Treading Lightly: No Tired Track for 2014

By: Wilfred Hahn | Tue, Feb 25, 2014
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After a rather cathartic start to the year (equity markets tumbling at the fastest pace in years) markets are again romping to the tune of the now familiar, well-told story. While we celebrate new equity market highs, we think the old story is tired; looking more like a re-tread here in early 2014. Why? Crucially, because the global financial story is changing. We therefore now need to be looking ahead ... not warming our old convictions on the hopes of a passing story.

But first, let's review the soothing story that still seems to be warming everyone's cockles.

Here are its major tenants and beliefs:

It has been a great script. Not because it holds much causal or theoretical credibility, but because it has been joyously believed. Somewhat dangerously, there's no one left to convert to this perspective. Mostly everyone is confident.

Never before have financial markets been as complicit with the bidding of the central banks. Its players are in collusion with the narrative that the central banks want to create, each signaling to the other that they must play together to create a rising wealth effect -- the biggest unhinged financial bubble of some time.

It's a colossal experiment that at some point will end up unfortunately, in one way or another. We identify current conditions as a renewed financial bubble that carries uncompensated risks. That's why we have been maintaining a cautious stance in our portfolios. Timing and judging the possible extent of over-exuberance is always problematic. Nevertheless, we think there will be rewards for the prudent and patient. It has always worked out that way before.

Just what is the new story? It holds some very significant shifts. These, in part, we think, will recognize the unsustainability of the past tenants as well as patent theoretical falsehoods.

Here is the new story that we perceive is coming on the scene:

The most serious misreading is the inflation regime. Overindebtedness, secular shifts , and the impact of technology betray an underlying disinflation (even deflationary) influence despite what central banks may wish to do. There is no way that profit growth can continue indefinitely in such an environment. The cash economy, in nominal terms, is being gradually squeezed.

Crucially, emerging markets are now (have been) the world's locomotive. Once upon a time, the world relied up the U.S. as its economic engine. When it pulled out of the station, so did the rest of the world's economies ... eventually. Right now, the U.S. is adding a slowing influence upon rest-of-world GDP growth. Post the Global Financial Crisis, China and other less-advanced nations contributed two-thirds of world GDP growth. That period (for now) is over. This is a critical difference.

Yes, we too want to believe that the old story will continue indefinitely. But, more than that, we want to make sure that our clients aren't vulnerable to yet another reckless, feckless financial bubble ... remarkably, the third one in 15 years.

We may risk missing the last "high risk" returns that are being extracted from libidinous investor enthusiasm (misplaced as we believe that it is). However, as our track record well proves, it's how much one keeps during the inclement financial times that is a major determinant of long-term returns.

The third financial bubble in 15 years is underway at present. No one can really know how far it may yet expand. The extremities of human emotions and possible policy responses really cannot be forecast in 2014. What we do know for certain is that overall investment risks have again risen. Our current investment policies have been adjusted accordingly. We remain broadly and globally diversified, holding some insurance as well as relying on higher yields.



Wilfred Hahn

Author: Wilfred Hahn

Wilfred Hahn
Hahn Investment Stewards & Company Inc.

Wilfred Hahn

HAHN Investment Stewards & Co Inc.
26 Wellington Street East, Suite 920
Toronto, ON
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HAHN Investment Stewards & Co Inc.
P.O. Box 2609, Station R
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V1X 6A7

Toll Free: 888 419 6715
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Wilfred Hahn is intimately familiar with the many facets and challenges of the world of money, having worked in the global financial and investment industry for over two decades.

Business and research travels have brought Wilfred to 40 countries around the world, allowing him a unique opportunity to keep abreast of global developments and to maintain an international network of contacts. He is a published author and has written on global financial markets, ethics and stewardship issues. When Euromoney Magazine asked fund managers around the world to name their favorite domestic and international research analysts, Wilfred was chosen one of them. Many foreign publications around the world have quoted Wilfred, including the South China Morning Post, Wall Street Journal, New York Times, Frankfurter Allgemeine, and the Financial Post. He has made numerous appearances on various television and radio broadcasts.

Prior to founding Hahn Investment Stewards, Wilfred was head of the Global Investment Group of the Royal Bank of Canada. In this position, he built the global discretionary business of this institution, comprising the activities of staff in nine countries and assets of clients totaling in excess of $10 billion. The group's many clients around the world included pension funds, corporations, mutual fund unit-holders and private individuals.

Prior to the Royal Bank he co-founded Hahn Capital Partners Inc. - a global investment counseling firm that was sold to the Royal Bank of Canada. Earlier in his career Wilfred was Senior Vice President, Director of Research of Prudential Bache Securities. There he gained extensive global experience, establishing a high ranking as a financial market strategist. Earlier, Wilfred was a partner in the investment banking firm of Gordon Capital Inc.

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