IceCap Asset Management: Hope Is Never A Good Strategy

From IceCap Asset Management


Dodge City, Kansas is a lovely place. The home to 26,101 people regularly enjoy old west casinos, old west rodeos and old west movies. Like we say – it is a lovely place.

Yet years ago when it was still cool to be a cowboy, cowboys of all types were getting’ out of Dodge. And who could blame them - bullets flew around town on a regular basis.

As we look across the globe today, Dodge City’s are popping up all over the place across America, Europe and Asia. However, within the World of financial markets, government sponsored economic policies are desperately trying to keep everyone in the 2012 financial version of Dodge.

Today’s question of the century is which market is the equivalent of Dodge? One thing is for sure, financial bullets are flying fast and furious these days forcing every sane investor to keep their head down. For all other investors, be a good cowboy and be sure to have an exit plan – you never know when you’ll need it.

Europe = Dodge City

IceCap has certainly not recently jumped on the anti-Europe/Greece bandwagon. If anything, we’ve been pulling the wagon since we first opened our doors in 2010. Back then we had good fun hi-lighting the errors made by the majority of financial advisors, mutual fund sales reps and the big banks who confidently stated that Greece is less than 2% of Europe’s economy – that Greece does not matter.

Well, by now everyone knows that Greece certainly does matter. To further clarify our view everyone must understand that GDP measures spending, yet the World is in the midst of a debt crisis.

The point being, anyone can max out their credit cards on nice holidays, cars and lattes. For the GDP counting folks out there, all this spending certainly does add to GDP – how can it not? However, eventually the day comes when you are unable to borrow and your spendthrift ways come to an end, and with that the fabled GDP indicator of economic growth declines as well.

Greece’s GDP is valued at about EUR 200 billion, yet the unofficial total debt obligations of the country and financial institutions exceed EUR 1 trillion – over 5 times their GDP. Similar numbers also exist for Ireland, Portugal, Spain and Italy. This debt problem is very big and very real. Debt matters.

Greece’s end should have occurred three years ago. If it was allowed to follow every other bankruptcy process, today Greece would have been well on its way to recovery. What should have cost a few billion is now certainly going to cost hundreds of billions and maybe even hitting trillions once all is said and done.

On June 17, 2012 Greeks will once again head to the polls. We have no idea of the outcome. All we know is that Greece has already lost everything it had – it can’t lose much more. Rather, the biggest losers will certainly be the rest of Europe and this is why you will see subtle, then not so subtle and then lunatic fringe campaigning by Brussels to ensure that Greeks vote to remain in the Euro-zone.

The talking heads will tell you that we’ll have to wait until June 17 for this drama to unfold. IceCap is telling you the drama will happen before this pivotal day.

With Greece, we really only have two possible outcomes:

1 – Greece stays in the Euro-zone and continues to receive bailouts. The problem with this is that practically all of the bailout money received is quickly paid back to bond investors who just so happen to be European financial institutions. The only thing the average Greek receives is the privilege to pay higher taxes from the salary they no longer receive. Brussels is effectively telling Greece, the bullying will stop as soon as the morale improves.

2 – Greece leaves the Euro-zone and defaults on its debt. Here, the institutions who lent money to Greece will lose money and justifiably so. Everyone else in the World (who isn’t a bank), always takes losses when they make a bad investment, Greek bond holders including the IMF, ECB and EU should be no exception.

With outcome # 2, Greece will certainly enter a recession – yet, since they are currently in a depression it will actually be an upgrade from their current state.

Hope is never a good strategy

The fact that the financial World is completely dependent upon the fate of Greece and possible contagion spreading to other European countries makes us very worried. In addition, we haven’t even touched upon the rapid decline of growth in India and China, nor the upcoming American fiscal cliff.

We fully expect The Troika (European Central Bank, European Union and International Monetary Fund) with the blessing of the US Federal Reserve to announce yet another save the day money printing scheme. We also fully expect markets to rally strongly on the news.

We only have two fears. One, The Troika et al do not make the widely expected announcement. It’s our current view that the only reason markets remain at current levels is due to this very same expectation of another super-charged money injection scheme. Our other fear is that The Troika is actually too late with any new scheme and they are not able to self-arrest the snow-balling bank runs in Europe.

We speak often with investors and other managers on a regular basis and the high degree of complacency towards these very real problems continues to amaze us. Is this complacency due to a strong conviction of a positive outcome or is it simply due to the way the investment industry is structured to focus on profits and gathering assets? Sadly, we believe it is the latter. While we will be amazed if the Greek and European situation is sorted out, we will not be shocked if it isn’t. A positive outcome will certainly provide a super boost to all aggressive investment strategies and we will be ready to make adjustments should this occur.

Our view is that this positive outcome is one based upon hope. Unfortunately, hope has never been a very good investment strategy.

Full report (pdf)