Opportunities Funds Commentary
Transcription
Opportunities Funds Commentary
2 Queen Street East, Twentieth Floor Toronto, Ontario M5C 3G7 www.ci.com Telephone: 416-364-1145 Toll Free: 1-800-268-9374 Facsimile: 416-364-6299 UPDATE Trident Investment Management, LLC Opportunities Funds Commentary January 31, 2012 Performance Discussion The dawn of 2012 was accompanied with market euphoria. Equity markets roared upward in January with the S&P 500, MSCI Europe and Nikkei indices all up 4.5%, 3.8% and 4.1% respectively. The emerging markets, which suffered in 2011, rallied with the MSCI Emerging Markets Free index up 11.2%. Commodities rose with gold up 11.1% to end at $1,737.6 an ounce and oil up 3.35% to end at $110.69 a barrel. The bond markets also performed with the 10-year Treasury rallying 0.08% to end at 1.79%. Credit spreads also came in significantly with the U.S. Investment Grade index tightening 0.19% to end at 1.00%. The only casualty in the month was the U.S. dollar, which depreciated against most of its trading partners (all figures in U.S. dollars). Our funds finished January almost flat. Our long positions in gold and oil stocks helped performance, but this was almost entirely offset by our short positions in credit, which hurt. Our fixed income, currency and other positions did not contribute much to returns. The data we have seen so far for 2012 suggest that the underlying problems in the world are far from being solved. Policymakers are resorting to increasingly desperate measures to postpone a reckoning, which we believe is both closer and likely much more painful than markets expect. We are struck by the willingness of market participants to approach each new year with extreme optimism which has inevitably been proven wrong over the next few months. We believe that the current market sentiment provides us yet another opportunity to position for the disappointment that we expect should follow when reality bites. We have started to add to our core positions over the past month and expect to be doing so for a few weeks to come. January saw selloffs in Norwegian and Australian bonds, a move which we expect will continue through February. We have begun to add selectively to our exposure in these markets. The Fed’s willingness to continue quantitative easing even in face of what appears to be marginally improving U.S. economic data has convinced us to add to our long gold positions and our Treasury shorts. On the equities side, we have increased our net long exposure, with the additions being largely in the emerging countries and Canada, both of which we feel have significant upside. We have been able to add to our exposure at levels that we had not anticipated in all of 2012 – such has been the market euphoria of the last few weeks. Market Outlook and Strategy2011 Review The primary reason for the market optimism in January was the belief that the acute phase of the European crisis was over and that the global economy was therefore back on track. The economic data over the month was largely mixed suggesting at best a global economy that was bottom-bouncing rather than readying for a sustainable lift-off. Yet, there is no doubt that European financial conditions improved thanks to the European Central Bank’s (ECB) Long Term Repurchase Operation (LTRO) instituted in December 2011. We generally agree with the markets that the LTRO may have allowed us to exit the acute phase of the EU crisis. However, the global crisis itself was engendered by longer-term structural imbalances in many of the world’s major economies which have not been addressed. In fact, most of the world’s policymakers view the EU situation as an aberration specific to that region rather than as a wake- 2012 JAN UPDATE up call for better economic self-management. Even worse, the policy consensus is to adopt short-term fixes for the economic issues the world faces rather than make the painful, but necessary long-term adjustments. We believe this nearsighted thinking is going to make the ultimate resolution of the underlying problems much harder. We lay out a framework to review economic conditions that lead to crisis below. We then consider the European crisis in some detail, and also attempt to identify future global flash points. An Economic Crisis Framework The National Income Identity in economics can be written as: Y = C + I + G + (X – M) Where Y is income, C consumption, I investment, G government expenditure, X exports and M imports. If we assume that the taxes paid to the government are T, we can rewrite the above identity as: Y – T = C + I + (G – T) + (X - M) or After Tax Income = Consumption + Investment + Fiscal Deficit + Net Exports What is interesting here is that a country can boost its income either by increasing its deficit expenditure (G-T) or boosting its net exports (X-M) or both. However, if a country is running a trade deficit with (X-M) < 0, it can still increase its income by a more than offsetting increase in its fiscal deficits to ensure that (G-T) > (X-M). The identity above is a snapshot in time of a country’s economy and does not consider its accumulated debt load directly, except to the extent that debt service costs show up as a part of government expenditure G. However, we can rather easily make the transition from our formula above to analyzing a country’s debt dynamics. When a country runs a fiscal deficit, but has no trade deficit, its government is living beyond its means and adding to its stock of domestic debt. This debt represents a burden for future generations to service. Moreover, the debt so incurred is owed by the government to its own people. As such, a fiscal deficit is essentially a redistribution of wealth across various sectors of the population. The government incurs its expenditures to benefit some and induces others to pay for the same. The inducement is in the form of the interest rate which can be viewed as the cost to get some members of society to postpone their current consumption in return for future income. The beneficiaries of the government largesse are, in turn, being allowed to overspend today but have to generate the needed future income to pay for their expenditures along with interest. A country’s trade deficit comes about for a variety of reasons. Some nations may lack certain critical resources necessary but yet may be unable to produce enough things that other nations might find desirable. Yet others may not lack for resources but nevertheless are unable to produce the necessary materials at a reasonable cost relative to their trading partners. In either event, we can simply view the country in question as being uncompetitive. A trade deficit means that foreigners, in selling to our country, 2012 JAN UPDATE accumulate claims on it. Continued large trade deficits thus result in increasing debts payable to foreigners. This in turn results in foreigners owning or having claims against much of the assets and/or productive output of the country. High domestic inflation often creates trade deficits because it is increasingly cheaper to buy from overseas than produce locally. Also, a trade deficit may not result from government policy at all – it is entirely possible for private cross-border capital flows to foster if not expand trade deficits even with active government discouragement. A reasonable position would be that for long-term economic success a country should aspire towards avoiding both fiscal and trade deficits over an economic cycle. Some would argue that a small fiscal deficit may be appropriate and even desirable, but the fact remains that any such deficits should keep the ultimate debt loads of the country manageable. When the debt levels of the country rise past certain thresholds, crises typically follow. History shows us that these thresholds are at a sovereign debt stock of about 90% of GDP (though fiscal deficits themselves may vary from year to year). With large, sustained trade deficits, the foreign debt of the country typically increases. When a significant fraction of the country’s export earnings go to servicing foreign debt, it becomes increasingly vulnerable to a loss of foreign confidence which could precipitate either an exchange rate crisis or, with a pegged exchange rate, a funding crisis. A trade deficit of over 7% of GDP has generally proved an important trigger point for such crises. When a country has to contend with trade and fiscal deficits, the thresholds for crisis are surely lower. However, since the luxury of running both deficits for extended periods of time seem to be a privilege of the world’s wealthiest nations of late, the crisis onset could be delayed because of the unwillingness of the world to acknowledge reality. Some Crisis Examples The table below lists some of the world’s countries/regions whose economic conditions triggered crises over the last several years. In many of the situations below, the economic numbers are flashing red but the crisis has not occurred yet. The numbers in parantheses show the year(s) of crisis or what we believe to be the time for a potential crisis. Exchange Rate Floating Fixed Trade Issues Mexico (1994 Tequila Crisis) Asia (1997 Crisis) Argentina(1994-2001 crisis) Fiscal Issues Japan (2012?) European Union (2013?) Trade and Fiscal Issues US (2013?) UK (2012/2013?) Greece, Portugal, Spain (2010-) Dealing with Crisis When a country runs a significant trade deficit for a long period of time, it is increasingly pledging its future to foreigners. Left unchecked, this will mean the economic slavery of the deficit country to its foreign masters. That is, foreigners are taking the wealth of the country in return for their exports to it and 2012 JAN UPDATE at some point the wealth simply runs out. Countries that pay for trade deficits with debt denominated in their own currency have the option of effecting a devaluation of their currency to restore their domestic competitiveness and forcing a capital loss on their foreign trading partners. The U.S.’ abandonment of the gold peg in 1971 ushering in the era of floating exchange rates is an example of such a move. Those that have debt in foreign currencies, but still have their own domestic currency, can nevertheless effect a devaluation that will sharply increase the value of their foreign debt while simultaneously boosting their domestic competitiveness. The boost in export performance that might result could well outweigh the increase in foreign debt service costs. The actions of Mexico in 1994 and Thailand in 1997 were both examples of such an outcome. Of course, if the foreign debt levels are too high, the country may have to default as well, as occurred in Latin American in the early 1980s. A country with no domestic currency that it can devalue, has to effect a real devaluation in its export industries. That is, it has to force down wages and reduce its people’s living standards, and also perhaps boost competitiveness with structural reforms and new investment. Argentina pursued such a system with an explicit Argentine peso-U.S. dollar peg but went into crisis in 1994, and was ultimately forced to abandon its dollar peg with a default on debt in 2001. A country with a huge fiscal deficit and a large accumulated debt load, but no significant trade deficit or debts owed to foreigners, can unburden itself either by government austerity, or forced debt reduction through inflation or default. With austerity, involving higher taxes and/or reduced government expenditure, there is a redistribution of wealth back to the domestic creditors who lent the money in the first place. From a purely ethical perspective, this perhaps makes the most sense given that the debt was taken on with such an agreement to begin with. Yet austerity will generally depress economic growth and tax revenues. With low or no inflation, this makes the real debt load much higher requiring even more cutbacks. When the debt loads are high, many countries often decide that the social costs to doing this are too much to bear and that a forced debt reduction involving a redistribution of wealth from the creditors to the debtors might be preferable. This can be accomplished either by inflation which reduces the real value of the debt or by outright default where creditors are given back less than they lent. While the latter may seem a perfect solution, it destroys the credibility of the borrower and makes creditors demand increasingly higher compensation for future loans. Put differently, if creditors get no benefit for deferring consumption, they will consume their wealth instead, making the savings rate drop for good. The government then simply cannot borrow again. There is no free lunch. The EU (as a region) and Japan are both examples of fiscal deficit areas where crises might be triggered in the near future. With large trade and fiscal deficits, a country is faced with a difficult set of choices. It needs a boost in competitiveness from a real decline in wages that can be achieved either with a recession or a large depreciation of its currency. Unfortunately, such a reduction in real wages would have to also be accompanied by austerity to ensure that the domestic debt is repayable. That is, the now poorer citizens of the country should be made to tighten their belts even more. When the country has its own currency, a significant depreciation will immediately achieve a real decline in its wages relative to its trading partners, and the ensuing trade boost may serve to offset some of the austerity that domestic debt repayment will require. The US and the UK today fit this mold. However, when the country does not have its own currency, as is the case in many of the EU’s member nations, it needs to engineer real decline in domestic wages which is usually achieved with an economic slowdown and high unemployment. But the deflationary forces unleashed will increase the real burden of domestic debt service making the country’s adjustment much more painful. If the debt levels for the country are high enough, the pain engendered could be so significant that an enraged (and now impoverished) population could force the rollback of the austerity measures making the problem totally intractable. 2012 JAN The European Crisis UPDATE There are some interesting observations one can make in regard to the European Union and the nature of the crisis today. When one looks at the entire EU as a region, it is very similar to an early-stage Japan. The EU as a whole is a highly competitive economy on the global stage and generally runs a small trade surplus with the rest of the world. Germany is largely responsible for this surplus with its economy manufacturing specialized products that appear to be in global demand despite the premium prices they command. That said, the EU does have a longer-term debt problem. The region has a low birth rate with an extensive welfare state that needs to be supported. Even worse, employers in the region have to deal with inflexible labor laws that have ensured a long-term structural increase in unemployment. Labor mobility across the region, while better of late, still lags other developed nations such as the US. Finally, despite the Maastricht criteria that limited government debts and deficits, the region as a whole has a relatively high level of sovereign debt with considerably higher contingent liabilities coming from the need to pay for future retiree benefits. The EU thus needs longer term austerity to deal with its domestic fiscal issues, but does not have the problem of being indebted to foreigners. In fact, the EU’s debt fundamentals are much less alarming overall than those of many of its trading partners. The need for longer-term austerity can be viewed as the macro dimension of the EU crisis. Unfortunately, what is true for the EU is not true for each of its member countries. Countries such as Greece labor under huge debt burdens approaching 180% of GDP and large trade deficits of over 7% of GDP. The Greek debt burden cannot be supported on an ongoing basis under any reasonable economic scenario, even with crushing austerity. The ultimate solution to Greece’s problems will require a significant wealth transfer. The important question is in which direction such a transfer will occur. If Greece were to work to repay the bulk of its debt to the EU, even with some help from them in the interim, or alternatively give them Greek land or assets in payment, the net result will be an ongoing transfer of Greek assets to EU counterparties. A total repudiation of debt by Greece will mean an expropriation by the nation of its creditors’ assets. There are a number of intermediate solutions that involve partial write-downs of debt. Many EU nations such as Portugal, Spain, Ireland and perhaps even Italy, face similar problems as Greece albeit to a lesser degree. The current debt problems facing the region come from markets’ unwillingness to fund these nations, requiring Germany and the other wealthier nations to come to their aid. In fact, German debt is viewed as being among the world’s safest. Thus, the micro dimension of the EU crisis today pertains to wealth redistribution. The indebted and uncompetitive members of the EU require a huge wealth transfer from the healthier ones. They would like such a transfer with few, if any conditions attached. The latter however, would prefer to act as debtors in possession. Given the huge debts owed to them, this might be the best chance they have to ensure that they receive even partial repayment of their loans. While most EU members would agree on the macro dimensions of the crisis and the need for austerity, the biggest arguments have arisen on the micro elements of redistribution. The current voting regime in the EU was designed with each nation getting a single vote on most decisions. The larger the number of poorer nations who want wealth transfers, the more likely it is that economically mighty countries such as Germany (who make up a much larger portion of EU output relative to their voting percentage) will get outvoted. What Germany and the wealthier nations are presented with is an unpleasant choice where they have to pay indefinitely for their weaker members, or tolerate the breakup of the union. It is entirely possible to arrive at an intermediate solution where restructuring of weaker members is initiated with aid, 2012 JAN along with stringent conditions being attached to the repayment of these new loans. However, the loss of sovereignty by the recipient of the largesse could prove a huge sticking point for such negotiations. UPDATE The political situation in the EU further complicates what is an already difficult economic environment. The electorates in the EU nations that voted to join the Eurozone are now realizing that the union they joined has morphed into something quite different from what they had been promised. The EU, in concept, is a loose association of sovereign fiscal states which share a common currency. The stringent rules for EU accession meant that only the capable could join the EU zone. The European Central Bank was set up to be the guardian of the common currency, with an explicit mandate to ensure its stability. The ECB was not expected to intervene in fiscal matters of member states, nor was it allowed to expose itself to sovereign risks by monetizing sovereign debt – it was primarily intended to safeguard the currency unit. Thus, the EU by design was expected to operate with a stable currency used across different nations whose fiscal discipline was to be assured by markets assigning appropriate risk spreads to member states’ sovereign debt. The quasi-autonomous union that the EU was supposed to be has now become one where a central government and fiscal authority are being contemplated along with wide-ranging wealth transfers across nations. Not surprisingly, electorates in Germany and the other more prosperous countries are strongly against such a system even if they believe in the EU as a concept. The citizens of Greece and other weaker countries benefited for several years from an implicit transfer from the wealthier countries in terms of cheaper borrowing costs and are being forced to recognize that that era is finished – being in the EU has responsibilities and costs too and not just benefits. In this context, the only appropriate long-term solution is to re-frame the EU treaty itself in a way that acknowledges this new regime where countries give up their sovereign rights for the collective good. Chancellor Angela Merkel of Germany deserves credit for recognizing this obvious issue and trying to force such a treaty change along with the necessary parliamentary approvals from all EU member countries. The simple fact is that Germany cannot accept the other nations voting to spend its citizens’ wealth. Not surprisingly, the treaty changes being attempted are not popular with the weaker countries which would much prefer the easier route of monetization that has so far been eschewed by Germany. A period of enforced austerity in many of the profligate countries of Europe will reduce their living standards very likely for a generation or longer. Even worse, it could expose the cracks in their political edifices and possibly bring about significant change in many of their regimes. Unfortunately, these problems are inevitable unless of course the wealthier countries commit to being perpetual welfare donors to the weaker members. The Role of the ECB in the Crisis Many observers of the EU crisis fault the designers of the union for not seeing the need for a more powerful central bank that could act by charter as the lender of last resort, even with powers to explicitly monetize sovereign debt. Yet, it is precisely the ECB’s going beyond its very limited role that has served as an important, if not main, trigger for the crisis. The EU by design relied on markets to enforce fiscal discipline. That is, a country that increasingly bent the union’s fiscal rules should have seen a substantial increase in its borrowing costs and been forced into corrective action. Yet, the ECB’s collateral rules made all EU sovereigns equivalent from the perspective of banking risk. This meant that EU banks could borrow from the ECB at low rates and speculate on higher- 2012 JAN UPDATE yielding debt of weaker EU members with no penalty. This, in turn, meant a spate of lending to the weaker EU nations allowing the continuation of irresponsible domestic policies, along with a dramatic expansion in banks’ balance sheets and thus their risk. When the collapse of the weaker sovereigns such as Greece began in 2009, the ECB should have let markets function and force a debt default on the then much less indebted Greece. Such an outcome, while painful, would have been relatively limited in its scope – Greece, for example, is a paltry 3% of EU-wide GDP. However, the ECB chose to act as an agent of the banks it regulates rather than as the enforcer for systemic stability. The ECB routinely buys and sells sovereign debt as part of its monetary operations. Rather than accepting markets’ belated recognition of the risks in Greek, Irish and Portuguese debt reflected by their rising borrowing costs, it acted to purchase bonds of these problem nations beyond its routine activities. Since markets did not believe in the creditworthiness of the problem nations, the ECB has become an increasingly larger provider of capital to these countries. Even worse, the ECB has been forced to accommodate deposit flight from these areas with automatic loans through its inter-country TARGET2 payments system – this was the subject of one of our previous communications. Unfortunately, the net result of these ECB actions has been a continued expansion in the indebtedness of weaker EU members along with huge exposure for the ECB itself to problem countries as its capital progressively replaced private capital flows. Thus, the ECB has taken what were a sequence of private sector errors, partly induced by its own poor regulatory framework, and compounded them into a gigantic headache for the EU taxpayer. The numbers bear out our view. In 2009, Greece’s debt to GDP ratio was only about 120% in contrast to today’s 170+%. Had the ECB acted in 2009 to force a Greek default, which it could have by the simple expedient of refusing to accept Greek sovereign collateral in its monetary operations, the country’s debt ratio could have been reduced to perhaps 60%, an acceptable threshold given currently contemplated haircuts. Today, after a second €130 billion bailout, Greece’s debt burden will hit the levels of 2009 only in 2020! Given its sequence of policy errors, the only reasonable action that the ECB can take now is to ensure a modicum of near-term market stability so that hard political decisions about bailouts and restructuring can be made quickly. In fact, there is good reason for the ECB to limit its activity because the greater the urgency of the crisis, the more certain is a workable political solution. Unfortunately, the ECB has continued to increase its involvement with the weaker countries most recently with the December announcement of the Long Term Repo Operation (LTRO). The Long-Term Repo Operation (LTRO) With the LTRO, the ECB committed to providing funding for 3 years at 1% against acceptable collateral for any bank in the EU system. Acceptable collateral included the bonds of the problem Euro members such as Greece, Portugal, Spain and Italy. Banks, especially in the weaker countries, used the LTRO facility to the tune of almost €500 billion in December 2011, with the expected take-up expected to be almost €1 trillion in a second operation to be conducted in late February. At face value, the LTRO seems a reasonable way to inject liquidity. However, it has extremely perverse effects because of the collateral that the ECB is willing to accept. Markets believe that there is a high 2012 JAN UPDATE probability of an Italian or Spanish debt default given their debt levels and internal growth issues. As such, the safest banks in the EU that operate with high levels of capital would not consider buying Italian bonds unless they were more than adequately compensated for their risk through higher rates. This is simply because the safest bank has something to lose – its capital. A bank that was unsafe or effectively insolvent, as for example an Italian bank that is already exposed to toxic Italian sovereign debt in huge amounts, would jump at a chance to use the LTRO facility to buy Italian bonds. The logic here is that if there is an actual default by Italy, the bank in question (which already has virtually no capital) would surely be declared insolvent which would leave the ECB with all the losses on the Italian bonds. Yet, if Italy were to keep paying, or even if the crisis just dragged on for another 3 years, the bank would be able to enjoy the spread between its 1% financing from the ECB and the much higher Italian interest rate. Given the happy result that the bank keeps 100% of its gains but the ECB keeps 100% of the losses in the event of default, our insolvent bank will use the LTRO to the maximum extent permissible. The results of the first LTRO in December 2011 reflected the perverse dynamics at play here. The Spanish, Italian and some French banks were among the most aggressive users of the facility. The safer banks in the system did not see much need for it. In fact, cash deposits with the ECB have soared in recent months as the safest banks keep their free cash in the central bank in preference to lending it out. The LTRO has had an undeniable benefit for problem issuers like Italy which might otherwise have had trouble raising debt. Any Italian debt up to 3 years can be bought by a bank and financed via the LTRO without any risk, as long as the latter is close to insolvency. As such, the LTRO has resulted in a significant drop in short-term Italian and Spanish rates. The ECB, by acting through its worst banks thus, has effectively monetized Italian and Spanish debt in the short end, in direct contravention of its charter. In that respect, the LTRO is very similar to the Federal Reserve’s QE program. Yet it is different from QE in that the risks of capital losses from the collateral provided are technically being borne by the banks even if the ECB is holding the same. This difference is entirely cosmetic though – if Italy or another large sovereign defaults, the ECB will surely bear all the losses. It is amazing when one considers that in a single LTRO transaction the ECB has taken on more toxic assets than the entire European Financial Stability Fund (EFSF) contemplated doing. ECB Governor Mario Draghi’s fig-leaf for this aggressive monetization was that the recent agreement among EU members to limit fiscal deficits (the so called “fiscal compact”) meant that future debt issuance would be severely limited allowing the ECB to act to stabilize markets. Were we to give Governor Draghi the benefit of the doubt, the only rationale for his action is that policymakers in the Eurozone have indeed concluded that draconian austerity is inevitable for member countries. Countries like Greece then face only a future where they leave the Eurozone after a default – a process that might be accelerated by the increasingly stringent requirements for fiscal cutbacks. But then, we are talking about a very bleak growth outlook for Europe as a whole. Limited sovereign debt issuance will continue to be underwritten by the banks with ECB support, but a credit crunch over time is inevitable. Fiscal cutbacks will add to growth weakness. And the bleak economic and political landscape will result in little to no new investment. While a collapse of the Euro currency might be desirable, it is unclear that that will help matters for any nation except Germany which has little need for an export boost at this stage. 2012 JAN UPDATE We can anticipate Japan-like conditions within Europe for the next decade then, except that Japan started its long adjustment with a debt to GDP ratio of about 15% and used aggressive fiscal policy to mitigate the effects of its bubble era excesses, keeping unemployment at 5% for the entire period. Europe’s starts with an 80+% region-wide debt to GDP ratio and the EU is going to be tightening fiscal policy when unemployment is already over 10% region-wide. We question the longer-term sustainability of austerity in the EU given popular sentiment. We also believe that the ECB has put its head in a noose from which extrication is virtually impossible. While markets may have been calmed by the ECB action, the longerterm risks for the Eurozone as a whole have increased dramatically. The Coming Austerity outside Europe While we have focused so far on the EU, one needs to remember where we started. The EU, for all its problems, is among the least indebted in the world after the developing nations viewed as a group. Japan, by most metrics, is more indebted than its trading partners and already faces a deflationary problem even with continued huge fiscal deficits. Any question about Japan’s solvency could trigger capital flight and a yen decline. The only saving grace is perhaps that a yen decline, even if it occurs under circumstances of sovereign concern, would help Japan’s exports and ultimately feed through into domestic inflation. The U.S. and the U.K., in addition to having huge fiscal deficits, also have large trade deficits. While the U.K. is actually attempting austerity, its efforts have done little to reduce deficits to acceptable levels. Inflation in the U.K. is also running at high levels but despite this, the Bank of England has engaged in aggressive monetization of the country’s debt. The U.S. has avoided any austerity at all so far. Virtually all its leaders (and potential leaders) continue to present economic plans that involve increased expenditure and limited or no tax increases, while making fatuous growth projections 20 years out for deficit reduction. Any real attempts at austerity by the U.S. in particular could lead to a dramatic growth slowdown in the country, if not the world. But the large fiscal deficits of the U.S. are leading to a continued increase in its debt levels. The only reason that US bond yields have not spiked already due to solvency concerns is because of the U.S. Federal Reserve’s debt monetization through quantitative easing. But this has only led to increased vulnerability in the U.S. – the largest foreign holders of U.S. debt such as China have already sharply curtailed their bond purchases. Conclusion With conditions being the way they are, it is hard to get excited. The EU may have set the stage for austerity and deflation notwithstanding the ECB’s actions. The U.S., and to a lesser degree the U.K., seem firmly on the path to hyperinflation. Unfortunately, in either outcome, we have trouble identifying countries or regions that could serve as locomotives for global growth. Even the perennial favourite, China, appears to be in the throes of a painful real-estate-bubble induced retrenchment. We are increasingly of the view that a major realignment in markets is likely this year, and perhaps as early as in the first six months. Market participants are altogether too sanguine about the risks we see everywhere. The fundamentals have deteriorated significantly over the last year even as market euphoria 2012 JAN UPDATE has returned. There seems to be no problem that omniscient central bankers cannot solve with the manna of money. The only thing we are sure of now is the post-crisis narrative. When markets adjust sharply to the fundamentals which are so undeniably obvious, we fully expect the consensus view to be then that no one could have possibly seen all this coming. Performance Summary at January 31, 2012 Trident Global Opportunities Fund 1 Mth. 3 Mth. 6 Mth. 1 Yr. 2 Yr. 3 Yr. 5 Yr. 10 Yr. YTD Since Inception (Feb. ‘01) -0.9% 1.6% 3.5% -1.6% -3.2% 20.4% 10.9% 0.0% 10.5% 0.0% CI Global Opportunities Fund 1 Mth. 3 Mth. 6 Mth. 1 Yr. 3 Yr. 5 Yr. 10 Yr. 15 Yr. YTD Since Inception (Mar. ‘95) -0.8% 1.3% 3.2% -3.1% 22.9% 9.9% 16.0% 0.0% 17.5% 0.0% Nothing herein should be read to constitute an offer or solicitation by Trident Investment Management, LLC or its principal to provide investment advisory services to any person or entity. This is not to be construed as a public offering of securities in any jurisdiction of Canada. The offering of units of the Trident Global Opportunities Fund are made pursuant to the Offering Memorandum only to those investors in jurisdictions of Canada who meet certain eligibility or minimum purchase requirements. Important information about the Funds, including a statement of the Fund’s fundamental investment objective, is contained in the Offering Memorandum. Obtain a copy of the Offering Memorandum and read it carefully before making an investment decision. These Funds are for sophisticated investors only. ®CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. 2012 JAN