Spielbank Bremen Adresse - Shrine circus orleans casino
12th December, 2013
Friends, Romans, Countrymen,
We have a few things on our mind at the moment.
2014 will, we hope, be a year when the economic
situation clarifies itself. We see a moderate growth
economy and stable markets, though we remain
gravely concerned about monetary environment
(despite improvements at the margin) and this
imparts fragility. It is not inconceivable to foresee a
situation where growth disappears altogether.
Finally, we resolve to do better when it comes to
pestering our investee companies in 2014.
2014 Views and News
We have just finished two days of roundtable
debate on what we think will transpire in 2014. On
balance, João is most bearish, Alexander is
cautious, and David is most positive (relatively),
with a mutedly (and cautiously) slightly optimistic
outlook. The determining emphasis of our separate
opinions essentially stem from João’s fear that
activity might falter. Alexander worries about
ongoing deleveraging headwinds, and David is
hopeful that corporate investment may underpin
growth. On balance, our combined view is for a
moderate growth environment.
In our base case, we are suspending disbelief at the
inane behaviour of the bond market and assume
the Fed can, like an ageing playboy, eke out one last
hurrah before the bond market demands a positive
real yield. Moderate growth and persistent low
rates should be constructive for equities as an
asset-class. Though we think the different
geographical markets are pricing this outcome
Real inflation not just the rubbish produced by Stasi
We apologise to the optimists out there, but we
view any hopes of strong growth will be quickly
choked off by higher inflation and a more normally
functioning bond market (ie higher yields) – i.e.
risks to the upside are comparatively low. Whereas
risks to the downside through weaker activity with
persistent inflation 1 present a higher risk. Under
this scenario, we are fearful that the bond hawks
may eventually reassert themselves – and quickly!
In economic terms, we concede that the US is leaps
ahead of its counterparts. And while some strength
of performance is most certainly due to
consumption and housing sector recovery, there
are clear signs of stronger endogenous growth.
Europe has the weakest growth outlook, but is
going through a period of adjustment that is byand-large
conservatism.) The UK sits between the two with
the worst aspects of each. A house-price creditfuelled (yet) weak recovery without the benefit of
previous deleveraging. Emerging markets are
slowing and are clearly feeling the pinch of tighter
liquidity, but like Europe we feel this is a healthy
In equity market terms, we feel the US has run too
rapidly ahead, and is due a pullback . . . though not
necessarily an aggressive one (for a change) but
rather a moderated fall, bringing valuations back to
more reasonable trend levels. While a more muted
US equity market will invariably lead to sympathy
pressure on other equity indices, we feel that the
valuation gap between the UK, EU and the S&P are
broadly constructive for the former. This is doubly
true of Emerging Markets, although within EM we
reserve our enthusiasm for countries without
current account issues. So we like China, Korea and
are measurably less keen on India, Indonesia,
Turkey, South Africa. (We particularly like China for
reasons that we lay out in detail below.)
In currency terms, we are the bemused judges of
the relative appeal of plummeting currencies (and
relative is the operative word). As such, we have
been partially surprised by the relative weakness of
the dollar in 2H13, and are looking for better dollar
performance into 2014. Further, while we
understand the relative strength of the Euro (CA
flows as well as more responsible monetary policy),
we feel longer-term Euro weakness is inevitable.
Our out and out pessimist view is the infinitely
elastic GBP, which seems to be strengthening on
the back of a false dawn of fading economy,
misplaced confidence in a money-printing flim-flam
man (Carney is an appropriate name!), and some
vague hope the fiscal position will be brought under
control. The less said about the Yen the better.
Nowhere is this truer than in our system of money.
Unequivocally, we need a new system of money.
The good news is that a new system is emerging,
the bad news is that we don’t know what form that
new system will take, or whether the transition will
be orderly or otherwise.
A Dollar Standard
People are surprised when we talk about currency
just how often the system changes. On balance, it is
fair to say that the system of money changes every
20-30 years, typically with a painful transition
period. So if we look back over the past century, we
Enough of the hideous. We like Gold for a series of
technical and fundamental reasons, but are
cautious about raising our weighting in the run up
to ‘Tapering’. We think weakness of some of the
strong CA Emerging Market currencies is overdone,
and separately find some appeal to RMB and the
HKD (peg days are numbered in our view).
We won’t talk about fixed income excessively – our
negative views are well-flagged. But we have
started to look at corporate issues with short-term
maturity, and decent asset-backing (offshore
bonds), where spreads have started to widen. We
are also looking at some EM special situation bonds
– issues that have been sold down excessively in our
view, and now offer a sensible risk-reward.
(This is a summary of our views. If you are interested
in taking a look at our strategy talking-points
presentations, please e-mail [email protected])
Page 2 of 7
The Classic Gold Standard until 1914
having run from around 1870.
The First World War brought on a period
of transition; governments could not
afford to run a hard money standard and
fund a war.
At the end of the First War, attempts to
re-establish a diminished gold standard,
through the Gold Exchange Standard
lasted between 1919 and 1932.
Hard Money Conundrum: Dollar
Grumpy old men the World over talk about
declining standards in public life, education, et
cetera. You name it we have a problem with it.
This was followed by an almighty bout of
currency collapses, which only ended with
the culmination of the Second World War.
The introduction of Bretton Woods
system (1944), which hinged all
currencies to the dollar, and the dollar to
gold, offered up a period of stability.
Twin US deficits during the Vietnam War
precipitated Bretton Woods’ demise, with
the collapse of the London Gold Pool
(1967) and then the Nixon Shock (1972) –
Nixon unilaterally refused to honour the
agreement to convert Central Bank
reserve balances to gold.
A period of painful transition ensued, as
an ‘unanchored and undefined’ 2 dollar
resulted in spiralling inflation, spiking oil
prices, et cetera.
The dollar’s saving grace came in the form
of Paul Volker as Fed Chairman and his
hard money policies – enter the era of the
One can debate whether the transition
period post-the Dollar Standard began in
2001, or in 2007. But in our view a change
to the currency system is currently
underway, the real issue is whether the
transition will be orderly or disorderly.
I want to dwell briefly on the similarities between
quantitative easing and the end of Bretton Woods
(before Nixon closed the gold window). Countries
were prepared to trade with America, and allow its
debts to expand and funding its twin deficits (CA
and Fiscal) during the Vietnam War. They did this
because they ultimately believed that they had
recourse to Gold.
In some respects the same bears witness today.
Countries (notably China and Saudi Arabia) have
been prepared to hold on to their Dollars (Pounds,
etc), because there is at the core the thought that
QE is a temporary monetary measure. And they will
ultimately have recourse back to the original supply
of Dollars, rather than the diluted version post-QE.
The lesson of Bretton Woods is important: the
system can persist as long as confidence of the
trading counterparty remains. But when confidence
expires, the US is at the mercy of its trading
partners. The French lit the blue touch paper for
Bretton Woods by asking for their gold back3. And
while the Germans were supportive4, others were
not. Gold reserves were converted at a rapid rate
post the collapse of the London Gold Pool.
If anything demonstrated the value of the dollar’s
exorbitant privilege (to the US), it was when the oilproducing Arab states started demanding a lot
more dollars for their oil. It would be churlish to
suggest the debasement of the dollar post-Bretton
Woods and their demands were unrelated.
Fast forwarding to today, the question is thus not
what the US wants, but what the Chinese want and
what they will do. Will the Chinese continue to
suspend disbelief in the US$? To us it appears China
is not quite France and not quite Germany of the
Bretton Woods era.
Role of China
China’s version of the Blessing Letter was sent in
2010. China’s monetary support for the US has
been extraordinary, and quite reasonably it appears
now they wish to help themselves.
Before speculating on the strategic machinations of
so-called great men, it is worth noting that there is
a fairly natural process to the rise and fall of a
reserve currency’s status. For example, when the
US was the largest component of most countries’
external trade, it was sensible that they should
settle their trade balances through their most liquid
route – the US dollar. Consider for instance that
Indonesia and Thailand’s largest trade partner was
the US in the early 90s. And their trade with one
another, as well as financial flows, was relatively
James Grant uses this term, and we feel it is most apt
Page 3 of 7
small. As such, it made sense that they settle their
trade activity through the US$. And while they were
doing this, it made sense to hold US dollars in
Nowadays, the ascendancy of China as a trading
partner, particularly in Asia, means the RMB would
be natural a ‘stock’ as well as ‘flow’ currency . . .
were it be more open to international settlement.
Singapore, Vietnam. Add in India and Russia, and
China is pretty well surrounded by “unfriendlies”.
China has been part of discussions on regional
currency cooperation since the Asian Financial
Crisis, but most of these discussions were handled
by the hopelessly inept ASEAN and ADB – and hence
went nowhere. China took a driving role in greater
regional coordination during the Global Financial
Share of World trade
RMB Cross-Border trade Settlement as a % of
USD Share of Allocated International Reserves
Selected Countries’ Share of Trade with China
Natural shifts as a result of trade flows aside, policy
and politics are critical – and the Chinese have a
delicate balance to play. China is eager to expand
its international commercial and political roles, and
is clearly irked that their export earnings / savings /
reserves have been thoroughly diluted by the
Federal Reserve. However, it is extremely wary of
taking an action that could be (mis)interpreted –
after all it has a counterparty with military bases in
Korea, Japan, Taiwan, the Philippines, Australia,
Crisis and because China was now involved,
something happened. It was a win-win for China
they managed to shore up some of its regional
trading partners (all were looking shaky as global
markets collapsed), and managed to put some of its
stranded dollars to political work. Swap lines of
US$120bn were put in place, and have since been
expanded to US$240bn.
Ongoing internationalisation of the RMB has seen
RMB deposits in Hong Kong rise to US$100bn, and
Page 4 of 7
the RMB overtake the Euro as the second largest
trade finance currency. While the RMB is still a
minor international currency in terms of global
transactions, its acceleration has been impressive
(ranks 8th according to SWIFT up from 20th 3 years
ago). And with China now settling around 18% of its
trade in RMB (from zero in 2010), it seems likely
that the RMB turnover should rise from a level that
is currently similar to the SGD and exceed GBP in
fairly short order.
position, and put it in a good position for the
new monetary hegemony.
A number of commentators have argued cogently
that there are four outcomes for the USD.
A New Dollar Standard. Under this scenario,
the Fed would have to return to a hard money
approach akin to Volker’s. This seems
What is marvellous about China, is that when they
announce that they are going to do something they
usually do it – the internationalisation of the RMB
has been an example of this, and this will almost
certainly see it displace GBP as a reserve currency,
if not the Euro within the next few years.
An SDR Solution. The IMF suggested greater
use of the SDR as a trade / reserve currency
during the financial crisis. This would be
disastrous and short-lived, as it puts global
currency further into the hands of
bureaucrats, but in this case with even less
All is not entirely positive for the RMB. The state of
the domestic banking system is not positive for the
RMB. Domestic debt has risen extremely sharply.
But paradoxically, we are less concerned about
leverage in the financial system because China still
has an extremely tight capital account. This is an
uncomfortable argument to make, as we consider
closed capital accounts to be offensive (to liberty
and economic principles) AND we are arguing for
greater openness for China’s external accounts. But
in China’s case we make a rare exception.
A multi-reserve system. A multi-reserve
system holds appeal in a world where global
trade is more dispersed (less US centric). But
it is only appealing if at least one currency is
worthy of the name: reserve currency. One
hard currency would force discipline on them
all. Without that discipline, the multi-reserve
system would descend into chaos.
布雷頓森林協定第二部分 (Bretton Woods
II). Whether it takes place as a multi-lateral
treaty, or on a unilateral basis, we see a
renewed role for Gold in the monetary
system, as a way of enforcing some degree to
insurance against central bank profligacy. It
will take one government to move first.
Those of you who know us well will be surprised,
but we see a good argument for a monetisation/
recapitalisation of the domestic financial system,
and we see this as sensible prior to convertibility of
While we would abhor similar action by the Fed or
the BoE, we are supportive of this in China as:
The pain of monetisation would fall largely on
the oligarchs, and this is politically sensible,
Because China’s credit boom resulted in asset
investment (as opposed to US/UK’s
consumption boom), debt monetisation
would thus be more akin to re-equitisation of
existing assets, rather than pure debasement,
and most importantly,
It would place downward pressure on the
RMB, which would benefit its external trade
In our view China is preparing itself for the last two
scenarios, and we would be prepared to bet that
China will introduce some degree of Gold-backing
to smooth the transition . . . afterall they are buying
up the world’s supply of gold for a reason, and that
reason is not just to get rid of its dollars.
If we are right, the Dollar will slide as a reserve
currency, US citizens will have a bit of a rude
awakening as to how privileged they had been
under the dollar standard, and a harder money era
Governance Confessions and Resolutions
Having worked in Asia in the 1990s, we have
witnessed some truly egregious governance sins.
Page 5 of 7
Industrial plants that investors paid for but were
never built, asset sales to related parties prior to
bankruptcy, rigged bankruptcy auctions, bribed
loan officers, related party transaction that were
truly rapine, the list goes on (and on).
Investors rarely complained, but when they did,
their complaints to regulatory authorities were byand-large ignored (or worse, punished).
The Asian Financial Crisis changed this a little - the
extent of wrongdoing not only became obvious but
also had direct and negative knock-on effects on
the broader economies.
Since then, popular opinion would have you believe
that corporate governance has improved sharply.
Most countries have introduced a corporate
governance code, and mandate some form of
annual compliance with the code. Arguably, this has
narrowed the gap with Europe and the United
States. Though clearly this narrowing has not been
uniform: Singapore is probably better than most
European countries, whereas Korea and Indonesia
should really be considered in the same breath as
The process of “improving governance” ended up in
a very different place than was originally intended.
In essence, the institutional governance framework
has developed in such a way that is convenient for
fiduciaries to demonstrate adherence to a code,
rather than exercising due care and attention in
overseeing governance. Ultimately, the efforts of
the authors of the Cadbury (and subsequent)
reports, and pioneering fiduciaries like Hermes and
Calpers, have seen their ideas heavily diluted, if not
de jure, then certainly de facto.
It is extremely simple to illustrate this point.
Corporate governance is founded correcting an
agency problem: managers typically NOT managing
on behalf of shareholders but for their own benefit.
Governance theories grew from an attempt to
narrow / repair the mismatch between ownership
of an entity and its control so as to redress the
agency issue. Optimistically, one could argue that
this is still a work in process, and strides have been
made. We are more pessimistic, we feel the status
quo is poor and that most investors have been
lulled into a false sense of security, such that there
is little pressure to continue reform.
We are deeply frustrated by the theatrical
approach large fund management companies go to
demonstrate lip service to this concept; it is sadly
rare for large groups to agitate for a change to
dividend policy, for example. Occasionally the more
alarmingly dubious acquisition (for example)
precipitates a proxy vote, but most governance
items go through on the nod. It is almost unheard
of for large fund managers to call time to a CEOs
career. And one can argue that we have seen some
fairly startling examples of where just this
intervention is called for. Consider the global bank
that has had to pay 9 separate fines totalling close
to US$20bn, has set aside a further US$8bn for
future settlements, and where the CEO is not only
CEO but Chairman. Surely, here is someone who
should receive a sword for Christmas and be given
till January to fall on it.
No one will be surprised that we place a good part
of the blame for this at the doors of: 1) Lazy Officials
(regular readers will know what high esteem we
hold these jobsworths in). Tighter regulatory
frameworks and less “perfunctory” scrutiny would
help. 2) Monetary Policymakers. A by-product of
loose money is what Adam Smith called
overtrading, or too much speculative investment.
This is highlighted by a well-known quote about the
difference between investors and speculators.
Investors seek their performance from the
companies they invest in. Speculators get their
returns from the market performance. It is clear
that in an era of limitless and cheap money, we
have altogether too few of the former, and too
many of the latter. The former are incentivised to
vote and exercise their fiduciary duty, and the latter
It is not just the ambivalence toward exercising
fiduciary control from passive (ETFs) or transient
(high-velocity quant funds) investors, but the
degree of intermediation between an investor and
his underlying investment. Ask your private banker,
IFA or fund manager how they vote your shares,
Page 6 of 7
and you will likely get a proverbial shrug. At best,
you will be pointed to anodyne “Governance
Principles” brochures that are liberally sprayed
around by marketing departments. Sadly these
serve little practical purpose.
We confess that we are part of the problem . . . we
rarely vote at AGMs as 1) we can’t make difference
given our size, 2) we can’t get the issues we would
like to vote about on the agenda.
As an example, we are a (broadly) contented
investor in a well-managed company that will
remain nameless. Our one gripe is their persistent
management. We feel that running a less flabby
balance sheet, and by consequence introducing a
higher payout, would ultimately lead to a more
streamline management structure. When we lay
out our thoughts, we have a fairly cordial
discussion, but both sides know that our ability to
affect change is effectively zero.
We do tend to spot-check our investee companies
with random governance requests (like, please
send us the articles of association, and explain how
we might introduce a resolution at the AGM), and
gauge how they respond. This tends to surprise our
investee companies (which clearly demonstrates
how few people do even this). But unlike most of
our gripes, where we present an alternative, we
don’t have a particularly satisfying solution to this
So next year our New Year’s resolution will be to
vote all our shares at AGMs. Please make yours a
concerted effort to demand your private bankers,
IFAs, fund managers et cetera demonstrate that
they are actually exercising their fiduciary duty.
Wishing you all a very merry holiday season, yours
David, Alexander, João
Page 7 of 7