Return of Your Capital over Return on Your Capital

By Lee Robinson, Altana Wealth Limited

It is difficult to know where to start. 2013 is beginning to look like a pivotal year for so many regions globally. The bear is savaging each market in turn. First it was commodities then emerging market currencies followed by everything else in emerging markets. China is back to 2009 levels. Next was  high yield credit, then longer duration credit including government bonds. Wine funds have collapsed and I expect contemporary art to shortly follow. Anyone that believes high-end property is safe in a world of higher interest rates needs to look at the performance of property shares over the past few weeks. Finally European equity markets suffered and even the US stock market internally is broken with advancing stocks significantly outpaced by decliners.


Once again the sell side has duped investors into buying in primary auctions and not reminding them that the exit is in the secondary market. One is a motorway whereby Apple can issue $17B of bonds with subscriptions for $52B, the other is an alleyway where a bad day means only $170m will trade. Banks and market makers in credit are carrying too much inventory at over $50B and are offside with losses of over $2.5B in one month. July and August are not great secondary liquidity markets. We can expect more carnage before the summer is out especially as bond redemptions are in the top 3% on record. I’ll say it again but the difference between an amateur and a professional in any market is not the ability to buy but the ability to sell.


Clearly stock markets have been driven by several factors including low interest rates that also allow bond issuance that supports buybacks. Clearly the total lack of said bond issuance in the last four weeks will hurt buybacks in the coming months. Profit margin increases since 2009 have been a function of low labour costs, rates and lower taxes. I was surprised that the G8 communique demanding greater transparency from global corporates was not given any sell side research coverage. The G8 are desperate for more money and want higher corporate taxes. Take 1-2% off profit margins due to higher taxes on a company on 15 times then the value can fall 15-30%. The fact that Switzerland, UK, China and others are all demanding higher capital ratios for their banks will not help bank profits nor spur lending which is another negative.


Indian Rupee vs Chinese Renminbi



Clearly global corporates that have also seen dollar profits rise due to strong emerging market sales are going to have some pressure due to the weaker global currencies. The big move that is getting little to no commentary is the Indian Rupee. It has fallen dramatically and the government is using many of the same methods to stabilise the currency that we usually see before a final collapse. What is clear is that the two most populous nations have seen a dramatic shift in value over the last 2 years. Over 1 Billion people in one country have seen a relative 40% hike in international labour costs whilst the other 1 Billion have seen the cost of food, oil and other commodities rise by 40%. This is not a recipe for harmony in the world. Unrest in India would make the Arab spring look like a sideshow. India is a real problem. Keep the Rupee ticker on your screens


Finally Cyprus etc. What can we say except that it this the first warning to all holders of assets especially cash deposits. Most governments have analysed the confiscation of deposits, many have thought about exchange controls. We continue to believe that the source of the problem is that the social welfare construct post 1945 is unaffordable. Senior politicians know this and realise that to stay in power they will need more money. Considerably more money. All the know your customer, anti money laundering laws, attacks on tax havens such as Switzerland are primarily about locating the money. We are already being robbed daily by financial repression that involves interest rates being set way below inflation but that will not be enough. We believe that reduction in the welfare contract without pain from this group will lead to unrest and potentially worse outcomes.


Confiscating large sums from corporates and the wealthy will terrify money out of those countries. Hence, we see a grand bargain whereby the extensive labour laws are reduced in exchange for a confiscation of wealth via taxation, cash deposits above €100,000 and/or other methods. We advise anyone who is willing to listen to regularly discuss and check your finances as you would your health. Speak to independent aligned interests and if you must speak to the major banks, speak to them alone so they can be more open in their response. We suggest to clients to set up extraterritorial accounts, swap cash deposits for bonds or other assets and diversify holdings by country and continent. Know where your assets are held and by whom at all times. We appreciate opening accounts in normal times can take several weeks. In times of stress it will take even longer – but once open transfers can be made overnight. We think the probability of depositor bail-ins has gone from sub 1% five years ago to over 25% today. That is too large to ignore. Now is the time to act. Preparation is the key.


Opportunities are coming though as prices fall. Stay liquid, organise your investment vehicles either directly or via due diligence on others and be ready to invest as the opportunities arise.