Pam Icecap Oct Nov2012


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Pam Icecap Oct Nov2012

  1. 1. Our view on global investment markets:October 2012 – “How to lull a banker to sleep”Keith Dicker, CFAChief Investment
  2. 2. October 2012 How to lull a banker to sleepSleepless in Ottawa Irrational ExuberanceWhen it comes to sleepless nights, Toimi Soini of Finland originally set The roaring 1990s was appreciated for something it wasn’t – an Alanthe record by using the “toothpicks under the eyelids” method for 11 Greenspan inspired economic miracle. The belief that human beingsstraight days. In hindsight, Toimi was an amateur. could forever alter a business cycle by simply changing interest rates and borrowing from the future to support current spending wasYou wouldn’t know it, but the nice people running the Bank of rampant throughout the Western World.Canada have gone sleepless since 2003 – that’s 3,564 days withoutsweet dreams. Of course, this mindset would eventually nearly blow-up the entire financial planet in 2008, but that was a long decade away. Now, whatYet, that’s nothing compared to the very private folks at the Swiss wasn’t appreciated in the 1990s was the fact that stock and bondNational Bank. These super-secretive bankers have surpassed over markets were in the late stages of the greatest secular bull market4,660 sleepless nights – despite living in Zzzzzzurich. ever.This, of course brings us to the World record for sleepless nights. At Since 1982, interest rates steadily decreased from 18% to 5% at the5,025 nights and counting, the always polite and well dressed chaps end of the 1990s. Inflation also followed the same road map and thisover at the Bank of England are reigning champions. combination lead to a boon for stock and bond investors. At the time, financial planners and mutual fund sales robots routinely used 10%+Toimi Soini was not a banker and this was his downfall. As for the returns to project your imaginary wealth and freedom at age 55.Canadians, Swiss and British – yes they are all bankers, but not justany bankers. This terrific trio have the displeasure of forever being Life was good. But not so for the central bankers of the World – theirknown as the bankers who sold their gold. overlords were just starting to turn up the heat.The irony of course, is the action of the World’s central bankers We need more moneythemselves is the reason why gold is destined to remain golden for While stock and bond market investors were rationalizing theirsometime to come. And with gold sitting near $1700/oz, and with no exuberance as skill, governments were beginning to feel the heat ofend to the money printing games, the sleepless nights are destined to running fiscal deficits. Although their economies were growing, taxcontinue. revenues were no where close enough to meet their irrational spending habits. 1
  3. 3. October 2012 How to lull a banker to sleepAnything But CommoditiesGovernments you see, are no different than people. When money How and when they acquired it has long been forgotten, yet centralgets tight, you begin to look everywhere for some spare change – and bankers and politicians everywhere knew they were sitting on athis is where central banks and their gold came into play. jackpot. Except this golden jackpot wasn’t paying out.Every country has a central bank. Unlike the big box banks, central The argument was that once you looked beyond the obvious shinybanks are not owned by shareholders, they do not lend money to appeal, gold held very little economic interest to anyone. Gold didn’tindividuals or businesses and they certainly do not sell you expensive pay any dividends, it certainly didn’t grow revenues or earnings andmutual funds. worst of all it didn’t create any jobs – let’s face it, this barbaric relic was useless.Rather, the role of a central bank is to promote a safe and soundfinancial system for your country. It guides your economy by utilizing As momentum grew, central bankers increasingly convincedits economic acumen to adjust interest rates up and down. themselves that perhaps it would be ok to sell their gold. After all, they could buy nice little bonds that paid interest. In addition, by thisAlso of importance is the responsibility of ensuring your country time central bankers around the World, realized that they nowmaintains a safe and secure currency. Unknown to many, it is this possessed the economic and financial skills to forever controllatter responsibility that is wreaking havoc with rapid eye movements inflation and currencies. That settled it – gold was no longer required.for certain central bankers these days. The Bank of England lead by Gordon Brown, was first up to sell goldWhile soaring stock and bond markets were helping stock brokers –at an average price of $270 an ounce. To measure the success of thisbuy more yachts in the 1990s, commodity markets were horrible transaction, one only needs to know that the price of gold at thatinvestments for most people involved. The problem with time is forever known as “Brown’s Bottom.”commodities was simple – it just wasn’t their time to shine.Although the greatest commodity bull market in history was just Next up were the Swiss. Financially, Switzerland ranks amongst thearound the corner, investors at the time knew there was only one most respected countries in the World. It is reported they currentlygame in town and it was called ABC – anything but commodities. hold over 1000 tonnes of gold and have always respected its “store of value” attributes. Yet, between 2000 and 2005 the Swiss NationalIt’s important to understand the environment during the 1990s as Bank sold over 1300 tonnes of the now very precious metal. Thecentral banks everywhere held gold bullion in some form or fashion. 2
  4. 4. October 2012 How to lull a banker to sleepThree handsofficial reason for the dramatic reduction was to further diversify Yet this is where the Bank of Canada is trying to thread the financialacross foreign currencies. Today however, with gold now 4-8 times needle. On one hand, Mr. Carney and his team would love to raisehigher than the 2000-2005 period combined with the ill-fated interest rates to temper household borrowing. On the other hand,decision to link the once-mighty Swiss Franc to the future-not-so- Mr. Carney has to consider the actions and policies of his central bankmighty Euro, the Swiss central bankers will eventually earn a brethren. Considering the Japanese, Americans, British andnickname even less kind than “Brown’s Bottom.” Europeans are fully committed to printing unlimited amounts of money for an undetermined time – any action by Canada to raiseAnd then there was Canada. The 1990s financial version of the Great interest rates would act as a beacon to attract even more foreignWhite North was anything but prolific. In fact, Canada was so safe-seeking investors which will further increase the now-mightyunprolific that the Canadian Dollar was known in some circles as the Loonie, and in the process destroy market share for exportingHudson Bay Peso. companies.Canada struggled with its debt load and a weakening currency, yet Then of course, on Mr. Carney’s other, other hand, if he does nothingsomething happened that isn’t happening elsewhere today – the he runs the risk of Canada’s household debt problem turning into angovernment acted decisively to reduce spending, increase taxes and even bigger household debt down its debt. Granted, unlike today where everyone has a debtproblem, Canada was able to stick to this financial diet and greatly Today Mark Carney is doing his darndest not to print loonies andbenefited from doing this when most others were financially healthy. devalue the currency. As Canada is the only major country in the World without ANY gold, should the Bank of Canada ever decide toCanada’s persistence was rewarded as today it compares quite print money, Canada will have nothing except good manners andfavourable relative to other Western World countries. good hockey players to support the currency. The gold is long gone.However, all is not rosy in Ottawa. While Canada’s government debt But where did the gold go?levels have improved dramatically, as has its fiscal position, thehousehold sector continues to bloat its debt levels. Taken in isolation, These days, most Asian countries recognize the destructive moneythis wouldn’t be too bad, after all if the previously unconstrained printing ways of the Western World. And, if you can’t beat them andfederal government could swallow a financial diet, surely every Bob don’t want to join them, the only way to protect your self is to use aand Doug could as well. great defense. Chart 1 (next page) shows the biggest buyer of gold. 3
  5. 5. October 2012 How to lull a banker to sleepChart 1 – Chinese shifting USD into gold Source: Ned Davis Research Source: Ned Davis Research Chinese purchases of US Treasury Bonds have flat-lined While Chinese since 2011 imports of gold have sky-rocketed Copyright 2012 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to 4
  6. 6. October 2012 How to lull a banker to sleepBest Friends ForeverThe forever told fable of China selling all of their US Treasuries is just Canada meanwhile is topping the fiscal charts on many fronts. Yetthat – a fable. You and I can sell currencies and buy other currencies should the Bank of Canada ever venture down the road of printingwithout affecting the World. Big countries cannot. The chain event money to stimulate the economy, its complete lack of gold bullionreaction would become circular at the end of the day. will provide little support for the primary goal of the central bank - currency stability.In addition, if the China did choose to collapse the US Dollar, it wouldalso collapse its export industries who invariably sell to the So, exactly how do you lull a banker to sleep? For starters, placeAmericans. Additionally, many of China’s Asia trade partners have plenty of gold bullion under their pillow. And to seal the deal – gentlycurrencies and monetary policy linked to the US dollar. Asian trade remind them that they in fact cannot control the economy by printingwould crumble as well. money. This sweet dream formula will be good for all of us. Gold Reserves However, China can maintain The Nobel Peace Prize Country its stable diet of US Treasury Help two countries turn into BFFs and you win the Nobel Peace Prize. Gold Reserves % of Foreign (tonnes) Currency Reserves purchases while also buying Successfully engineer a treaty between warring nations – expect aUSA 8,134 75.3% gold bullion with excess call from Oslo. Since 1901, the good folks in Norway have beenGermany 3,396 72.3% reserves. This is exactly what recognizing the extraordinary efforts by people and countries forItaly 2,452 71.9% is happening now and with creating peace on earth.France 2,435 72.0% China’s gold reserves = 1.7%China 1,054 1.7%Switzerland 1,040 16.9% of its foreign currency Then came 2009. It seems that seven years of war in Iraq &Russia 896 9.1% reserves – expect plenty Afghanistan combined with the Great Global Recession created aJapan 765 3.2% more gold bullion purchases cloud over everyone’s head. Something had to be done, and it wasThe Netherlands 613 60.2% in the future. And while Oslo who stepped up to the plate.India 558 9.9% considering that the US andCanada - 0.0% other countries hold gold After only 38 days in office, President Obama became the hands Source: World Gold Council June 2012 down winner of this most esteemed award. According to Oslo, “hisbullion greater than 70% of their foreign currency reserves, the extraordinary efforts to strengthen international diplomacy andupside for Chinese purchases is substantial. cooperation between peoples” was the reason for his selection. If 5
  7. 7. October 2012 How to lull a banker to sleepBob Dylan wins Nobel Peace PrizePresident Obama achieved this after only 38 days in office, imagine As for “peace and reconciliation,” chart 2 on the next page showswhat he’d do over the next 1,422 days in office. High expectations exactly how that’s working out in Europe these days.indeed. It is true that France and Germany haven’t been to war for a longIn 2012, Oslo once again thought it was time to improve the World’s time. It is also true the Italians have not tried to re-establish themorale and future expectations. And what better place to start than original axis of evil. Yet, the imagination that the European Union hasEurope. set the stage for World peace has been stretched to its limits.It’s no secret by now that Europe has been struggling somewhat. It Perhaps Oslo is right, a little hope and change will help resolve theseems that all these money problems really can harm the psyche European debt crisis. Or perhaps not.after a while. Since no one in Brussels, Paris, Berlin or Washingtonhave been able to set things right, once again it was up to Oslo to From our perspective, bad debt continues to clog the system, whilelead the way. And lead they did, by announcing that the 2012 winner private capital seeks safer places to sleep. There’s no question that aof the Nobel Peace Prize was – the European Union. financial war has indeed been waged. However, the days of foreign troops patrolling conquered streets are no where close to becoming aThe committee noted that for over “six decades,” the European reality a this point. Rather, the real threat to the European Union’sUnion has “contributed to the advancement of peace and Nobel Peace prize lies within the social strife enveloping thereconciliation, democracy and human rights in Europe.” Well, at least nations. From dramatic marches, demonstrations and strikes in thethey didn’t base it upon 38 days of work. southern countries to the growing political unease in the northern countries.While the European Council and the Council of European Unioncelebrate this much deserved award, celebrations elsewhere across European times are a-changin’. And in some ways, perhaps the folksthe old world are somewhat muted. in Oslo were correct to bring this to the World’s attention. After all, no one else is interested in taking the lead at this point in time.After all, democracy is when the most votes win. Yet, forcing Irelandto continue having EU related referendums until they vote “yes” and Inflationforcing unelected leaders on the people of Greece and Italy (and soon Inflation is often misunderstood by many. Most people see inflationto be followed in Spain) doesn’t exactly meet the sniff test. as the price of goods as measured by the CPI. Yet, inflation exists in 6
  8. 8. October 2012 How to lull a banker to sleepChart 2: Nobel Peace Prize Winner 2012 - Europe 2012 Athens, Greece 2012 Barcelona, Spain 2012 Rome, Italy Source: the internet 2012 Lisbon, Portugal 7
  9. 9. October 2012 How to lull a banker to sleepDon’t cross the Rubiconother goods or assets as well. Today, money printing effectively This scenario is happening in real life Europe today. Banks andincreases the supply of money available to buy stuff. Yet, the stuff governments are doing their best stop it. While few so called financialpeople are buying is stocks and bonds, and this is where many experts refuse to step back, adjust their glasses, its actually quitefinancial and investment pundits are missing the boat. While stocks easy to see the private capital fleeing Greece, Spain and Italy whileare going higher, it is not due to earnings increasing rather it is due to the governments in charge desperately try to replace private capitalasset inflation resulting from the money printing. with capital created out of thin air.Unfortunately, many not so funny things can happen along the road Europe remains in serious trouble, do not be fooled into thinkingof asset inflation. Firstly, some type of commodity will attract money that all money and capital is equal because it isnt. Long-termand its price will rise. However, unlike iPhones or Chevy volts, the sustainable economic growth, product innovation and profit issupply of many commodities is inelastic meaning additional supply created by private capital - not fake printed money.cannot quickly be created to meet new demand - this results in theprice inflation that we normally think of. Today, of course we get to watch not only the Europeans destroy their currency, but also the Americans, Japanese and British. The notNow, the big whopper called hyper inflation does not start due to so funny thing is that, as each of these formidable economic superrising prices from inventory adjustments. Rather the hyper inflation powers rush to crush their own currency, they actually do not losemany are so afraid of today will undoubtedly be caused by money value relatively to each other. Rather, the true loss in real terms willprinting. However the catalyst of this hyper inflation trigger will be be relative to the countries who are not printing money includingthe resulting currency crisis. Canada, Australia, New Zealand and Singapore as well as to gold.As an economy quickly declines, private investors increasingly pull While each of these countries will always remain economicallytheir money from the banks forcing the banks to collapse which sensitive, the absence of money printing should attract foreign directsimultaneously contributes to the currency collapsing. The result is a investment which will lead to stronger economies, stronger bankslack of confidence and faith in that country which starts a currency and stronger currencies.crisis. It is this severe decline in the currency that ultimately leads tohyper inflation, but only for that specific country. The point to never forget is that the moment you cross the money printing Rubicon, is the moment you raise the white flag and surrender yourself to a future of currency debasement. 8
  10. 10. October 2012 How to lull a banker to sleepFake money McDonalds, General Electric, DuPont, Microsoft, IBM and even i-Global Growth crazy Apple have all said that next quarter their revenues andSince the bazooka money printing announcements by the Americans earnings will be less than originally forecast. These daily economicand Europeans in September, all headline making systems have been barometers are telling us that the World is slowing and it will hit theshut down. American economy later this year.No more news about Spain being broke. No more news about Greece Will the slowdown be enough to cause a recession? We don’t know.needing a 25th bailout, and certainly no more news about Bollinger What we do know is that any hopes for a recovery at escape velocityand banks being naughty. Until the US Election is over, the financial speed will be greatly disappointed.World will continue to operate in a vacuum. People tend to forget that between 1900 and 2008, the economyHowever, that hasn’t stopped some people from taking notice. produced countless escape velocity type recoveries. Yet, during thisOriginally the European debt crisis would only affect the periphery - same period we had no instances of 0% interest rates, nor did we seethe core was safe. any money printing from the World economic powers.Now that the core certainly is being dragged lower, it was widely Instead, today interest rates are effectively at 0% everywhere and webelieved that China and the rest of Asia wouldn’t be affected. have almost $6 trillion in fake money printing over the last 4 years.Of course, now that China and Asia are being affected, analysts and $7,000,000,000,000 Quantitative Easing bypundits have drawn a line in the American sand – there is no way USA, Britain, Europe and Japan $6,000,000,000,000possible the European recession would hit American shores. $5,000,000,000,000 $4,000,000,000,000Well, now it seems we (and countless big American companies) have $3,000,000,000,000news for you – the American slowdown is coming and it’s right $2,000,000,000,000around the bend. Yes, US Q3 GDP was respectable at +2%. Yet this $1,000,000,000,000was for the last three months. Looking forward all you need to do is $0to listen and read the warning shots coming from real companies in Total Fake Money Total Fake Moneyreal industries. 1930 to 2008 2009 to 2012 Source: IceCap Asset Management and Goldman Sachs Global Economics 9
  11. 11. October 2012 How to lull a banker to sleepRelative calmness is overWe still caution people, investors and machines to respect that the The potential for Europe’s crisis to deteriorate even further is alivefinancial World today remains stuck in a moment never experienced and well. In just a few short days, Greece will need another bailout.before. Weird, wonderful and un-wonderful things will occur and for Meanwhile, everyone waits to see exactly when Spain requests theirthat reason we suggest you remain alert and do not become bailout. The waiting game continues.hypnotized from the state of relative calmness recently experienced. Regarding gold bullion, we continue to hold it in our portfolios whichOur Strategy naturally allows us to sleep very well at night.A short month ago, we concluded that we remain very concernedabout both the real economy and the now all-in actions of money As always, we’d be pleased to speak with anyone about ourprinting by the Americans and Europeans. Simultaneously, we investment management capabilities. As well, we encourage you tobalanced this economic outlook with the likelihood that financial share our global market outlook with those who you think may find itmarkets would react positively and that we would be adjusting our of interest.strategy. Please feel free to contact:While our bond strategies have changed to capture additional yield,our stock holdings have not changed. Stock market optimism has John Corney at orimproved from elevated levels, and we’ll continue to remain patientuntil this subsides further. Keith Dicker at the American election is over, the market’s relative state of Thank you for sharing your time with us.calmness will also be over. Europe and Greece and Spain will onceagain make headlines, as will the pending American fiscal cliff. Inshort, prepare yourself for a year-end market frenzy – up or down.Going forward, the key will be whether America falls into recession. Ifit does, financial markets will react to the negative side. If not, wecontinue to see near-term opportunities in short duration credit aswell as within equities. 10