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August 2013
Becoming a legend
In mountaineering lore, summiting Everest, McKinley or even the Vinson Massif certainly warrants a notch in your ice axe. However, the mountain that always produces jaw-dropping admiration, respect and outright fear, has been and always will be K2. The Worlds second highest mountain, is rarely guided and attempted only by the most skilled, the most patient and the most determined climbers and for good reason, falls, slips and nasty tricks can happen in a moments notice. And when they occur, knowing how to swiftly execute a self arrest, or a belay can be the difference between a tragic fall and living to climb another day. Now, when it comes to belays, American Pete Schoening has become synonymous with not just any belay, but the miracle belay. In 1953 at 25,000 feet high in the clouds on K2, one precarious moment turned Mr. Schoening into a climbing legend when he single handedly saved five of his rope mates from plummeting off the mountain. Naturally the climbers were all shaken; yet they learned from this experience and enjoyed many more years of climbing. In 2009, 2010, 2011 and if you can believe it again in 2012, global financial markets were also hanging from a ledge. But each time, instead of having an experienced professional to save everyone involved, the World was dependent upon central banks whose entire legacy was smeared with economic and monetary failures.
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August 2013
Fair is fair
enough, all they had to do was to make people feel wealthier and when it comes to wealth in America, theres no better barometer than the stock market. Chart 1 next page shows the cumulative effect on the US stock market from all the various forms of quantitative easing, or money printing programs. One can see that as the Federal Reserve printed more and more money, the stock market increased more and more as well. This made Ben Bernanke a happy man. As demonstrated in chart 2, the household net worth of Americans has just hit its highest mark EVER. Yes, Americans are now wealthier and now all the world has to do is wait for them to start their borrowing and spending engines. Except this hasnt happened. While GDP loving economist are quick to point out that unlike Europe, America hasnt slipped back into any recession, they conveniently fail to mention that +1.5% GDP growth is hardly the stuff of legendary recoveries. Instead America, and the World continues to slowly grind lower. At any time, cracks in the system appear. Fractured governments in Italy and Greece, massive protests in Turkey and Brazil, and outright civil war and coups in Syria and Egypt are all symptoms of a weak global economy. Lets face it, those who disagree and say money
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August 2013
Money Printing 3
Printing 4
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August 2013
Wealth Effect Step 1: A SUCCESS Individuals and companies are wealthier today than at any other time in history
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August 2013
Wealth Effect Step 2: A FAILURE Despite being wealthier, individuals and companies are not borrowing & spending, which means money has basically stopped sloshing around the economy
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August 2013
A breath of fresh air
As for the Republicans, they are not exactly showering the country with innovative solutions either. Senator John McCain is leading the charge to tax the internet claiming it is providing an unfair playing field for the mom & pop stores on main street. Technology is one area where America still has a competitive advantage. McCain and other career politicians should understand that allowing businesses and consumers to embrace technology may actually help the economy escape the stalled recovery. If they are going to further stifle innovation, dont be surprised if they next devise taxes for fresh air and sunlight. Meanwhile in France, President Hollande also ponders how much he should tax the rich. Of course, this shouldnt be surprising. After all, while campaigning Mr. Hollande frequently called finance his greatest adversary. And if that wasnt enough he also declared he didnt like the rich that much either. Yes, this is the person entrusted to lead the Euro-zones second largest economy out of recession. Similar views, moves and laws have also been sighted in Italy, Spain, Greece, and Cyprus. And since we live in a global world, lets not forget Japans newest super duper money printing attempt, nor Chinas now regular participation in their liquidity markets. All of which brings us to 2013 and the irony that inevitably follows any Holy Grail plans devised by our central banks. As the lull of
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August 2013
Head-locked
Unfortunately, this rather awkward situation now leaves the financial World in a rather uncomfortable place Will central banks continue to print money and therefore blow even more air into the bubbles they have created? Or alternatively, will the Americans begin to print less money in an attempt to slowly deflate the bubbles. This is a tough spot thats for sure. But correctly understanding the dynamics of the global financial system and the ongoing proactive moves by private capital will help you better position your investment strategies for what is about to happen next. The Next Big Thing When it comes to the next big thing, we are not talking about Bieber, Kaepernick, or Baby George were much cooler than that. Instead, investors everywhere should begin preparing for the effects of a significantly stronger US Dollar. In November 2011, we clearly stated our view that the US Dollar would once again return to prominence and strengthen considerably against most currencies. Yes, the days of the Loonie & the Aussie at par would be fodder for camp fire stories. The Euro would break-up altogether, and yes, even the mighty British Pound would shed some weight. In short the next 10 years in the currency World is going to look a lot different than the previous 10 years. The challenge of course is that human beings fail time and time again to correctly anticipate major turning points. Cognitive dissonance has
August 2013
The paradox
these global policies gone wrong. Of course, as the US Dollar strengthens and its stock market rises the talking heads will be talking about the miracle economic recovery - we advise that this reasoning will be proven wrong. Global private capital is fluid, and just as people become comfortable with the next new paradigm of a super duper America, another bubble will have formed right before them. Eventually of course, this global capital will flow away from the US and back to where it came, meaning after the rise of the USD, investors should prepare for a decline, as well as the opposite reaction a rising Asia. For a reference point to this view, consider the 1987-90 Japanese market. Chart 4 on the next page details the surge in the Nikkei over a very short period of time. While Sony, Cannon and Fujitsu gave investors easy to understand stories for dinner and drinks, many forget the 1987 US market crash which was the precursor to nonAmericans yanking their money out of the US. As for the near-near-term, the Federal Reserve boondoggle in Jackson Hole, Wyoming will stir up the buzz surrounding Ben Bernankes replacement. At present, it seems like a two-horse race between the usual socially inappropriate Larry Summers and the career public servant Janet Yellen. Careful throwing a dart to pick the winner, apparently this very political decision changes by the day. The near-term has the September 22, 2013 German election. It will
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August 2013
The US stock market could emulate the 1988-1990 Japanese stock market and double very quickly
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August 2013
Hero vs Villain
Our Strategy The difference between Pete Schoenings Miracle Belay and the various market saving feats of the central banks is very clear; Mr. Schoenings act saved his friends from certain death and his act did not put them into any further danger. Petes a hero. On the other hand, while in 2009 the central banks initially did try to save the day, their repeated attempts have time and time again severely distorted financial markets, putting investors back into even more danger. Over the past three years, the real risk in financial markets has been in global stock markets. Each time stock markets teetered and tottered, central bank stepped in to save it. Ben Bernankes June 2013 speech has completely changed the dynamics of financial markets by significantly increasing the risk associated with bonds and interest rate sensitive strategies. Considering the confusion caused by the US Federal Reserve and the ongoing sluggishness of global growth, our portfolios are reducing exposure to interest rate sensitive strategies and increasing exposure to USD markets. Stock market sentiment has once again crept up towards the non-reward zone and this allows us to remain patient as we enter into the upcoming events in Jackson Hole and Germany.
As always, wed be pleased to speak with anyone about our investment management capabilities. As well, we encourage you to share our global market outlook with those who you think may find it of interest. Please feel to contact: John Corney at johncorney@IceCapAssetManagement.com or Keith Dicker at keithdicker@IceCapAssetManagement.com. Thank you for sharing your time with us.
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