Caseridge TechSys Commentary by Adam Adamou, CFA
Do you remember when major multi-billion dollar fund managers were confidently announcing that a “depression” was imminent? That was just six months ago, and while we believe that it is safe to say that a world-wide economic depression did not come to pass, it doesn’t mean that that the worst is behind us. Looking forward from here, we believe that we have entered into a different growth paradigm than we have seen in the past, and it is this paradigm that is informing our investment and financing decisions.
The principle elements of this new paradigm, and it really is a conspiracy theory at its root, are as as follows:
1. We will see currencies weaken against commodities over the next five to ten years, and specifically against gold. Global confidence in the world-wide central banking system has been diminished as a result of this financial crisis. The US dollar has had a free ride as the world’s reserve currency since the fall of the “gold standard” in the early 1970’s, and the US consumer, the US government and the US Federal Reserve have benefited tremendously as the de facto central bank to the world. We believe that we are at a point in which there is an increasing chorus of nations, led by the emerging BRIC nations, that no longer see it as being in their best interests to rely on the US Fed for global monetary policy. They believe that this international crisis was caused by the US Federal Reserve (and we agree) and that a failure of this magnitude cannot be allowed to pass unchallenged. The tax and spending increases that are imminent will also undermine the ability of the US currency to remain as the global standard.
2. We believe that there is a systemic strategy in place among the major (non-BRIC) western economies to peg their international currencies against a weakening US dollar, at least over the next three to five years. This creative strategy is geared toward hiding the fact that the fiat currencies are being inflated by keeping international exchange rates within a narrow band relative to each other even as real assets increase in value. While asset price volatility will continue to be a function of supply and demand factors, particularly as they apply to production level commodities in the energy, agricultural or mining sectors – we will also see monetary inflation that is masked as asset price increases or stock market gains. Economic theory states that “expectations” help to create the reality of the market and that there is a “paradox of thrift” that hurts a recovering economy. This monetary strategy is geared toward creating a set of positive expectations that reduces the desire to save by focusing inflation on the asset front rather than at the consumer level in the belief that this will in turn lead to a sustainable economic recovery. It is based on a view that “saving” is the enemy of a sustainable recovery and a wish to move back to the “consumption based” economy of the past. We are test subjects in some massive economic game theory, and a very risky game at that.
3. As a result, we will most likely see a continued rise in the value of gold relative to the US dollar and to international fiat currencies in general. Our hope is that at the end of this process that we will see gold once again replace the US dollar as a global currency standard. In the best case, should this strategy prove successful, we expect to see an extended period of higher economic volatility along with a period of lower growth rates and an increase in the “full employment” level of unemployment (from about 4% to 6%).
We believe that these macro-economic factors should inform our decision making process in some very specific ways.
Our advice to CEO’s and to business executives is to maintain a tight lid on your costs and to be aware of “false starts” in the economy or “bull market” gains in commodities, agricultural, energy and stock markets that are in fact driven by declining currencies. Keep a nice stack of cash on the balance sheet at all times, and when market windows open for new issues, grab the cash that you can get. Grab some debt as well.
To our institutional and accredited investors, our advice is to keep a higher percentage of your portfolio in gold and in real assets. Investments in profitable operating companies, many of which we discuss in this report will serve as an excellent hedge against a global decline in currencies as well, but be aware of the “too fast too soon” scenarios that will occur, take profits, and constantly re-allocate to companies that are able to maintain growth along with stability in their gross margins.