Our view on global investment markets:

October 2010: Here it comes....

Keith Dicker, CFA
Chief Investment Officer
keithdicker@IceCapAssetManagement.com
www.IceCapAssetManagement.com

First publication June 2010

October 2010: Here it comes...
I can see the future
As an investment manager, I have a skill that is extremely valuable
(it’s worth gazillions), highly desired (the Russians and the Chinese
want it) and rather unique (very few punters in the local pubs have it)
– I can see the future.
Using this talent, I know for certain that 20 years from now my
children will ask me the following all important question: “Dad, why
did Mom decide to marry you?”
The answer? Well, I’m definitely not tall nor dark. No one has ever
referred to me as being handsome. Athletic? No. Witty? A wise-ass
maybe, but certainly not witty. Then why? What made her say yes?
The answer – Star Trek.
While you won’t find us parading around with pointed ears, or
attending conventions in Vegas, we have always enjoyed the show. It
was truly ahead of its time. Apologies to the creators of the
Blackberry, but I’m pretty sure Captain Kirk and the gang were
touting around the same device back in 1966 – a full 40 years before
the rest of us.
Of course, everyone knows the crew of the Enterprise always
prevailed over the bad guy. But (and this is a big but), there was one
bad guy that almost won and his name was Kahn. For our non-Trekkie
readers, Kahn was played by Ricardo Montalban (the boss from
Fantasy Island fame) and he was the baddest dude in the universe.
Fortunately for the Federation of Planets, Kahn also had one bad trait
- stubbornness. You see, years earlier Captain Kirk defeated Kahn and
banished him to a remote planet for the rest of his life. Years pass,
and out of the blue Kahn emerges, more powerful than ever with one
objective – get even with Kirk.
Without making a long story longer, Kahn actually has the Enterprise
defeated but his preoccupation with destroying Kirk as well, blinded
him to a counterattack. From his Captain’s chair, watching Kahn on his
120 inch plasma TV (another early invention by Star Trek), the good
Captain pulled the trigger on the biggest giant death ray known to
mankind whispering “Here it comes” – and with that, Kahn was
gone.
Fast forward to October 2010. Ben Bernanke, the Chairman of the
Federal Reserve (the most powerful financial institution on the
planet) is also sitting in his captain’s chair, watching a 120 inch plasma
TV and he too is getting ready to pull the trigger on his own version of
“Here it comes.” What exactly is “it”? Well, “it” refers to a big
helicopter filled to the blades with money – Helicopter Ben, you see,
is about to drop the single biggest financial bomb ever; anywhere
from $500 billion to $7 trillion onto America.
Exactly 2 years ago, Helicopter Ben made his first “Here it comes”
announcement and started the first ever Quantitative Easing (or
money printing) program by the good ole US of A. At that time, Ben
and boys printed $1.2 trillion to help save the World (see Chart 1 ).
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October 2010: Here it comes...
Chart 1: Securities held by the US Federal Reserve This is
$2,500,000
fun !

$2,300,000

$2,100,000

The US Federal
$1,900,000
Reserve
$1,700,000
Printed
Money:
$1,500,000 $1.25 Trillion
to help
$1,300,000 stimulate the
economy
$1,100,000

$900,000
Leaving nothing for the people who need it
Source: US Federal Reserve, IceCap Asset Management Limited
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October 2010: Here it comes...
and, it involves wet pants
At that time, the financial world was in turmoil. We all know the story
by now – housing markets collapsed, banks collapsed, soufflés
collapsed and retirement plans collapsed. Someone had to take
control and start to rebuild – enter Mr. Bernanke and the gang.
Back then they had a decision to make – who will be bailed out and
who would pay for it. There is no doubt that the Big Banks (including
some French & German banks, and let’s not forget the Chinese)
would be bailed out and there was never any doubt about who would
pay for it – the American tax payer.
On a normal planet, these banks would have declared bankruptcy,
and the stock and bond holders of these companies would have lost
their shirts. That’s the way capitalism works. The only area where the
long dangly arm of the government should have been involved was
with those who held GICs and Term Deposits at the banks. These are
the people who should have been helped. Yes, in this situation,
chaos would surely have existed, but the Great Recession of 2007
would have turned into the Great Recovery of 2010.
Think about this for a minute; close down 75% of the American
banks, post an ad in the Globe & Mail, Financial Times and Wall
Street Journal asking who would like to open a bank in the US. The
result would have been 100s of shiny, new, clean, healthy banks
ready to kick-start the economy (come to think about it, IceCap Bank
sounds nice). Instead we have the following:
• House prices still declining
• 8 million people still looking for work
• Budget deficit approaching $ 1.3 Trillion
• States & cities issuing IOUs
• Capital spending by small businesses at a 35 year low
• Big banks sitting on $1.2 Trillion in cash and refusing to lend
• Senior citizens trying to live on 0% interest from their savings
Is there anyone else who finds this to be a little weird? The first
attempt of Quantitative Easing was suppose to be a panacea. The
economy was suppose to be growing at 8%, unemployment was
suppose to be down to 7% and housing prices should have been
increasing. Instead, we are witnessing a bug hitting a windshield in
slow motion.
Recall our July 2010 Outlook “Somewhere over the rainbow” where
we first described Mr. Bernanke’s attempt at Quantitative Easing as
being equivalent to wetting his pants to stay warm. Mr. Bernanke
was then humble enough to follow this with a slight trickle down his
leg which was covered in our August Outlook “Oops...I did it again.”
Here we are now in October 2010 and the global media has decided
that Bernanke’s next version of money printing shall be called
Quantitative Easing 2, or QE2 for short. While that has a nice ring to
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October 2010: Here it comes...
yet, money printing didn’t work here, or there
20% Chart 2: US Unemployment Rate (U6) 1,600 Chart 3: US New Home Sales

18% 17% Unemployment 1,400

16% 1,200

14% 1,000

12% 800

10% 600

8% 400
Fewest new houses sold EVER
6% 200
Source: US Bureau of Labor Statistics, U6 Rate, IceCap Asset Management Limited Source: US Commerce Department, IceCap Asset Management Limited
4% 0

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it, we’ll stick with the pants wetting theme (because that is what it (apologies to my fellow Trekkies) Star Trek isn’t real. Bernanke
really is) and call it Pee2. however, is very real and he is conducting the World’s biggest science
experiment – completely funded by the American taxpayers.
The probability of the economy not working out the way the rose-
coloured glasses wearing economists are telling you is actually quite It has been written before that the definition of insanity is doing the
higher than you would think. Mr. Bernanke knows this and in some same thing over and over again and expecting a different outcome.
aspects, you have to admire the guy – just as Kahn was preoccupied With QE2 coming, why would the banks pull away their net and not
with destroying Captain Kirk, Bernanke is just as determined to catch the free money? In other words, why should QE2 work when
destroy the threat of deflation. The difference being of course, QE1 didn’t work?

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October 2010: Here it comes...
and now we have a bonanza for lawyers!
The real challenge today is not a lack of money or liquidity in the
system, rather, the real problem is a lack of demand – for the
recovery to occur, people and businesses must have a desire (or
need) to borrow and spend. Take a look a Chart 2 and Chart 3. It’s
pretty clear why neither people nor businesses are spending.
Although it’s nice of Mr. Bernanke to make money even cheaper, the
result will once again be risk-free profits for the banks. For America to
recover the government has to create attractive conditions to
encourage companies to invest and hire again. Cheap financing has
already been established, the challenge baton now should be passed
along to the folks in Washington. However, considering the current
political landscape, it will be a surprise how any spending program or
tax cut will become effective.
The bottom line: regardless of the potential size of QE2 it will not
make things right. We ask: when will this madness stop?
The Latest Goof-up
Previously, we’ve written about the US housing market crapping out
and how the big US banks are essentially insolvent because of it. As a
matter of fact, if it wasn’t for a change to some accounting rules, the
banks would have had to close their doors. There really isn’t much
left to say, unless of course we discover that the entire mortgage
approval process had been built out of duct tape. Correction, let’s
make that scotch tape.
Over the last few days, virtually the entire foreclosure system has
been frozen due to dodgy paper work by the banks. Few people
understand all of the details, but we can tell you this: of the 12 legal
steps required to buy and sell a house, it turns out that about 12 of
those steps were performed illegally.
While Obama has refused to declare a moratorium on foreclosures, in
effect he doesn’t have to. No one in their right mind is going to buy a
house until this has been cleared up. If you do proceed with a
purchase, there is a chance the house you just purchased didn’t
legally belong to the seller to start with. The immediate result is
about $1 trillion worth of houses that will exist in limbo until the
issue is resolved. If you are a banker – good luck with that. If you are
a real estate lawyer, this is your chance of a life-time. Pack your bags
head to Florida, California or Nevada – Obama needs you.
Our strategy
A few weeks ago Mr. Bernanke confirmed that he would once again
start the printing press. Since then stocks, bonds, commodities, gold
and every currency except the USD all increased; the key driver of the
returns isn’t an improving economy and profits for companies, rather
it is the systematic depreciation of the USD – that’s what printing
money does for you.
Presently, sentiment for the USD is extremely pessimistic (see Chart
4) and we believe this will reverse itself soon enough causing a
correction in most other asset classes. Our strategy is to overweight
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October 2010:
Chart 4: US Dollar Sentiment
Source: Ned Davis Research
Here it comes...
bonds, underweight commodities and
stocks. We continue to like gold and will
look to add to positions during periods of
weakness.
If you’d like to chat further about our
view and our unique investment
solutions, please feel to contact:
John Corney at
johncorney@IceCapAssetManagement.com
or
Keith Dicker at
keithdicker@IceCapAssetManagement.com
Thank you for sharing your time with us.
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