Volume III, Issue 9 / September 2009
Welcome Letter
Welcome back. As I sat to pen this monthly missive, I gazed out over the pasture as a scene unfolded that gave birth to the title for this edition. Under a big eucalyptus tree sat the bull the kids named Ferdinand. He is a big bull of indeterminate age but undeniable power and presence. The rest of the herd as well as the horses, sheep and all but the dumbest of dogs give wide berth. Ferdinand sat stoic while chaos exploded around him. Two dogs were nipping at the heels of a young colt and inadvertently got between a few calves and their mothers. The cacophony of animal mayhem was clearly heard from my perch one story up and two hundred meters away. So much so that the gaucho responsible for the animals hot-footed it over two fences in record time. Snorts, barks and yelps from a well placed kick replaced pastoral peace for about three minutes and while no more than ten meters from the melee, Ferdinand barely pricked an ear. He did nothing, and he did it very well. He made sure he would not be affected by the outcome. He judged his position secure and did not waste a calorie better preserved for another day.
How I admired his composure. I must admit this month has had me once again digging deep into our investment hypothesis and questioning if perhaps we here at Without Borders had missed something. Is the economy really improving? Maybe all this government stimulus is working? Maybe this time it is a ¨goldilocks¨ economy and just a matter of the FED and its evil stepsisters in Europe and Asia dialing the right knobs at the right time to ensure just the right trim in the engine? A pinch of regulation here and a dash of bonus limits there and the soup will be perfect? Are we here at Without Borders anachronistic curmudgeons, so smug in our sidestepping the worst of the crisis that we could not hear the new tune over our own ¨We told you so¨? Has hubris gotten the better of us?
We think not. Although we, and some of our FLASH CABLE subscribers, are presently taking it in the proverbial ¨shorts¨ as overvalued securities creep higher, we remain confident in our analysis. The fact that many shares have almost fully recovered from the devastation of last year does not change our opinion because it does not change the facts. The fact that several of our short positions are under water by 10% or more is uncomfortable, even disconcerting but it does not change the balance sheet of any company or country. In point of fact the situation is getting worse despite the persistence of the bear market rally.
Deja Vu All Over Again?
We would much rather lean on those prescient words of Yogi Berra, or Yogi the Bear for that matter, before we would follow the lead of Ben Bernanke or the other Wizards behind the curtains. Every time we see the central bankers wax pathetically on TV or read a Bloomberg headline of the ¨Market Rallies on ((Insert buffoon´s name))’s Comments¨ variety, we think of this clip from the Wizard of Oz, which ironically many believe to have been political commentary on the gold standard in the wake of the financial turmoil of the late 1800s. Having just watched the clip again we want to initiate a contest: A free six month subscription to FLASH CABLE to the clever reader who comes up with the best lampoon of central banking or Wall Street using either the Wizard of Oz or another video. Here is a funny one from last year to give you inspiration. In July 08, we were embarrassed to admit that more than once we found ourselves heckling the talking heads on CNBC and Bloomberg. It got a bit embarrassing in airport lounges and coffee shops. Just today a comment from Barton Biggs evoked a too loud ¨who are you kidding?¨ at the gym. Surely this is a sign that the markets will follow the path we predict? This time it is different. It is worse.
Last time around we sat on our hands for nearly a year waiting for the pin to find the bubble. We were not as calm or collected as our inspirational hero Ferdinand. In the Spring of 08 we fidgeted and fretted and closed out losing short positions here and there. But our patience paid off when the markets tumbled. We then bought companies that were trading for less than their net cash with all we had and watched them rebound and once again climb to the levels we felt were unsustainable and we sold. This summer we rearranged our portfolios to hold gold, silver, cash and only the securities we wanted to hold for many years. We also started to bring you securities to buy when the market dips, and private deals to help you diversify out of your home country. We will continue to do that because buying most of what is on offer in the public markets at these levels is uncomfortable for us.
So now we are sanguine in our belief that history will repeat itself and that share and bond prices will soon collapse as the economic situation worsens and inflation is unleashed. Right? Mostly yes. This time it is even more frustrating because it seems as if the delusional are running the world and denial has become accepted public policy. At least last time most of the political class were oblivious to the problems. Now they are trying to fix it. It reminds me of Spiccolli from Fast Times At Ridgemont High and his dads ¨awesome set of tools!¨ In this issue we highlight the goings on in Germany and Ireland as only two data points that reaffirm our bearish outlook.
After much introspection we see no way this economic story can have a happy ending. As we have often said in these pages, the wisest investor knows when to sell and when to buy and more importantly when to do neither. As it relates to the equity markets now is the time to do nothing. We may have more deflation mixed with nonsensical stories about the worst being over. Share prices may creep higher. Inflation fears and the desire to be out of Treasuries may spur foreign investors into the equity markets. This period could and likely will last longer than we think. But that will not change the true valuations. It will not increase earnings. It will not preserve purchasing power or your net worth. And it will eventually collapse and reverse violently.
Investment success is met when you are sure of your actions. If your analysis says this is a sure thing then buy. If your analysis says the asset price is unjustified then sell. If your analysis leaves you befuddled or is at best inconclusive then be like Ferdinand and do nothing.
Is Now the Time to SELL?
With rare exceptions, yes. If you may need the cash in the next two years then sell now. Do not try to seek back some of your losses. If you hold anything but the shortest maturity bonds then sell them now. If you own a diversified portfolio of stocks, then sell them now. Why? Mark to Myth accounting can dress up a quarterly report but it only serves to put lipstick on the pig. The term political economy has now become redundant. For there to be a bottom, the economy needs to be allowed to bottom and at this moment governments around the world are still borrowing fingers to plug holes in dikes. We now view the western governments as junior mining companies that have drilled 80% of its properties and come up with nothing but clay. They are now running on promotion and hopes. But the CEOs, be it Merkel or the greatest promoter of all time Obama, are still viewed by shareholders as having the midas touch and therefore the company can issue a bunch of paper on nothing more than inspiring rhetoric and the unspoken threat that if shareholders do not double down on the rights offering all will be lost. But unlike a penny stock, there is no chance of finding gold in there and instead of the paper merely diluting shareholder´s equity, there is an unserviceable mountain of debt. Misallocation of capital and mal-investment must be worked out of the system but it is only being exacerbated by government intervention. Strike that. It is not being exacerbated by governments. It is being carried out by governments.
While we are talking about the political economy, or the politiconomy, there is more to worry about than the mountain of debt and the lack of productive enterprise. In reality that is merely a speed bump on the road to prosperity. The roadblock is the erosion and eventual destruction of individual liberty and politically protected freedoms. Looking back a thousand years, it is obvious that the world becomes richer as people become freer. The world becomes poorer when people become less free. The rise of intrusive and repressive government is without doubt the enemy of capital appreciation. We have not done the required study to test the theory but we would be willing to wager that if there was a thousand year old investment house that did nothing but invest in financial markets and real estate when freedom was increasing and buy gold when freedom was decreasing that finance house would have a treasury greater than any nation today. All it would take is a binary freedom meter that recognized when there was a net gain in freedom vs. a net decrease in freedom. So the bottom line, as we wrote two months ago in the portfolio review, is you should be selling all financial assets that you do not want to own for the very long term. We cleaned out the Without Borders portfolio and if you have an IRA chock full of mutual funds or a hodge podge of shares your broker recommended, now would be a good time to sell. Increase your cash and precious metals holdings until such time that there are bargains to be found.
In This Issue
This month we bring you part two of our three part series on Argentina focusing on Buenos Aries and the surrounding area. We had hoped to include a detailed section on the residency and second citizenship process for this issue but we are still working through the finer points that are more confusing than one would expect. We are working with a talented firm and will bring you all the details in part three of the series.
In the AI section we are excited to bring to your attention a company that we have been itching to highlight for almost a year but could never do so because there were just too many unknowns. Now that their strategy is firmly established we believe Endeavor (EDV:T) will be a stock to ride for the long run. It has all the elements for success over the next decade and it is selling at a discount to net assets.
Also this month we will update you on our private deals. The response has been enthusiastic and we are progressing nicely. Tim will weigh in from China where he has been ¨wading through the hype¨ in his search for profit opportunities. Finally we will give you our take on the evolving situation in Germany and Ireland.
Thanks again for your patronage. As we continue to meet more of you in our travels we are more convinced than ever that the Without Borders community is unique. Therefore we are moving forward with our plans to give you more opportunities to interact with each other. While we believe that ¨friends don´t let friends Facebook¨ and having a MySpace account is grounds for permanent banishment from McLeanistan, we are devising a way to allow free thought to prosper amongst subscribers in cyberspace and in person. More to follow. As always any ideas, you may have are welcome.
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