Incentives, conditions and events

Dear Reader and Fellow Investors,

I recently read an article that, as many articles do these days, focused on how Greece became so indebted and hence got itself into such a precarious state of affairs.

It put forward an opinion I had not heard yet, which suggested that to understand the current Greece predicament we have to go back more than a decade, to when Greece applied to hold the Olympics. This event forced the country to take on more debt.

Interesting.

I am of the opinion that single events in history, or in life, rarely mean anything.

What is more important are the incentives the system has created (willingly or unwillingly) that generate conditions that allow certain events to happen. If Greece could not borrow, it could not build an Olympic stadium. End of story.

Identifying the incentives that allow you to appreciate the conditions we are in and hence the probable turn of events that are likely to occur is what our macroeconomic overlay attempts to enforce on our security selection discipline when constructing our portfolios.

This macro overlay, macro because it compares regions and often focuses on country aggregated data, is more closely related to profits than may first seem. Indeed, earnings per share on aggregate seem statistically to follow nominal GDP growth quite satisfactory (we refer to the fantastic work by Crestmont research). Indeed, one could even keep on assuming and say currencies simply move over the long term to the rythme of capital flows where one gets more profit per unit of currency....

Lets leave it there for now.


Yours sincerely,

Alessandro Sajwani