If you can keep your head when all about you are losing theirs ...

you don't
work for the Federal Reserve

Apologies to Mr. Kipling for using his work to create an inflammatory headline.

A considerable amount of ink is being spilled on the topic of whether there is a

recovery underway in the west and if so, whether that recovery is sustainable. So
much ink in fact that one would have thought that when combined with the mighty
labors of our central banks to single-handedly create an ink shortage this lowly
substance would have been used up long ago.

Fortunately, or perhaps unfortunately depending on your view of my monthly

musings, we haven't run out yet so let me give you my view on the recovery
debate - a recovery in nominal or real terms? With the printing presses running
full time (ink supplies notwithstanding) some form of nominal recovery will occur
in the western economies. Sadly, it's not going to be anywhere nearly as
satisfying as other post-war recoveries because it largely will be an illusion in real
terms. Our recovery is not being built on the sound fundamentals for growth:

· Favorable demographics;
· Low national debt levels;
· High savings rates; and
· Persistent trade surpluses.

Please take a moment and consider which so-called developed nation has these
characteristics. Stumped? None. Now turn your gaze to the emerging world - I
doubt you are still stumped as the list is long and obvious.

Take Canada as an example of a country suffering from the western growth

malaise. Canada has:

· An aging population:
· Large unfunded liabilities for social benefits;
· High total debt-to-GDP levels;
· Low savings rates;
· Large and increasing government intervention in the economy;
· Large fiscal deficits; and
· An overly accommodative monetary authority.

I'm sorry to be the bearer of bad tidings but these are not the seeds from which
mighty recoveries are grown. By insisting on printing over the systemic solvency
issues in the financial sector, by actively preventing the liquidation of decades of
mal-investment, by subsidizing speculation and consumption to the detriment of
production (and so on) our valiant central bankers will not create a recovery.
Unless these problems are addressed they are creating an inflationary
environment with poor real growth dynamics - i.e. the ideal raw materials for
stagflation in the west.

What are our investment options? It should come as no surprise to anyone who
has read one of my letters that I believe its important to find investments in
politically stable regions of the world that are directly exposed to emerging
economy growth - i.e. regions that export what the emerging economies need
and are not exposed to emerging economy competitive advantages - i.e. regions
that do not export what the emerging economies make.

In my funds' backyard, western Canada, energy and agriculture are dominant

industries. In fact, western Canada, with only 10 million inhabitants, is one of the
world's largest net exporters of both energy and agricultural commodities. As we
know, energy and food consumption undergo rapid growth as a developing
economy makes the transition to a middle class standard of living. These
markets already appear to be tightening and demand is still accelerating. Here
are some quick numbers to give you an idea of western Canada's resources
endowment:

Energy
· Oil (13% of world reserves; 4% of world production)
· Uranium (8% of world reserves; 20% of world production)

Agriculture
· Potash (60% of world reserves; 30% of world production)
· Wheat (21% of the world export market)
· Oil seeds (10% of the world export market)
· Farmland (80% of Canadian total)

The Canadian economy appears bifurcated between the lower growth east and
the higher growth west. Investing in western Canada provides exposure to
emerging market consumption patterns in energy and agriculture in a politically
stable market. I believe a good approach is to make direct investments in
commodity production assets - in addition to providing less volatile exposure to
commodity price trends, production assets are excellent inflation hedges that,
unlike gold, generate cash flow.

In addition, investors who have a value orientation have been provided what I
believe is an attractive entry point into the Western Canadian conventional oil
market. The credit crisis has caused financing to become scarce for junior oil &
gas companies while low natural gas prices are reducing their
profitability. They are being forced to sell assets to stay in business. This has
created a buyers' market for the acquisition of smaller oil production assets -
assets that are highly cash flow positive at current oil prices.

Shifting gears for a moment - I want to ask when we gave permission for central
banks to take over the tax role of our governments? Central bankers now seem
to feel free to increase the money supply by any quantity they deem necessary to
keep the banking sector solvent. In effect, they are extracting a massive tax from
savers everywhere via the historically low interest rates they have engineered.
When questioned about what they are doing with our money they get downright
testy and roll out the cliché of "central bank independence".

Let's take a look at what that vaunted "independence" is costing Canadians using
some Bank of Canada ("BOC") data. There is C$1.2 trillion on deposit with
Canadian chartered banks. If we assume that BOC actions are keeping interest
rates at least 4% below their equilibrium level then Canadian savers are being
taxed by the BOC to the tune of $50 billion annually in the form of lost interest
income. Canadian federal government income tax revenues are approximately
$150 billion, so is it not accurate to say the BOC has unilaterally increased
Canadian income taxes by around 33%?

Let me leave you with this. If central banks really believe that printing money and
giving it to the government and the banking sector is solving our problems and is
not inflationary why not print much, much more and be done with the crisis once
and for all? Perhaps all this money printing will usher in a new era of wealth,
prosperity and low inflation - what do you think?

Kind Regards

Stephen Johnston - Partner

Petrocapita Income Trust
Agcapita Farmland Investment Partnership

Stephen is a partner at Petrocapita, an energy investment fund built around the core
premise that the world is in a bull market in commodities driven by inflation and a step-
change increase in demand and, accordingly, that investments with direct or indirect
exposure to commodities in a politically stable environment such as Canada will provide
above average returns. Petrocapita holds a portfolio of low risk, producing energy
assets.

Stephen graduated from London Business School and is the founder of one of Canada’s
largest farmland investment funds, and Petrocapita. He has over 15 years experience
as a fund manger – working for organizations such as the European Bank for
Reconstruction and Development, Societe Generale and Baring Brothers.

Stephen has appeared on Business News Network and CBC News and been quoted in
such media outlets as Fortune, the Financial Times and The Globe and Mail.

Information contained herein is obtained from sources believed to be reliable, but its
accuracy cannot be guaranteed. The information contained herein is not intended to
constitute individual investment advice and is not designed to meet your personal
financial situation. The opinions expressed herein are those of the author and are
subject to change without notice. The information herein may become outdated and
there is no obligation to update any such information.