"Do You Believe In Miracles": IceCap Asset Management Monthly Letter

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From IceCap Asset Management

Do You Believe In Miracles?

The odds of winning were slim and none. Avoiding embarrassment was the real objective, but then something happened. Momentum changed and the rag-tag bunch of American college hockey players shocked not only the Soviets and their 1980 Big Red Machine, but the entire sports World.

When seemingly faced with the impossible, America always perseveres and finds a way to win. After winning the global economic game for the better part of 100 years, America is once again on the ropes and no one is giving her any hopes at winning, or even surviving for that matter.

America’s debt levels are disastrous. It has no money to pay future pensions and healthcare. Economic growth is anemic. Meanwhile, more Americans than at any other time in history reply upon food stamps. And to make matters even more dire, it is only the decision to print trillions of new dollar bills that is holding everything together.

Just as America’s rock is about to hit its American bottom, you must ask “Do you believe in miracles”? And, the short answer is – yes.

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Unfortunately, there’s also some bad news. This upward surge in USD does not reflect a surging US economy or an improving fiscal condition. To see the canary in the American coal mine, look no further than Chart 1.

Ultimately, once the effects of money printing and the poor handling of debt levels has played itself out in Europe, Britain and Japan, the US too will bare the brunt of its similar strategies. For now however, the US is last in the long line of financial heart ache.

To fully understand how the global debt crisis plays out however, investors must be willing to step outside of their own domestic  economy and financial markets, and view the World from an independent perspective. Unfortunately in financial analysis, all too often  investors become one or two dimensional at best. To really up your investment game, you need to broaden your perspective and see  through the daily grind of financial pomp and circumstance.

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While we disagree with recent conjecture that central banks will one day soon put an end to their money printing ways, one thing is certain – the effect on emerging markets will not be kind. While much discussion is focused on US domestic financial markets, the American withdrawal of liquidity will have a severe effect on emerging markets.

To further expand your financial horizons, one must also be contemplating the effect of Japan’s newly embraced money printing  programs. Whereas America has committed to printing $2.67 billion a day to help create a few jobs, the Japanese have taken money printing to an entirely new level. Their program has one goal – significantly decrease the value of the Japanese Yen.

Think South Korea and other Asian exporting countries are happy with Japan’s attempt to drastically cut the value of the Yen? Not a chance. You can be certain that as the Yen continues to weaken, South Korea and others will also attempt to debase their currencies. And just to be clear, there is nothing like a good old currency crisis to help nudge money to safer areas.

Understanding how these dynamics play out is the key to correctly forecasting the long-term direction of financial markets and why ultimately the US Dollar will strengthen relative to the Euro, Yen and British Pound.

 

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