Welcome to the second quarter of 2013 and a continuation of the new normal. Numerous debates have ensued over recent years about Quantitative Easing (QE) and how much money is enough (or too much?). Much has been written by experts and novices alike about the unintended consequences of all the money printing in the Western world but no one really has a clue. The last time we were in the quagmire or near the end of the “winter” deflationary period was in the late 1940’s following the Second World War. This was followed by a “spring” of expansion and rising inflation. But no one has all the answers.
We recently wrote a weekly research piece about the history of the Nile River and the optimum amount of water in it as a direct comparison to the QE situation. The fertile land on each side of the Nile feeds millions of people except during periods of serious drought or plague. The point of the piece was to examine the effects of a change (significant rise) in the water level on the people dependent on the Nile. An immediate effect would be that the fertility of the cultivable land bordering the Nile would increase, producing higher crop yields, benefitting the farmers. However, there would be no direct benefit to those Bedouins living in the desert areas that lie to the north, beyond where the fertile land gives way to mountain ranges on each side of the Nile. Too large a rise in the water level, however, could also destroy crops along the Nile. This would impact not only the valley farmers but also the Bedouins who would be unable to trade their goods for food. On the other hand, too little water would also be damaging for the country’s economy.
“Just as there is an optimum amount of water in Egypt’s Nile River, there may be an ideal quantity of money in a capitalistic system” says Marc Faber in his most recent Gloom, Boom and Doom Report. However we do not know the correct level of money in our capitalistic system and many of the unintended consequences of money printed are yet to be seen. One immediate effect is that that the rich are getting richer with asset inflation. At the same time lower real income levels of the working class plus a decline in housing affordability is leading to a rising Gini coefficient – with unknown consequences. Perhaps we could look at modern Egypt and the rest of the ‘Arab Spring’ uprisings for insight as to possible outcomes! It should be noted that river levels will always over and under shoot, just like inflation and deflation. Your portfolio manager must always be attempting to stay ahead of these strategic decisions and fine tune the day to day tactical noise in markets.
In this Quarterly we try and help our clients understand our perspectives on some key issues in investing. Joanne Baynham reviews the benefits of targeting an investment return while Professor Evan Gilbert reviews the nature, and relative advantages, of Passive vs. Active investment products and managers. Armien Diem presents the case for high conviction investment strategies in equities. Nina Campbell looks at space tourism and argues that we should rather apply our energies to issues closer to home. As usual, we review our current asset allocation before finishing with an introduction to our new team members, Rob Macdonald and Riaan Maartens.
Quarterly Newsletter - Q1, 2013
