IceCap Asset Management: "The Worst Is Over"

From IceCap Asset Management, February 2013,

The Worst Is Over

The dark ages were an awful time. Considering the brightest days delivered constant warfare, the burning of books, and the fear of barbarians, no one ever looked forward to the darkest days.

Fast forward 1,600 years, and the darkest days of the European debt crisis are finally over - not because the bad debt has been written off or due to the consolidation of all debt, but simply because everyone has said so.

First up to declare the worst is over was European Commission Vice President Ollie Rehn who announced “the worst is over”.

Next up, everyone’s favourite socialist president Francois Hollande of France confirmed “tonight I have the confirmation that the worst is behind us”.

The French President was then confidently followed by the meticulous German Finance Minister Wolfgang Schauble who droned “we have the worst behind us“.

And then to leave no doubt whatsoever, the scandal plagued Spanish Prime Minister, Mariano Rajoy convincingly reported “I’m totally and absolutely convinced that the worst has passed”.

And, just in case everyone needed a little extra convincing and confirming, European Central Bank President Mario Draghi blasted his favourite Journey song and told reporters everywhere to start believing because “the darkest clouds over the euro area have subsided”.

And that my friends, is how you solve the biggest debt crisis in the history of the World. If you say something often enough, pretty soon you’ll start to believe it. And when it comes to Europeans talking about the swift and miraculous resolution to their debt crisis, no one is singing off-key. Well almost nobody.

Since it is Europe, contradictions never run short. Just 4 short weeks prior to declaring “we have the worst behind us”, Wolfgang Schauble warned “the worst is yet to come.” Whatever very bad thing happened during those four weeks must have been a doozy, as it certainly caused Mr. Schauble to change his tune.

Of course, this was nothing compared to the moment of clarity shared by France’s Labour Minister, Michel Sapin who described his country as being “totally bankrupt”.

And, just to keep things real we should always remember Luxembourg Prime Minister Jean-Claude Juncker’s confession that “when it becomes serious, you have to lie”.

Exactly who is telling lies and who is telling the truth will only be determined in due course. Our view is that before declaring victory over this debt crisis, investors must remember a few things.

First of all, in the real World a resolution to a debt problem usually involves losses of some kind. Normally, when a person cannot repay the money they owe, they stop making payments and the lender takes the loss. Today in Europe, the lenders are the banks, pension funds, and insurance companies – and taking losses would make life very uncomfortable for all of these guys.


Without a doubt, global economic growth remains stagnate, yet stock markets are booming. The message is very clear – there’s money to be made in these markets. There’s no question that trend, sentiment and technical strategies are making money for investors. However, it’s those buy and hold investors who are not being told the other side of the very clear message – there’s losses to be made in these markets too.

Our message on financial markets remains very consistent – do not confuse strong financial markets with a strong underlying economy. While this may sound like hogwash to many investors and investment professionals, it is the extreme, unorthodox, and never-before-tried policies by the World’s central banks that is the reason for the march higher for stocks.

We fully respect everyone who says financial markets are going higher due to money printing. However, those who are telling investors that markets are going higher because the economy is recovering and stocks are cheap will eventually have some serious explaining to do during client meetings.

Whether it is China, America, Brazil or Europe - economic growth around the World is stagnant at best. We’ve written before about Stall Speed – the speed at which the economy will accelerate sharply in one direction, either up or down. The point we make is that economies cannot grow at a steady, constant rate. Regular business and inventory cycles produce the ebbs and flows that many expect during a normal economy.

The worrisome feature of today’s global economy is that despite trillions (we repeat: trillions) in various forms of stimulus, economies around the World have not returned to the pre-2008 growth rates. If Alan Greenspan and not Ben Bernanke was still Chair of the US Federal Reserve he would most certainly be as confused as ever and refer to this economic-monetary puzzle as a conundrum.

Bernanke of course simply refers to this as fun. Regardless, for those who honestly believe in the recovery, ask yourself the following questions:

1 – What would happen to current GDP growth rates if the central banks stopped their money printing programs?

2 – What would happen to short and long interest rates if the central banks stopped their money printing programs?

3 – What happens to all equity valuation models if interest rates are higher?


Full Letter below:

IceCap Asset Management Limited Global Markets 2013.2 by