January 09, 2009

Less is more in 2009

Dear Friends & Fellow Investors

I hate to start the year with bad news, so Happy New Year first of all and let’s try to look at our "economic glass" as half full for the sake of good intentions.

For most of us, the financial crisis of 2008 has been the worst we have experienced in our life times or least during our working careers. And yet, the world hasn’t fallen off a cliff. When you walk/drive through your local streets, you see most people going about their daily business, albeit perhaps at a slower and less enthusiastic pace. Today's announcement that the US unemployment rate for December-08 was 7.2% is concerning and the fact that 2.6 million US jobs have been lost in 2008 is an alarm bell everyone should hear. Stop reading or listening to the news for a week and look around. People in most of the developed countries aren't starving from hunger and unlike the Great Depression, when unemployment rates in the US were about 25%, the current labor market appears relatively strong still (steeper hurdles to climb in '09 though). As I've repeatedly noted, we have difficult times ahead in 2009 but this whole financial tsunami may have been the necessary wake-up call our increasingly global society needed. More importantly though, this wake-up call may guide consumers as well as investors towards making the the right consumption and investment decisions.

Less is more
Admittedly, those Prada/Hermes/Gucci etc. purses or the latest iGadgets look incredibly tempting. I know I'm running up against a storm of protest here but I'll say it anyway: Nobody "needs" a $1,000 purse when an equivalent looking $50 purse will perform the same basic function. And similarly, a decent inexpensive car will get you from A to B just as well as the latest Ferrari. No teenager "needs" an iPhone nor an iPod that holds 30,000 songs (30,000 songs at 99 cents each for a download, that's the price of a new mid-size car) . As consumers we may desire these items but we certainly don't need them.

Anyway, the point is we should all be making our purchasing decisions on a need basis rather than based on wants, desires or simply keeping up with the Joneses. Despite the gloomy trends for 2009 and perhaps beyond, there's a silver lining though: now that the credit crunch has tightened the seemingly endless flow of credit, "Joe Consumer" is actually forced to make wiser purchasing decisions, it's no longer a choice anymore. As a result, anything frivolous needs to be shelved for a while. And if we all drive less, eat less and walk more, we gain by living healthier and more frugal lives. Less can be more...

Translate that into your investment decisions for 2009 & beyond and you have some pretty good guidelines for certain sectors/companies which may weather the storm better than others.

Despite abysmal employment data today, the US$ gained in strength against most of the major currencies with the exception of the Japanese Yen. Some traders used the term FIFO (first in first out) this week when describing the possibility that the US economy may come out of this crisis ahead of other G8 countries. It's certainly been reflected in some intermediate US$ strength wherein the bulk all global cash still on the sidelines seems to favor US short term Treasuries. The European Central Bank is expected to only lower rates modestly next week, if at all; this leaves the door open for currency analysts to look towards the next meeting in February for potentially larger rate cuts. Unlike the Fed and the Bank of England however, the ECB has not yet signaled a willingness for quantitative easing a.k.a. printing a lot more money.

It is conceivable that the US$ may gain some more strength in the next few weeks/months but we continue to see a long-term dilution in the value of the greenback. The US Congressional Budget Office (CBO) estimates America's budget deficit might reach $1,200bn this year; that's without the planned fiscal stimulus proposed by Mr. Obama of $775bn. It is likely that the US fiscal deficit might reach 10% of GDP in 2009. Compare that to the stated max. deficit of 3% of GDP imposed on Euro area member countries and one must wonder what tricks the nominated dream team of Mr. Obama has up its sleeve that would give us the confidence we can get out of this mess unscathed? On a personal note, I fail to see the logic of deficit spending. It is clear that leverage was one of the key factors in causing the biggest financial crisis since the Great Depression. Why should we trust in leverage to get us out of the mess?

The longer term view suggests that continued budget and trade deficits must dilute the value of the US$. The US printing press is running full steam ahead and more Dollars in the market can only lead to a decrease in real US$ purchasing power, all other things being equal.

A real record
If you thought the 10th anniversary of the Euro is significant, or that the worst US annual job losses since 1945 are noteworthy - get this: The Bank of England cut interest rates to the lowest level since 1694, the year in which the Central Bank received its Royal Charter. That's the lowest rate in 315 years - a real record.

More good news - Happy Birthday Euro!
The Euro officially turned 10 years old on January 1st 2009. Reason to celebrate? As a European by birth and at heart, I believe so. If you had asked me 10 years ago about the prospects of the Euro, I would have given you a 50 page document of reasons as to why I foresee many difficulties in implementing a cross border single currency. Without going into details here, my first-hand experience from the currency crises of 1992 (Britain's exit of the ERM) and 1997/98 (Asian financial crisis) as well as the combination of economic hardship from a reunified Germany, fiscal restrictions on national central banks and number of other financial and legal hurdles that the EU needed to overcome had my utmost concerns. And some of these factors did indeed drive the Euro down initially. At the beginning of 1999 the Euro traded around 1.15 vs. US$ and declined to a low of 82 cents versus the US$ in October 2000. But since then, the single currency has been gaining strength successively in large part because of stricter adherence to fiscal policy requirements by the European Central Bank, or perhaps the lack thereof by its counterpart in the US.

For currency aficionados, here's a nice overview of the developments leading to the Euro today.

Brief History of the Euro
Source: http://www.ecb.eu/pub/pdf/other/ecbhistoryrolefunctions2006en.pdf

The European Commission makes its first proposal (Marjolin Memorandum) for economic and monetary union.
May 1964
A Committee of Governors of the central banks of the Member States of the European Economic Community (EEC) is formed to institutionalise the cooperation among EEC central banks.
The Werner Report sets out a plan to realise an economic and monetary union in the Community by 1980.
April 1972
A system (the “snake”) for the progressive narrowing of the margins of fluctuation between the currencies of the Member States of the European Economic Community is established.
April 1973
The European Monetary Cooperation Fund (EMCF) is set up to ensure the proper operation of the snake.
March 1979
The European Monetary System (EMS) is created.
February 1986
The Single European Act (SEA) is signed.
June 1988
The European Council mandates a committee of experts under the chairmanship of Jacques Delors (the “Delors Committee”) to make proposals for the realisation of EMU.
May 1989
The “Delors Report” is submitted to the European Council.
June 1989
The European Council agrees on the realisation of EMU in three stages.
July 1990
Stage One of EMU begins.
December 1990
An Intergovernmental Conference to prepare for Stages Two and Three of EMU is launched.
February 1992
The Treaty on European Union (the “Maastricht Treaty”) is signed.
October 1993
Frankfurt am Main is chosen as the seat of the EMI and of the ECB and a President of the EMI is nominated.
November 1993
The Treaty on European Union enters into force.
December 1993
Alexandre Lamfalussy is appointed as President of the EMI, to be established on 1 January 1994.
January 1994
Stage Two of EMU begins and the EMI is established.
December 1995
The Madrid European Council decides on the name of the single currency and sets out the scenario for its adoption and the cash changeover.
December 1996
The EMI presents specimen euro banknotes to the European Council.
June 1997
The European Council agrees on the Stability and Growth Pact.
May 1998
Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland are considered to fulfill the necessary conditions for the adoption of the euro as their single currency; the Members of the Executive Board of the ECB are appointed.
June 1998
The ECB and the ESCB are established.
October 1998
The ECB announces the strategy and the operational framework for the single monetary policy it will conduct from 1 January 1999.
January 1999
Stage Three of EMU begins; the euro becomes the single currency of the euro area; conversion rates are fixed irrevocably for the former national currencies of the participating Member States; a single monetary policy is conducted for the euro area.
January 2001
Greece becomes the 12th EU Member State to join the euro area.
January 2002
The euro cash changeover: euro banknotes and coins are introduced and become sole legal tender in the euro area by the end of February 2002.
May 2004
The NCBs of the ten new EU Member States join the ESCB.
January 2007
Slovenia joins the euro area.
January 2008
Cyprus and Malta join the euro area
January 2009
Slovakia joins the euro area.

Other Markets
US stocks ended the week on a sour note, mirroring the continued gloomy outlook for the year ahead. Stocks in Europe and Asia performed equally bad ending the week on a negative note.
Gold continues to be a an interesting commodity, particularly in this economy. Traditionally, Gold has been the safe haven commodity and there are an increasing number of supporters of a return to some form of gold standard to help deal with some of the fundamental flaws of the global system of exchange rates. Some analysts have called for a renewed test of the $1000 barrier we witnessed earlier last year. In fact, some investment gurus such as Jim Rogers and Peter Schiff are banking on a continued commodity boom, with gold rising as high as $1500/$2000 or higher. It is conceivable to see these levels at some point, especially if and when true inflation will kick in. For the time being though, the charts show successively lower high's (an indication of a current down-trend) and unless Gold significantly break above the $900 level, the short/medium term trend remains sideways to bearish. Email us if you'd like to receive a copy of our technical analysis chart.

Outlook for 2009
We are still in the process of formulating a more comprehensive outlook for this year. In the meantime, let’s look at what others have to say about the year ahead…

Expert's view of the Financial Times: http://www.ft.com/cms/s/0/b05f4888-db91-11dd-be53-000077b07658.html
Never a better moment to set up in business: http://www.ft.com/cms/s/0/6bd397a0-db91-11dd-be53-000077b07658.html?nclick_check=1

Once again, best wishes for a peaceful 2009 and good luck for the year ahead - Clemens Kownatzki

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