Investing in a world without capitalism

Presentation Structure

1.

The situation today

1.1 Too much debt 1.2 Weak growth 1.3 A crippled financial system 1.4 Incompetent policymakers 2.

What will happen

3.

Investment opportunities 3

4 5 6 7

8 10

1. The situation today

•

Too much debt in the developed countries with large ongoing fiscal deficits.

•

Weak global growth even with extraordinary monetary and fiscal stimulus.

•

A crippled financial system with huge unrecognized losses.

•

Incompetent policymakers who lack strategic vision.

1.1 Too much debt

The developed world is saddled with huge levels of sovereign and private debt. Even worse, most growth is coming from the assumption of more debt.

The ability to repay is questionable in some of the countries. The lack of austerity suggests unwillingness to repay.

Sources: Bloomberg, International Monetary Fund (IMF), Organisation for Economic Co-Operation and Development (OECD) websites.

1.2 Weak growth

The high debt levels are precluding a normal economic recovery with its attendant job creation. This calls into question the sustainability of any recovery absent record stimulus.

Job growth in the “recovery” since 2008 in the U.S. has been the weakest in the post-war period. The results are even worse overseas. Source: http://www.calculatedriskblog.com/2012/04/march-employment-report-120000-jobs-82.html.

1.3 A crippled financial system

Banks in the Eurozone and the U.S. have significant issues of capital adequacy. • • • Subprime debt losses from 2007-2008 not fully recognized. Falling home prices mean future mortgage impairment. Huge real estate inventories held by banks not written down to market valuations. • Potential sovereign debt losses in Europe and elsewhere likely to reduce capital even more.

The large global banks need a minimum of about $700 billion in additional capital to meet new Basel III rules. They may also have to sell over $2.25 billion in assets to meet the liquidity guidelines set up in Basel III.

1.4 Incompetent policymakers

• • • Kick the can down the road with short-term fixes. (The U.S. approach with Quantitative Easing, Europe with the European Stability Mechanism.) Blame someone else. (Ban short sales, financial transaction taxes, tax the rich for their “fair share.”) Doctor the data and deny reality. (The U.S. has “created” jobs and has “emerged from recession” even though the raw data do not support those facts.) Policymakers have demonstrated a complete lack of strategic vision, and are unwilling, even today, to acknowledge reality.

2. What will happen

1.

• • •

The European crisis will get worse.

Austerity with too much debt is a recipe for disaster. No austerity means Germany pays for everyone. Quantitative easing cannot boost growth much. Need very low interest rates, austerity and pro-growth structural reforms with weak growth for 5 years or more. Only possible with determined and visionary leadership, coupled with public support.

2.

• •

China and most other EM countries are slowing.

China is having an economic landing. Odds are it will be a hard landing. Growth simply through monetary expansion and investment is not possible – inflation is rampant, even with excess capacity in export industries.

2. What will happen

3.

• • •

U.S. growth will falter.

No attempt has been made to rein in debt spending. The main candidates for the Presidency intend to increase spending and/or cut taxes. This is US style “austerity.” Growth unlikely without huge monetary and fiscal support. U.S. is rapidly behaving like a banana republic of yore. Hyperinflation or a deflationary bust are possible outcomes.

4.

•

Japan’s day of reckoning comes closer.

Will the Japanese try austerity or will they weaken the yen and try to export their way out of trouble? A much weaker yen could spawn a global crisis.

3. Investment opportunities

1.

• •

Buy safe assets where capital will be preserved

. Buy Norwegian debt which offers great fundamentals and high rates with a stable currency. Buy Australian, Canadian, Korean and Swedish debt, which look relatively attractive too.

2.

Emerging markets in medium to long term will

• •

outperform the developed world. A short term correction is likely and will provide a good entry

•

point.

EM currencies are very undervalued vs. the developed world. Buy selected EM currencies such as the INR and RMB. EM debt risk is mispriced. Buy the debt of China and Korea, which offer higher yields than the U.S., even in dollars. EM equities are attractive as longs. Average into a multi-year long position.

3. Investment opportunities

3.

• •

Buy hard assets. Gold and energy look very attractive.

Money printing in the developed world will cause an appreciation in commodity prices. Gold and energy stocks are attractive with huge potential upside.

4.

• •

Sell the debt of countries which are trying to create inflation by printing money.

Short U.S. 10-year Treasuries. At less than 2% yields, they provide no compensation for risk, especially with the Fed printing money without limit. Short Japanese and U.K. government bonds. Both countries might soon face solvency issues like Spain and Italy.

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Certain information contained herein has been supplied to TIM by third parties. While TIM believes such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete.

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