Pam Icecap Oct Nov2012

Our view on global investment markets:

October 2012 – “How to lull a banker to sleep”
Keith Dicker, CFA
Chief Investment Officer
keithdicker@IceCapAssetManagement.com
www.IceCapAssetManagement.com

October 2012 How to lull a banker to sleep
Sleepless in Ottawa
Irrational Exuberance
When it comes to sleepless nights, Toimi Soini of Finland originally set The roaring 1990s was appreciated for something it wasn’t – an Alan
the record by using the “toothpicks under the eyelids” method for 11 Greenspan inspired economic miracle. The belief that human beings
straight 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 was
You 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 without
sweet dreams. Of course, this mindset would eventually nearly blow-up the entire
financial planet in 2008, but that was a long decade away. Now, what
Yet, that’s nothing compared to the very private folks at the Swiss wasn’t appreciated in the 1990s was the fact that stock and bond
National Bank. These super-secretive bankers have surpassed over markets were in the late stages of the greatest secular bull market
4,660 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 the
5,025 nights and counting, the always polite and well dressed chaps end of the 1990s. Inflation also followed the same road map and this
over 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 just
any bankers. This terrific trio have the displeasure of forever being Life was good. But not so for the central bankers of the World – their
known 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 money
themselves is the reason why gold is destined to remain golden for While stock and bond market investors were rationalizing their
sometime to come. And with gold sitting near $1700/oz, and with no exuberance as skill, governments were beginning to feel the heat of
end to the money printing games, the sleepless nights are destined to running fiscal deficits. Although their economies were growing, tax
continue. revenues were no where close enough to meet their irrational
spending habits.

www.IceCapAssetManagement.com 1

Anything But Commodities
Governments you see, are no different than people. When money How and when they acquired it has long been forgotten, yet central
gets tight, you begin to look everywhere for some spare change – and bankers and politicians everywhere knew they were sitting on a
this 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 shiny
banks are not owned by shareholders, they do not lend money to appeal, gold held very little economic interest to anyone. Gold didn’t
individuals or businesses and they certainly do not sell you expensive pay any dividends, it certainly didn’t grow revenues or earnings and
mutual 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 sound
financial system for your country. It guides your economy by utilizing As momentum grew, central bankers increasingly convinced
its 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 this
Also of importance is the responsibility of ensuring your country time central bankers around the World, realized that they now
maintains a safe and secure currency. Unknown to many, it is this possessed the economic and financial skills to forever control
latter 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 gold
While soaring stock and bond markets were helping stock brokers –at an average price of $270 an ounce. To measure the success of this
buy more yachts in the 1990s, commodity markets were horrible transaction, one only needs to know that the price of gold at that
investments 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 the
around the corner, investors at the time knew there was only one most respected countries in the World. It is reported they currently
game 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 National
It’s important to understand the environment during the 1990s as Bank sold over 1300 tonnes of the now very precious metal. The
central banks everywhere held gold bullion in some form or fashion.


Three hands
official reason for the dramatic reduction was to further diversify Yet this is where the Bank of Canada is trying to thread the financial
across foreign currencies. Today however, with gold now 4-8 times needle. On one hand, Mr. Carney and his team would love to raise
higher 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 bank
mighty Euro, the Swiss central bankers will eventually earn a brethren. Considering the Japanese, Americans, British and
nickname 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 raise
And then there was Canada. The 1990s financial version of the Great interest rates would act as a beacon to attract even more foreign
White North was anything but prolific. In fact, Canada was so safe-seeking investors which will further increase the now-mighty
unprolific that the Canadian Dollar was known in some circles as the Loonie, and in the process destroy market share for exporting
Hudson 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 nothing
something happened that isn’t happening elsewhere today – the he runs the risk of Canada’s household debt problem turning into an
government acted decisively to reduce spending, increase taxes and even bigger household debt problem.
pay down its debt. Granted, unlike today where everyone has a debt
problem, Canada was able to stick to this financial diet and greatly Today Mark Carney is doing his darndest not to print loonies and
benefited 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 to
Canada’s persistence was rewarded as today it compares quite print money, Canada will have nothing except good manners and
favourable 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, the
household sector continues to bloat its debt levels. Taken in isolation, These days, most Asian countries recognize the destructive money
this wouldn’t be too bad, after all if the previously unconstrained printing ways of the Western World. And, if you can’t beat them and
federal 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 a
and Doug could as well. great defense. Chart 1 (next page) shows the biggest buyer of gold.


Chart 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 www.ndr.com/copyright.html. For data vendor
disclaimers refer to ww.ndr.com/vendorinfo/.


Best Friends Forever
The forever told fable of China selling all of their US Treasuries is just Canada meanwhile is topping the fiscal charts on many fronts. Yet
that – a fable. You and I can sell currencies and buy other currencies should the Bank of Canada ever venture down the road of printing
without affecting the World. Big countries cannot. The chain event money to stimulate the economy, its complete lack of gold bullion
reaction 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 would
also collapse its export industries who invariably sell to the So, exactly how do you lull a banker to sleep? For starters, place
Americans. Additionally, many of China’s Asia trade partners have plenty of gold bullion under their pillow. And to seal the deal – gently
currencies and monetary policy linked to the US dollar. Asian trade remind them that they in fact cannot control the economy by printing
would 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 a
USA 8,134 75.3% gold bullion with excess call from Oslo. Since 1901, the good folks in Norway have been
Germany 3,396 72.3% reserves. This is exactly what recognizing the extraordinary efforts by people and countries for
Italy 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 a
Japan 765 3.2% more gold bullion purchases cloud over everyone’s head. Something had to be done, and it was
The Netherlands 613 60.2% in the future. And while Oslo who stepped up to the plate.
India 558 9.9%
considering that the US and
Canada - 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, “his
bullion greater than 70% of their foreign currency reserves, the
extraordinary efforts to strengthen international diplomacy and
upside for Chinese purchases is substantial.
cooperation between peoples” was the reason for his selection. If


Bob Dylan wins Nobel Peace Prize
President Obama achieved this after only 38 days in office, imagine As for “peace and reconciliation,” chart 2 on the next page shows
what 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 long
In 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 the
morale and future expectations. And what better place to start than original axis of evil. Yet, the imagination that the European Union has
Europe. 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 the
seems 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 Washington
have been able to set things right, once again it was up to Oslo to From our perspective, bad debt continues to clog the system, while
lead the way. And lead they did, by announcing that the 2012 winner private capital seeks safer places to sleep. There’s no question that a
of 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 a
The committee noted that for over “six decades,” the European reality a this point. Rather, the real threat to the European Union’s
Union has “contributed to the advancement of peace and Nobel Peace prize lies within the social strife enveloping the
reconciliation, democracy and human rights in Europe.” Well, at least nations. From dramatic marches, demonstrations and strikes in the
they 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 Union
celebrate this much deserved award, celebrations elsewhere across European times are a-changin’. And in some ways, perhaps the folks
the 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 Ireland
to continue having EU related referendums until they vote “yes” and Inflation
forcing unelected leaders on the people of Greece and Italy (and soon Inflation is often misunderstood by many. Most people see inflation
to 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


Chart 2: Nobel Peace Prize Winner 2012 - Europe
2012 Athens, Greece 2012 Barcelona, Spain

2012 Rome, Italy Source: the internet 2012 Lisbon, Portugal


Don’t cross the Rubicon
other goods or assets as well. Today, money printing effectively This scenario is happening in real life Europe today. Banks and
increases the supply of money available to buy stuff. Yet, the stuff governments are doing their best stop it. While few so called financial
people are buying is stocks and bonds, and this is where many experts refuse to step back, adjust their glasses, it's actually quite
financial and investment pundits are missing the boat. While stocks easy to see the private capital fleeing Greece, Spain and Italy while
are going higher, it is not due to earnings increasing rather it is due to the governments in charge desperately try to replace private capital
asset 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 thinking
of asset inflation. Firstly, some type of commodity will attract money that all money and capital is equal because it isn't. Long-term
and it's price will rise. However, unlike iPhones or Chevy volts, the sustainable economic growth, product innovation and profit is
supply 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 the
price 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 not
Now, the big whopper called hyper inflation does not start due to so funny thing is that, as each of these formidable economic super
rising prices from inventory adjustments. Rather the hyper inflation powers rush to crush their own currency, they actually do not lose
many are so afraid of today will undoubtedly be caused by money value relatively to each other. Rather, the true loss in real terms will
printing. However the catalyst of this hyper inflation trigger will be be relative to the countries who are not printing money including
the 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 economically
their money from the banks forcing the banks to collapse which sensitive, the absence of money printing should attract foreign direct
simultaneously contributes to the currency collapsing. The result is a investment which will lead to stronger economies, stronger banks
lack 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 to
hyper 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.


Fake money
McDonalds, General Electric, DuPont, Microsoft, IBM and even i-
Global Growth
crazy Apple have all said that next quarter their revenues and
Since the bazooka money printing announcements by the Americans
earnings will be less than originally forecast. These daily economic
and Europeans in September, all headline making systems have been
barometers are telling us that the World is slowing and it will hit the
shut 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 velocity
and 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 economy
However, that hasn’t stopped some people from taking notice.
produced countless escape velocity type recoveries. Yet, during this
Originally the European debt crisis would only affect the periphery -
same period we had no instances of 0% interest rates, nor did we see
the 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 we
believed 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 by
pundits have drawn a line in the American sand – there is no way USA, Britain, Europe and Japan
$6,000,000,000,000
possible the European recession would hit American shores. $5,000,000,000,000
$4,000,000,000,000
Well, now it seems we (and countless big American companies) have $3,000,000,000,000
news for you – the American slowdown is coming and it’s right $2,000,000,000,000
around the bend. Yes, US Q3 GDP was respectable at +2%. Yet this $1,000,000,000,000
was for the last three months. Looking forward all you need to do is $0
to listen and read the warning shots coming from real companies in Total Fake Money Total Fake Money
real industries. 1930 to 2008 2009 to 2012
Source: IceCap Asset Management and Goldman Sachs Global Economics


Relative calmness is over
We still caution people, investors and machines to respect that the The potential for Europe’s crisis to deteriorate even further is alive
financial 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 their
that 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 which
Our Strategy naturally allows us to sleep very well at night.
A short month ago, we concluded that we remain very concerned
about both the real economy and the now all-in actions of money As always, we’d be pleased to speak with anyone about our
printing by the Americans and Europeans. Simultaneously, we investment management capabilities. As well, we encourage you to
balanced this economic outlook with the likelihood that financial share our global market outlook with those who you think may find it
markets 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 johncorney@IceCapAssetManagement.com or
improved from elevated levels, and we’ll continue to remain patient
until this subsides further. Keith Dicker at keithdicker@IceCapAssetManagement.com.

Once 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 once
again make headlines, as will the pending American fiscal cliff. In
short, prepare yourself for a year-end market frenzy – up or down.

Going forward, the key will be whether America falls into recession. If
it does, financial markets will react to the negative side. If not, we
continue to see near-term opportunities in short duration credit as
well as within equities.


Pam Icecap Oct Nov2012

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