Absolute Return Partners letter

October 2014
Six Months of Nothing

“Imagination is a poor substitute for experience.” – Havelock Ellis

H/T ValueInvestingWorld

The accident

It was late in the evening of the 12th March. I was going to bed early as I had a big day ahead of me. Cycling is my sport and I had lined up a handful of Danish friends for a challenging few days in the mountains of Majorca, the beautiful Spanish island. We were all keen cyclists and wanted to take advantage of the early arrival of spring in Southern Europe to get some miles in the legs.

The next morning I took the first lead out of Esporles, a nice village on the edge of the Tramuntana – the mountain chain running along the Northwest coast of Majorca. We aimed for S’Esgleita with me in front – keen to show the other Danes that I hadn’t completely neglected my winter training despite the very wet winter in the UK. In S’Esgleita we took a right turn towards Santa Maria and Alaro, heading towards the serious mountains.

I had shown what I wanted to show and had dropped back to fourth position when the accident happened. The rider in front of me made a mistake and took a heavy fall. Riding on his wheel (in hindsight too closely!), I couldn’t escape the accident and went straight over him, hit the rocky ground myself and was knocked unconscious.

The rest is history. Too much time in hospital and a long recovery at home explains the absence of the Absolute Return Letter over the past seven months. The most difficult part has been to get the body functioning again, but I am (slowly) getting there, and I am excited to be back.

Enough about the accident. Now to what I much prefer to think and write about, but, before I do that, please allow me to thank all those of you who have sent me well wishes. Quite extraordinary and hugely appreciated!

Because of the long break, this letter is a little different from the typical Absolute Return Letter. Instead of picking on a particular subject, as I would normally do, this is more a summary of our views across asset classes. I hope you’ll find it interesting nevertheless. Next month I will return to the familiar format.

When I look at the world passing by outside my window, there is little doubt in my mind that the world is not as safe today as it was six months ago. For starters we have just had a very important referendum in Scotland. We now know the outcome but not yet the full implications. In about 3 years – unless Labour regains the control of the UK parliament – we will have an even more important referendum in the UK (more important economically if not emotionally) on the future relationship between the UK and the EU.

In the meantime, Putin and his cronies have played a very dangerous game in Ukraine. This is his third war, following armed conflicts with both Chechnya and Georgia, and the signs are that he is not going to walk away quietly. Even without Putin’s (outright) involvement, we have armed conflicts and new terror threats in many countries at present. Libya, Syria, Iraq, Sudan and Israel/Palestine to name a few.

In Europe, the economic recovery is limited to a handful of countries and the ECB has been forced to not only prolong but also intensify its de facto QE programme. The European powerhouse of yesteryear, Germany, looks surprisingly vulnerable and Italy is not in a good state either. The combination of almost zero inflation and high national debt, as in the case of Italy, is a bad one.

The ECB may have a serious job to do in Italy over the next 12-24 months if economic growth doesn’t pick up. Italy’s debt-to-GDP now stands at 145% and nobody knows when financial markets will decide that enough is enough. Before Italy is declared a complete write-off, though, one needs to remember that private savings in Italy are amongst the highest in the world.

Absolute return 1 U.S. equity performance

Absolute Return 2 Japanese working age population

See full Absolute Return Letter: Six Months of Nothing in PDF format here.