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Our view on global investment markets:
March 2013 – Do you believe in miracles?
Keith Dicker, CFA
Chief Investment Officer
keithdicker@IceCapAssetManagement.com
www.IceCapAssetManagement.com
1
U-S-A...U-S-A...
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Fortunately for USD Bulls – America’s big currency neighbours are all
looking a little shabby these days. In fact, in the 16 months since
publishing Return of the Dollar, the Euro has declined -8%, the
Japanese Yen has declined -24%, and the British Pound has declined -
6%. The currency war is certainly in full swing, but the race to the
bottom is far from over.
Granted, this doesn’t exactly produce solid votes of confidence for
the global economy. And, believe it or not, this trend will only get
stronger. In fact, investors should prepare to see the USD strengthen
considerably against most currencies. The good news is that this
allows investors from all walks of life to position themselves to either
gain from USD strength, or to protect their capital against loss from
EUR, GBP and Yen.
Unfortunately, there’s also some bad news. This upward surge in USD
does not reflect a surging US economy or an improving fiscal
condition. To see the canary in the American coal mine, look no
further than Chart 1 on page 2. Ultimately, once the effects of money
printing and the poor handling of debt levels has played itself out in
Europe, Britain and Japan, the US too will bare the brunt of its similar
strategies. For now however, the US is last in the long line of financial
heart ache.
To fully understand how the global debt crisis plays out however,
investors must be willing to step outside of their own domestic
economy and financial markets, and view the World from an
March 2013 Do you believe in miracles?
The odds of winning were slim and none. Avoiding embarrassment
was the real objective, but then something happened. Momentum
changed and the rag-tag bunch of American college hockey players
shocked not only the Soviets and their 1980 Big Red Machine, but the
entire sports World.
When seemingly faced with the impossible, America always
perseveres and finds a way to win. After winning the global economic
game for the better part of 100 years, America is once again on the
ropes and no one is giving her any hopes at winning, or even
surviving for that matter.
America’s debt levels are disastrous. It has no money to pay future
pensions and healthcare. Economic growth is anemic. Meanwhile,
more Americans than at any other time in history reply upon food
stamps. And to make matters even more dire, it is only the decision
to print trillions of new dollar bills that is holding everything together.
Just as America’s rock is about to hit its American bottom, you must
ask “Do you believe in miracles”? And, the short answer is – yes.
US Dollar Strength
Way back in November 2011, our Global Outlook “Return of the
Dollar” concluded “when it comes to currencies it doesn’t matter how
you look in isolation – it’s how you look when lined up next to your
neighbour”.
2
Chart 1: Canary in the US coal mine
March 2013 Do you believe in miracles?
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$ 45 trillion
and growing
Source: IceCap Asset Management Limited, www.justfacts.com
$15,000,000,000,000
$60,000,000,000,000
$-
$10,000,000,000,000
$20,000,000,000,000
$30,000,000,000,000
$40,000,000,000,000
$50,000,000,000,000
$60,000,000,000,000
$70,000,000,000,000
GDP Unfunded Liabilities
USA - Nominal GDP vs Net Unfunded Liabilities
3
Honda vs Hyundai
www.IceCapAssetManagement.com
independent perspective. Unfortunately in financial analysis, all too
often investors become one or two dimensional at best. To really up
your investment game, you need to broaden your perspective and
see through the daily grind of financial pomp and circumstance.
Case in point – inflation. Whereas our leading central banks report
that their money printing ways are not creating inflation. Ask
emerging market central banks, and they’ll tell you a different story.
While it is certainly true that American Quantitative Easing 1,2,3 and
4 is creating very little inflation in the US, the effect on emerging
markets is a different story.
All of this newly minted money has to go somewhere, and one thing
is for certain – it certainly isn’t going into the US domestic economy.
Instead, financial assets are pouring overseas to Asia and driving up
inflation, currencies and local property markets.
While we disagree with recent conjecture that central banks will one
day soon put an end to their money printing ways, one thing is
certain – the effect on emerging markets will not be kind. While
much discussion is focused on US domestic financial markets, the
American withdrawal of liquidity will have a severe effect on
emerging markets.
To further expand your financial horizons, one must also be
contemplating the effect of Japan’s newly embraced money printing
programs. Whereas America has committed to printing $2.67 billion a
March 2013 Do you believe in miracles?
day to help create a few jobs, the Japanese have taken money
printing to an entirely new level. Their program has one goal –
significantly decrease the value of the Japanese Yen.
Think South Korea and other Asian exporting countries are happy
with Japan’s attempt to drastically cut the value of the Yen? Not a
chance. You can be certain that as the Yen continues to weaken,
South Korea and others will also attempt to debase their currencies.
And just to be clear, there is nothing like a good old currency crisis to
help nudge money to safer areas.
Understanding how these dynamics play out is the key to correctly
forecasting the long-term direction of financial markets and why
ultimately the US Dollar will strengthen relative to the Euro, Yen and
British Pound.
The worst is over
Not one to be nostalgic, yet if it seems like it was only a few weeks
ago we warned “The Worst is Over”, that’s because it is true. Our
February 2013 publication deftly explained why despite
proclamations from Europe’s finest leaders that the “worst is over”,
the debt crisis was in in fact still ongoing with no resolution in sight.
Financially speaking, the only problem with Europe is that it refuses
to allow debt markets to follow the normal course where good loans
are repaid, and bad loans results in losses for those who made poor
investment decisions. As you know by now of course, European
4
The Crisis in Cyprus
www.IceCapAssetManagement.com
leaders have become very effective at ensuring everyone and
everything not called a bank will take losses. Private companies – you
are out of luck, line up for your losses. Wealthy individuals – go cry
elsewhere, you are directed towards the “higher taxes” line up. And
for everyone else – sorry, nothing for you either. Except instead of
losses on your investments and or higher taxes on your wealth, you
are forced to accept ultra low returns and the pleasure of having 3-4
generations of your family living under one roof again.
The question on everyone’s mind today is – can it get any worse?
For the answer, look no further than Cyprus. Cyprus is easy to
dismiss. While your financial advisor is telling you Cyprus is a tiny
country with a tiny economy, tiny banks and a tiny debt problem –
don’t worry; the non-herd following investment managers of the
World understand there is much more at stake. However, what isn’t
so tiny is the resulting geopolitical, economic, and monetary
ramifications.
In Europe, the crisis in Cyprus has proved to be THE most important
showdown thus far. While the situations in Ireland, Portugal, Spain
and Greece were all mostly the same and somewhat different –
Cyprus was simply a product of bad timing.
From a fundamental perspective, the mighty little tax haven was no
different than anyone else. The government’s finances grew out of
whack while simultaneously its banking system grew even more out
March 2013 Do you believe in miracles?
of whack. As such it really was no different than its bailed out
predecessors.
The reason Cyprus suddenly became different, had nothing to do
with its finances, but everything to do with the upcoming German
election. The growing discontent towards the debt crisis within
Europe is a phenomena that is no longer being taken lightly in
Brussels and especially in Berlin.
Prior to Cyprus, every Euro-zone government had a solid hold over
their country. Yet, first in Italy, followed by France and Greece and
then Spain – support for ruling governments started to turn.
Greece almost broke the Euro shackles and escaped, and this deeply
worried Brussels. Yet this was nothing compared to the election
nightmare in Italy where not only did Brussels’ preferred candidate
not win, he didn’t even come close to winning. Instead, the political
future in Italy rests with a new political party whose Euro skeptic
vision is sending shivers up and down the Troika.
Meanwhile in France, the rock-star status enjoyed by the newly
elected president Francois Hollande has completely vanished. In fact,
over 67% of people disapprove of his handling of the economy, and
this just 10 months into office. Considering the French economy is
firmly entrenched in recession (see Chart 2, next page), exactly how
Mr. Hollande plans to ignite a turn around remains unknown.
5
Chart 2: France Composite Output Index
March 2013 Do you believe in miracles?
www.IceCapAssetManagement.com
France is now in recession
6
Cypus: new template
www.IceCapAssetManagement.com
March 2013 Do you believe in miracles?
Which brings us to Germany. The September 22, 2013 federal
election is rapidly approaching. Although Chancellor Merkel’s
coalition currently enjoys a cushion, distaste for additional bailouts is
growing and the sudden emergence of a new political party is causing
consternation for Ms. Merkel.
It’s for this reason that a new bailout using German tax payer money
was risky indeed. Throw in the nuance of bailout money going to help
uber wealthy Russians, and it is easy to see why Cyprus didn’t stand a
chance.
IceCap will not recite the facts and storyline of the Cyprus bailout –
this information is readily available. We believe the most important
question is whether Cyprus is the new template for European (and
eventually global) debt restructuring?
Prior to Cyprus, the European bailout model resulted in buckets of
new debt for the underlying country combined with crippling
spending cuts and tax increases. Any investment losses occurred for
stock holders of the banks and in some situations the bond holders.
Bank deposits were never in play.
The Cyprus template changed everything. Now everyday, average
people who saved their entire lives and never participated in the
world of global finance are being forced to cough up some money
towards the bailout and losing a part of their bank deposit.
Banks deposits have always been considered hands-off. The fact that
many depositors in Cyprus are being levied 30-40% of their savings is
a major turning point in the global debt crisis.
This critical turn will have unintended consequences. For starters,
deposit holders in every Euro-zone country is presently thinking
whether they should move their money somewhere, anywhere
beyond the reaches of Brussels. Savers in Italy and especially Spain
must be making alternative plans – not to, is simply irrational and
irresponsible.
Those who believe that the probability of having their deposits taxed
in Spain, or Italy are really missing the point. Whereas prior to
Cyprus, the mere mention of losses for depositors drew laughter and
justifiably so. After all, there was nothing to base this fear. However,
now the precedent has been set.
The reason the Spanish banking system required a EUR 100 billion
bailout, was due to the combination of banks losing billions on a
collapsing housing market AND people withdrawing their deposits.
Since the Spanish economy continues to decline, new strains are
developing on the government and banking system which increases
the probability of additional bailouts.
This of course means the Cyprus template has now re-opened the
deposit can of worms and the risk of money fleeing the banking
system has once again returned. As a result, the risk of Spanish banks
losing deposits is certainly causing jitters in Brussels.
7
You can check out anytime you like, but you can never leave
www.IceCapAssetManagement.com
March 2013 Do you believe in miracles?
Naturally, Brussels considers itself a master of game theory and
whether to tax or not to tax the depositors in Cyprus. In the end, they
concluded the risk of Merkel losing the German election outweighed
the probability of the bank deposit runs spreading elsewhere in
Europe.
With Slovenia up next on the bailout chopping block, we’ll get to see
whether the Euro-zone really is a Hotel California. The burning
question is whether depositors will once again be invited to
contribute to the bailout. Our guess is that Brussels is desperate to
show that Cyprus was a one-off event and that depositors elsewhere
in the Euro-zone are not at risk. Slovenia deposits should be safe. But
seriously, if you have money in a Slovenian bank we’re pretty sure
you are on the cusp of a major withdrawal.
Chart 3, next page shows the result of the European bailout strategy.
Overall, new debt that can never be repaid is forced upon tax payers
all while higher taxes and reduced spending produces long lasting
recessions. As long as Brussels continues to treat the symptoms of
the debt crisis, the odds of resolution are slim and none.
Over time, increasingly more and more private capital will leave the
Euro-zone and seek relative safety elsewhere. Considering Britain and
Japan are also fully engaged in money printing, currency debasement
and bank bailouts, expect the same in these countries as well.
This is where the USD comes into play. We believe over time, private
capital will move towards the US. For better or worse, the USD is the
World’s reserve currency. The bulk of international trade occurs in
USD, and USD debt is the deepest debt market in the World.
Presently there is no alternative – the USD is the only game in town.
As capital shifts to the USD, we expect all asset classes to benefit. US
Treasury bonds will attract a lot of institutional money, while the
corporate bond market will also draw attention. The same can be said
for high earnings quality and high cash flow stocks. Meanwhile, real
estate will also be an obvious benefactor, as will other alternative
forms of investments – season tickets to the San Francisco 49ers new
stadium anyone?
As demand for everything USD develops, it’s important to remember
this movement isn’t a vote FOR the US, rather it is a vote AGAINST
other currencies and countries.
Does this mean America’s debt and fiscal problems will be fixed?
Definitely not – don’t start believing in miracles just yet. In fact, our
view on a strong USD is anything but a vote of confidence for the
long-term health of the American fiscal and monetary pie. The US will
continue to run large deficits and accumulate even more debt. In
short, America’s money problems will continue not to improve.
While these shifts in global financial assets are occurring, we suggest
you keep your eye (and hands) on gold bullion. Our view towards gold
hasn’t changed. There are times to own gold and times not to own
gold. It just so happens that the current global financial environment
8
Chart 3: The cost of Europe’s bailout
March 2013 Do you believe in miracles?
www.IceCapAssetManagement.com
Source: IceCap Asset Management Limited, Eurostat
*
*
* IceCap estimate
25%
68%
107%
176%
117% 120%
162%
471%
0%
100%
200%
300%
400%
500%
Ireland Portugal Greece Cyprus
Debt to GDP
Before Bailout After Bailout
5%
8% 7%
4%
14%
17%
27%
24%
0%
5%
10%
15%
20%
25%
30%
Ireland Portugal Greece Cyprus
Unemployment
Rate
Before Bailout After Bailout
*
9
A confidence game
www.IceCapAssetManagement.com
continues to present a very favourable situation for gold bullion and
other precious metals.
During the transition towards stronger demand for USD, we expect
gold to trade within long and volatile ranges. Due to technicalities,
many investors (mostly institutional investors such as pension funds,
bank assets etc) cannot invest in gold bullion. For this reason, gold
will increase dramatically against non-USD currencies but trade in-
line with USD. However, a point will eventually be reached where,
just as investors lost confidence in EUR, Yen and GBP, they too will
lose confidence in USD and then you will see surging prices for gold
bullion.
Bottom line – don’t be surprised by further USD strength, it will
happen.
Our Strategy
One thing about IceCap Asset Management is our ongoing focus on
transparency. For better or worse, we share with clients, non clients
and other managers our investment strategy and provide critique
when warranted.
Our recent decision to increase equities in early December followed
by a quick reversal of the trade in the middle of February remains
correct. Global equities have zigged and zagged but remain at the
exact same level since we last traded. Our sentiment models
continue to guide us towards caution, and we’ll retain this stance
until conditions change in either direction.
March 2013 Do you believe in miracles?
Gold bullion continues to trade within a fairly wide range and remains
sluggish. Long-term fundamentals and sentiment models remain
extremely positive for gold, yet we remain concerned with the short-
term technical picture. Like every other asset class, we’ll adjust our
gold strategy if needed.
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.

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IceCap Asset Management Limited Global Markets 2013.3

  • 1. Our view on global investment markets: March 2013 – Do you believe in miracles? Keith Dicker, CFA Chief Investment Officer keithdicker@IceCapAssetManagement.com www.IceCapAssetManagement.com
  • 2. 1 U-S-A...U-S-A... www.IceCapAssetManagement.com Fortunately for USD Bulls – America’s big currency neighbours are all looking a little shabby these days. In fact, in the 16 months since publishing Return of the Dollar, the Euro has declined -8%, the Japanese Yen has declined -24%, and the British Pound has declined - 6%. The currency war is certainly in full swing, but the race to the bottom is far from over. Granted, this doesn’t exactly produce solid votes of confidence for the global economy. And, believe it or not, this trend will only get stronger. In fact, investors should prepare to see the USD strengthen considerably against most currencies. The good news is that this allows investors from all walks of life to position themselves to either gain from USD strength, or to protect their capital against loss from EUR, GBP and Yen. Unfortunately, there’s also some bad news. This upward surge in USD does not reflect a surging US economy or an improving fiscal condition. To see the canary in the American coal mine, look no further than Chart 1 on page 2. Ultimately, once the effects of money printing and the poor handling of debt levels has played itself out in Europe, Britain and Japan, the US too will bare the brunt of its similar strategies. For now however, the US is last in the long line of financial heart ache. To fully understand how the global debt crisis plays out however, investors must be willing to step outside of their own domestic economy and financial markets, and view the World from an March 2013 Do you believe in miracles? The odds of winning were slim and none. Avoiding embarrassment was the real objective, but then something happened. Momentum changed and the rag-tag bunch of American college hockey players shocked not only the Soviets and their 1980 Big Red Machine, but the entire sports World. When seemingly faced with the impossible, America always perseveres and finds a way to win. After winning the global economic game for the better part of 100 years, America is once again on the ropes and no one is giving her any hopes at winning, or even surviving for that matter. America’s debt levels are disastrous. It has no money to pay future pensions and healthcare. Economic growth is anemic. Meanwhile, more Americans than at any other time in history reply upon food stamps. And to make matters even more dire, it is only the decision to print trillions of new dollar bills that is holding everything together. Just as America’s rock is about to hit its American bottom, you must ask “Do you believe in miracles”? And, the short answer is – yes. US Dollar Strength Way back in November 2011, our Global Outlook “Return of the Dollar” concluded “when it comes to currencies it doesn’t matter how you look in isolation – it’s how you look when lined up next to your neighbour”.
  • 3. 2 Chart 1: Canary in the US coal mine March 2013 Do you believe in miracles? www.IceCapAssetManagement.com $ 45 trillion and growing Source: IceCap Asset Management Limited, www.justfacts.com $15,000,000,000,000 $60,000,000,000,000 $- $10,000,000,000,000 $20,000,000,000,000 $30,000,000,000,000 $40,000,000,000,000 $50,000,000,000,000 $60,000,000,000,000 $70,000,000,000,000 GDP Unfunded Liabilities USA - Nominal GDP vs Net Unfunded Liabilities
  • 4. 3 Honda vs Hyundai www.IceCapAssetManagement.com independent perspective. Unfortunately in financial analysis, all too often investors become one or two dimensional at best. To really up your investment game, you need to broaden your perspective and see through the daily grind of financial pomp and circumstance. Case in point – inflation. Whereas our leading central banks report that their money printing ways are not creating inflation. Ask emerging market central banks, and they’ll tell you a different story. While it is certainly true that American Quantitative Easing 1,2,3 and 4 is creating very little inflation in the US, the effect on emerging markets is a different story. All of this newly minted money has to go somewhere, and one thing is for certain – it certainly isn’t going into the US domestic economy. Instead, financial assets are pouring overseas to Asia and driving up inflation, currencies and local property markets. While we disagree with recent conjecture that central banks will one day soon put an end to their money printing ways, one thing is certain – the effect on emerging markets will not be kind. While much discussion is focused on US domestic financial markets, the American withdrawal of liquidity will have a severe effect on emerging markets. To further expand your financial horizons, one must also be contemplating the effect of Japan’s newly embraced money printing programs. Whereas America has committed to printing $2.67 billion a March 2013 Do you believe in miracles? day to help create a few jobs, the Japanese have taken money printing to an entirely new level. Their program has one goal – significantly decrease the value of the Japanese Yen. Think South Korea and other Asian exporting countries are happy with Japan’s attempt to drastically cut the value of the Yen? Not a chance. You can be certain that as the Yen continues to weaken, South Korea and others will also attempt to debase their currencies. And just to be clear, there is nothing like a good old currency crisis to help nudge money to safer areas. Understanding how these dynamics play out is the key to correctly forecasting the long-term direction of financial markets and why ultimately the US Dollar will strengthen relative to the Euro, Yen and British Pound. The worst is over Not one to be nostalgic, yet if it seems like it was only a few weeks ago we warned “The Worst is Over”, that’s because it is true. Our February 2013 publication deftly explained why despite proclamations from Europe’s finest leaders that the “worst is over”, the debt crisis was in in fact still ongoing with no resolution in sight. Financially speaking, the only problem with Europe is that it refuses to allow debt markets to follow the normal course where good loans are repaid, and bad loans results in losses for those who made poor investment decisions. As you know by now of course, European
  • 5. 4 The Crisis in Cyprus www.IceCapAssetManagement.com leaders have become very effective at ensuring everyone and everything not called a bank will take losses. Private companies – you are out of luck, line up for your losses. Wealthy individuals – go cry elsewhere, you are directed towards the “higher taxes” line up. And for everyone else – sorry, nothing for you either. Except instead of losses on your investments and or higher taxes on your wealth, you are forced to accept ultra low returns and the pleasure of having 3-4 generations of your family living under one roof again. The question on everyone’s mind today is – can it get any worse? For the answer, look no further than Cyprus. Cyprus is easy to dismiss. While your financial advisor is telling you Cyprus is a tiny country with a tiny economy, tiny banks and a tiny debt problem – don’t worry; the non-herd following investment managers of the World understand there is much more at stake. However, what isn’t so tiny is the resulting geopolitical, economic, and monetary ramifications. In Europe, the crisis in Cyprus has proved to be THE most important showdown thus far. While the situations in Ireland, Portugal, Spain and Greece were all mostly the same and somewhat different – Cyprus was simply a product of bad timing. From a fundamental perspective, the mighty little tax haven was no different than anyone else. The government’s finances grew out of whack while simultaneously its banking system grew even more out March 2013 Do you believe in miracles? of whack. As such it really was no different than its bailed out predecessors. The reason Cyprus suddenly became different, had nothing to do with its finances, but everything to do with the upcoming German election. The growing discontent towards the debt crisis within Europe is a phenomena that is no longer being taken lightly in Brussels and especially in Berlin. Prior to Cyprus, every Euro-zone government had a solid hold over their country. Yet, first in Italy, followed by France and Greece and then Spain – support for ruling governments started to turn. Greece almost broke the Euro shackles and escaped, and this deeply worried Brussels. Yet this was nothing compared to the election nightmare in Italy where not only did Brussels’ preferred candidate not win, he didn’t even come close to winning. Instead, the political future in Italy rests with a new political party whose Euro skeptic vision is sending shivers up and down the Troika. Meanwhile in France, the rock-star status enjoyed by the newly elected president Francois Hollande has completely vanished. In fact, over 67% of people disapprove of his handling of the economy, and this just 10 months into office. Considering the French economy is firmly entrenched in recession (see Chart 2, next page), exactly how Mr. Hollande plans to ignite a turn around remains unknown.
  • 6. 5 Chart 2: France Composite Output Index March 2013 Do you believe in miracles? www.IceCapAssetManagement.com France is now in recession
  • 7. 6 Cypus: new template www.IceCapAssetManagement.com March 2013 Do you believe in miracles? Which brings us to Germany. The September 22, 2013 federal election is rapidly approaching. Although Chancellor Merkel’s coalition currently enjoys a cushion, distaste for additional bailouts is growing and the sudden emergence of a new political party is causing consternation for Ms. Merkel. It’s for this reason that a new bailout using German tax payer money was risky indeed. Throw in the nuance of bailout money going to help uber wealthy Russians, and it is easy to see why Cyprus didn’t stand a chance. IceCap will not recite the facts and storyline of the Cyprus bailout – this information is readily available. We believe the most important question is whether Cyprus is the new template for European (and eventually global) debt restructuring? Prior to Cyprus, the European bailout model resulted in buckets of new debt for the underlying country combined with crippling spending cuts and tax increases. Any investment losses occurred for stock holders of the banks and in some situations the bond holders. Bank deposits were never in play. The Cyprus template changed everything. Now everyday, average people who saved their entire lives and never participated in the world of global finance are being forced to cough up some money towards the bailout and losing a part of their bank deposit. Banks deposits have always been considered hands-off. The fact that many depositors in Cyprus are being levied 30-40% of their savings is a major turning point in the global debt crisis. This critical turn will have unintended consequences. For starters, deposit holders in every Euro-zone country is presently thinking whether they should move their money somewhere, anywhere beyond the reaches of Brussels. Savers in Italy and especially Spain must be making alternative plans – not to, is simply irrational and irresponsible. Those who believe that the probability of having their deposits taxed in Spain, or Italy are really missing the point. Whereas prior to Cyprus, the mere mention of losses for depositors drew laughter and justifiably so. After all, there was nothing to base this fear. However, now the precedent has been set. The reason the Spanish banking system required a EUR 100 billion bailout, was due to the combination of banks losing billions on a collapsing housing market AND people withdrawing their deposits. Since the Spanish economy continues to decline, new strains are developing on the government and banking system which increases the probability of additional bailouts. This of course means the Cyprus template has now re-opened the deposit can of worms and the risk of money fleeing the banking system has once again returned. As a result, the risk of Spanish banks losing deposits is certainly causing jitters in Brussels.
  • 8. 7 You can check out anytime you like, but you can never leave www.IceCapAssetManagement.com March 2013 Do you believe in miracles? Naturally, Brussels considers itself a master of game theory and whether to tax or not to tax the depositors in Cyprus. In the end, they concluded the risk of Merkel losing the German election outweighed the probability of the bank deposit runs spreading elsewhere in Europe. With Slovenia up next on the bailout chopping block, we’ll get to see whether the Euro-zone really is a Hotel California. The burning question is whether depositors will once again be invited to contribute to the bailout. Our guess is that Brussels is desperate to show that Cyprus was a one-off event and that depositors elsewhere in the Euro-zone are not at risk. Slovenia deposits should be safe. But seriously, if you have money in a Slovenian bank we’re pretty sure you are on the cusp of a major withdrawal. Chart 3, next page shows the result of the European bailout strategy. Overall, new debt that can never be repaid is forced upon tax payers all while higher taxes and reduced spending produces long lasting recessions. As long as Brussels continues to treat the symptoms of the debt crisis, the odds of resolution are slim and none. Over time, increasingly more and more private capital will leave the Euro-zone and seek relative safety elsewhere. Considering Britain and Japan are also fully engaged in money printing, currency debasement and bank bailouts, expect the same in these countries as well. This is where the USD comes into play. We believe over time, private capital will move towards the US. For better or worse, the USD is the World’s reserve currency. The bulk of international trade occurs in USD, and USD debt is the deepest debt market in the World. Presently there is no alternative – the USD is the only game in town. As capital shifts to the USD, we expect all asset classes to benefit. US Treasury bonds will attract a lot of institutional money, while the corporate bond market will also draw attention. The same can be said for high earnings quality and high cash flow stocks. Meanwhile, real estate will also be an obvious benefactor, as will other alternative forms of investments – season tickets to the San Francisco 49ers new stadium anyone? As demand for everything USD develops, it’s important to remember this movement isn’t a vote FOR the US, rather it is a vote AGAINST other currencies and countries. Does this mean America’s debt and fiscal problems will be fixed? Definitely not – don’t start believing in miracles just yet. In fact, our view on a strong USD is anything but a vote of confidence for the long-term health of the American fiscal and monetary pie. The US will continue to run large deficits and accumulate even more debt. In short, America’s money problems will continue not to improve. While these shifts in global financial assets are occurring, we suggest you keep your eye (and hands) on gold bullion. Our view towards gold hasn’t changed. There are times to own gold and times not to own gold. It just so happens that the current global financial environment
  • 9. 8 Chart 3: The cost of Europe’s bailout March 2013 Do you believe in miracles? www.IceCapAssetManagement.com Source: IceCap Asset Management Limited, Eurostat * * * IceCap estimate 25% 68% 107% 176% 117% 120% 162% 471% 0% 100% 200% 300% 400% 500% Ireland Portugal Greece Cyprus Debt to GDP Before Bailout After Bailout 5% 8% 7% 4% 14% 17% 27% 24% 0% 5% 10% 15% 20% 25% 30% Ireland Portugal Greece Cyprus Unemployment Rate Before Bailout After Bailout *
  • 10. 9 A confidence game www.IceCapAssetManagement.com continues to present a very favourable situation for gold bullion and other precious metals. During the transition towards stronger demand for USD, we expect gold to trade within long and volatile ranges. Due to technicalities, many investors (mostly institutional investors such as pension funds, bank assets etc) cannot invest in gold bullion. For this reason, gold will increase dramatically against non-USD currencies but trade in- line with USD. However, a point will eventually be reached where, just as investors lost confidence in EUR, Yen and GBP, they too will lose confidence in USD and then you will see surging prices for gold bullion. Bottom line – don’t be surprised by further USD strength, it will happen. Our Strategy One thing about IceCap Asset Management is our ongoing focus on transparency. For better or worse, we share with clients, non clients and other managers our investment strategy and provide critique when warranted. Our recent decision to increase equities in early December followed by a quick reversal of the trade in the middle of February remains correct. Global equities have zigged and zagged but remain at the exact same level since we last traded. Our sentiment models continue to guide us towards caution, and we’ll retain this stance until conditions change in either direction. March 2013 Do you believe in miracles? Gold bullion continues to trade within a fairly wide range and remains sluggish. Long-term fundamentals and sentiment models remain extremely positive for gold, yet we remain concerned with the short- term technical picture. Like every other asset class, we’ll adjust our gold strategy if needed. 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.