Though not actually juggling dynamite, Danielle Park does juggle many hats: Portfolio Manager, financial analyst, attorney, finance author, and media personality.
Danielle Park is author of the book, "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," as well as the popular daily financial blog, www.jugglingdynamite.com.
Ms. Park worked as a litigator until 1997 and later became a Chartered Financial Analyst (CFA). She co-founded Venable Park Investment Counsel Inc., an independent investment counsel firm, and now helps to manage the portfolios for more than 200 of North America's wealthiest families.
We recently caught up with Ms. Park at the Cambridge House World Conference in Vancouver, where she was speaking. Her presentation topic was “The Global Credit Crisis Goes Viral.”
The main point of her presentation was that the credit bubble did not end in 2008. “It morphed and spread into various levels of government around the world. So now we have more leverage in the financial system today than we did 3 years ago,” she explains.
Economic Review and Forecast
In our discussion with Ms. Park she reviewed some of the points from her presentation and filled us in on her concerns about the economy.
Ms. Park begins, “my concern is that rally that we saw in asset markets from March 2009 into 2010, was unnatural and front-loaded such that is served to truncate this market cycle. Where we might have expected 3 or 4 years of expansion coming out of the last recession, I think all the stimulus money that was pumped into markets around the world, [the governments] may have shortened that. They triggered a dramatic rebound in asset prices, but I think we’re now probably on the precipice of the next significant contraction.”
She continues, “and because the system is so over leveraged I don’t think there’s much cushion to absorb the credit crisis round two, the second phase. So I’m actually very defensive again at this point just out of concern for how that may play out.”
Ms. Park doesn’t see a lot of opportunity in many stocks and commodities at current prices. “I think that right now we’re about defensive as we were in 2007.
Over Leveraged
In the last couple of years you saw a big investment theme into precious metals in response to the government debt taken on to re-inflate the economy.” Ms. Park says that the theme of buying precious metals has manifested itself in increased investor interest in exchange traded funds and futures. She goes on to say, “the amount of credit derivatives in the world today is absolutely mind numbing.” Mentioning that listed and unlisted derivatives are estimated at $1.4 quadrillion, Ms. Park exclaims, “that is a staggering amount of leverage.”
Explaining, Ms. Park goes on to say, “government stimulus and derivatives have disproportionately driven the price of commodities, my concern is that they are now the most vulnerable, and I wouldn’t be surprised to see a 50 to 70% correction in some of the main categories like copper, oil…. Silver’s already had a significant correction. I think that’s the kind of market climate we’re coming into in the second half of 2011.”
Ms. Park’s concern is that many people have purchased commodities as an investment class in the last few years and now they could see significant losses again.
Governments aren’t likely to step in this time with stimulus dollars. Ms. Park elaborates, “I don’t think there’s going to be the political will or funding to reignite a big rally off the bottom the next time.”
Ms. Park doesn’t see that the efforts of the central banks to stimulate their economies were that helpful. “I think that the QE experiments have been tried and they provided a couple of quarters of some inventory building at best. At the end of the day, they didn’t solve the problems of the economy. Unemployment is still above 9%, etc.”
Continuing Ms. Park says, “I think that you could see less appetite for trying such massive stimulus efforts the next time. The Republicans are now looking for spending cuts and debt decreases. I think this theme will be prevalent for the next few years in many countries.”
Ms. Park fears that the 2009-2010 bounce back could create false hope for investors: “the problem with people losing in the next down leg is that they may think, ‘Oh well, it comes back quick.’” She cautions, “I don’t think we can count on the same unusually quick price rally the next time, in which case you need to protect yourself now before the losses hit.”
She continues with a possible reward for the next cycle, if you protect yourself now, “you may get a really exciting buying opportunity to reenter some of your favourite companies, sectors and commodities at lower prices ahead. This would allow you to pick up investments with good dividend yields again.”
Buying Gold the Wrong Way
Gold can be an alternative to fiat currency, but Ms. Park cautions that many people are participating in gold via derivatives or paper asset versions. Ms. Park explains, “although they may think of gold as an alternative to fiat currency, a store of value, defensive against risk in financial markets, if you’re participating in it through financial markets it really doesn’t provide that diversity. At least it hasn’t in past cycles and I don’t think it will in this next cycle either.”
Ms. Park says that credit derivatives and the commodities trading has been the main growth area of the big investment banks in the last year. Ms. Park sees dangers ahead with this amount of leverage: “that just means once the correction starts it tends to really snow ball and you see the margin clerks making calls and people liquidating. Even things they don’t want to liquidate; perhaps things that they think they may want to hold on to like gold. It could see significant selling as well. And that’s why so much leverage in the system is dangerous for people “trying to invest”, because the speculators are forced to liquidate en mass when these phases start.”
US Bonds a Good Buy for the Short Term
Ms. Park sees bonds as a good hold right now, “both on the Canadian and the US side.” She explains, “US cash is a good place to park some funds. I’m not necessarily talking long term. I realize there are major fiscal problems, but I’m saying that we may continue to see the negative correlation of a flight to quality in bonds and US dollars when everything else is being sold.”
Though the Canadian dollar was strong in 2010, Ms. Park still sees Canada closely linked to the US. She says, “in the last several weeks, we’ve seen the US dollar bounce off its long-term support, which was 71 on the world index, and has traded higher from there. Even in days when the US dollar was softer against other currencies, the Canadian dollar has weakened.”
She explains, “I think it’s a reflection of our exposure to the commodities leverage issue that I’m talking about. The ISM data last week suggests the US is definitely slowing if not contracting outright in the near future. Canada is very much connected to that wagon so to speak.
Ms. Park continues, “in the past decade, when we’ve seen a sell-off across the board in risk assets, the only diversity you could get was by hedging or selling your equity side and reallocating money toward cash, cash like deposits, US dollar currency and other “safe havens”. You want to own the few things that go up when everything else goes down.”
“I think that’s the type of climate we’re in again.”
Another Recession
“I’m expecting that we might see a recession in the US in 2012,” predicts Ms. Park. “The stock market may indeed be starting to reflect that now.”
As indicators of a coming recession, Ms. Park says the market “basically peaked in February and that was a few months ago and it’s been declining. The S&P 500 broke through some key levels in the last few weeks. China and India have been trading lower. Things that tend to be leading indicators of the cycle have been breaking down. Bonds found a bid in the last few weeks; the 10-year Treasury note broke out; yields were significantly higher at the start of this year. The 3.20 yield was key on the 10-year note and it broke below that in May and is now below 3%.
Ms. Park continues “this is all happened the last few times we have had a risk aversion sell off. Early last year I thought we’d gone too far too fast on the upside from the March 2009 lows; I thought perhaps a mid cycle pull back of 20% would be sufficient to sort of take the froth out of the market and then we might see an expansion for another year or so. This time, because QE 2 came in and made things that were already expensive much more expensive, now I’m concerned that we may get a full on contraction where the stock market loses another 30 to 40%.”
“And as I say, the problem with this next downturn is it could be a long slow slog back to present levels.”