment or question and I will come back to you.  Also check back soon—I will have more insights to come.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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