Beruflich Dokumente
Kultur Dokumente
September 2014
moment in time when anyone with a vested interest in the Euro loses
significant wealth. How would we ever collect on our well-earned ski
holiday? As we are not supporters of stealing from the future poor,
we declined the wager - but retained our dignity.
Lazy summers are usually the time when you invest in lazy days at
lazy parks, lazy lakes and even lazier beaches. Yet, if one took their
nose out of their favourite summertime book, they would be shocked
by the rather un-lazy restlessness enveloping the world.
During this usually slow time of year, world events have been
anything but slow. For starters, another military conflict escalated
between Israel and Palestine. Whereas previous conflicts were
dominated by missiles and bombs fired across the border, this one
saw the dreaded boots on the ground. In adition, Israels latest
military strategy to protect its people has resulted in over 30,000
artillery shells being fired into Gaza. As you would imagine, damage is
extensive. Cease fire and peace talks are being mediated by Egypt, all
while the rest of the middle east stews.
If that wasnt enough to interrupt your summer of bocce, then
consider the newest, current situation in Iraq. Yes, only a few short
months ago, Nobel Peace Prize winner, President Obama declared
that American troops had finally finished their jobs meaning Iraq was
now free to stand on its own two feet.
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September 2014
It also just so happens that there is another country who doesnt care
much for ISIS. But it also just so happens that this country has
interesting relationships with America, Iraq and Syria. This is where
everyones favourite axis of all evils enters the fray yes, we are
talking about Iran.
Whereas Iran is predominantly Shia, ISIS is predominantly Sunni. In
the middle east, these two major Islamic denominations have long
been at odds and have been a key dividing line between the various
conflicts in the region.
Naturally, this must be great news for the economy, and will only
further help the accelerating recovery. We say this tongue in cheek,
of course, yet when the talking heads and big bank economists
sharpen their pencils while calculating the latest GDP figures
defense spending and procurement are major contributors.
And speaking of boots on the ground, it appears that any day now the
Russia-Ukraine conflict will also escalate to boots, rifles, humvees and
other ground hitting equipment. This too will be good for the global
economy at least thats what you will be told.
However, the situation in Ukraine is anything but positive for the
global economy. Now, there will be many investment reporters and
analysts who will tell you that Ukraine doesnt matter. After all, the
countrys economy is roughly the same size as that of Oregon.
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September 2014
Obama vs Putin
And, while Oregon may lay claim to producing some of the best pinot
noir and micro brews in the world it cannot lay claim to being the
spark that ignites the latest reincarnation of the cold war.
While, the good old days of Reagan vs Gorbachev have passed us bye,
the days of Obama vs Putin are just getting started. In effect,
investors will be wise not to mistake the Ukrainian crisis as a civil war
drummed up through years of domestic cultural differences.
Recall that the real sparks started to fly just as Ukraine declared itself
broke yes, yet another country discovered that you cannot
indefinitely spend more money than you collect in taxes. And it was
at this moment, Europe strolled in offering a bailout package to help
the Ukraine government get through their little money problem.
Problem solved or at least thats what we were told. Of course,
never to let a good crisis go to waste, Russia saw this as a perfect
opportunity to gallop into Kiev offering an even better money saving
deal. Fast forward through Maiden Square riots, strong-armed riot
police, a fleeing president and an annexed peninsula and you will get
the Ukraine-Russia conflict of today.
There are two reasons why understanding this is important for your
wealth. First, the long-term prospects for the next great war have
increased significantly. Domestically, Russia is really struggling from
an economic perspective. The growing divide between the wealthy
and everyone else is perhaps greater in Moscow than anywhere else
including London and New York.
The wealth gap in Russia is especially sharp due to the lack of true
capital markets. Instead of having free competition and objective
regulation, Russias economy is dominated and completely controlled
by the business oligarchs. If you are in doubt about the strangle hold
of these modern day business barons, we invite you to open a
restaurant in Moscow and see what happens. We await your reply.
Meanwhile, many non-oligarchs are suffering economically and are
simply not happy. And it is this unhappiness that is the target of
America and Europe. The western world believes the best way to
defeat Putin is for him to be defeated by his own people. And the
easiest way to achieve this is to cut off Russia from the rest of the
world and then literally watch the government and oligarchs fall apart
as well.
Obamanomics
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September 2014
As you would expect, Russia responded with their very own sanctions
against all of these countries making it illegal for Russia to buy any
meat, fish, milk, cheese, yogurt, fruit, and vegetables, from anyone
outside of Russia.
While this playground-style tit for tat may appear predictable, the
results have been unpredictable not to the average person, but to
the governments at least.
In Russia, it seems that the slowing economy, impending war in
Ukraine and sanctions by the west have had the opposite effect.
Putin is in fact gaining from this charade. The Russian people are
rallying behind him and against the evil Americans and Europeans.
At the same time, European farmers are also up in arms, but not
against Russia and Putin. Instead they want to be compensated for
their lost revenues and blame only their European governments.
European Union flags and fresh peaches have been burned, with the
threat of more harm against fresh produce should the farmers not be
paid for their lost sales.
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September 2014
Chart 1: Trade sanctions will hurt Europe a lot more than America
Source: CNN
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September 2014
Chart 2: Trade sanctions will hurt Europe a lot more than America
Source: CNN
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September 2014
Its akin to saying if you exclude all of the body fat, that person isnt
overweight. Or, if you exclude all of the people who finished ahead of
me in the running race, I finished first. We think you get the point.
Excluding the interest payments on debt seems a tad disingenuous.
Others may call it deceitful, or dishonest. We often refer to old world
as the mathematical fantasy land called Europe - this misuse of the
primary account surplus data is simply another example of why the
situation is so bad in Europe.
September 2014
September 2014
At IceCap, we certainly dont yet grace the covers of any celebrityesque magazines, nor do we attract throngs of paparazzi whenever
we leave the cozy confines of our offices. Yet for some strange reason
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September 2014
Whereas stock market groupies will tell you that strong profits and
earnings are the key drivers of stock market returns they are in fact
missing the boat. In fact, since 1927 stock markets generally do
better when profits are growing slowly, and actually do worse when
profits are soaring.
Theres also a failure to understand that there are times when
earnings and profits have very little influence whatsoever on stock
prices. Inflation and real interest rates are also key drivers of stock
market returns yet, if you are going to start talking about inflation
during your dinner party, you might as well start serving merlot and
call it a night. After all, if you think people do not understand the
nuances of the bond market, try sprinkling the conversation with
powdery bits of price increases. Yes a party killer to be sure.
Yet, research has been crystal clear whenever inflation is declining
from high levels, stocks and bonds perform very well. Fortunately, the
alternative is also true whenever inflation begins to rise from very
low levels both stocks and bonds will perform well.
Today, inflation is certainly declining which should elicit yays from
our stock market friends. Yet, if want to be a party pooper (or realist
take your pick), you should also tell your guests that when inflation
continues to decline through a somewhat magical/opaque line the
opposite happens stocks and bonds decline.
In general the biggest problem in our financial world today is that
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September 2014
Keep digging
around the world inflation is declining straight through this magical
line. Chart 3 on the next page shows Europes current experience
with inflation and this is what should be discussed during your dinner
parties. Granted, there are countries who are experiencing price
increases and this will always be the case. However, since 2009
various measures of inflation have been on the downtrend and this
isnt exactly good.
Weve written before how the worlds central banks are completely
occupied with trying to keep inflation at a stable rate, all of the time.
The folks tasked with this job have had some serious training. In fact,
those in charge have pretty well dedicated their entire lives to
understanding why prices move up and down. This group of men and
women are so dedicated to their trade, that theyve spent their entire
career in academics studying and developing economic theory.
Put another way, few of them have actually worked in the real world.
Whereas everyone else in life has to learn through a few hard knocks
every now and then, the biggest knock facing most of our central
bankers is wearing the wrong loafers to their afternoon fireside chats.
Weve been told the mocking and ridiculing can be rather
uncongenial at times.
Understanding the background of our central bankers is crucial to
understanding why and how the global financial system is about to
enter a rather interesting phase.
The worlds challenge is that our central bankers believe they can in
fact control the business cycle and inflation, which will then be
reflected in financial markets. What is making this uncomfortable for
many people in the real world, is that the actions of the central
bankers are doing the opposite they are making matters worse.
And, worst of all, the central bankers dont seem to understand that
it is their very actions that are creating the severe distortions we are
seeing today.
Weve also written before that the central bankers have been digging
a hole now for 5 years, and instead of asking for help to get out, they
are demanding bigger shovels to dig even bigger holes. Look no
further than past, present and future actions by the European Central
Bank for proof of this pudding.
As a result of ineffective actions by our central banks, this global
decline in inflation is a reflection of the lack of consumer and
business confidence to spend and make capital investments. Our
overall investment thesis has been very clear our governments
reaction to the 2008 credit crisis simply transferred all of the bad
investments from the private sector to the tax payer.
Virtually every country in the world spends more money than they
collect in taxes, and no group of countries has done a better job at
this than those that formed the Euro-zone.
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September 2014
1.5%
1.0%
0.5%
0.0%
Source: Eurostat
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September 2014
This second type of market is one where prices are not determined
by private investors and a free market. For our economic buffs, this is
similar to a centrally planned market or a closed market place. For
the average investor, simply think about how products and services
were priced in the Soviet Union prior to the collapse of communism.
This is indeed true. However, this is the point when IceCap reminds
In 2012, the Euro crisis reached its latest crescendo and each
countrys ability to borrow was at the mercy of the open market.
Some will argue that the continued bailouts and stimulus packages
from the ECB will allow the Euro-zone to continue on its merry way
into eternity. We believe otherwise. None of these stimulus programs
are feeding money down to the unemployed. Many are becoming
extremely frustrated, and this is being reflected in the high turnover
investors that there are two types of debt markets. The first is the
one where the price or interest rate you pay is determined by the
open market, with no interference or influence by other forces.
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September 2014
Current Market
3% to 6%
< 0%
<0%
5% to 10%
1% to 4%
1% to 4%
Private investors Borrow from central banks Borrow from central banks
Private investors Borrow from central banks Borrow from central banks
Savings
earn interest
Stable
Unstable
Unstable
Civil Unrest
Infrequent
Frequent
Frequent
Bailouts
Infrequent
Frequent
Frequent
Few
Many
Many
Governments
Separatist Movements
of current governments, increased popularity of extreme right and left wing parties
as well as a rise in popularity of separatists movements.
Every market has a release valve, and for Europe it will be the bond market. The
beginning of the end, so to speak, really starts when social unrest reaches a new
level. Its at that point confidence rapidly declines and so too will the European bond
market.
Today, those that are comfortable investing in bonds issued by European
governments, banks and insurance companies really dont appreciate how far and
hard this market can drop. The entire bond market is really like the Hotel California
getting in was easy, but just dont try to leave. This is the point when the Euro bulls
will discover the true market price for their Euro fixed income bonds.
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September 2014
Bond markets, and more specifically the high yield bond market
provided investors with a preview of what we believe is coming at
some point down the road. In mid July, our research concluded high
yield strategies had reached its maximum value and we therefore
sold our positions. While we didnt expect it to happen as fast as it
did, but merely days later the high yield market fell over 5% and thus
providing investors with a preview of what we believe will be occur at
some point in the near future. The lack of liquidity in this market is
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