Cavelti & Associates helps institutions and individuals stay abreast of geopolitical and demographic changes. About Cavelti & Associates Ltd.
Peter Cavelti's essays have been printed and quoted in papers, magazines and newsletters internationally, including The Wall Street Journal, Barron's, The Financial Times, the Financial Post, The Globe and Mail, Money, Personal Finance and World Link.
Below, in chronological order, is a repository of our website commentaries published during the past 20 years. They range from travelogues and social criticism to economic commentary and financial advice.
Quarterly letters posted during the past five years may be read in full, while the best of our older communications appear in abbreviated form. You can also access the most relevant issues of Perspectives, the weekly review we published from 1999-2006. Perspectives was designed to benefit charity—in lieu of paying us a fee, subscribers had to support Doctors Without Borders. We had many thousands of subscribers in over 40 countries.
April 2020, "A New World"
Covid-19 has made the world into a new place. Not just “out there”, but in our homes and workplaces. From here on, we’ll be doing many things differently, maybe for a few months and maybe for decades to come. It’s important to understand how we got here. Yes, governments, central bankers, the corporate elites and investment professionals tell us that all this commotion is being caused by the virus. Yet that is only half the story. The other half is that while the coronavirus is a potent catalyst for change, it is not the cause for the numerous dislocations that are underway. So dysfunctional was the policy construct that existed prior to the virus’ arrival that any number of problems would have derailed the status quo. A total reset of existing policies was urgently required because, in very simple terms, nothing worked any longer.
January 2020, "Against All Expectations"
In this issue, we review a year in which markets—against all expectations—continued to advance, against an exceptionally challenging background. We also look ahead at 2020 and beyond, considering key political, economic and social issues, both at home and globally. Our in-depth commentaries on the breakdown of the West’s post-war institutions, the ascent of China and the rapidly rising pressures on the demographic front explore how each of these developments can easily derail the existing order.
October 2019, "Disruption Everywhere"
America’s executives and board members have sold a combined $19 billion of stock in their companies through to mid-September. If we annualize that, it puts insider sales at a two-decade high. There is good reason for such sales: on average, corporate earnings are now contracting. Elsewhere, things are worse. The global economy is slowing; some key European countries, such as Germany, the UK and Italy are probably in recession. Of course, we’ve been there before. In fact, for the United States, the current expansion is the longest on record since 1854. Yet, what’s different from other post-war economic cycles is that the Federal Reserve no longer has the tools required to counteract a serious slowdown. Ever since the slowdown of 2008, along with its counterparts in Europe, Japan and elsewhere, the U.S. central bank has recklessly pumped liquidity into the system, all along stating that the plan was to ‘normalize’ interest rates once the economy strengthened. Well, that normalization has now become impossible. In accommodating ever more unsustainable debt levels at the government, corporate and personal level, the Fed and its overseas cousins have created a situation where, to keep the economy from sinking, more and more stimulus needs to be administered. In this issue, we explore the logical progression of this trend, argue for a defensive investment strategy and outline what that means.
July 2019, "The United States, Again"
It’s interesting that the date of this communication should fall on America’s Independence Day, because America is once again my central topic—not by design, but by default. How else could it be? Whether we look at America’s neighbors, trading partners or military allies, frustration with an utterly unpredictable U.S. administration and legislature runs higher than ever. Only 30 years ago, as Communism collapsed, the speed of America’s descent was unimaginable. On the contrary, much of the world was looking forward to a uni-polar arrangement, in which a Pax Americana would reduce geo-political tensions and more capital could be deployed towards economic wellbeing, social security and education. Now, contrast that notion with what’s actually happened. America’s ‘defense’ budget tops $800 billion a year as the country’s forever-war seeks ever more battlefronts; the disparity of wealth is greater than in any other developed nation; and the only way economic growth can be perpetuated is by bringing government, corporate and personal debt to ever greater heights. Then there is America’s gradual retreat into isolationism, which further aggravates domestic pressures and leaves Washington’s friends, trading partners and allies in a difficult position. Right now, the lines fed by politicians and their parrots in the mainstream media keep the market mirage alive quite nicely. Flagging economic and corporate fundamentals are easily dismissed—because a huge trade deal may yet happen, because the Federal Reserve may lower interest rates, or for whatever other convenient reason. Eventually, the narrative will change and the likelihood is that it will happen much faster than expected.
April 2019, "Command and
again, predictably and on time, the U.S.
Federal Reserve and the European Central
Banks, have shifted gears. After talking tough
for most of the past year, the world’s key
monetary agencies have softened their stance.
The Fed suddenly sees no further need to
ratchet up short-term interest rates, while
the ECB has put in place measures to make life
easier for the continent’s ailing banks. The
reason for all this, in plain and simple
language: the economy is so weak that without
ongoing stimulus from the world’s central
banks, a global recession is virtual
January 2019, "The
As I wrote three months ago,
the stock market has for some time been a risky
place to be. Yet, with few exceptions, financial
columnists, the talking heads on television, and
the major investment firms sang the same
chorus—the economy, they chirped, is doing just
great and a major correction is months, perhaps
years, away. In confirmation bias terms: we want
to believe in perpetually good markets, and if
we look hard enough we can spot the positives to
support our case. To be sure, in recent months
favorable economic statistics did provide
reassurance, but there were countless negatives
you had to ignore to end up with a bullish view.
Organizations like the International Monetary
Fund and the Bank of International Settlements
described the risks at hand in great detail, as
did a number of prominent hedge fund managers
and people like ourselves—but most of the
financial media were deaf to messages of
October 2018, "Unstable
World, Robust Markets"
It’s ten years since Lehman Brothers collapsed and the financial world unravelled. We entered the crisis with cash reserves that seemed alarmist, but helped us weather the storm and be able to stock up on quality equities after their precipitous drop. Once again, we are extremely cautious, with cash positions between 40% and 50%. And once again, our posture appears exaggerated, at least when we listen to the messages produced by the presidential tweet machine and Wall Street’s hype factory. Yet, we prefer to look at substance over media spin and, when we do that, we’re deeply concerned. Let us explain.
July 2018, "Toward a
A new world order, without
America at the head of the table, is in the
making. We examine why even Washington’s allies
are finding it difficult to relate to the
world’s lead power. We trace America’s
multi-decade transformation from admired nation
to a bizarrely inconsistent and unreliable one
and conclude that it spanned both Republican and
Democrat administrations. To be sure, President
Trump has managed to considerably speed up the
process, but the root problems are deeply
systemic and cultural.
April 2018, "An
Important Change in Narrative"
Inflection points in
narrative are highly important markers.
Technically, the stock market is still in a bull
market and no one can know when a deeper
correction will unfold. What is certain is that
the reassuring storyline that’s been with us for
so long is dead. That doesn’t mean the talking
heads on financial TV channels and their
followers will embrace the new reality
immediately, but it makes a more defensive
portfolio strategy imperative. With two years of
considerable outperformance behind us, we
explore what may lie ahead and how you can
safeguard your portfolio.
January 2018, "Events,
Trends and Catalysts"
With two years of
considerable outperformance behind us, we
explore what may lie ahead. For now, the
prevailing narrative persists: motivated by the
belief that central banks won't allow a
meaningful correction in equities and that there
are few attractive places for money outside the
stock market, investors feel that broad
overvaluation is justified. Yet, a challenging
geopolitical landscape, looming social policy
issues and economic imbalances all suggest 2018
may be turbulent. We look at potentially
disrupting events and contemplate how they may
derail the many unsustainable trends.
Holiday Season: Peter's
Lifetime Voyage Through the Charitable Universe
For most of us, the practice
of charitable giving is not something that follows
a defined set of rules, but rather something that
continuously evolves. Peter Cavelti wants to share
his journey with you-how he was first taught to
give, how his perceptions and attitudes changed,
and why he eventually ended up with a very small
number of causes to support. He explains why one
of them, Doctors Without Borders, continuously
2017, “The Elusive Correction ”
How risky is the broad stock
market? It depends how you look at it, but there
is plenty to worry about. To begin with,
valuations are high by any yardstick; in the U.S.
for example, the S&P500 cyclically adjusted
price-to-earnings ratio has only been higher
once—in the late 1990s. Then there is the fact
that during the past decade S&P500
corporations have spent more on dividends and
share-buybacks than they’ve earned. That, in turn,
has boosted corporate indebtedness to close to $9
trillion, which is a third higher than it was at
its previous peak in 2008. U.S. corporate debt is
now at 46% of the country’s GDP, a historical
high. In short, America’s companies are more
highly valued, less profitable and more indebted
than they’ve been in years. Unfortunately, none of
this gives us a clue as to when exactly the
inevitable correction will unfold. All it provides
us with is a historical marker. A number of
prominent hedge fund managers have exited markets,
some by liquidating their holdings and returning
cash to the clients. Our approach has been
different: we believe that the key central banks
have no alternative but to keep interest rates at
extreme lows, and that politicians fully support
that stance. Of course, the continuous use of
stimuli to counteract economic challenges is
extremely imprudent—eventually, a much bigger
crisis will force creative destruction and bring
this folly to an end. But when that happens is
2017, “Deviations from the Norm”
We examine several recent
events that threaten to overthrow the social,
economic and political order. As a general rule,
when the unknowns starts to crowd out the
predictable, it’s best to be cautious. We find it
absurd that, in the face of that, most investment
professionals still stick to fairly dogmatic
‘themes’ and ‘styles’. As we’ve tried to explain
for several calendar quarters, we believe an
open-minded approach works much better. Our
flexible strategy, along with paying attention to
downside risk and occasional retreats into cash,
has helped us to considerably outperform during
the past three years.
2017, “Age of Discontent”
The majority of people in the
industrialized world feel disenfranchised. Their
life appears to be in the hands of an
unaccountable elite, where corporate, political
and academic leaders collude. They can vote for
the major parties, with the outcome that a
profoundly unsatisfactory status quo is
perpetuated, or they can vote for a fringe party
that promises to shake things up, but typically
brings with it elements of extremism and lack of
experience. The U.K. Brexit vote and the election
of President Trump were a warm-up for the upheaval
this year and beyond.
Turning to the markets, we believe there is a huge disconnect between the world’s economic, social and political challenges on the one hand, and the pricing of financial assets on the other. Given this dilemma, we continue to believe in a diversified and pragmatically managed stock portfolio that combines growth and income objectives and targets different macro outcomes. You should also hold gold, ideally in physical, segregated form.
2017, “On America”
So far, financial markets have welcomed Donald Trump’s victory with exuberance, focusing primarily on his promise of lower taxes and less regulation. But, for several reasons, Wall Street’s party may prove premature. All the more reason to enter the new year with a dose of caution.
2017, “Three Tests for Gold”
Because the recent fall in gold prices begs for a comprehensive reassessment, we subject the yellow metal to three tests. How does gold look as a currency alternative, how does it stack up in terms of commodity fundamentals, and how does it look when viewed through the lense of technical analysis?
2016, “The Delta Factor”
The recent suspension of all
Delta Air Lines flights highlights the drastic
need to overhaul our badly impaired
infrastructure. The eventual cost of overhaul will
be high, and other areas of governance, such as
health care, education and social welfare, demand
equal attention. Yet the decades of high economic
growth and swelling tax revenues are behind us,
while central bank efforts to reverse economic
stagnation have failed.
An inflection point appears close, but timing it is impossible. Given these circumstances, we continue along our course of retaining market exposure, but with an eye on vastly different possible outcomes.
July 2016, “On Arrogance”
We comment on the arrogance of the political class, the misguided and desperate actions of central bankers attempting to fix a broken system, Brexit and the future of Europe, and our conviction that investors have no choice but to resort to an approach of extreme pragmatism and flexibility.
April 2016, “The Central Banks, Again”
The positive effect of central bank shenanigans is that equity values, for now, are being propped up, which boosts the wealth effect and in turn makes consumers a bit more confident. The negative is that our monetary authorities have managed to distort every conceivable link between the pricing of financial assets and their underlying fundamentals. In doing so they have also undermined the ethics complex that governed the successful operation of society during the past many centuries. Working hard and saving for a rainy day no longer seems like a smart idea; consumption in excess of production is what is being systemically promoted instead.
Given the many uncertainties ahead, it seems to us that a strategy recognizing various outcomes, and diversifying accordingly, may make the most sense.
January 2016, “Annus Horribilis”
Considering the weighty issues overhanging the global economy and social order, it seems a fair bet that financial assets markets will be marked by growing volatility. Our view is that what lies ahead is unknowable and, because of that, the only strategy that makes sense is to keep an eye firmly on downside protection. For Melissa and me that means we maintain exposures to assets that will flourish under various possible scenarios, while also maintaining a robust liquidity reserve. This has been our core belief for the past two years and will continue to guide us into the future.
December 2015, “Gold Offers Solid Value”
As I’ve noted before, gold’s commodity fundamentals are strong, with supplies being challenged both as a result of low prices and sharply fewer gold discoveries, and demand likely to remain brisk, as geopolitical uncertainties abound, investors almost everywhere in the world look for hedges against depreciating paper currencies, and central banks continue to shore up their gold holdings.
The mechanics of financial markets frequently defy logic, which means that we cannot forecast the timing or extent of gold’s next movements. What we can do is attempt to seek the best relative value among a large array of offerings. And in line with that approach, we feel it is very advisable to continue holding a meaningful percentage of overall assets in physical, segregated gold.
As investors are coming to understand, chaos is frequently present in the economy, whose functioning and success is dictated by two forces: the mindset of its participants and the policy actions initiated by politicians and monetary authorities. To say the least, that makes for an extremely complex construct. In recent years, central banks have made available to the economy trillions of dollars, while politicians have continuously reassured us that all is under control, and economists and the financial industry have echoed this optimistic sentiment. But people aren’t buying it. Consumers are extremely cautious and businesses are hesitant to make productive investments.
It’s difficult to determine exactly when public sentiment changed. Maybe the 2008 financial crisis provided a catalyst, or maybe the policy responses to that crisis (such as the mega bailout of patently reckless banks and incompetent enterprises) were responsible. Or perhaps negativity built in small increments, over time. Few people have the knowledge or analytical tools to investigate economic and social developments, but everyone is touched on some level as they unfold. What is not grasped through intellectual reasoning is still deeply understood at an intuitive level.
July 2015, “Countdown to Lift-Off”
Central banks try to be “precise” in timing a rate increase, but fail to understand the overall context—politically, economically and culturally. What’s needed is a return to a world where productivity and thrift is rewarded.
Absent that, the question on everyone’s mind is when a “riot point” will arrive and what form it will take. Will it come in the form of social unrest, a policy error by a key central bank or government, a foreign military adventure gone wrong, a banking crisis, or will the catalyst be something entirely unforeseeable? No one can know, but it seems clear that the default force of the American-run world, organized money, is no longer serving us well. Unfortunately, the transition to a different system will most likely be messy and inconvenient.
April 2015, “On A Wing And A
We expect volatility to increase throughout this year.
January 2015, “More Unintended Consequences”
dramatic decline in the price of oil will have
serious unintended consequences. Expect the Middle
East to be further destabilized and oil producers
everywhere to be plunged into budget deficits. The
U.S. will not be spared—the shale miracle will turn
into shale bust, banks will be pressured, and
unemployment will start to rise again.
The loop in which we’re caught is by now brutally transparent: central banks, led by the U.S. Federal Reserve, are forced to keep interest rates at virtually zero or numerous mainstream economies face ruin. We don’t need to economically define what that means: given the precarious state of the Eurozone, or Japan, or the bubble characteristics of U.S. stocks or Chinese or Canadian real estate, even a hiccup in interest rates could lead to economic pneumonia. It won’t take much to send the global economy into deep recession, massively swell the ranks of the unemployed, and thus even further aggravate the problem of wealth disparity.
Is there any asset class that offers value? The massive debasement of the world’s key currencies suggests that a gold holding, ideally in physical and segregated form, makes more sense than ever—especially at these prices.
The past few weeks have blown a few holes into such thinking. Bond yields have risen sharply, major stock indices have been under growing pressure and gold has rallied against all currencies. There are numerous theories of why this happened and why it happened at this time—we view it simply as the beginning of an inevitable return to a state of normalcy. Manipulation can have a large impact on assets values, but no matter how massive the manipulation is, eventually a return to the natural order of things must occur. And what is the natural order by which financial markets function? It’s simple: interest rates must be allowed to serve as a pricing mechanism for risk, yields must reward productivity, equity values should reflect current and prospective corporate success, and the value of currencies should mirror the economic and monetary integrity of their issuers. The path toward such a state of normalcy will be extremely difficult and disruptive, and may take place over many years.
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