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Don’t be Fooled by What Policy Makers tell you Read the Facts

By : Ziad K. Abdelnour| 29 May 2010
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As part of Blackhawk’s close group of family and friends, we thought we’d share with you some of our most salient views as to the state of the world economy today and what to watch for in case you’re also in the “Wealth Creation” business.

We hope these thoughts will help you better position yourselves in the months and years ahead.

Even if you disagree with our points on the trajectory of where the world is heading, it cannot hurt to understand and prepare for the worst case scenario while still hoping for the best.

So here they are…..

About the markets at large:

Contrary to what the talking heads and pontificating gurus are saying, markets are not out of control, central banks are out of control printing money….. and we believe they will never tighten monetary policy again, but merely print, print, and print more as they love to see asset prices go up, and as their policy reflects their desperation to perpetuate the process. As far as we are concerned, we know the Federal Reserve will keep interest rates at 0, precisely 0…in real terms.

About the Federal Reserve:

The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything, everywhere. In fact, you have to ask what they were smoking during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004. It seems that the tremendous economic Sophism of the day is that a nation can print its way into prosperity. By the same token, if debt and money printing equaled prosperity then Zimbabwe would be the richest country in the world. Go figure if Mugabe is not the economic mentor of Ben Bernanke.

About Our Fiscal Policy:

Our fiscal situation is much more horrendous than it is made out to be; total debt (public and private) as a percentage of GDP counting unfunded liabilities is an astounding 800% of GDP, more than double that during 1929. Sovereign credits in the Western world are also without a doubt all bankrupt, but before bankruptcy governments will print money; US government leaders will try to postpone the hour of truth, pushing the problems off till succeeding Presidents and Congressmen. So be ready for a real bumpy ride.

About Wall Street Reform:

Unless reform is promulgated by people who understand what the “wealth creation” process is all about, we are going nowhere but torture for all; for Wall Street and Main Street as well. It is a fact that you can’t beat the very same companies which constitute the core of US capitalism over the head and not expect them to get a headache. YES. We for sure need regulation; but by people who know what they are talking about, not a bunch of lawyers turned politicians. Going after the wrong people with the wrong regulations will only lead to more chaos and volatility in the US financial services industry as currently witnessed today. As pathetic as it seems, many seem to hail praise & accolades on reforms for sticking it to us all.

About all those Ivy League Experts from Academia:

They are without a doubt intelligent people and study the textbooks hard, but they study the wrong textbooks and are totally inconsistent in their philosophy. So do yourself a favor and stop listening to them as they are irrelevant anyway. Besides, if they were so smart, wouldn’t they be in the private sector creating wealth than “pontificating” about it?

About Asset Allocation:

Americans must re-think what constitutes a safe asset. In a “traditional” period, one would generally rank from most to least safe assets: cash, Treasuries, corporate bonds, equities, commodities. As the next 3-5 years will be highly volatile, we believe cash and long-term bonds will be a bad place to hold one’s money; equities are an avenue to preserve wealth (but this is a risky proposition, given the effects of rampant currency depreciation); precious metals are a sound place for wealth preservation. In an environment of money-printing and high volatility that exists in the US and that will be created by future policy, we believe physical gold is the best thing to own. Once currency depreciation does take place, stocks may become very cheap, as happened when the Mexican peso depreciated by 95% in the early 80s, as the fund managers invested in Mexican equities completely undervalued them after currency collapse Overall, we favor commodities, equities in emerging markets tied to resources (especially necessities like water and oil) and healthcare, and most of Asia including especially Japanese stocks

About the United States of America:

As for the US being the most important economy for the world, there is a sea of change going on right now; recently car sales in emerging economies (such as Brazil, China) are outpacing those of the US, Europe and Japan; Oil consumption in emerging markets is increasing, while in the developed world it is contracting; the whole world does not depend on American consumption anymore – 60% of total exports are now going to the emerging world when one includes Europe. The US is still a large economy but it is not growing, while the growth in the emerging world is and will continue to be strong. So face reality and stop living in your “ivory tower” that is the USA.

About Emerging Markets:

People still think of emerging market economies as poor cousins, but because 80% of the world’s people are there, in aggregate the consumption is huge.; these are not saturated markets and they are growing rapidly. Hence, we believe everybody should have at least 50% of their money in the emerging world, outside the West.; people should also keep the custody of their assets overseas. The drivers of growth in the emerging world will be the urbanization of India and China; stocks won’t necessarily rise in the short term, but there will be significant growth in Asia in the long run. The shift in economic power from West to East has been remarkable in speed, largely due to the rapid industrialization of the emerging world and the speed at which information travels today .

About Greece and what to learn from the experience:

We at Blackhawk think the lesson from Greece is that, if the problem had been dealt with three months ago, it would not have become as serious as it subsequently became. And we think the important thing now is that Greece has been dealt with a major IMF and European Union package…..But those measures provide only a window of opportunity. They do not affect the total amount of debt, in themselves which countries around the world have to repay. The markets, which some of the European partners like to describe as speculators causing difficulty, are the very same markets where the public sector is looking to provide trillions of dollars of support to finance public debt around the major countries in the world over the next few years.

What matters is that those investors are prepared to buy government debt at interest rates which make it tolerable for the countries concerned. And that is why it is important for each and every country to demonstrate that they are on top of a program for their country to reduce the fiscal deficit to a sustainable path.

That has been the big message, but within the international community we think there is a very clear understanding that the package of financial support which was made available is not an underlying solution to the problem. It provides a window of opportunity which gives governments the chance to put their house in order; and it gives the international economic community a chance to talk about what we think to be one of the major issues facing us, which is the need to rebalance demand around the world economy.

About Oil and Global Geopolitics

The supply/demand characteristics of oil are great due to the need for oil in China, India, rest of Asia. Oil is the top priority for China, as they are now a net importer. The US has a huge strategic advantage over China given that we have access to our own oil, and that of Mexico, Canada, the Middle East and off the western Coast of Africa, in addition to the ability to travel on the Atlantic or Pacific Ocean; meanwhile, China sources 95% of their oil from the Middle East, and while they are building pipelines throughout Eastern Europe, their oil supply points in terms of ports for example are limited, and the US has defense bases surrounding these areas; Chinese subs could sink our boats however; the Russians are also not happy about our forces being in the region, and therefore we believe that tensions will grow as the need for natural resources in these nations grows exponentially.

About a Global War

We believe that there is no means of avoiding a total collapse in the West; at the first train station in 2008, the financial system went bust but didn’t die, at the next station nations will go bust (though this could take 5-10 years or less), but first they will print money as this is the most politically tenable option, and ultimately the world will go to war. So be aware of this next time you vote for your next representative in Congress or your next President.

Bottom Line:

Some investors will buy while blood is flowing; others will wait. Some investors will position themselves right and read the writings on the wall while others will still be snowed by the propaganda machine perpetrated by some of our charismatic leaders out there. We at Blackhawk are positioned to keep creating wealth no matter what.

Looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. RobertRobert

    Ziad, this is very insightfull. I would like to add a comment in regards to the parity of the USD-Euro: This will severely affect US companies with global presence (ie most of F1000 companies)in terms of their financial results by the end of this calendar year, disappointing investors and ultimately crashing their publicly-traded equity valuations. The DOW will be around 7500 before December 2010. Personally, I will stay out of publicly traded equities in the US for the next 2 years – as you have indirectly suggested as well. However, Private Equity will still be a good place to invest, given the reasonable valuations today below 5X Eearnings.

  2. Frederick W. CroftFrederick W. Croft

    Unfortunately, I agree with everything Ziad says here. From the idiocy of SoX 404a requirements to the fake fixes of “financial reform” and the continued use of the Gaussian copula in developing unstable derivative products, the U.S. is vaporizing its ability to create and sustain business value. When I speak to PRC-based clients and they no longer want to expand U.S. operations because “you’re more socialist than we are!”, something is deeply wrong.

  3. Jose ArozamenaJose Arozamena

    Ziad, As always on the ball. The problem seems to be that those of us who see the real problems facing us seem to be like the few who saw that the emperor had no clothes.

  4. David PohndorfDavid Pohndorf

    Ziad — well said…I think we are in deep trouble when only 8% of the current administration has worked in the private sector where you cannot borrow yourself into oblivion. Nikita Khruchev remarked years ago that Russia will not try to beat the United States. The U.S. will spend itself into oblivion…

  5. Mike ClarkeMike Clarke

    Insightful comments as usual Ziad. Thanks for sharing. I like the comparisons to 1929, Zimbabwe and Greece. From the somewhat neutral view from Canada I can see this unfolding and feel somewhat insulated due to the stable oil-based economy, but am keeping my enthusiasm curbed for two reasons. 1) The Canadian economy is tied at the hip to the US 2) If a Liberal government is voted in in Canada policy could shift to heavily subsidizing the unions and manufacturing in Central Canada and the expansion of government, which will raise deficits and taxation and cause political friction in Canada with an East (manufacturing) vs West (energy) struggle. However, given that I am in high tech and will be dependent on business from the US I’m afraid there is a very real possibility that the US dollar will fall in value against the “loonie”. That means that our revenue potential from the US, and probably EU will fall VS our local costs. Keeping that in mind perhaps this fall may be the best thing for the US as companies like us will be more likely to open shop in the US and hire there. The downside being that corporate taxes, given current trends, will be crippling there and perhaps here and therefor we may need to look elsewhere. It all depends on who gets voted in next and what kind of a mess they have to deal with. The “may you live in interesting times” curse is upon us and, as you said, we need to be globally aware.

  6. CharlesCharles

    Hello Ziad, I reside in Australia and have followed you with much interest over the years. Until 2007 Australia had a very strong economy with a budgetary surplus. Australia is approximately the same size as the USA but with a population of 22 million. Our resources industry was strong and robust and substantially insulating us as a nation from the world economic woes. Unfortunately our government now wants a resources tax to pay for the disastrous stimulus package that failed to reignite an alleged flagging economy. If we are lucky enough to oust our Labor Government at the next election Australia’s resource market is likely to be an excellent opportunity for investment. Thank you for your incisive comments

  7. Lynnwood BibbensLynnwood Bibbens

    Mr. Ziad K. Abdelnour I appreciate your detailed thoughts and your articulation of the future marketplace. As I’m in the Physical Commodity business, I agree with you 110%. When it comes to talking heads and Academics, they all have an agenda. At my company we are Entrepreneurs and we are in the business of building wealth. We see opportunites in every market. We are also seeing the same opportunities for Oil into China. As China works through the barriers of entry suppliers are currently experiencing, their access to Oil will increase dramatically. This increase will accelerate the growth in China. It will also humble the West, the U.S. imparticular and also will cause a tremendous amount of tension. Again I appreciate your detailed thoughts and look forward to working together and sharing ideas. Thanks,

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