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Petrocapita - Thoughts on 2011

Petrocapita - Thoughts on 2011

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Published by Capita1
Western governments are hopelessly addicted to deficit financing while refusing to address looming funding issues - with apologies to the embarrassingly foolish Angela Merkel, politicians can no more successfully “battle” the markets than you and I can successfully “battle” gravity. Petrocapita is an investment trust built around the premise that demand for energy will continue to move prices higher over the long-term. Petrocapita was created to allow investors to add professionally managed oil & gas assets directly to their portfolios.
Western governments are hopelessly addicted to deficit financing while refusing to address looming funding issues - with apologies to the embarrassingly foolish Angela Merkel, politicians can no more successfully “battle” the markets than you and I can successfully “battle” gravity. Petrocapita is an investment trust built around the premise that demand for energy will continue to move prices higher over the long-term. Petrocapita was created to allow investors to add professionally managed oil & gas assets directly to their portfolios.

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Published by: Capita1 on Jan 12, 2011
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01/20/2011

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Petrocapita UpdateJanuary 2011
 
1
THE POLITICIANS AGAINST THE MARKETS
If it is possible for two short phrases to encapsulate theproblems we face in the west please give some consideration tothese as contenders:
“In some ways it’s a battle of the politicians against the markets.That’s how I do see it. But I’m determined to win this battle.”
  Angela Merkel, German Chancellor
“How did you go bankrupt? Two ways. Gradually, thensuddenly.”
Ernest Hemingway Western governments are hopelessly addicted to decitnancing while refusing to address looming funding issues - withapologies to the embarrassingly foolish Angela Merkel, politicianscan no more successfully “battle” the markets than you and Ican successfully “battle” gravity. How long will governmentscontinue to ignore the fact that countries, like people, canand do go bankrupt - often quite suddenly as Mr. Hemingwayreminds us.Going into 2011 I thought it might be useful to revisit somethemes from my 2010 commentaries...The nancial sector has not been stabilizedWestern government balance sheets are seriously impairedand deterioratingCentral banks are monetizing government decitsThe deation versus ination debateGlobal growth will not be uniformGovernment pension funds - perhaps not gold plated afterall?Is the Renminbi peg one of the last things keeping westerncurrencies alive?Ask not how high hard assets like gold can rise; rather ask how low at currencies can fall 
Petrocapita Update
 
2
Petrocapita Update (continued)
My reason for shamelessly plagiarizing old material isa belief that these critical issues that we face in thewest remain largely unaddressed - worse yet manyare actually growing. As such they are worth anotherlook if only to act as counterpoints to the inevitableavalanche of “bullish, equity centric, long only”analysis that invariably emanates from the banks,mutual funds, and the mainstream nancial media atthe start of every new year.
THE FINANCIAL SECTOR HAS NOT BEENSTABILIZED
By subsidizing failure and creating even greatermoral hazard the bailouts will increase the amountof mispriced risk in the system - not reduce it. Thenancial sector has barely begun the process of recognizing and accurately provisioning for existinglosses. Examples of large yet mostly ignoredexposures abound. Here are just two:Commercial real estate debtNon-sovereign, government debt - e.g. municipalbondsRest assured that current low interest rates will createa host of new problems. Problems that are likely toarise on a scale and in ways that we cannot foreseetoday - the law of unintended consequences willnot be denied. Ask yourself what unsound risks arebeing taken on to bank, hedge fund, corporate andpersonal balance sheets today because long-termfunding rates are under 3% in many cases?
WESTERN GOVERNMENT BALANCE SHEETS ARE SERIOUSLY IMPAIRED AND DETERIORATING
EU and US net liabilities add up to around $135trillion - approximately four times the capitalization of the world’s equity markets. On top of this mountainof existing liabilities, scal decits are now risingnothing short of spectacularly. The US federal decitis now over 10% of GDP. These are the worst levelssince WWII for the US. By comparison, the US decitin 2007 was around 2% and peaked at around 4%during the inationary 1970s. Such massive debtscan probably only be repaid with some combinationof ination, tax increases and/or forced austerity -with the smart money betting on ination.
CENTRAL BANKS ARE MONETIZINGGOVERNMENT DEFICITS
By printing money to buy distressed assets, centralbanks are monetizing government decits. Themechanism is simple - recipient banks take thenewly printed money they receive in exchangefor their badly impaired assets and buy sovereigndebt. Indirect monetization to be sure, but moneyis fungible so monetization nonetheless. I wouldalso argue that this monetization is an explicit policyobjective. Don’t believe me? Here is a summary of some recent central bank printing activity:The Bank of England printed £200bn = 2009 UK government decit.The US Federal Reserve printed $1.25 trillion =2009 US government decitECB printing €750 for Greek bailout = 2009 EU27 government decit

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