Prepare Now for Debt maggedon

Continued from The Worthlessness of U.S. Public Debt

The outcome of a sudden change in inflation perception is dramatic. What is very likely to happen, unfortunately, is that the risk-reward model that has reigned since the beginning of the early 1980s bull market will invert on itself. Money that was once “safe” to move from bonds to stocks and back to bonds will find no quarter in either.

At first, rising interest rates will prompt money managers to move out of stocks and into debt. But they won’t want to buy long-dated debt already on the market. Why? Because rising bond rates will mean that newer debt will pay progressively higher yields (in effect, at a lower cost).

The price valuation of long bonds will begin to crater. As bond sellers flood into the market to dump their paper first, rates will rise even faster. Things could easily spiral out of the Fed’s control, which will have its own problems to solve in subtracting the several trillion in virtual dollars it put on deposit and, technically, remains available to lend through the banking system.


Rising interest rates will have the secondary effect of slowing the economy. That will be felt worldwide and lead, inevitably, to panic sell-offs in stock markets worldwide (and not necessarily all at once, either). Similarly, inflation expectations — bottled up for so long by the Fed’s extraordinary efforts — at last will percolate up into the CPI. We should expect, at the very least, the same kind of rapid declines and falls we saw in hard assets back during the early days of the credit crisis.

Don’t remember those much? At one point, the dollar was so weak that it was rejected by caretakers at the Taj Mahal. Laughably, they preferred euros. Remember about the middle of 2008 when crude oil roared above $140 a barrel? How about when gold popped above $1,900 an ounce in August 2011?

Economists will unload reams of data to argue that these kinds of swings are the product of tight supply, rising demand or disturbances in the news, real or imagined. Those factors matter, but the much more reasonable explanation is that the forces at work in the commodities markets are really no different than what has been driving the bond and stock markets: artificial market gravity, fueled by our own Fed.

For money managers, the irreality of the last five years is about to be ripped away, exposing them to a fundamentally new playing field. Without the Fed to buy up bonds, everyone long will be a seller and far too few will be tempted to buy. Without the Fed to drive down interest rates, long equities will suddenly feel like an unnecessary risk. Selling will commence there, too, with far too few buyers at first. Cash will pour in and out of hard assets in response.

Meanwhile, legions of fund managers have built their models around what they once thought of as an unremarkable, “safe” rate of return — about 7.5%. Unfortunately, all of their models are built on the soon-to-be-humiliated long-only duopoly of stocks and bonds.


At CoreStates, we have actively worked to disabuse our clients of the notion that “what always worked” is the safe way forward. It is, in fact, a way fraught with obstacles and danger. Not making a simple 7.5% is the least of those problems. In the markets to come, you run the very real risk of simply being wiped out.

That’s why we have worked hard to produce a solid, responsible, actionable investment policy with a handful of bedrock principles: careful examination of global economic realities, political risk management, real diversification, truly uncorrelated asset classes, and thoughtful income protection.

Moving beyond Modern Portfolio Theory (stocks, bonds, cash, and real estate), we encompass the global asset classes you need to grow and defend wealth, including real assets, raw materials and commodities, precious metals, energy, and currencies. Each offers its own particular hedge against risk, leading to steady investment performance in unsteady markets.

It’s part of our 20/20 Global Vision, a unique investment philosophy that defines us in the market and, we believe, will make all the difference when it comes to defending your hard-earned wealth.