“Current prices have squeezed out all of the risk and interest rate premiums from future cash flows, and now financial markets are left with real growth, which itself experiences a slower new normal because of less financial leverage.” Bill Gross

“The cynic knows the price of everything and the value of nothing.”  Oscar Wilde

 ”The idea of a bailout for Greece is absurd….It is easy for Greece to service their debt.” Joseph Stiglitz, Nobel Laureate

In March, the FTSE All Share was down 1.1% and the Hedge Fund Index was flat for the Month. Kelpie was down by 2.5% which is disappointing given my defensive positioning.

It was a quiet month where the market’s relentless advance seemed to stall out. The focus shifted very much to Apple which became the subject of incessant media coverage and much US recovery “hopium” on CNBC.

Apple is now easily the largest company in the world by market capitalisation, at some $600 billion. It looms over Exxon Mobil, which is worth a mere $408 billion. Since the start of this year it has added $187 billion to its valuation, roughly equivalent to the entire market caps of companies like Procter & Gamble, Johnson & Johnson and Wells Fargo. Apple is larger than all of the American retail sector combined. Philosophically this makes me wonder what does it say about our society that the biggest company in the world produces gadgets? Apple has some fantastic operating momentum and the ex-cash valuation is reasonable but I do think we are seeing signs of irrational exuberance.

From a secular valuation/opportunity perspective the menu of asset classes offers us an incredibly poor choice today. Andrew Smithers has now updated his valuation data to mid December 2011.  At that time, his calculation was that fair value for U.S. non-financials was equivalent to about 925 on the S&P 500 based on his version of the q Ratio and was about 820 based on Robert Shiller’s updated measure of Cyclically Adjusted Price to Earnings. This represents overvaluation of fairly extreme levels of between 50% and 70%. Furthermore, the ratio of corporate profits to GDP is nearly 70% above the historical norm.

My portfolio is gravitating towards a certain style currently; a balance of greed assets and fear assets. Those which I view as very low risk investments – Cash, Microsoft, Berkshire Hathaway, JZCP, British Empire Trust and Greenlight Re. Contrasted against those “greed assets” which I view as higher risk, very high upside investments like Energold Drilling, Yukon Nevada, Dart Group and Sandstorm Metals & Energy. The hope of course is that the low risk assets perform adequately but also afford the riskier investments breathing space to fulfil their potential.

Another way of looking at the portfolio would be a balance of inflation assets and deflation assets. The range of potential outcomes for the global economy is wide, there are left tail and right tail events that can force the global economy into inflation or deflation. The commodity plays mentioned above and the asset backed stocks like Tesco, British Empire Trust and Intergroup would fare well in an inflationary environment. But conversely my large cash balance, robust balance sheets and shorts will perform well in a deflationary environment when the purchasing power of cash increases dramatically and the value of liquidity increases.

Not All Jobs are Created Equal

The bulls are trumpeting a return to sustained job creation in the US but a closer look at the data reveals that it is way too early to call a jobs recovery. US Treasury Tax Receipts in Feb 2012 were $103.4 billion, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012. Real income data declined month over month which sits uncomfortably with the job creation data that everyone is getting excited about. What this tells us is that either, the unemployment data is wrong and there are fewer employed people this year than there was at this stage last year OR alternatively the new jobs are paying considerably less than the old jobs. This second point is my preferred explanation; the high paid white collar jobs of the FIRE industries are gone and not coming back, the new jobs are low skilled and lower paid.

Watch What They Do, Not What They Say

It is seemingly increasingly apparent that the central bankers and politicians of the world are attempting to engage in a trick of misdirection. The trick is to make all the right noises on the one hand and with the other hand quietly go about doing precisely the opposite. What we saw with “extend and pretend” and failing to mark to market we now see with fiscal policy. The UK government has been loudly talking the talk of austerity and belt tightening, but why has public sector net debt rose by around £120bn over the last 12 months?  The scary thing is that even though the fiscal austerity has yet to actually begin and the monetary spigots remain loose, the UK is slipping back into recession.  The OECD has called that the UK will officially enter recession when the Q1 Data is released.

The coupling of this great misdirection with the fact that central bankers are deep in unchartered waters with monetary largesse and policy experimentation leaves a wide margin for error when it comes to policy mistakes and unintended consequences. It is in an attempt to insulate myself from these potential mistakes that I seek exposure to gold.

It seems that bankers and politicians have chosen their eventual path – further liquidity, further obfuscation, further misdirection and I think this will lead to precious metals appreciating against all fiat currencies over time. The volatility in the spot prices is unsettling but I believe we have a great secular wind at our backs on this investment. When gold falls by several percent just because Ben Bernanke doesn’t mention QE3 in a testimony doesn’t mean it won’t be enacted in some form or other before the year is out. One bad month does not change a long-term trend that has been building over 10 years.

New Positions

Sandstorm Metals & Energy

British Empire Investment Trust

Playtech

Gigaset De

Reduced Positions

Investors Title Insurance Company

Exited Positions

Mercer International