The Global Rebalancing
Echo From the Alps | 2/2013
August 2013 Investment Update by Daniel Zurbrügg, Alpine Atlantic Global Asset Management AG
Dear Readers, Making decisions is never easy. This is true for financial and business investments but making decisions in other areas of life is also a difficult process. Weighing pros and cons against each other is challenging enough but eventually making a decision is often the hardest part of the process. Once a decision has been taken and a proper long-term plan has been established, ones focus moves to executing and monitoring. Executing a long-term plan or strategy naturally involves a regular critical review of the process. Measuring progress is often difficult, there are times when things go very positively and smoothly, but sometimes progress is slow and momentum negative. We all have experience with that in our own lives.
These moments and the decisions taken during times of difficulty are often the ones that yield the greatest returns and benefits; this is true for life in general and for financial investments in particular. Consider for example an athlete, let’s say a marathon runner. Preparing for a marathon means investing a lot of time, energy and discipline. During the preparation period, there will be good days and bad days, but just because progress might be slow sometimes, a good athlete never quits. Instead they are critically reviewing training and making slight modifications along the way. The parallels to financial investing are obvious; also in this area we need discipline and focus on a long-term goal. This helps us to deal with challenges that will come up over time and these challenges will come for sure, sooner or later.
The last couple of years have brought enormous challenges to the world economy and the global financial system. What started as a housing boom in the United States more than a decade ago, eventually became a worldwide problem when the housing bubble burst. With the collapse of the U.S. housing market, a lot of banks were sitting on bad loans and the stability of the global financial system was at risk, especially after the bankruptcy of Lehman Brothers, which sent shock waves across global markets. The result was a global banking crisis and banks almost stopped lending to each other because everybody was concerned with counterparty risk. We all know the consequences this had in the last few years. Governments eventually jumped in to bail out banks and financial institutions that were becoming insolvent. This caused finances of many governments to turn from bad to worse. In an attempt to stabilize the global financial system, and with it the global economy, central banks around the world have been providing liquidity like never before, which is now visible in the massively enlarged balance sheets of these central banks. Governments on the other hand have been taking on more and more debt since it is very difficult for them to cut costs given the often inefficient dynamics of politics. This has led to an intense debate about whether or not spending cuts and austerity measures are the right way out of this misery.
The current debt burden of many nations is very problematic but in order to assess whether a debt problem might become unsustainable, we need to put it in the right context and also compare it to the GDP of a given country and the net assets/ wealth of its households. Some countries can afford a higher debt level, since they have more wealth and higher economic profitability or per capita GDP. Over the last twelve months, the global sovereign debt crisis has been the main market theme. Going forward the main question is whether those concerns intensify again or whether markets come to the conclusion that the world is finding a way out of this debt trap. In this issue we are going to highlight a new debt story that worries us even more than the international sovereign debt situation and that is the situation in the municipal bond market in the U.S. The recent bankruptcy of Detroit is just one example of this huge problem and more cities are likely to follow Detroit. We think there could be a real storm coming in the municipal bond market and we think investors have to be very careful. We are going to look at Detroit’s bankruptcy and its implication later in this issue.
One of the major market stories in recent months has been the drop in gold prices to levels around USD 1200/ounce. In recent weeks the price moved back up to prices around USD 1300/ ounce. The correction seen in the previous quarter was caused by large scale liquidation of gold positions, especially by funds/ETF’s as well as by speculative investors. At the same time the intense discussions and speculation about a possible end of the Fed’s asset purchase program caused more downward pressure on gold prices. With market prices having moved to levels not too far away from average global productions costs (USD 1050), the downside looks to be better protected. It is not unusual to find a market where prices can temporarily fall below production costs, but in the long-run this is not sustainable. We take the recovery of gold prices back up to levels above USD 1300 as a sign that the supply/ demand situation is about to change, shorting precious metals and commodities has been a very popular trade in recent months but it looks as if this is coming to an end. It looks to us as if gold is currently trading in a trendless range without many drivers out there that can move it back up to the levels we had. So what is ahead for precious metals in coming months? We are going to review this later in this investment update.
Growth in China is slowing and currently the economy is growing at a rate of 7.5% per year. While this is still very good by western standards, it represents the weakest growth rates in China in several years. The effects of this can be felt across markets already and especially the commodity markets where most prices have corrected sharply. The Chinese government seems to be determined to keep growth at current levels, however, the main story is that the structure of the Chinese economy is changing. There is a clear trend and an even clearer commitment from the government to move the economy towards a more sustainable model where consumption is becoming an increasingly important driver of the economy.
We live in a world that is trying to rebalance from the many imbalances we have built up in the last couple of decades. It is very critical that investors understand this development and the opportunities created thereof.
We hope you enjoy reading our latest investment update. Download it here.
With the very best regards from Switzerland,