IceCap: Europe, Bonds and The Ski Holiday by IceCap Asset Management
Laughter and bubbles followed by…
Whispers, murmurs and furrowed brows filled the room. Without looking harder, you could also sense puzzlement, bafflement and even obfuscation. Yes, it was scene.
Only minutes earlier the room was filled with laughter, bubbles and the very best French and Italian foods only a local could find. And then it happened – someone dared to suggest all wasn’t quite well in the mathematically challenged land called Europe.
Defensive arguments tilted heavily towards subjective and emotional appeals stammering that only Europeans know what it is to be European. Offensive arguments simply deteriorated to offensive name calling.
Just when we thought the momentum peaked, it reached another level with the wager – “I’ll bet you a ski holiday that the Euro doesn’t break apart.”
Now, it was at this point our original conclusion was confirmed, and it was also the point when we felt a bit uneasy about the entire situation. After all, if we declined the wager we would be seen as not being a true believer in our investment outlook for Europe. And, as our readers know, nothing could be further from the truth.
Yet, the wager itself was laced with irony. The exact moment in time when we are in fact proven correct, ironically will also be the exact moment in time when anyone with a vested interest in the Euro loses significant wealth. How would we ever collect on our well-earned ski holiday? As we are not supporters of stealing from the future poor, we declined the wager – but retained our dignity.
The un-lazy summer
Lazy summers are usually the time when you invest in lazy days at lazy parks, lazy lakes and even lazier beaches. Yet, if one took their nose out of their favourite summertime book, they would be shocked by the rather un-lazy restlessness enveloping the world.
During this usually slow time of year, world events have been anything but slow. For starters, another military conflict escalated between Israel and Palestine. Whereas previous conflicts were dominated by missiles and bombs fired across the border, this one saw the dreaded boots on the ground. In addition, Israel’s latest military strategy to protect its people has resulted in over 30,000 artillery shells being fired into Gaza. As you would imagine, damage is extensive. Cease fire and peace talks are being mediated by Egypt, all while the rest of the middle east stews.
If that wasn’t enough to interrupt your summer of bocce, then consider the newest, current situation in Iraq. Yes, only a few short months ago, Nobel Peace Prize winner, President Obama declared that American troops had finally finished their jobs meaning Iraq was now free to stand on its own two feet.
American guns vs American guns
Literally hours later, the entire country returned to chaos as the jihadist group – ISIS (Islamic State of Iraq and Syria) violently took control over many parts of the country. What makes this latest Iraq situation interesting is that ISIS was heavily involved in the Syrian civil war and received substantial military equipment and support from none other than – America.
Today, President Obama has reordered American “military advisors” back into Iraq to help the local government fight ISIS. So, now we have American troops using American military equipment, fighting against a American declared Islamic terrorist group who also happen to be using American military equipment, who also happened to be supported by the American government while fighting against the Syrian government.
Confused yet? It gets worse
It also just so happens that there is another country who doesn’t care much for ISIS. But it also just so happens that this country has interesting relationships with America, Iraq and Syria. This is where everyone’s favourite axis of all evils enters the fray – yes, we are talking about Iran.
Whereas Iran is predominantly Shi’a, ISIS is predominantly Sunni. In the middle east, these two major Islamic denominations have long been at odds and have been a key dividing line between the various conflicts in the region.
As there are no free lunches anywhere in the world – Iran’s offer to help the Americans fight ISIS comes with a small cost or favour. In exchange for helping the next good fight, Iran simply asks for the nuclear sanctions to be lifted.
What could possibly go wrong with this arrangement?
The entire situation reeks of military equipment and foreign policy irony at the highest levels. While Iraq yet again, burns to the ground, there is some good news. In 2002, the Bush government estimated a war with Iraq would cost about $60 billion. Today, the final calculations are reporting the total cost to be closer to $6 trillion.
Naturally, this must be great news for the economy, and will only further help the accelerating recovery. We say this tongue in cheek, of course, yet when the talking heads and big bank economists sharpen their pencils while calculating the latest GDP figures – defense spending and procurement are major contributors.
And speaking of boots on the ground, it appears that any day now the Russia-Ukraine conflict will also escalate to boots, rifles, humvees and other ground hitting equipment. This too will be good for the global economy – at least that’s what you will be told.
However, the situation in Ukraine is anything but positive for the global economy. Now, there will be many investment reporters and analysts who will tell you that Ukraine doesn’t matter. After all, the country’s economy is roughly the same size as that of Oregon.
Obama vs Putin
And, while Oregon may lay claim to producing some of the best pinot noir and micro brews in the world – it cannot lay claim to being the spark that ignites the latest reincarnation of the cold war.
While, the good old days of Reagan vs Gorbachev have passed us bye, the days of Obama vs Putin are just getting started. In effect, investors will be wise not to mistake the Ukrainian crisis as a civil war drummed up through years of domestic cultural differences.
Recall that the real sparks started to fly just as Ukraine declared itself broke – yes, yet another country discovered that you cannot indefinitely spend more money than you collect in taxes. And it was at this moment, Europe strolled in offering a bailout package to help the Ukraine government get through their little money problem.
Problem solved – or at least that’s what we were told. Of course, never to let a good crisis go to waste, Russia saw this as a perfect opportunity to gallop into Kiev offering an even better money saving deal. Fast forward through Maiden Square riots, strong-armed riot police, a fleeing president and an annexed peninsula and you will get the Ukraine-Russia conflict of today.
There are two reasons why understanding this is important for your wealth. First, the long-term prospects for the next great war have increased significantly. Domestically, Russia is really struggling from an economic perspective. The growing divide between the wealthy and everyone else is perhaps greater in Moscow than anywhere else – including London and New York.
The wealth gap in Russia is especially sharp due to the lack of true capital markets. Instead of having free competition and objective regulation, Russia’s