The bigger the boom, the bigger the bust – ishares msci acwi (all country world index) index etf (nasdaq_acwi) _ seeking alpha

Investors, speculators and traders should remember the 2003-2007 time-frame, where a new era of low volatility was trumpeted by professional money managers as having a permanency that ultimately proved very fragile.

During this time, the rampant growth of indexed assets was hailed as the onset of a new era, in which the implementation of efficient market theory would dominate individual and institutional portfolio construction and market volatility could be harnessed by monetary policy makers to smooth out the business cycle. Msci world wiki Sound familiar?

We all should remember how that turned out, yet we have quickly forgotten, as the current rise in asset prices has quieted dissenters of contemporary monetary policy, by directly undercutting the validity of their views, or by indirectly undercutting the market value of their portfolios.


Looking back, the resulting fallout in 2008 revived the study of Dr. Msci barra performance Hyman Minsky, who hypothesized that a period of stability was the foundation of a period of instability.

While there was much discussion about Minsky in 2007-2009, and authors like Nassim Taleb rose to prominence with his famous 2007 book, The Black Swan , the dialogue about risk has taken a back seat to almost all investors today.

Instead of looking for distinctive ways to mitigate risk, investors have embraced “risk parity,” which leaves the financial markets in a uniquely vulnerable position today, in my opinion, if bond and stock prices happen to go down together.

Thus, here we stand today, in the midst of an even bigger, all-encompassing bubble, which now embodies the vast majority of the United States stock market and bond market, two of the largest pools of risk capital in the world.

The rationalizations of why money has been recycled back to the U.S. Msci contact markets make sense on the surface, as does the logic of why U.S. Msci share price bond yields could go lower, particularly since they offer relative value compared to most of the world’s sovereign bonds. Msci performance Having stated this, proponents of infinitely higher bond prices are generally not even open to debate. Msci world constituents And, frankly, in their defense, why should they be? With roughly $13 trillion of sovereign bonds possessing negative yields, zero has become a relatively attractive yield in some parts of the world.

In summary, trading in debt and equity markets has been a one-way affair, where opposing views have been crushed, by the near uniform move in asset prices. Msci world quality index Yes, occasionally there is a sharp drop, like in August of 2015, or in the first months of 2016, but these periods of volatility are ultimately papered over, setting the state for a bigger bust when the current boom ultimately ends.

A globally coordinated central bank easing campaign, with the Federal Reserve acting as the general in command, has fed the animal spirits of investors, and inflated asset prices so much, that the prospective future returns, from today’s lofty perch, are lower than they were in 2000 or 2007.

This is shown below, in the latest update of a table that I have put together using data from GMO, which shows GMO’s projections of future “real” returns, on an annual basis, for the next seven years.

The forecasted returns for equities, as a group, are more dismal than they were in July of 2000 or January of 2008. Msci emerging markets europe index More interestingly is the negative projected “real returns” for a majority of bonds, indicating that fixed income may not be the safe haven that everyone thinks it is today.

In summary, from GMO’s perspective, the combined stock and bond markets are in a more precarious position today, than they were prior to the market collapses in 2000 and 2007.

Excess valuations and excess returns are centered in the United States, which has positively diverged from the rest of the world from 2011-2015. Msci world ticker Said another way, almost everything in the U.S. Msci world index yahoo finance has appreciated, with a few notable exceptions, while the rest of the world generally struggled.

This is shown by the five-year performance chart depicting the returns of the SPDR S&P 500 Trust ETF (NYSEARCA: SPY), the iShares Russell 2000 ETF (NYSEARCA: IWM), the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT), the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG) and the Vanguard REIT Index ETF (NYSEARCA: VNQ).

Over the trailing five years, SPY is up 106.5%, VNQ is up 99.7%, IWM is up 90.4%, TLT is up 54.1% and HYG is up 30.0%. Msci full form All of these returns, except for the high-yield bond ETF, outpace international equity and bond returns over this time frame.

To illustrate this drastic outperformance of the U.S. Msci world index koers financial assets versus their international counterparts, I have graphed the five-year performance of the SPDR S&P 500 ETF against the respective performance of the iShares MSCI EAFE ETF (NYSEARCA: EFA), the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM), the Vanguard Total International Bond ETF (NASDAQ: BNDX) and the iShares J.P. Msci world nr eur Morgan USD Emerging Markets Bond ETF (NYSEARCA: EMB).

As a result of the outperformance of U.S. Msci equity index assets, international funds have flowed to the U.S. Msci us in a self-reinforcing cycle. Msci world pr usd This has led to the U.S. Msci acwi etf increasing its share of the world stock market capitalization, over the past five years, as shown by the chart below, courtesy of Bespoke.

In summary, while 2000-2009 was the decade of emerging markets, led by star participants, Brazil (NYSEARCA: EWZ), Russia (NYSEARCA: RSX), India (BATS: INDA) and China (NYSEARCA: FXI), who were infamously dubbed the “BRIC” countries by Jim O’Neill of Goldman Sachs (NYSE: GS), the decade commencing in 2010 has seen the U.S. Ishares msci emerging markets index reassert its global dominance.

The reluctance of the Federal Reserve to stick to their projected rate hike schedule in 2016, where Fed officials originally anticipated four rate increases during this year, has been an indirect easing campaign, as market expectations for rate increases have been guided lower, and this indirect easing has undoubtedly been a positive for stock prices.

In June of this year, I opined that the S&P 500 Index could rise 20% before crashing, based on my own research and data from Ned Davis Research, that showed MSCI World Index earnings turning higher and so far this forecast has proven accurate.

Earnings look set to bottom in the second quarter of 2016, and the iShares MSCI ACWI Index ETF (NASDAQ: ACWI) is now on the verge of making new highs, leading the upturn in global earnings.

In reviewing past earnings bottoms in the MSCI World Index, Ned Davis Research found that the index rallied roughly 15% on average as the table below shows.

Thus, even though global equity markets have rallied this year, and have come a long way from their bottoms in 2009, there still could be more intermediate-term upside, based on the fact that global earnings momentum and growth appear to be turning up.

In an article published earlier this week on Seeking Alpha, I discussed the reasons why the bond market was in a bubble and I investigated the potential for the bond market to top first.

I continue to view this as a distinct possibility, as I believe the bubble in the bond market is actually bigger than the bubble in the stock market, due to the uniformity of belief from investors that bond prices can only rise with the wind of central bankers at their back.

From my perspective, the bubble in the bond market is centered in sovereign debt, with longer duration bonds the most extended, as shown by the yields, which are the inverse of price, on the 30-Year U.S. Msci world ex us etf Treasury Bond Yield and the 10-Year U.S. Msci careers Treasury Bond Yield.

Looking at the charts above, there is a decent chance, in my opinion, that the plunge lower in yields during the summer of 2016 will mark the ultimate top for the bond market.

Risk parity has become a prominent investment strategy, and it involves the leveraging of fixed income positions to achieve the same risk position in a portfolio, in order to offset the movement of traditional risk assets like equities.

Keep in mind that risk parity only works if bonds and stocks remain negatively correlated. Msci world weights With bond prices so high, what happens if bonds cannot serve their role as an asset stabilizer, in a diversified portfolio, as they have traditionally done?

If stocks and bonds decline together, it will be in direct contrast to the consensus view, which views bonds a safe asset class, based on their performance in past busts.

Additionally, if bond prices were to top and then decline first, it could challenge the entire widely adopted portfolio construct concept of risk parity.

Central bankers have forced market participants to forget a crucial lesson that should have been learned by investors during the past twenty years. Msci nyc And that lesson is, give Wall Street or investment bankers in London, Tokyo, or Shanghai time and a sustained period of non-volatility, and these financial alchemists will create a bomb that has the potential to bring down the entire financial system.

Instead of learning this lesson from the low volatility buildup, and subsequent fallout of the 2003-2007 time period, central bankers have provided an even longer period of apparent stability and low volatility, by promoting asset price inflation as an indirect way to wealth creation.

This viewpoint will ultimately prove false and the current political climate around the world should be an indication that the status quo is not working.

Let the markets operate uninterrupted. Msci world quality I know this is a novel concept in our hand holding world, where everyone needs to be reassured that everything will be alright. Msci investor relations However, unelected central bankers have tried nearly everything else, short of outright monetary handouts, which could be coming if we extrapolate the path we are on today and nothing has worked.

The solution is simple. Wiki msci Let capitalism do its job and get central bankers, investment bankers and anyone else looking to benefit from the liquidity flow out of the way.

Would volatility be higher if every interest rate increase was not telegraphed months in advance, quantitative easing was retired and markets were left to their own price discovery? The answer is almost assuredly. Msci eafe etf This higher volatility, however, would strengthen the financial markets, as a two-way debate in the marketplace would discourage excesses, when these same excesses are encouraged today.

Nassim Taleb explored this concept in his book Antifragile , yet the unfortunate realities of today’s financial markets are that they are the opposite of antifragile. What is msci world index In fact, with valuations stretched to extremes, Taleb believes that markets are in store for a dramatic drawdown.

In conclusion, in contrast to assertions by central bankers that we were on the edge of the abyss in 2008, the truth was that we were on the edge of the solution, and the markets would have cleansed the patient, instead of enabling him/her further. Msci index chart Instead, the excesses have been allowed to accumulate, making the markets’ cleansing process a bigger endeavor. Msci value index methodology Throughout market history, large booms have been followed by large busts, and everyone should realize where we are at in this inevitable market lifecycle today.

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I wrote this article myself, and it expresses my own opinions. Msci events I am not receiving compensation for it (other than from Seeking Alpha). Msci eafe small cap index I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Every investor’s situation is different. Msci world real estate index Positions can change at any time without warning. Msci world esg index Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. Msci world index bloomberg The author is not acting in an investment adviser capacity. Msci developed markets The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Msci index list The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Msci currency index Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.