The great advantage of a mini sabbatical is of course the opportunity to reflect. The great advantage of sailing across the Atlantic is not only the complete isolation amid the majesty and power of nature, but also the great opportunity to read uninterrupted. From Homer’s History of Odysseus, through Emile Zola’s numerous works, to various biographies by Barack Obama, combined with the poetry of Derek Walcott, I have had an invaluable opportunity to understand the great trading routes between the UK, Africa, and the Americas, as well as the Caribbean.

 

Why invaluable? If there is one thing that is apparent from the current position of global economic performance, it is that we have been here many, many times before and while the facts at the moment may be different to those of the past, the general sense and overall performance of humanity is remarkably similar throughout history.

 

 

I continue to take the view that the striking difference between the reaction to the current crisis and all previous crises is today’s collective, global, unified response.

 

One wonders how our current leaders could have allowed the debt binge to have got so out of control and why none of them were prepared to stand up and shout “enough is enough”. Possibly the closest we ever got to this was the observation by the previous Federal Reserve chairman Alan Greenspan, who suggested that markets were showing “irrational exuberance”. But even he has now admitted that he became completely beguiled by the whole evolution of the debt binge.

 

As we wrote in the latter part of 2009, the “Goldilocks” scenario is currently holding together. The G20 plan of campaign appears to be that countries and governments stick together. They continue to print money in order to maintain stability in financial markets. They will hopefully begin to withdraw quantitative easing when they feel that markets generally have enough confidence to pick up the baton and run with the debt. They hope to engineer modest inflation which they can control (which has never happened before) in such a way that the debt burden slowly becomes less critical to taxpayers than it appears at the moment. They hope that global economic activity will expand at such a strong rate that GDP income for developed and emerging markets grows so rapidly that it is more capable of collecting taxes from profits and incomes, in order to slowly pay away the massive debt burden that continues to be incurred.

 

They believe that inflation will be controlled by a combination of:

 

·         managing unemployment to a reasonable level (who knows what that means to those that have lost their jobs and can not get another one)

·         debt, which will be slowly withdrawn, curtailing further expansion in asset prices particularly in property

·         a reasonable increase in taxation, which will also dampen consumer exuberance and asset price inflation.

 

 

A good example from recent history is the way in which the developed world did or did not treat Germany during the first half of the 20^th Century and the consequences that occurred.

 

To my view, the best demonstration of the support that the G20 and the observations made above are being adhered to is the election victory of Angela Merkel in September. Despite appealing to normal German psychology, after she won the election she immediately undertook a total u-turn. While I have been away, she has managed to pass through both Parliamentary houses in Germany a complete change in economic policy (albeit with a very small margin). The strategy of the Germans is now completely different to that which they have adopted in the past; it goes against their natural psychology, is greatly opposed by many Germans and, somewhat remarkably, follows the Anglo-Saxon proposal much derided by the Germans in the past.

 

Angela Merkel has decided to reduce taxes, to borrow more money to inflate the economy, to ignore the Maastricht criteria, and thus effectively follow the same model as put forward by the Americans, the UK and indeed just about everybody else in the G20. Germany knows that it cannot stand-alone; it must start spending in order to save the European model (let alone the global economy). I would argue that the Chinese, whose psychology of creation and exportation is in some respects similar to the Germans, are now also carrying out the same sort of economic policy to save the world from complete economic meltdown.

 

 

We continue to tread water and see how, if at all, this policy may work. We continue to believe that any economic recovery will be an extremely slow (possibly very well managed) global event. It will be a long grind but there will be pockets of opportunity which we will try to exploit.

 

 

Having achieved a rebalancing of all our clients’ portfolios towards caution and conservatism with the opportunity for some protection against inflation, we propose the following.

 

We will continue to monitor global economic events (the UK election is somewhat irrelevant). We will, however, be very alive to the possible collapse of sterling and the effects upon investment portfolios. We believe that we have already done a huge amount to protect our clients’ investment portfolios from this situation by adopting an extremely global investment strategy where revenues are generated from multi-national corporations who derive most of their investment returns, security, and profits outside of the UK economy.

 

If we think that the G20 can hold their act together, and if we believe the global economy will slowly (oh so slowly) generally recover without incurring too much taxation, inflation, and unemployment, then we will gradually become more orientated towards equity, emerging markets, and the themes that we will need to develop in:

 

·         reducing global warming

·         managing the population explosion

·         coping with the demographic age wave

·         dealing with protectionism

·         as well as energy and food shortage.

 

We at KMG very much look forward to discussing each of our client’s investment portfolios with them during the course of 2010 and developing our collective thinking from a position of strength and knowledge.

January 2010, Patrick McIntosh