Petrocapita November 2011 - Keynesian Wreckonomics


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Petrocapita November 2011 - Keynesian Wreckonomics

  1. 1. Petrocapita UpdateNovember 2011
  2. 2. Petrocapita UpdateKEYNESIAN WRECKONOMICS WORLD TOUR 2011The causes of economic events, as opposed to the often morehead-line grabbing symptoms, are frequently overlooked by themainstream financial media. So while recent public opinion hasseen virtually a consensus of hostility towards the symptom offinancial sector malfeasance, as yet there does not seem to be acoherent understanding about the cause of the financial crisis. TheOccupy Wallstreet movement is an almost perfect example of thissymptom/cause confusion.I am glad that the brazenly kleptocratic behavior of politicallyfavored financial institutions is receiving the criticism it deserves,but it is important not to let the prime culprits in the ongoingdebacle slip away in the confusion.At its core, the financial crisis results from the belief amongst thepolitical class and their Keynesian apologists in tenured academiathat exponential government can be supported by a linearproductive economy.What we are currently witnessing is the inevitable collision betweenthe exponential government economy (debt/fiat driven) and itsproxies in the Finance, Insurance & Real Estate sectors (“FIRE”)and the linear, underlying capital/production-based economy. Inthe simplest terms the financial crisis is the direct result of:– Capital destruction caused by growth in the size of government;– Risk subsidies for the FIRE sectors; and– Artificially low/negative real interest rates that have skewed western economies to consumption.All this has taken place at the expense of the productive /capitalbased economy in the west. Remember - you cannot print capital;the real economy ultimately makes the rules.The political class is all too happy to divert attention away fromits pivotal role in the financial crisis. They are now falling over 1
  3. 3. Petrocapita Update (continued)themselves to co-opt the legitimate anger at what And so what of the future? Well first of all, I believe itcan only be described as the wholesale looting is wishful thinking that volatility will subside to historicof our economies by politically protected financial norms anytime soon. Volatility will persist as it resultsinstitutions. But we must never forget what came from the collision of two titanic and competing forcesfirst. It was the actions of the political class with in the global economy - the liquidation of years of lowrelentlessly expansionary fiscal and monetary policy interest rate fueled mal-investments versus continuingin the form of ultra-low interest rates that provided inflationary fiscal and monetary policy.the risk subsidy to the financial sector activities. Asubsidy that certain participants from the financial Sadly then, the financial crisis will not end untilsector exploited with ruthless diligence. real interest rates are positive and back to historic norms, decades of mal-investments are liquidatedBut stop and honestly ask if what has transpired and governments are spending within their means.would have taken place if the central banks had Because of this I believe the key investment drivers tonot slashed interest rates to historic lows following understand over next decade are very different fromthe 2001 dot-com crash (which provided the low those that were in place in the last decade. For thecost fuel for an explosion in the financial sector’s foreseeable future I believe we will continue to see:speculative activities) and central governments had – Deteriorating finances of the public sector;not created mortgage markets consisting almost – Monetary authorities willing to fill the gap byentirely of subsidized loan financing (which in the printing money;US in the form of Freddie and Fannie Mae provided – Low real growth rates in the west; andthe low cost fuel for an explosion in retail investors’ – High real growth rates in the emergingspeculative real estate activities). Absent these two economies.government created drivers you would have had nofinancial crisis. And so my investment beliefs remain:Given their culpability in providing both implicit and 1) Underweight investments that rely on real growthcurrent explicit back-stops to this massive mal- in western markets to generate returnsinvestment in real estate and financial speculation,it is unseemly in the highest degree for the same 2) Overweight investments:politicians to be attempting to absolve themselves of – that are directly exposed to emerging economyany responsibility and make sure that if anyone is held growth in politically stable parts of the world;accountable it is not them. We must never forget – that eliminate or reduce counter-party risk - e.g.that it is the state created interest rate subsidies and farmland versus wheat futures;financial guarantees that directly or indirectly created – that hedge inflation; anddebts that do not have offsetting productive (cash – whose products have inelastic demand curves.producing) assets to service them. Debts with nooffsetting assets is the dictionary definition of a crisis. Kind Regards Stephen Johnston 2
  4. 4. DISCLAIMER: The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Petrocapita Income Trust (“PETROCAPITA”) and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither PETROCAPITA nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to PETROCAPITA and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting PETROCAPITA or its relevant affiliate directly.#205, 120 Country Hills Landing NW Tel: +1.403.218.6506 www.petrocapita.comCalgary, AB T3K 5P3 Fax: +1.403.648.2776Canada