Real assets versus financial assets

We note the ongoing theme of capital flowing to real assets relative to financial assets seems to continue. As a result the USD continues to weaken and the Shiller P/E multiple will continue to decline.

We feel a European alliance on supporting periphery countries can be a critical event in starting the decline of the EUR and the increase of the cost of borrowing for the USD.

The other great event that can start such a large shift is the de pegging of the USD for many emerging countries. This will have the effet of reducing demand for USD and weakening the link between emerging markets (EM) and developed markets (something which is urgently needed due to the inflation this policy is creating in EM).

Support to periphery countries will reduce the spread in the cost of borrowing between such countries and Germany.

We fear the USD can only decline - it is the most important varible (and easiest to change in the current global system) that can reduce the huge imbalances that have built up within the global system.


Main themes

Buy real assets at cheap prices. We prefer timber and oil and are investigating agriculture (we find it hard to invest in this sector at the moment)

Short the USD for the long term

Buy high quality companies

Currency management is becoming more important. The lack of a freely tradable currency in many countries that are accumulating cash makes this difficult and distorts the market (i.e. the need for the Euro and the CHF)

Buy cheap insurance against increasing interest rates (market determined interest rates such as government cost of borrowing or libor rates. The authorities in DM will do all they can to keep interest rates low) in developed markets that have large debt burdens (US, UK, many european countries)

Deep value investments that are considerably less dependent on macro issues. A iliquidity premium may be available here