Spielbank Bremen Adresse - Shrine circus orleans casino
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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 quite differently. 1 Real inflation not just the rubbish produced by Stasi statisticians 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 healthy. (Thanks to German 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 process. 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 had: 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]) Currency Timeline 1900 1914 Transition 1919 1932 Page 2 of 7 Gold Exchange Standard Transition 1945 Transition 1967-1971 Bretton Woods 1980 2007 Dollar Standard Transition To Where? 1. The Classic Gold Standard until 1914 having run from around 1870. 2. The First World War brought on a period of transition; governments could not afford to run a hard money standard and fund a war. 3. 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. Gold Standard 4. This was followed by an almighty bout of currency collapses, which only ended with the culmination of the Second World War. 5. 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. 6. 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. 7. A period of painful transition ensued, as an ‘unanchored and undefined’ 2 dollar resulted in spiralling inflation, spiking oil prices, et cetera. 8. 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 Dollar Standard. 9. 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$? To us it appears China is not quite France and not quite Germany of the Bretton Woods era. Role of China China’s version of the Blessing Letter was sent in 2010. China’s monetary support for the US has been extraordinary, and quite reasonably it appears now they wish to help themselves. Before speculating on the strategic machinations of so-called great men, it is worth noting that there is a fairly natural process to the rise and fall of a reserve currency’s status. For example, when the US was the largest component of most countries’ external trade, it was sensible that they should settle their trade balances through their most liquid route – the US dollar. Consider for instance that Indonesia and Thailand’s largest trade partner was the US in the early 90s. And their trade with one another, as well as financial flows, was relatively 4 2 James Grant uses this term, and we feel it is most apt 3 Charles de Gaulle’s Famous Speech http://www.youtube.com/watch?v=i-g2iGskFPE http://www.bundesbank.de/Redaktion/EN/Standardarti kel/Topics/2013_01_18_blessing_letter.html?nn=15726 4#f7 Page 3 of 7 small. As such, it made sense that they settle their trade activity through the US$. And while they were doing this, it made sense to hold US dollars in reserve. 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 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 Source: PoBC Dec/11 Jan/10 Feb/08 Mar/06 Apr/04 May/02 Nov/90 Aug/13 Apr/13 Dec/12 Apr/12 Aug/12 Dec/11 Apr/11 Aug/11 Dec/10 Apr/10 Aug/10 Dec/09 0% Jul/98 5% US China Jun/00 10% Oct/92 15% Sep/94 20% Aug/96 RMB Cross-Border trade Settlement as a % of Chinese Trade Source: IMF USD Share of Allocated International Reserves Selected Countries’ Share of Trade with China 75% 30% Australia Brazil Japan ASEAN-3 25% 70% 20% 65% 15% 10% 60% 5% Nov/11 Feb/10 May/08 Aug/06 Nov/04 Feb/03 May/01 Aug/99 Nov/97 Feb/96 May/94 Nov/90 Dec/12 Sep/11 Jun/10 Dec/07 Mar/09 Sep/06 Jun/05 Mar/04 Dec/02 Jun/00 Sep/01 Mar/99 Aug/92 0% 55% Source: IMF Source: IMF 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. Endgame 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 politically unfeasible. 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 democratic control. 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 the RMB. 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 should ensue. 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 Nigeria. 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 are not. 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 under-leverage and excessive layers of 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 problem. 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 sincerely, David, Alexander, João Page 7 of 7