Is it time for us to cash in our chips?

Cast your mind back, if you will, to the market low of March 2009, after the precious wealth underpinning family offices halved in value, against the November 2007 high.

Diversification was no protection during a collapse in liquidity which left every asset in uneasy correlation. The financial system rocked on the brink of failure until governments and their central bankers mounted their rescue.

Ten years on, the S&P 500 has risen 435% from the low, or 80% from the high, for those using inactivity as an investment strategy. For those selling near the low, net returns have been nugatory. Those who sold near the top and reinvested in at the bottom have enjoyed returns not seen for a generation, or more.

In short, timing is all. And family offices now need to be aware that 2019 is the year when taking risk off the table could well repay them handsomely. Encashment could even leave them in a position to profit following the Great Upheaval, whose complexity will make the last crisis look like a party in the park.

Why so? When push comes to shove, the rally of the last ten years has been driven by debt, rather than fundamental economic growth. It leaves us vulnerable to upheaval, especially with a complacent stock market.

The financial drugs used to save us in 2008 have lost their potency, due to the additional debt they have produced, and I believe the next low will be even lower than that of 2009

Beyond this point, there can be a recovery. And it is those investors with decent cash reserves who will have sufficient flexibility to take advantage of cheap opportunities.

In my view, there are eight factors that will mark the progress of the impending decline.

1. The S&P stalls. Outside the technology sector, equities have lagged three-month Treasury bonds since the start of 2018.

2. The printing of money continues to fail to reignite real growth in the US and especially in Europe.  Notably, the US Federal Reserve was forced to renege on a money tightening programme last year, when it realised the economy too fragile to take the strain.

3. The shift of geopolitical power away from the US becomes a big swing factor. In 2008 it was the world’s only superpower, enabling it to manage its financial crisis with relative freedom and tacit support of other nations. Today, China is also a rival superpower, especially economically and both sides are in the process of locking horns. Other emerging economies are jostling for position. America’s room to manoeuvre will be restricted during the next Great Upheaval.

4. The US-China trade war is one symptom of the level of strategic competition as Trump, and his advisers, attempt to slow down the rate of Chinese economic growth, and its challenge to US power. This can only increase in ferocity. In my view, the trade war will evolve into a debt war which will accelerate the market decline. There is also a high risk of military conflict in 2025-27 following an upswing in the price of commodities, unless America can create sufficient deterrence to China and Russia. To do that military spending budgets are going to have to increase by multiples in America,

5. Commodity inflation. The stock markets recovery has been coincident with a downward cycle in commodity prices from 2010 to 2019. This cycle will bottom in the next 18 months and be replaced with one of the most powerful inflationary cycles for decades, that will inhibit the growth of any consumer nation, especially America. Price increases will reflect the industrialisation of emerging markets and supply shortages.

6. The EU’s economic morbidity. European stocks have been falling. The European Central Bank continues to run a loose monetary policy, reflecting regional economic morbidity. This will fuel renewed economic and political crisis across the European Union, making it vulnerable to break up. There are various routes to follow, but the most likely involves the creation of a  core northern group, plus spin-off orphan states, which will be vulnerable to China and Russia (i.e. Italy). The fate of the UK will depend on the nature of Brexit (most probably a WTO DEAL) and the identity of its next leaders, but it may also become the safe haven of Europe.

7. Robotics and AI will change our society over the next decade, faster than forecast, potentially creating high unemployment that will have to be supported by a universal wage. This search for “fairness” already evident on the left, could produce a new model of wealth distribution across even the most capitalistic of nations. The impact of automation on military systems can only be imagined – so far.

8. Climate change is accelerating, as levels of carbon dioxide in the atmosphere shoot higher and temperature records keep being broken. There are ways to counter the carbon threat, but they are expensive and lack political support. So there is a very real and present threat that we shall need to draw on huge national resources to mitigate weather extremes while protecting our littoral cities against flooding.

Once markets start to fall this will continue for many years, given the complexity of the problem and the limits on action by central banks second time around. So step one for investors is to cash in your chips.  Step two would involve investing in haven assets like gold. The final step should involve the purchase of real assets and commodities, but the Great Upheaval could take longer to unwind that you might expect.

David Murrin is a reformed hedge fund manager. He is the author of Breaking the Code of History, published in 2010, which forecast the challenges faced by a faltering US, as imperial China gains power