Agcapita Update

February 2011
Agcapita Update

As Kierkegaard elegantly pointed out, “There are two ways to be

fooled: One is to believe what isn’t so; the other is to refuse to
believe what is so.” 
 
The problem of being fooled “by believing what isn’t so” appears
to be endemic in mainstream economic circles.   Increasingly, we
see the panic of central bankers and politicians in the thrall of the
mistaken belief that the mere act of printing money can conjure
wealth and sustainable growth into existence that this nostrum
has stopped working. 
 
In simple terms the powers that be in the west have been fooled
by Keynesian dogma that:
 
–   nominal increases in GDP represent growth;
–   printing money increases nominal GDP; therefore
–   printing money must generate growth. 
 
Surely, this is to believe what isn’t so.  A simple example of
the fallacy this represents is Frederic Bastiat’s parable of the
“broken window”.  To paraphrase Bastiat, if all the windows in
the country were suddenly broken there might be an increase
in nominal GDP as the reconstruction took place but we should
not be fooled into believing that this has made us wealthier. 
 
Keynesians would argue that business activity has been
stimulated, jobs were created and the economy benefited.
In his own version of the “broken window” Keynes famously
advocated burying newly printed money and paying people to
dig it up as a way to stimulate the economy. 
 
With all due respect to Lord Keynes, this belief is in the process
of being exposed as the mirage it has always been.  The true
measure of the wealth of an economy is the pool of productive
capital.  Currency is merely the measuring stick.  In our broken
window example, the pool has been maintained but without
the reconstruction it could have been increased - therefore the

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Agcapita Update (continued)

net effect, taking into account both “the seen and overnight would we have more farmland, more oil
the unseen” in Bastiat’s words, is actually a loss of wells, more factories, more of anything other than
wealth.  decimal places in our currency? The nominal price of
  all these things would likely increase but the size of
If printing money does not create productive capital the capital pool has not changed. How do the money
then how can you explain its perennial appeal printing programs currently underway differ from this
amongst the banking and political classes?  in anything but magnitude?
 
For politicians, printing money is desirable for two Unfortunately, the perverse consequences of printing
reasons.  Firstly, it acts as an unseen tax.  One which money do not stop with the misappropriation of
few voters understand and for which even fewer wealth from the inflatees to the inflators.  A policy
are likely to blame the political class, at least in the of artificially low interest rates serves to sustain or
beginning. Secondly, by reducing the value of the create additional mal-investments - investments that
currency, the measuring stick I mentioned above, cannot generate sufficient returns, and in many cases
politicians are able to fool many of the voters that over the last decade ANY returns, to justify their
their wealth has increased, but of course no such existence.   The failure to liquidate mal-investments
thing has happened.  allows the economic problems they cause to multiply
  and the inevitable accounting to be that much more
For members of the privileged banking class the devastating.  Artificially low interest rates also fool the
appeal of printing money is that they are best market into believing that capital is plentiful and that
positioned to take advantage of the confusion consumption can continue at unsustainable levels
between the measurement of the pool of capital and with severe consequences for the real economy.
the actual pool of capital itself.  In simple terms, they The word consume means “to expend, to use up,
can exchange the declining currency for productive to waste or squander”.   Always remember that
assets while artificially low interest rates finance these consumption represents the diversion of productive
activities at minimal cost.   capital into non-productive uses - i.e. the destruction
  of capital.   Savings, on the other hand, are the only
So in general while printing money creates no new source of capital to create productive assets.
wealth in the form of productive capital, a significant
amount of wealth can be misappropriated silently by I do not believe that the aggressive expansion of the
the banking and political classes.   For the rest of us, money supply in the west will have a beneficial effect
the relentless expansion of the money supply offers on the real economy - i.e. will not increase the pool of
no true benefits and the very real danger that it is our productive capital in any meaningful way.  However,
wealth that is misappropriated.  I do believe it will fuel inflation and speculative
activities.    Of course, more inflation and speculation
In the spirit of Bastiat, ask yourself if the central are exactly the opposite of what western economies
banks increased the global money supply 20-fold need. We cannot all make our livings selling condos,

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Agcapita Update (continued)
stocks and bonds to each other - someone has to
produce something and production requires genuine
capital.  developed world until we stop engaging in capital
 
But this Frankenstein, finance driven economy
appears to be exactly what our governments and
central bankers are trying to keep alive.  The west has
become a vast inflation-creating machine in order to
support the impaired banking and housing sectors. 
According to data published by analyst Mike Hewitt,
since the dot.com crash in 2001 and the onset of
aggressive low interest policies, the global money
(M0) supply has increased over 170%.   Some, fooled
by government inflation data ask - “but where is all
the inflation?”   Fortunately for us, the Renminbi peg
and OPEC petro-dollar recycling have been escape
routes for a large amount of western money/inflation
creation and heavily massaged government inflation
data has helped disguise the rest. 
 
As fast as we have been creating money in the west,
China and OPEC have been importing and storing
it on their balance sheets in the form of developed
world sovereign debt.  Some observers even argue
that China will indefinitely accumulate western debt in
order to maintain its peg against our inherently weak
currencies.   I believe that this is wishful thinking and
once again it is to be fooled into believing what isn’t
so merely because something hasn’t happened to
date.  When the emerging economies are forced to
take serious steps to check domestic inflation - which
for example is already starting to happen in China
- they will stop purchasing our debt and even start
selling it, at which point decades of stored western
inflation could be returned to us in a very short period
of time indeed.
In general, my investment premise remains that
sustained real growth is unlikely to take place in the
destroying activities.   Worse, our depleted and
declining capital pool, combined with an enormous
expansion of the monetary base and expanding
government is creating a high probability of an
extended period of stagflation in the west.
 
This is not to say that I take a universally pessimistic
view of possible future returns.  I believe that
exposure to inflation-hedging assets with strong
macro fundamentals and underlying cash generating
capability, ideally in sectors exposed to growth
outside of developed markets, will continue to be
a fruitful area to search for outperformance over
the long-term.  My personal preference remains
agriculture and energy.
Kind Regards
Stephen Johnston - CIO
Petrocapita Income Trust & Agcapita Farmland
Investment Partnership
Stephen graduated from London Business School
and is the founder of one of Canada’s largest
farmland investment funds, Agcapita, and Petrocapita
Income Trust. Petrocapita is an energy investment
trust 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
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Agcapita Update (continued)

such as Canada will provide above average returns.

Petrocapita holds a portfolio of low risk, producing
energy assets.

Stephen 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.

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