Our view on global investment markets:
June 2013 – Scrapbooking
Keith Dicker, CFAChief Investment Officerkeithdicker@IceCapAssetManagement.com www.IceCapAssetManagement.com
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Scissors and glue
www.IceCapAssetManagement.comIn the investment world, it’s usually wise to buy low and sell high. Yet,feverish, money making enthusiasm often results in many buying highand then never selling until it is too late. This is a human trait, andlike it or not it will always exist in the money world. In the eyes of many, all was very good in the investment world. Buy stocks, morestocks and then even more stocks and you’ll be fine.On June 19, 2013 this all changed.You’ll recall it was just a few weeks back when we published “
” which reiterated our view that all financial markets aresignificantly affected by the money printing ways of our centralbanks. On June 19, 2013 Ben Bernanke announced that later this yearthe Federal Reserve would very likely begin to print less money thanwhat they are printing today, in effect resulting in many investorsrefusing to catch the bouncing ball. Early estimates have the moneyprinting being reduced from $85 billion/month to $65 billion/month.This pronouncement was enough to send all financial markets into atizzy with everything declining, except for the US Dollar. Investorsmust understand that this is a game changer. Whether the Federal
June 2013 Scrapbooking
When it comes to money making, nothing compares to Europeanfootball. This money making machine is always on, spans the entireplanet, and seems to have championship matches on a weekly basis.In this league, life is very good.Better still is America’s National Football League. This money oozing juggernaut produces billion dollar stadiums, millionaire players, $15beer and millions of rabid fans to consume it all. In this league, life iseven better.Yet, neither of these hugely popular machines can come close to theexplosive growth of the latest American export craze –
scrapbooking
.Yes, while goooooaaaaals and touch downs can hold fans and Vegasto the edge of their seats, nothing it seems, is able to beat thepersonal satisfaction of using scissors, paper and glue to score yourvery own goals, while preserving memories that will last forever.As we believe in sharing, this month IceCap reveals for the very firsttime, our very own contribution to the world of scrapbooking.
In early March 2013
, we concluded global stock markets were duefor a decline or a pause at the very least. Since that time, globaldeveloped markets have declined about -3%, while emerging marketsas a whole have declined -15%. Back then, the reason for our concernwas soaring sentiment – everyone, including your taxi driver andbarista were urging you to buy stocks.
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$4.1 Trillion is a lot of money
www.IceCapAssetManagement.comReserve actually carries through with this plan is open to debate. Oneconsideration has to be the fact that this “tapering” of the moneyprinting scheme is dependent upon employment, growth andinflation all moving inline with the Fed’s projections. Now,considering the Federal Reserve completely missed the Tech Bubble,then missed again on the Housing Bubble, and as shown in
Chart 1
are usually too optimistic with their economic projections, there is avery big chance the mighty US recovery may not exactly pan out theway they are projecting.Perhaps the most important observation from the “tapering”announcement was the reaction by all financial markets to what wasin reality a very small move by the Federal Reserve. First, wecompletely agree that the beginning of the end to money printing isnot immaterial by any means – after all, the money printing schemehad to end at some point.In reality however, the actual effect of this slowdown in moneyprinting in the grand scheme of things is small indeed. There are twoimportant points to consider. First, instead of printing $1.02 trillion ayear, they may only print $780 billion a year - the pile of fake moneywill still be increasing.Second, the actual change required to restore the Federal Reserve toits original monetary base is significant, very significant. If the Fedstopped printing money altogether in mid 2014 – they would have anaccumulated balance sheet of about $4.1 trillion (see
Chart 2
next
June 2013 Scrapbooking
Source: advisorperspective.com
Chart 1: Federal Reserve GDP Estimates vs actual
page). Before all of this nonsense money printing started, the FederalReserve’s Balance on August 8, 2007 was only $869 billion. We mustremember, that stopping money printing is only the first step – thesecond step is even more onerous and involves reducing the balancesheet back to a more normal level. To provide further clarification tothis pretty important point – the Fed will have to siphon $3.1TRILLION out of the system.Now considering financial markets had a conniption over less moneybeing printed, what will happen should the Federal Reserve actuallytry a return to normalcy?Should the Fed continue on this path to monetary enlightenment, it’sgoing to become a bit messy out there. Considering this fact,combined with our view that the Fed’s economic projections are toooptimistic, and the likelihood of Janet Yellen becoming the nextChairperson, there’s a pretty good chance we may actually see evenmore money printing – not less.
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