Today it is seen as the epitome of human hubris, an example of human tragedy and suffering, a humbling instance of where our grasp exceeded our reach.

As we all know, the Titanic was the biggest ship ever built at that time and was thought to be unsinkable – this was part of the reason why she had too few lifeboats (20).  This would have accommodated 1178 people, about a third of total capacity.  What is not well known is that the Titanic actually carried more lifeboats than required by regulation (16 – 990 people) – this regulatory and oversight disaster cost over 1500 people their lives.

What is remarkable is the breakdowns thereof – of 1^st and 2^nd class women and children along with female crew, over 92% survived the disaster, compared with 33% of men in the 1^st class.  This was clearly a more chivalrous era! (Would this still be true today?)

The Titanic also birthed legends.  The Titanic Captain went down with his ship, which contrasts starkly to some more recent Italian captains.  We had the unsinkable Margaret “Molly” Brown – and probably the most famous, the band that played on.

The Titanic should serve as an object lesson in the human condition, the question is, did we learn the right ones?

It seems that from the Titanic and other disasters in our recent modern history, we have learnt to be more careful.  We have learnt caution. Measure twice, cut once.  Regulation, legislation and oversight.

And yet we may have made two grave mistakes – one of hubris, the other of intent.

We have taken from the Titanic that we need to move slower, try less and monitor more – yet the true message seems to be that some things are beyond our control.  Some things cannot be escaped or avoided, but must be survived and endured.  And while this seems unfeeling to the mother who will want to find blame, or the father who wants to rage – the truth often does not fit into these boxes we create for our own convenience.  Often it is no one person’s fault….. in some ways, these tragedies are inevitable.

The deaths on the Titanic were not the fault of the Captain, crew or company any more than it was due to media hype and a society’s belief in their own superiority.  It was an unfortunate, unforeseen and unforeseeable aggregation of events that led to tragedy.  If it had not been the Titanic on that fateful day, it would have been another ship a month, year or decade hence.

Partly as a result of this, we have changed our modus operandi.  In “the time most free since its dawn” we now have regulations and legislation controlling almost every interpersonal action.  Discovery has changed from the boundless pursuit of knowledge into unknown, into the regimented and segmented process bureaucracy prefers.  Don’t get me wrong, while the lessons learnt from her and other disasters (Human, Natural or Financial) certainly added to our understanding and improved our regulatory structures, it feels like the pendulum has swung too far the other way.

We are attempting to regulate the human condition…. and we are failing.

While life is objectively safer, it seems difficult to shake the feeling that we are living it at half pace, at a rate that doesn’t blow our hair back.  While quotations on boldness abounds, these days even a vigorous argument seems to offend and be frowned upon.  Where are the days of Winston Churchill and his speeches in the house?*

Much of this seems to have survived into the 21^st century and our control of the economy.  From somewhere originated the idea that presidents and politicians have more than a fingernails worth of control of the economy and it’s been forgotten than in actuality all that can be done is the smoothing over of rough patches and avoiding major potholes.

There is a major school of thought that suggests that our obsession with control and our unwillingness to face the harsh realities of our situation draws out the crises – that it lengthens and worsens its effects.  The lesson then, it seems – and the difficulty, is exemplified beautifully in a well-known prayer.

“Grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.”

Lastly, in economics there is a concept called creative destruction.  Sometimes things have to be cut, occasionally industries need to die and jobs need to be lost for the world to move forward.  Yes it is painful, even in abstract – and for the individuals involved it is often terrible and tragic, but nothing can be done about it, nor should it.

The email and internet is instrumental in destroying livelihoods for everyone from the postal worker and small book shop owner to newspapers and magazines.  The music industry raged against Napster and files sharing, but now benefits from it greatly.  Seneca said, “Every new beginning comes from some other beginning’s end.”**

It is uncomfortable, usually painful, but is also unstoppable.

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The 15^th of April 2012 commemorates the Centenary of the Titanic tragedy.

*

http://talkingincircles.net/2008/06/02/witty-quotes-and-insults-from-winston-churchill/

** Yes I know it is also in the lyrics of “Closing time”…

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Albert Botha

Atlantic Asset Management

Here is a link to the article.

-          Mark Twain

History is the collective past action of our race.  It is the tale of our faults, foibles, victories -  it can and should be a road map to the future – but there is a problem.

When looking at the contradictions that lie within a single person, their capacity to repeat mistakes of the past, to wallow in their pain, refuse sound advice, to remain obstinate beyond the point of help or reason – then the collective madness of the masses is understandable.  Both the individual and the collective seem unwilling to learn from their past mistakes.

The history of the Great Wars of the last century should be ingrained in each of us and yet the link between WWI and WWII through Versailles and a Depression often seems to be either misunderstood or ignored.

We are all familiar with the basic outline of WWI. The shot heard around the world was the assassination of Archduke Ferdinand, after which the war followed.  Following the war, the allied powers gathered at Versailles and set up a treaty thus named and demanded what amounted to reparations, tribute and not a small measure of vengeance…. it was in this fertile ground that Hitler was able to plant the seeds of fascism.  And WWII followed.*

In looking at this period of history we should have learnt that the idea of punitive justice is not retribution.

The idea behind our system of courts and jails is not retribution – and while it is called justice, the concept it too vague to be of use.  For many people the system merely provides a means of revenge by proxy.  These motives come from the infancy of our society – revenge is one of the more base instincts of our species.

The criminal justice system is set up as a deterrent and as a way to ensure society’s safety by removing those who break the social contract.  This is the reason the death penalty is so widely opposed by the moral leaders in our society.  It has been shown that the introduction of the death penalty provides no additional disincentive to crime and often increases the tendency toward violent crimes.  Furthermore, in many countries (incl. USA) the death penalty legal proceedings cost the state significantly more than lifetime incarceration.

And yet the death penalty remains widely popular amongst the population of many countries.  This shows a disturbing tendency towards a retribution that smacks of vengeance.

It seems this remains prevalent in the relationship between countries.  When looking at the current economic scenario we see elements of this in play.  Some parts of Europe clearly exhibit some feeling of justified satisfaction at the situation in Greece.  “They spent too much, they worked too little” you can hear them saying.  Their fall is way overdue.  The Greeks on the other hand feel that the rest of Europe was complicit.  They did not get here on their own.  They feel a certain amount of Schadenfreude – If we go down, we will take some of you with us.

These motives and justifications, while understandable, are not acceptable.  We are in a game theory scenario where each acting for their own good leads to a sub-optimal result – something we cannot afford.

“Ich bin ein Berliner” – in 1963 JFK said as much to express global solidarity and cooperation.  “I am an American” echoed around the world post 911.  The concept is not a new one.  Almost 2000 years ago Marcus Aurelius wrote, “Frequently consider the connection of all things in the universe.  We should not say ‘I am an Athenian’ or ‘I am a Roman’ but ‘I am a citizen of the Universe.”

Yet the concept remains frustratingly out of our grasp – or maybe rather we prefer to cling to our baser instincts.

Now I am not suggesting that Greece will be the centre of a new world war, but with Google, YouTube and Facebook spanning the globe; with the citizens of the world becoming closer by the day – increasingly understanding that the “feared other”, the “rooi gevaar” is a construct, maybe countries and societies should wake up to this too.  The lesson is that we are too connected, too intertwined and too similar not to help when help is so desperately needed – especially if by doing so we will be helping ourselves.

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*The root and justifications of any conflict of this scale is obviously beyond the simple linear cause and effect described above, but the humiliation of Germany along with the economic depression worsened by War debt played a massive part.

“History, despite its wrenching pain, cannot be unlived, but if faced with courage, need not be lived again.”

-          Maya Angelou

“Hegel was right when he said that we learn from history that man can never learn anything from history.”

-          George Bernard Shaw (1856 – 1950)

“Those who cannot remember the past are condemned to repeat it.”

-          George Santayana (1863 – 1952)

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Albert Botha

Atlantic Asset Management

Link

Hope you enjoy.

To help make matters easier, here are all the details.

By any estimation it has been a challenging, frustrating and interesting year.

But as the the year draws to a close, we received some nice publicity in the 4th quarter issue of HEDGENEWS AFRICA.

Give it a read…….

Albert Botha

Atlantic Asset Management

If you are such a person, or if you know of one, please have a look at the ad.

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Albert Botha

Atlantic Asset Management

With the current financial crisis still reverberating around the world, along with fears and anxieties appearing to grow daily about the ultimate outcome, it is still nonetheless possible to peer into the crystal ball and get some sense of how this is all likely to end—and what it means for investors.

Over the past week the markets have caved in after realising yet again that there is no light at the end of the tunnel. Here we are 4 years after the crisis started in the subprime market, and we still find various trouble spots around the world where massive uncertainty reigns. This is despite the developed world maintaining a ZIRP (zero interest rate policy) since the end of 2008; despite unbelievable amounts of fiscal stimulus and other more arcane means of stimulating an economy, such as quantitative easing.

Herein lies one very important lesson for investors and it is possibly the single most important piece of advice we can offer right now: There is no quick fix to this crisis.

This is despite the soothing words and actions of central bankers. Do not believe them when they tell you over the course of the next 12 months that things are getting better. They were telling us this for the last 3 years already. Rather, our current advice is to listen to the gold price, there is a message there.

We do not proclaim to have a gold price model and we do not vouch for its true monetary value, but we do know that investors around the world WILL use gold as a safe haven. For that reason, when the gold price finally starts falling back sustainably, then you can believe that the crisis is over. Until then, do not believe what central bankers tell you.

So how do we make sense of what is going on in world financial markets? Are we implying a doomsday type scenario that lies in wait, or are markets “an accident waiting to happen?”

We cannot tell for sure, and yes there is a non-zero probability of a major dislocation in markets somewhere down the line. And we may even come awfully close to disaster. But there is too much vested interest for markets to capitulate completely and become completely dysfunctional to the extent that all assets go to zero.

The backstop for much of the thinking requires us to understand the fundamental nature of financial assets – they represent a contractual claim upon assets and the cash-flows of underlying economic entities. We then need to understand what drives the real economy in order to ascertain whether there is value or not in those financial assets.

But before we do that we need to truly understand the nature of the crisis. At the heart of the issue we have incredibly high debt levels. Not that those high levels of debt in absolute terms are necessarily a problem – it is about the relative size of debt, in particular to the revenue-generating capacity of an economy, usually measured by the size of GDP. Thus, the outlandish debt-to-GDP ratios of many Eurozone economies have come under the spotlight – Greece for example stands at around 140%, Italy at 120%, and Ireland at roughly 100%.

But it is not the first time that Governments around the world and through the ages have survived high debt to GDP ratios. Most interestingly is the fact that the UK survived through most of the 1930’s and 1940’s with a debt:GDP ratio of well above 150% – peaking above 200%!

If we can work out how they did this we may have some idea as to how the world will emerge from the current crisis. After all, unless one makes the debt disappear (by defaulting) it must be repaid at some point. So how do governments pay off debt? Through using tax revenues? This was the UK’s solution in the Post WW2 debt crisis. Notably, in the USA, higher taxes were also used to bring down debt. Be warned then that the big picture view on this is then either higher taxes, or higher inflation……..or both.

So the answer is that ultimately in order to escape the noose, economies have to find a balance in the combination of higher real growth and pushing out the term of their debt. Of course, there is a trade-off to this – there is no free lunch! Longer average terms to maturity of debt mean higher interest rate costs overall, which only exacerbate the budget shortfall in the short term. Of course the other side of the coin is to allow one’s currency to depreciate or devalue, which will also reduce the real value of one’s debt as well as hopefully provide some stimulus to exports and thus increase GDP growth.

Thus, it is the economic leaders’ quest to provide a believable package that induces long term sustainable growth, caps debt and, in the face of a disbelieving market, prevent disbelievers from continuing to short the market. But how do you provide a believable growth plan when austerity implies a lack of spending (and thus leading to slower GDP growth)? And thus they face possible default if the plan doesn’t work.

GDP growth according to the economists is a function of many things, but when faced with serious demographic problems in the form of declining and ageing populations, this only adds to the woes. It is for these reasons that, in our mind, given the constraints, these highly debt-laden countries will have no choice but to default at some point. The price of austerity in our belief is too high a price for politicians to stomach. For the time being though, they are kicking the can down the road, but Mr Market is not stupid.

The end of the crisis for peripheral Europe will only truly be in sight once we see the actual defaults…

We believe that the end of the crisis for peripheral Europe will only truly be in sight once we see those actual defaults – whereby actual debt levels are reduced relative to the size of the GDP. For the developed world as we noted it will require higher inflation and/or higher long term inflation.

So what does that mean for investors in practical terms?

Firstly, the euro. As this area’s currency is constrained and likely to remain weak relative to the other major currencies – even the US dollar. Secondly, until the debt overhang is removed, growth is also likely to be constrained, taxes are likely to be increased over time and it is only Germany that is really in a position to benefit in growth terms from a weaker euro. These point to avoiding Euro-zone corporates for the foreseeable future, but high quality large cap German multinationals may of course be a sweet spot.

Further to that, if default woes still hang around, then gold will remain in its upwards trajectory towards (inevitable) bubble status as the best crisis hedge out there. If a large seller of gold emerges of course, such as the USA – to help balance the books – then all gold bets will be off!

Emerging Markets will continue to attract inflows in such an environment, and will maintain higher growth rates.

Emerging markets will continue to attract capital flows in such an environment and will maintain higher growth rates. So look to growth companies in Emerging Markets as the source of safer and higher quality growth relative to that of Developed World.

Lastly, demographics again come into the equation in the form of what is happening in Emerging Markets – theirs is a growth story and this feeds into one line that we have long held in that a suitable long term investment play on this will be in the agricultural space. Yes, it has become somewhat of a cliché, we know, but there can be little better in the long term than an African farm! Even if just to escape the volatility!

Let it be said though, a productive African farm – not just one where you can kick your feet up and enjoy a drink on the stoep! That is of course, if one can see through all the smoke, mirrors, greed, corruption and investment noise. Who said investing was simple or easy?

There are no free lunches remember! For the time being, we must view the world through Japanese-coloured spectacles – low interest rates and anaemic growth for quite some time to come.

Invest SA

Enjoy the read!

What we are witnessing going on in the European hunting-grounds is fascinating to say the least, and despite all the twists and turns that those PIGS may take, there is no escape from the Bears. Someone IS going to get hurt, badly. When will this happen? Who knows, and with the likes of these PIGS, there is probably still some lying, er, running to be done. And we don’t even want to say anything about when PIGS fly, ‘cos we know that ain’t going to happen, but what we are seeing right now is PIG yields flying!

Enjoy this Week’s Commentary!

The Atlantic Team

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Atlantic’s Cash Plus Fund Yield: 6.00% (nominal after costs)

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The past week (and especially the previous session) was once again marked by excessive volatility in both global and local markets as European debt concerns remain. The latest news on this front appears to be that Lionel Messi has lent his goal-scoring boot to the EU as we are likely to see another solid kick of the can down the road as both the IMF and EU members come to the party in style. (The EU is now allegedly considering sweeteners to encourage current Greek bondholders to roll over maturing debt without triggering a credit-rating downgrade. You just cannot make this stuff up!)

We are faced with some interesting risk scenarios all of a sudden :

Locally the Competition Commission did the right thing on the Walmart issue (with perhaps less onerous conditions than previously feared). We include a letter on the impact of this company in another EM country for your benefit.

Chilean experience shows how Walmart will benefit SA

Also, irrespective whether the eventual outcome for Europe remains the same, it does improve the risk outlook in the short-term. What does that mean for ‘risk-on’ junkies?

Perhaps most importantly, why are US Treasuries rallying a few weeks ahead of the end of QE2?
(In fact, all assets are currently rallying across the globe – even copper and silver have made remarkable comebacks of late!)

The key lies in assessing the impact of the global mid-cycle slowdown as well as its extent. Current data, while surprising slightly to the downside, may be because of a combination of natural disasters in both Japan and Australia. If this is the case, getting too comfortable with a slowdown in inflation might be a mistake. However, as previously mentioned, we will need at least another 2-3 months’ worth of data before we will be able to ascertain for sure that 2H11 will still see an upswing in global growth.

Figure 1: Will the end of QE2 and a potential slowdown in global liquidity lead to a ‘risk-on’ shakeout? (Classic textbook technical formation on JSE ALSI)

Fixed Income

The most interesting piece of information over the past week from a local fixed income perspective undoubtedly has to be comments made by SARB governor Gill Marcus on Tuesday night.
“At this stage, in South Africa we are not seeing signs of an excessive build-up credit, or rapidly rising asset prices. Credit extension has remained subdued, while the various house price indices indicate a relatively weak housing market. Unfortunately domestic financial stability on its own is not enough. The animal spirits are alive at the global level, with ebbs and flows of confidence, and there are significant risks still emanating from a range of problems, which will require continued central bank focus on financial stability issues.”

Once again these comments are left wide open for one’s own interpretation…

Perhaps another weblink from our side to point to one specific, ongoing risk in this regard:

Wage negotiations
A meaningful 1Q11 GDP upside surprise has led to some topside revisions for the growth outlook for 2011 – from around 3.5% to at least 3.8% as there appears to be clear signs of a broadening in growth (at least one reputable analyst felt his long-held belief of 3.8% growth in 2011 may now be too conservative).
Interestingly we also note that die-hard 2012 interest rate hike forecasters for the first time appear to be changing their tone slightly. (Although at present this is nowhere to be seen in local price action!)
Therefore, once again, we will likely continue to be dictated to by the pace/depth of what is now widely-believed to be a mid-cycle slowdown.

Finally, adding onto comments in this research last week, we came across the following graphic from research conducted by UBS.
While local institutional reluctance to participate in the local bond market continues, foreigners have managed to buy just shy of $2bn worth of bonds in May alone, bringing total net buying for the year to R23bn. (A reminder that EFRF data showed that at the end of May total net inflows into dedicated EM local debt amounted to $8bn.)

Figure 2: Foreign inflows into SA local bonds (ZAR terms)

Global

As the tug-of-war in Europe continues market watchers remain on the edge of their seats as they await the final outcome of this rollercoaster ride. For us whatever decision is made in the short-term will likely be just yet another postponement of the inevitable, and we therefore side with comments recently made by Mark Mobius that it will come as little surprise if global financial markets ran into another crises in the next few years.
Morgan Stanley captured our thoughts on the Euro area best in a recent comment:
“ The single currency system remains deeply flawed and all attempts to stabilize it thus far have been nothing more than swift kicks of the can … can-kicking can only last as long as the citizens of these nations remain ignorant of their reality – that they are suffering at the hands of austerity in order to ensure that bankers do not suffer. The biggest risk in Europe may not be that Greece or any other nation will default. It may be that the citizens will wake up to flaws of the single currency system and demand a complete reversal of the current course.”

Another fascinating piece of research from Morgan Stanley also on the US opened our eyes to other ongoing risks elsewhere on the globe:

Why is the US economy so BAD ?

- Millions of Americans have lost their homes, tens of millions of Americans can’t find a decent job and 44m Americans (1 in are on food stamps.
- According to the U.S. Bureau of Labor Statistics, an average of about 5m Americans were being hired every single month during 2006. Today, an average of about 3.5m Americans are being hired every single month.
- Only 66.8% of American men had a job last year… That was the lowest level that has ever been recorded.
- The U.S. has lost an average of 50,000 manufacturing jobs per month since China joined the WTO in 2001, and the U.S. trade deficit with China is now 27 times larger than it was back in 1990.
- Amazingly, the United States has lost a staggering 32% of its manufacturing jobs since the year 2000.
- While 23% of the jobs lost in the Great Recession that followed the economic meltdown of 2008 were “low-wage” (those paying $9-$13 an hour), 49% of new jobs added in the sluggish “recovery” are in those same low-wage industries.
- On the other end of the spectrum, 40% of the jobs lost paid high wages ($19-$31 an hour), while a mere 14% of new jobs pay similarly high wages.
- For the first time ever, more than a million American homes were repossessed during 2010.
- Today, there are 6.4m homeowners that are delinquent on their mortgages or in foreclosure. Of those, 675,000 have not made a payment in at least two years.
- There are 120m more people in the U.S. than there were in 1963, but home purchases are currently at about half the level they were back then.
- According to the Bureau of Economic Analysis, health care costs accounted for just 9.5% of all personal consumption back in 1980. Today they account for approximately 16.3%.
- One study found that approximately 41% of working-age Americans either have medical bill problems or are currently paying off medical debt.
- Health care costs continue to increase far faster than the general rate of inflation and so this crisis is going to continue to get worse.
- A study found that American workers are $6.6 trillion short of what they need to retire comfortably.
- 59% of all Americans now receive money from the federal government in one form or another.
- Average household debt in the United States has now reached a level of 136% of average household income.

FX

A combination of relief (Walmart decision) and some can-kicking in Europe has made the Rand’s fortunes change rather swiftly. After testing quite important technical levels around 7.05 to the US Dollar, the unit was hovering around first strong resistance levels (6.77) at time of writing.

From here the Rand appears trapped pretty much in the middle of a relatively well-defined trading range of 7.05/6.55. It will therefore be important to gauge the impact of the end of QE2 against that of an interim solution for European issues for the fortunes of the Rand.

From a bigger-picture perspective though, ongoing Rand strength (seen as anything sub 7.30) continues to be very good news for local inflation, and may still postpone what we see to be an inevitable first hike of interest rates on the local front.

Albert’s Quote of the week

“The world will remain an unusually fluid place. By looking forward and retaining our culture of CONSTRUCTIVE PARANOIA we will strive to ensure that your portfolios benefit from change, rather than fall victim to it.”
- Mohamed A. El-Erian