IceCap Asset Management Limited Global Markets 2013.6

Our view on global investment markets:
June 2013 – Scrapbooking
Keith Dicker, CFA
Chief Investment Officer
keithdicker@IceCapAssetManagement.com
www.IceCapAssetManagement.com

1
Scissors and glue
In the investment world, it’s usually wise to buy low and sell high. Yet,
feverish, money making enthusiasm often results in many buying high
and then never selling until it is too late. This is a human trait, and
like it or not it will always exist in the money world. In the eyes of
many, all was very good in the investment world. Buy stocks, more
stocks and then even more stocks and you’ll be fine.
On June 19, 2013 this all changed.
You’ll recall it was just a few weeks back when we published “The
Bouncing Ball” which reiterated our view that all financial markets are
significantly affected by the money printing ways of our central
banks. On June 19, 2013 Ben Bernanke announced that later this year
the Federal Reserve would very likely begin to print less money than
what they are printing today, in effect resulting in many investors
refusing to catch the bouncing ball. Early estimates have the money
printing being reduced from $85 billion/month to $65 billion/month.
This pronouncement was enough to send all financial markets into a
tizzy with everything declining, except for the US Dollar. Investors
must understand that this is a game changer. Whether the Federal
June 2013 Scrapbooking
When it comes to money making, nothing compares to European
football. This money making machine is always on, spans the entire
planet, and seems to have championship matches on a weekly basis.
In this league, life is very good.
Better still is America’s National Football League. This money oozing
juggernaut produces billion dollar stadiums, millionaire players, $15
beer and millions of rabid fans to consume it all. In this league, life is
even better.
Yet, neither of these hugely popular machines can come close to the
explosive growth of the latest American export craze – scrapbooking.
Yes, while goooooaaaaals and touch downs can hold fans and Vegas
to the edge of their seats, nothing it seems, is able to beat the
personal satisfaction of using scissors, paper and glue to score your
very own goals, while preserving memories that will last forever.
As we believe in sharing, this month IceCap reveals for the very first
time, our very own contribution to the world of scrapbooking.
In early March 2013, we concluded global stock markets were due
for a decline or a pause at the very least. Since that time, global
developed markets have declined about -3%, while emerging markets
as a whole have declined -15%. Back then, the reason for our concern
was soaring sentiment – everyone, including your taxi driver and
barista were urging you to buy stocks.

2
$4.1 Trillion is a lot of money
Reserve actually carries through with this plan is open to debate. One
consideration has to be the fact that this “tapering” of the money
printing scheme is dependent upon employment, growth and
inflation all moving inline with the Fed’s projections. Now,
considering the Federal Reserve completely missed the Tech Bubble,
then missed again on the Housing Bubble, and as shown in Chart 1
are usually too optimistic with their economic projections, there is a
very big chance the mighty US recovery may not exactly pan out the
way they are projecting.
Perhaps the most important observation from the “tapering”
announcement was the reaction by all financial markets to what was
in reality a very small move by the Federal Reserve. First, we
completely agree that the beginning of the end to money printing is
not immaterial by any means – after all, the money printing scheme
had to end at some point.
In reality however, the actual effect of this slowdown in money
printing in the grand scheme of things is small indeed. There are two
important points to consider. First, instead of printing $1.02 trillion a
year, they may only print $780 billion a year - the pile of fake money
will still be increasing.
Second, the actual change required to restore the Federal Reserve to
its original monetary base is significant, very significant. If the Fed
stopped printing money altogether in mid 2014 – they would have an
accumulated balance sheet of about $4.1 trillion (see Chart 2 next
Source: advisorperspective.com
Chart 1: Federal Reserve GDP Estimates vs actual
page). Before all of this nonsense money printing started, the Federal
Reserve’s Balance on August 8, 2007 was only $869 billion. We must
remember, that stopping money printing is only the first step – the
second step is even more onerous and involves reducing the balance
sheet back to a more normal level. To provide further clarification to
this pretty important point – the Fed will have to siphon $3.1
TRILLION out of the system.
Now considering financial markets had a conniption over less money
being printed, what will happen should the Federal Reserve actually
try a return to normalcy?
Should the Fed continue on this path to monetary enlightenment, it’s
going to become a bit messy out there. Considering this fact,
combined with our view that the Fed’s economic projections are too
optimistic, and the likelihood of Janet Yellen becoming the next
Chairperson, there’s a pretty good chance we may actually see even
more money printing – not less.

3
Chart 2: Federal Reserve Balance Sheet
4,000
If money printing is stopped completely in 2014, the
Fed will still have a $4 trillion balance sheet
To return the balance sheet to pre-crisis levels, $3.1
trillion has to be withdrawn from the economy

4
Money printing sumo style!
These days, one shouldn’t consider themselves an investment
professional if they’re not up to speed on the latest and greatest save
the day scheme. This time however, instead of emanating from
Frankfurt or Washington, we find ourselves once again enamored
with Japan.
Yes, Japan – the very Japan that once laid claim to the most
expensive properties and golf club memberships this side of El
Dorado. And, yes Japan the very same one that has seen prices
decline for 15 years while also borrowing so much money that 25% of
tax revenues is used simply to pay interest on said debt.
Having said that, it should be no surprise that the time has finally
come for Japan to truly join the money printing games. But what
makes Japan in vogue is the style they’re using to pump up their
economy. Whereas the Americans, the British and the Europeans
cautiously (or more likely out of fear) dipped each toe in the water
before fully committing the ultimate monetary crime, the Japanese
jumped into the money printing water sumo style with the goal of
making the biggest splash possible.
In relative terms, the Japanese are printing almost twice as much as
the Americans. And in terms of spending new money, let’s just say
the newest program would put the Greeks, Spanish and Portuguese
to shame as well. Simply put – the Japanese money printing
experiment (aka Abenomics) could be the money medicine to finally
shake the world out of its economic funk, or maybe just make it
funkier.
While it may take a while to objectively judge the outcome of this
money printing experiment, cracks have already started to show. To
begin with, 5% daily swings in the Japanese stock market are quickly
becoming the norm. Yes, stock markets should experience volatility,
but the degree to which is happening in Japan is quite extraordinary.

5
Elite
In fact, it’s come to the point where investors in this stock market
might want to consider DAILY dollar-cost-averaging instead of the
usual MONTHLY investment strategy encouraged by investment
gurus. Better still, this volatility isn’t restricted to just the stock
market. Japanese interest rates and its currency are also experiencing
sumo-like volatility which is reverberating around the world.
Back in December 2012, we forecast that Japan would likely become
the biggest story in financial markets for 2013. As investors begin to
prepare for a tapering of the American money printing scheme, they
need to appreciate that while the US Federal Reserve will always be
the kingpin of the money world, the Bank of Japan and it’s governor,
Haruhiko Kuroda, are quickly becoming the headline makers and
pretty nice scrapbooking material too for that matter.
If the Americans truly are on the road to ending their money printing
program, investors everywhere will be looking to Japan for their daily
fix. The Yen is sure to decline, while Japanese stocks should benefit
from not only hedged strategies, but also from private capital fleeing
the Japanese bond market. However, our sense is that this easy to
see strategy won’t play out as simple as it should. Rather, the strain
on Japanese bonds and their fiscal situation really has the potential
to keep all Japanese bank and insurance risk managers awake
throughout the night followed by uncomfortable executive meetings
in the morning.
Be prepared for more headlines from the land of the rising sun.
Protests in Turkey
For a number of years now, Turkey has been championed by the west
as a model for democracy in the Muslim world. Inching ever closer
towards joining elite global groups such as the European Union as
well as playing host to NATOs missile defense shield has certainly
elevated their status in the eyes of Washington and Brussels.
However, suddenly a not so elite wave has enveloped the country and
pushed it into crisis. We are told the crisis originally started as a small
protest against knocking down a few trees in Istanbul's Gezi Park. A
few days later, the world is watching as millions marched, occupied
and protested against Prime Minister Erdogan across 77 cities. Not
one to back down, Erdogan told the protesters to go home and
generously offered water cannons, tear gas and rubber bullets as
incentives for these people to find their way.
Meanwhile over in Brazil, the world was stunned to hear of another
spontaneous protest involving over a million people that easily made
it into our scrapbook. Brazil is heralded as one of the pillars of
emerging markets. It’s enormous commodity base and China-like
growth rate has made it a darling for BRIC (Brazil, Russia, India, China)
lovers everywhere. Yet, once you look underneath the shine of the
upcoming 2014 Soccer World Cup and the 2016 Summer

6
Close down city squares
Olympics, it is easily apparent that not all Brazilians are participating
in this mambo driven economy.
When it comes down to it, economics plays a key role in igniting the
current wave of protests around the world. Yes, many will point to
inequalities or lack of freedom as the igniter for these protesting
storms, however there’s no better cure for social unrest than more
jobs, better working conditions, and a stronger social network. Our
view isn’t a vote of confidence for more socialism or more capitalism
– both approaches have their good and bad points. Rather, it is a
statement that the current global debt crisis continues, its effects
have spread, and the policy responses have been ineffective.
The plight of the unemployed and over indebted student has been
featured many times. IceCap has stated that we fully expect a
summer of protests in Europe. We didn’t expect to see protests in
Turkey and Brazil, however these events illustrate the severe tension
along economic lines that currently exists in the world.
In our opinion, there are two ways to resolve these protests. For
starters, simply having all city squares destroyed could help – remove
the meeting place and suddenly there will be no meetings. Perhaps a
more complicated way to resolve the brewing social unrest is to
create an environment for our economies to thrive once again.
Of course, this would involve deep structural changes affecting tax,
regulatory, trade and monetary policies – neither of which seem to
be on the agenda at this point. Yet, that is exactly the point. As long
as the world remains stuck in this stagnant economic state, the
possibility of further social unrest increases. Which incidentally,
introduces the increasing importance of geopolitics and how it affects
your investment portfolio.
Which seamlessly brings us to Syria
What initially started out as a protest against Bashar Assad’s regime
has quickly developed into an all-out civil war in Syria. As the fighting
escalates, the global implications escalate as well. On one side you
have President Assad who is also backed by both Iran and Russia. On
the other side, you have the rebels who are backed by America and

7
Hollande is in control
Europe. On the periphery, let’s not forget we have Lebanon to the
south west and then Israel right after. To say tensions are running
high is no exaggeration.
While it is known that Russia is supplying Assad with military
equipment, now it appears that America & Europe are on the verge
of supplying the rebels with equipment as well. To make matters
even more fragile, Iran has now committed to sending 4,000 troops
to help Assad. And to complicate things even further, if possible, all
the rebels are not even from Syria - many have traveled from other
countries to help fight the war against Assad. The reason for this
complication is that many of these fighters are allegedly Al Qaeda.
Yes, America could once again be arming Al Qaeda.
From a geopolitical perspective, Syria has rapidly escalated into a
serious situation. The world’s power brokers all have a seat and a
stake at this table. Naturally this isn’t the first time, nor will it be the
last time, the world’s super powers butt heads. However, should new
crises develop in the region, or old ones redevelop, the potential for a
long summer of increased market volatility increases.
While no one knows what will happen next, should it escalate further,
we’re confident crude oil is going a lot higher.
Whew – that’s good news. For a while there we thought that maybe
the Euro crisis was still lingering. Depending upon your view, it was
either a very short or very long 13 months ago when Francois
Hollande became the newest President of France. His policies of
more spending, more government jobs and more retirement for
everyone certainly was the catalyst for him winning more votes. Yet,
here we are today and everyone’s favourite socialist leader is quickly
becoming the punch line of Europe’s economic joke.
For starters, proclaiming “the worst is over” for Europe is so February.
Everyone now knows the latest and coolest slang is an “accelerating
recovery”. Yet, everywhere we look in Europe we see few signs of
these better times. France specifically is showing no signs of
recovery. Often paired with Germany as the economic anchor of the
Euro-zone, France was viewed as Europe’s counter balance to
Source: BBC.co.uk

8
Euro crisis is not over
Germany’s rigid economic ways. Yet, as economic conditions in
France continue to slide, it’s seat at the power table has slid right on
over next to the Spanish and Italians. To fully grasp the extent of the
French economic slowdown, look no further than the continual
decline in year-over-year imports as shown in Chart 3. As well as,
another concern which no one talks about is the French housing
market. Chart 4 does a terrific job illustrating the struggles in this key
component of household wealth.
Europe and especially France continues to struggle. Claims by
President Hollande that the crisis is over is an attempt to help both
foreign investors and the French public restore confidence in the
domestic economy. While currently there is a lull in any crisis news
emanating from Europe, investors should prepare for an action
packed fall election in Germany as well as the possibility of a summer
of student protests.
Despite what Hollande says – the Euro crisis is not over.
Chart 4: French Housing Market
Chart 3: French Imports

9
An upside down world
Our Strategy
In our previous market update, “The Bouncing Ball”, we cautioned
investors that virtually all investment strategies whether it be stocks,
bonds, currencies or commodities are all very much inter-twined with
the money printing strategies of the major central banks. The sudden
move by the Americans to indicate that they will likely print less
money starting this fall, created stress and duress across all markets.
We believe US and Global growth will continue to slow, which will
surprise the US Federal Reserve and allow them to not carry through
with their tapering announcement. Additionally, Ben Bernanke is as
good as gone and his likely replacement is Janet Yellen. We’ve written
before that Ms. Yellen has a very solid and consistent record of
whole-heartedly supporting expansionary monetary policies. Should
she inherit the helm, the probability of more money printing shoots
even higher.
However, until that time investors must understand that things have
suddenly and very quickly changed. The comforting idea of buying
dividend stocks and high yielding bonds and taking long afternoon
naps has clearly become somewhat uncomfortable.
As the world continues to shift under this new market paradigm, we
are ironically becoming more and more interested in stocks. Europe
and now Japan will see increasingly more stress within their financial
systems which will provide private capital every incentive necessary
to shift elsewhere. Our view remains that eventual US Dollar strength
will surprise even those most bullish on the USA.
Markets meanwhile, are sentenced to a summer of finding their
footing. Sentiment for stock markets is not supportive of a renewed
rally at this point. And, we also have to consider market technicals
which are showing less signs of support. In short, remain cautious.
As always, we’d 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.

IceCap Asset Management Limited Global Markets 2013.6

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IceCap Asset Management Limited Global Markets 2013.6