COMMENTARY & PORTFOLIO STRATEGY

JANUARY 2011

M. Cullen Thompson, CFA

Managing Partner & Chief Investment Officer
cullen.thompson@bienvillecapital.com

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act of policy; it consists in tracing the
consequences of that policy not merely for one group but for all groups.” - Henry Hazlitt, Economics in One Lesson

SHORTING CONGRESS Of course, these figures give no mention of the so-called off-
balance sheet liabilities, principally the expanding entitlements of
“That government is best that governs least,” declared
Social Security and Medicare, for which our legislators have
Thomas Payne, noted pamphleteer and co-Founding Father of
conspicuously failed to provision for. Lumping the present value
the United States. What has been a long-standing libertarian
of those future cash outflows to the debts Congress admits to,
belief has more recently been converted into an investable
and the tally comes to a knee-knocking $202 trillion 3—in essence,
(and successful) investment strategy. The Congressional
an arm, a leg and virtually every other body part of the
Effect Fund (ticker: CEFFX), launched in May 2008, is one of
forthcoming generation.
the more unique offerings available to everyday investors
hoping to sidestep the pernicious effects of an incalcitrant “The American hegemon knows no limits, it seems, when it
Congress. But before diving in, a little background is comes to spending other people’s money for their own
deserved. consumption,” offers Bill Gross, founder and co-CIO of
PIMCO, in the candid January edition of his monthly Investment
It is no secret that Congress has had increasing difficulties
Outlook. “Unlike Euroland or the United Kingdom, which
balancing the nation’s books. Since 1961—a period spanning
appear to have gone on an extreme fiscal diet, the American
nearly half a century—in only five years did more money
answer to a bulging waistline is always mañana.”
come in the front door than went out the back. 1
Seconding Gross’ thoughts, Kenneth Rogoff, author of This Time
As the sea of red ink has risen, so has the country’s
Is Different, and a recognized authoritarian on matters related to
outstanding stock of debt. As the clock rolled over to 2011,
sovereign folly, suggested in the Financial Times on January 12th
America’s obligations reached a notorious milestone: $14
that “all the major regions remain trapped in post-crisis
trillion—nearly triple the amount owed just over 10 short
macroeconomic strategies that are either inconsistent, incoherent,
years ago when we cheered in the new millennium 2. Now
or both. US budget policy is deliciously contradictory, cutting
closing in on 100% of the nation’s collective income, the
taxes while promising to balance the budget later, dramatically
accumulated liabilities equate to a non-negligible $126,900 per
expanding entitlements while vowing to rein them in later. And
taxpayer—a virtual Mount Everest in the eyes of the average
because the dollar is so popular, the US is being sure to print lots
American when measured against his stagnant pre-tax income.
of them.”
US Treasury Outstanding Debt
(in billions, USD)
Source: Bloomberg
Spending, it seems, is the nation’s new pastime. With the
$15,000 consumer driving over 70% of GDP, our elected officials can’t
$12,500
help but obsess over the shopping habits of their constituents.
Nor can they resist the urge of tapping the public’s coffers in
$10,000
order to provide them with the necessary funds to do so.
$7,500
Given the amount of stimulus plowed into the economy in recent
$5,000
years, one has to wonder how we would’ve fared without it. Felix
$2,500 Zulauf, of Zulauf Asset Management, recently took the liberty of
$- estimating that very hypothetical for Barron’s. Had the
Jan-44 Jan-50 Jan-56 Jan-62 Jan-68 Jan-74 Jan-80 Jan-86 Jan-92 Jan-98 Jan-04 Jan-10 government abstained rather than indulged over the previous
decade, in only two years would the economy have experienced
growth at all (2001 and 2006). In 2009, Zulauf believes, the

1The Congressional Budget Office recently raised its forecast for 2011’s budget deficit to $1.5 trillion
2The Federal Reserve is now the largest holder of US Treasury debt at an estimated $1.13 trillion,
followed by China, Japan and the UK, per TIC 3 CBO Long-Term Budget Outlook – Alternative Scenario, June 2010

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COMMENTARY & PORTFOLIO STRATEGY
economy would have contracted by 12.8%, followed by an
8.9% decline last year.
When scrubbing through today’s economic statistics, a
number of oddities and contradictions present themselves.
Given the havoc caused by the Great Recession, combined
with a 17% underemployment rate, it may not be surprising to
learn that over 43 million Americans now rely on food stamps,
or that 20% of incomes are derived from government transfer
payments. But when these dismal realities are juxtaposed
against retail sales, which are soon to pass their all-time,
housing-inflated highs, the mind is easily boggled.
Total Adjusted Retail Sales (Less Food Services) Source: Bloomberg
(in USD)
$360
$340
$320
$300
$280
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09
As much as we hate to speculate whether officials are
knowingly trashing the public sector’s balance sheet and
sacrificing what little remaining integrity the Fed has left just
to keep us in the malls, it’s hard not to reach that conclusion.
In fact, this past November, the very caretaker of the nation’s
currency, Ben Bernanke, provided some insight into this
question when he suggested that—thanks to his ultra loose
monetary policy—“higher stock prices will boost consumer
wealth and help increase confidence, which can also spur
spending.” On the economic benefits of saving and
investment, or the adverse consequences of today’s obsessive
short-termism, he remains silent.
According to Dylan Grice, SocGen’s piercingly insightful
strategist, kicking the can down the proverbial road is not a
rare strain of DNA specific to Americans, but rather all
policymakers who naturally prefer quick fixes on the path of
least resistance. Grice explains: “Behavioral psychology
applies to central bankers, regulators and politicians as much
as it does to investors. In promising to fiscally retrench
tomorrow, finance ministers are exhibiting the behavioral
phenomenon of overconfidence in their future self control.”
So how, we all ask, do we gain the necessary self control
needed to rediscover the necessary fiscal (and monetary)
rectitude? Grice offers a prediction: “the bitter fiscal medicine
required to stabilize debt levels won’t become more palatable
today relative to tomorrow until the bond market makes it so.
It can only do this through higher yields. Thus, Ireland and
perhaps now Greece can lead the way. For the Japanese it’s too
late.”
When that day—higher interest rates, that is—will come remains
anyone’s guess. Today yields remain near generational lows while
the collectively pro-stimulus Wall Street and financial media have
undoubtedly assisted Congress and the Fed in pushing out the
inevitable day of adjustment by disingenuously selling the “spend
to prosperity” economic model to the American people. But as
the economist Herb Stein once said, “if something cannot go on
forever, it will stop.”
To Eric Singer, founder of the Congressional Effect Fund,
tomorrow is promised to no one. Protecting from the
“cumulative effect of unintended adverse consequences on the
US stock market from anticipated and actual Congressional
legislative initiatives” is an immediate concern. With that belief,
according to the fund’s website, he launched “the first mutual
fund to explicitly seek to minimize investor exposure to
potentially negative impact of new and proposed Congressional
legislation.” The idea, however, was not simply a meritless,
ideological reaction, but one based on hard-nosed, empirical
Jun-10 research. Singer, a finance professor of some 25 years, discovered
that over long periods of time the stock market performs
dramatically better on days when Congress is out of session
compared to days when it is in.
To fulfill its mandate, the fund only utilizes two basic investment
options: cash and the price return of the S&P 500 (apparently, the
damage done by Congress is so great, the fund doesn’t even
bother with dividends—traditionally a prominent source of
returns for equities). Deciding between the two is even simpler.
When Congress is in session, the fund sits comfortably in cash.
When on recess, the boat is loaded with equities.
Although it may seem as somewhat of a novelty product, the
math is anything but. Since 1965—a period that roughly lines up
with President Johnson’s entitlement-expanding ‘Great Society’—
the performance of the S&P is heavily tilted in favor of keeping
our elected officials at home on their respective sofas. On the
days when Capitol Hill is vacated, the daily annualized price gain
of the S&P 500 has been an astounding 16.0%. When Congress
is busy improving the world: a paltry 0.9%. The differential,
nearly 17.0% annually, represents a type of pseudo ‘alpha’ any
hedge fund would be envious of. We wonder what the results
would be if instead of cash, the fund hunkered down in gold.
To date, Bienville has remained a passive, yet interested observer
of the fund rather than an invested participant. Favoring value-
minded strategies, it is hard to reconcile the fund’s approach with
the proven one expounded by Graham & Dodd. One day,
however, our hesitation may disappear.
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COMMENTARY & PORTFOLIO STRATEGY

YEAR IN REVIEW beneficial as the fixed income portion of the portfolio

The 4th quarter proved to be a good one for equities—the returned nearly 9.0% for the year, versus 0.09% for iShares
S&P 500 finished up 10.8% while MSCI World, a broader S&P National Bond Fund (a significant dispersion in
global market index, rose 9.1%. Contrarily, municipal bonds performance among fixed income sectors). Early in the
struggled considerably on the back of concerns regarding year we believed deflationary fears would overwhelm those
creditworthiness with the Barclays Muni Index falling 4.2%. of inflation in the very short term. This proved correct, and
The 1, 3, 5 and 10-year returns for the various indices, as well as yields collapsed we began to shift exposures, reducing
as their respective standard deviations are listed below. duration

Annualized
• Marginally underweight equities, but within equities,
Index 1 Year 3 Year 5 Year 10 Year overweight high-quality and generally larger domestic
S&P 500 15.06% -2.86% 2.29% 1.41% capitalization companies versus small cap and non-US
Standard Deviation 19.26% 22.16% 17.82% 16.38% developed markets (i.e. Europe and Japan). While the
MSCI World 12.34% -4.29% 2.99% 2.82% underweight exposure to Europe was beneficial, our view
Standard Deviation 20.48% 24.08% 19.39% 17.13%
that high quality would outperform low quality was wrong
Barclays Muni 2.37% 4.08% 4.09% 4.84%
Standard Deviation 4.37% 6.35% 5.09% 4.64%
and detracted from performance, particularly so in the 4th
quarter. Although we continue to believe lower quality,
Despite the impressive year-end result for equities, 2010 was small cap stocks are now considerably overvalued relative to
anything but a smooth, linear advance. As the chart below larger ones, we reduced our hedge (i.e. short position) in the
illustrates, risk appetite oscillated violently over the course of Russell 2000 as it became clear the market was becoming
the year as the market struggled to reconcile impressive more speculative and momentum-based. On average, the
corporate profitability with the bailout of Greece, May’s flash equity portion of our portfolios returned approximately 15-
crash, spurts of economic growth followed by fears of double- 20% (net of hedges), outpacing the S&P 500 by a few
dip, Ireland’s collapse, and finally, the combination of the percent
Fed’s second round of quantitative easing and the unexpected
S&P 500 Index
tax cuts from the Obama administration. It wasn’t until the (in USD)
Source: Bloomberg

latter that equities moved aggressively higher (see adjacent 1,300

chart). 1,250

S&P 500 Index Source: Bloomberg, Gluskin Sheff 1,200

(Percent Change)
20% 1,150

15% 1,100

10% 1,050

5% 1,000
Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10
0%

-5% • Within the thematic equity bucket, our allocation to gold-

-10%
related equities was the standout performer, returning 40%
Jan 18 - Feb 8 - Apr 23 - May 7 - May 12 - May 26 - May 27 - June 1 - June 3 to June 7 June 18 July 2 - Aug 9 - Aug 30 - Nov 5 - Nov 16 -
Feb 8 Apr 23 May 7 May 12 May 26 May 27 June 1 June 3 June 7 - June 18 - July 2 Aug 9 Aug 30 Nov 5 Nov 16 Dec 31
since inception of the position in June. This position was
scaled back at year-end
PERFORMANCE ATTRIBUTION
• Where possible, we maintained sizeable positions in long-
Similar to 2009, having the flexibility and the latitude to invest short equity, credit and thematic macro strategies.
across asset classes was an advantage in 2010, allowing us to Although the long-short equity strategies struggled early in
earn attractive equity-like returns with disproportionately less the year in the face of abnormally high levels of correlation,
risk (and volatility). With respect to specific contributions to many delivered impressive returns despite their low beta
performance, below is a review of some of the key decisions and hedged nature. The credit strategies delivered another
and exposures over the course of the year: year of good results while the thematic macro strategies did
• Overweight fixed income, specifically credit-oriented manage to successfully insulate portfolios during the
strategies as opposed to municipal bonds where we periods of sovereign distress and increased volatility
believed risk had been underpriced. This decision was

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COMMENTARY & PORTFOLIO STRATEGY
• Within the macro portion of the portfolio, we remained
overweight gold—funded from our equity allocation—
which was a significant value add thanks to a nearly 30%
appreciation over the year
• Although we have traded around the sovereign distress
theme opportunistically, we generally retained short
positions in the euro, pound and yen (expressed as a
long position in the USD). This particular position
often comes with the added benefit of mitigating the
overall portfolio volatility in periods of stress, which
generally causes the USD to rally
Asset Class Performance
Source: Bloomberg
(2010 Percent Change)
30%
25%
20%
15%
10%
5%
0%
Gold Commodities S&P 500 MSCI EAFE Barclays
Aggregate
Barclays Muni
In aggregate, the portfolios delivered attractive returns with
both low volatility and little correlation to the broad market,
accomplishing our primary goal. Additionally, that we
performed well in the year’s most distressful months, such as
May, and to a lesser extent, November, provided some
evidence of the downside protection inherent in the overall
positioning.
Finally, we’re happy to report that 2010 also turned out to be a
highly tax-efficient year for our clients as we realized none of
our large winners—with the exception of part of the gold
equity allocation—yet continuously harvested losses on our
hedges throughout the year. We hope this alleviates some of
the annual pain come April.
……
PORTFOLIO STRATEGY
Looking forward, not surprisingly, many of our themes remain
unchanged, specifically our primary one, which is that 2007
marked the end of the 25-year secular credit bubble and that
the crisis that resulted from its collapse was simply one
symptom of a larger, yet unresolved problem—excessive debt.
To be clear, the subprime and banking crisis was not the
“event” itself, but rather one of the potentially many by-
products of the end of the cheap credit era. For this reason, it
remains important to be aware of other former beneficiaries
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of cheap capital, especially those who became critically reliant on
it.
As history has shown, crises tend to move sequentially, generally
beginning with the weakest link before moving further along the
chain. As the credit bubble initially unraveled, subprime finance
was most vulnerable as its Ponzi-style structure depended entirely
on the further appreciation of housing prices. Once the
additional credit required to support it disappeared, the result was
the well-documented housing and banking collapse.
As global liquidity subsequently seized up, the crisis migrated to
the periphery economies of Europe where both the public and
private sectors were previously able to load up on what are now
unserviceable levels of debt. Despite numerous bailout attempts,
the sovereign debt issues in Europe remain unresolved. And
given the lack of global competitiveness of many of these
countries, anything short of a debt restructuring will simply delay
the inevitable.
As for other candidates for concern, we offer two: Japan and
China, both of which have also been significant beneficiaries of
access to cheap money. For two decades Japan has been able to
tap the plentiful savings of their citizens at below market interest
rates in order to fund its hyperinflationary fiscal policy. However,
with domestic savings now diminished relative to the country’s
perennial budget deficits, the well is nearly dry. In addition to the
world’s largest “stock” of outstanding debt, Japan now has an
enormous “flow” problem—that is, they need an additional
source of capital to fund ongoing deficits. We believe Japan will
soon be required to either monetize these ongoing deficits (via
the Bank of Japan) or tap international credit markets for external
funding. Yet if they’re required to borrow at rates as low as 4.0%,
interest expense alone will exceed the country’s tax revenues. For
this reason, we believe a crisis will unfold in Japan—it’s not a
question of if, but when.
China has also been a beneficiary of cheap money, via net capital
inflows, which result from three sources: its annual trade surplus,
foreign direct investment and speculative inflows (i.e. hot money).
And because it manages its currency to the US dollar, China
imports the ultra loose monetary policy of the Federal Reserve.
The result has been a dramatic expansion of both its money
supply (up over 50% in the last two years alone) and credit, which
are now creating intensifying inflationary pressures.
Much of the foreign direct investment and speculative capital that
flows into China does so on the expectation of continued high
rates of growth, and more importantly, the eventual rebalancing
of its economy from exports to domestic demand. We believe
markets have vastly overestimated the probability of a smooth
transition and have failed to make the important distinction
between high-quality and low-quality growth—the latter referring
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COMMENTARY & PORTFOLIO STRATEGY
to China’s excessive reliance on infrastructure and exports,
which appears to have resulted in a vast misallocation of
capital. The immediate challenges and risks to the Chinese
managed economic model are immense as the government
struggles to maintain high rates of GDP, necessary to create
jobs, while simultaneously containing the inflationary
outcome, as well as the asset bubbles the very same policies
inspired. Needless to say, it is a tall order. For this reason,
over the near term, China is likely to be at the epicenter of the
global economy.
……
In a sense, the financial crises marked a critical inflection
point: either the world would rebalance to more sustainable
sources of growth, or, on the back of stimulus, continue to
pursue the logically flawed policies of asset and credit-driven
growth—the very same policies which led to the crisis in the
first place. It is now clear that the path of political least
resistance was chosen. As a result, the global economy has
become more imbalanced with 45% of growth derived from
countries running fiscal deficits of greater than 10%.
Additionally, central bankers around the globe are now
targeting asset prices in order to drive consumption while the
emerging economies in Asia have fallen back into the illusory
comfort of export-led growth. With China, Japan and
Germany—the world’s 2nd, 3rd and 4th largest economies—
running perennial trade surpluses, the burden of global
demand is placed squarely on the already over-indebted
countries of the west, specifically, the US and Britain.
Although the world today remains highly imbalanced, we are
also careful not to underestimate the will of policymakers, or
ignore the adept management and profitability of many high-
quality companies over the near term. We would not at all be
surprised by a further increase in equity prices.
Nonetheless, similar to banks in 2007, governments today rely
more on access to capital markets to fund themselves than any
time in history. Many countries in Europe are effectively
insolvent, yet have avoided default as a result of recent
liquidity (either provided by markets or from bailout vehicles
and supranational entities). Liquidity, however, largely results
from confidence. As confidence erodes, sovereign defaults will
become more likely.
Finally, the fiscal deflation necessary to cover both the on-
and-off-balance sheet liabilities around the world is politically
impossible, which, combined with a hyper-expansionary
Federal Reserve, provides a positive backdrop for gold, as well
as other sound currencies. Although we may tactically alter
our position size given the wild swings in sentiment that
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accompany it, gold is likely to remains a core position for the
medium term.
To conclude, we hope that our investors will take comfort in the
following thoughts:
• We don’t believe the global economy is on a sustainable path
of growth and are therefore skeptical over the medium-to-
long term
• Therefore, as stewards of your capital, as well as our own, we
remain unwilling to posture portfolios in an overly aggressive
manner. Our focus is on delivering positive returns with less
downside potential
• For the time being, we are likely to remain slightly
underweight in our equity allocation, focusing on areas where
risk does not appear to be underpriced. We remain intensely
focused on the quality of the assets we buy and the price we
(and our external managers) pay for them
• Despite our cautious positioning, our portfolios have
managed to deliver attractive, equity-like returns since the
recovery began in 2009 with considerably less volatility.
Tactical positioning and outperformance from our
underlying managers have contributed materially
• Given our positioning, we hope we are adequately prepared
for any of the “grey swans” (i.e. potentially foreseeable
events), as well as the unforeseeable, black ones.
Additionally, we will continue to devote significant time and
resources to uncovering them
……
ORGANIZATIONAL UPDATE
On the organizational front, we are happy to report that 2010 was
a year of substantial progress for Bienville. On the client side, the
firm selectively added a few new relationships. As a result, our
assets under management are now approaching $300 million.
We continue to travel extensively, expanding our network of
contacts, as well as invest material resources in research in order
to improve our idea generation and information flow.
And finally, we are happy to announce that we have made an
addition to the team. We welcome Blake Bennett to Bienville,
who will join us in the New York office as an analyst. Blake, a
graduate of Vanderbilt University, is highly motivated and will
undoubtedly make a substantial contribution to our research
process. We are fortunate to have him.
We thank all of our clients for your support and feel blessed by
the trust and freedom you place with us.
- Bienville Capital Management, LLC
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COMMENTARY & PORTFOLIO STRATEGY

ABOUT BIENVILLE
Bienville Capital Management, LLC is a research-focused,
SEC-registered investment advisory firm offering
sophisticated and customized investment solutions to high-
net-worth individuals, family offices and institutional
investors.
The members of the Bienville team have broad and
complimentary expertise in the investment business, including
over 100 years of collective experience in private wealth
management, institutional investment management, trading,
investment banking and alternative assets. Bienville has
established a performance-driven culture focused on
delivering exceptional advice and service. We communicate
candidly and frequently with our clients in order to articulate
our views.
Bienville Capital Management, LLC has offices in New York,
NY and Mobile, AL.
DISCLAIMERS
This document contains general information that is not suitable
for everyone. The information contained herein should not be
construed as personalized investment advice. The views
expressed here are the current opinions of the author and not
necessarily those of Bienville Capital Management. The author’s
opinions are subject to change without notice. There is no
guarantee that the views and opinions expressed in this document
will come to pass. Investing in the stock market involves gains
and losses and may not be suitable for all investors. Information
presented herein is subject to change without notice and should
not be considered as a solicitation to buy or sell any security.
Past performance may not be indicative of future results and the
performance of a specific individual client account may vary
substantially from the foregoing general performance results.
Therefore, no current or prospective client should assume that
future performance will be profitable or equal the foregoing
results. Furthermore, different types of investments and
management styles involve varying degrees of risk and there can
be no assurance that any investment or investment style will be
profitable.

Bienville Capital Management, LLC. (“Bienville”) is an SEC
registered investment adviser with its principal place of
business in the State of New York. Bienville and its
representatives are in compliance with the current notice filing
requirements imposed upon registered investment advisers by
those states in which Bienville maintains clients. Bienville may
only transact business in those states in which it is notice filed,
or qualifies for an exemption or exclusion from notice filing
requirements. This document is limited to the dissemination
of general information pertaining to its investment advisory
services. Any subsequent, direct communication by Bienville
with a prospective client shall be conducted by a
representative that is either registered or qualifies for an
exemption or exclusion from registration in the state where
the prospective client resides. For information pertaining to
the registration status of Bienville, please contact Bienville or
refer to the Investment Adviser Public Disclosure web site
(www.adviserinfo.sec.gov).
This document is not intended to be, nor should it be construed
or used as, an offer to sell or a solicitation of any offer to buy
securities of Bienville Capital Partners, LP. No offer or
solicitation may be made prior to the delivery of the Confidential
Private Offering Memorandum of the Fund. Securities of the
Fund shall not be offered or sold in any jurisdiction in which such
offer, solicitation or sale would be unlawful until the requirements
of the laws of such jurisdiction have been satisfied. For
additional information about Bienville, including fees and
services, please see our disclosure statement as set forth on Form
ADV.

This document is confidential, intended only for the person to

whom it has been provided, and under no circumstance may
be shown, transmitted or otherwise provided to any person
other than the authorized recipient. While all information in
this document is believed to be accurate, the General Partner
makes no express warranty as to its completeness or accuracy
and is not responsible for errors in the document.

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