IceCap Asset Management Limited Global Markets 2013.6 | Bashar Al Assad | Federal Reserve System

Our view on global investment markets

June 2013 – Scrapbooking
Keith Dicker, CFA Chief Investment Officer

June 2013
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.

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.

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
$4.1 Trillion is a lot of money

Chart 1: Federal Reserve GDP Estimates vs actual

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

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. 2

June 2013


Chart 2: Federal Reserve Balance Sheet

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


June 2013
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. 4

June 2013


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


June 2013
Close down city squares

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

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.

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


June 2013
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


June 2013
Euro crisis is not over

Chart 3: French Imports

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


June 2013
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 or Keith Dicker at Thank you for sharing your time with us.


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