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Real time market pricing is often the best predictor of future events. Why? Because live market pricing tends to discount the future. Hockey legend Wayne Gretzky’s stellar play was analogous to real time market pricing; it wasn’t about where the puck (market) had been, it was all about where the puck (market) is going.

German government bonds, long considered to be Europe’s ‘safest haven’ sovereign debt, are now trading at negative nominal interest rates. German bonds now carry a negative yield from -0.31% for a 3-month T-bill to a whopping -0.04% through 2022! That’s right, investors seeking safe haven within the troubled Eurozone are now willing to PAY the German Government to hold their money, for as long as seven years, because they believe the Euro may soon bust. As a result, German bonds would likely better protect their investment’s purchasing power, as they would likely receive a reconstituted ‘blue chip’ German Mark currency after a Euro currency break-up. Like Switzerland’s recent move to ‘de-peg’ from the Euro and subsequent 30% Swiss Franc appreciation relative to the Euro, German bond investors are expecting a similarly positive outcome. A Greek investor, for example, would likely benefit from owning a negative yielding German bond as a hedge to the fallout of Greek exit from the Euro, despite the fact that longer term Greek government bonds are paying 10% or more today, or a 1000 basis points more than a German bond. Clearly, the objective for many European investors has migrated from ‘Return ON Capital’ to ‘Return OF Capital’.

Prudent investors should be paying attention to these major developments in the world’s largest financial market — the global currency market. The Euro/US Dollar is in free-fall, now down nearly 25% in just the last 10 months. With global liquidity approaching a record $70Trillion (IMF-Jan 2014), international capital is moving major currencies as well as entire asset class valuations around the world.

Most US investors have remained immune to these new developments and are significantly exposed to risk markets including high-priced stocks, bonds, venture capital, private equity, and highly leveraged real estate. In fact, with 90% of the industrialized world’s bond markets trading at or near 0%, nearly everyone has been forced out of savings and into risk markets.

For investors that believe in a cyclical economy and cyclical markets, our SPP research suggests that major market corrections have occurred every 5 — 7 years since 1973. Note that we are currently nearly 7 years post- 2008 and the Credit Crisis of the late 2000s.

Investors should pay attention to what the global markets are telling us. A break-up of the Euro will send major shock waves through the financial markets across the world. Some geographies and asset classes will greatly benefit, while other geographies and asset classes will significantly deteriorate. Massive international capital movement is already underway and will eventually find its way to each and every individual investor.

Investors should be moving now to protect their traditionally managed portfolios from the coming market volatility and likely risk market ‘correction’ ahead. Experienced investors might consider alternative strategies to opportunistically exploit the next downturn. Tremendous volatility can also create tremendous opportunity at the same time.

It has been said that history repeats itself because the passions of man have remained the same throughout the ages. Fear, greed, power all have remained constant throughout time — the next turn in the cycle will be no different.

Kirk Bostrom

Managing Partner

Strategic Preservation Partners LP

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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