"The (Other) Shoe" - IceCap Monthly Commentary

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Select excerpts from this month's client letter by IceCap Asset Management

The World is Booming

If one were only to look at the stock market and the buzz within New York, London, San Francisco, Sydney or Toronto; they would conclude that the world is indeed booming.

After all, people say the stock market is a leading indicator and that is telling us that the world is bursting at the seams with accelerating growth. In addition, business in restaurants, shops and real estate in these major cities are also off the charts. And of course, the leading financial news stations are tripping over themselves with gushes of great news.

Now, we don’t mean to be the party pooper; however one must understand what is really happening to truly appreciate the still, slow moving and delicate economic pickle the world has been stuck with. For starters, these major cities are always booming. When is the traffic not flowing, when are the restaurants not chalk full, and when are the brownstones not expensive? Instead, for a better picture of economic life, feel free to visit St. Louis, Winnipeg, or Marseilles and we’re sure you’ll have no problems at all securing that dinner reservation.

Peeling away the top layer of fabulous news resulting from the stock market, we cannot help but see that the deep structural issues associated with the 2008-09 crisis remain. The mountains of bad debt have simply shifted away from specific investors, to governments and their tax payers.

From a global perspective, this transfer of bad debt from specific investors to tax payers is THE most important issue to understand. In simpler terms, and unknown to many, the bad debt has been spread around the world for everyone to share. Yes, socialism has arrived and few in our capitalistic world have noticed.

Now, if we said “Okay the bad debt has been spread around, let’s everyone take losses and then we’ll be on our way,” then that would have been a good thing. On with the show.

However, major governments and central banks have decided that no one will take losses, and everything will be okay over time. To prevent (actually “delay” is a better term) these losses, the following occurred:

1 – 0% interest paid on savings
2 – bailouts to big banks
3 – money printing
4 – currency manipulations
5 – long-term interest rate manipulations

Of course, these extreme policy responses have resulted in:

1 - extreme sluggish growth
2 - extreme unemployment
3 - and perhaps the most terrifying of all extremely unhappy masses

And when we say masses, we mean the average person not working on Wall, Bay or Threadneedle Streets. This is where change will occur.

And, it is the unhappy masses that will shape the world in 2014 and beyond. Although this is very clear to some people, the world is on the verge of experiencing even more draconian responses from our world leaders.

First up is the 10% wealth tax which will occur in the Eurozone countries. In our last global market outlook, we provided the details behind this IMF issued and endorsed recommendation. The thinking is that if everyone contributed 10% of their wealth to the governments then that would be enough to restore debt levels to pre-2008 levels. The key words are “tax on your wealth” not a tax on your income - two completely different animals. Europe actually believes their citizens will be quite fine with having 10% lopped off of their bank and investment accounts – we disagree.

Next, the Eurozone is likely to see negative interest rates. Apparently paying little old ladies 0% on their savings wasn’t evil enough. Now, to further improve morale amongst the savers, the ECB is increasingly becoming comfortable with banks charging people for having their savings on deposit. Europe actually believes that if there is a penalty for keeping money on deposit, people and companies will instead spend their lifelong savings which will help with the recovery.

Instead, we see the opposite happening: People and companies will simply withdraw or hoard their money instead.

Why is there such a positive outlook by European governments for Europe? Simply put, the Eurozone governments believe they will not experience any reputational damage from taxing the rich and stealing from the poor.

Now, at various times many emerging market countries experienced catastrophic money problems as well. In the end, just as every rational human being would do - foreign money fled along with local private money. The result was a complete collapse of the local currency, moon high interest rates as well as zero access to international capital markets.

Yet in Europe, the espresso-sipping and champagne-gurgling powers-that-be, actually believe the continent will have no reputation damage whatsoever. Foreign money will stay put, locals will stay put. All the wealth will stay put.

We completely disagree, and unless all 18 Eurozone countries agree to form one government, create one tax code and consolidate all debt the world will be facing the largest debt default in the history of mankind.

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Read the full letter below (pdf)