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Secrets To Managing The Bulge

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My earliest recollection of economic sanctions was in 1984 … during apartheid years.

The Anglo-American hegemony imposed economic sanctions on a wealthy South Africa.

One effect was to prevent South African Airways from flying over airspace of numerous African countries.

Instead SAA would have to fly west out to the Atlantic Ocean and land on a cockroach infested volcanic rock in the Canary Island’s called Ihla do sal at 2:30 in the morning.

Everybody had to leave the aircraft and spend an hour in a hot terminal building whilst they refueled the B747’s.


This detour became colloquially known as flying Round the Bulge, adding at least 3 to 4 hours to any flight, making London a 13 hour flight instead of 10!


At that time the Rand was trading at R2:$1

It’s now hovering at R15:$1

A 650% depreciation!

Such was the power of the United States and its allies (primarily the UK) that a relatively wealthy country could be brought to its knees and the brink of financial collapse … which in part paved the way, thankfully, for the end of the apartheid system.

We recollect this story because its causes us to marvel at what appears to us to be a slipping of World leadership by those powers.

We cannot help but wonder at the populist revolutions that have occurred as a result of Brexit and now (no matter the outcome) the ascendency of Donald Trump as a viable Presidential candidate.

Few would argue that this is no longer the Republic of Ronald Reagan and (to us at least) we seem to be moving towards an Orwellian future as depicted in the novel bearing the self-same name as my earliest economic recollection – 1984:


“… set in Airstrip One (formerly known as Great Britain), a province of the superstate Oceania in a world of perpetual war, omnipresent government surveillance, and public manipulation, dictated by a political system euphemistically named English Socialism (or Ingsoc in the government’s invented language, Newspeak) under the control of a privileged elite of the Inner Party, that persecutes individualism and independent thinking as “thoughtcrime.”

The tyranny is epitomized by Big Brother, the Party leader who enjoys an intense cult of personality but who may not even exist.

The Party “seeks power entirely for its own sake.

It is not interested in the good of others; it is interested solely in power.”

The protagonist of the novel, Winston Smith, is a member of the Outer Party, who works for the Ministry of Truth (or Minitrue in Newspeak), which is responsible for propaganda and historical revisionism.

His job is to rewrite past newspaper articles, so that the historical record always supports the party line.

The instructions that the workers receive specify the corrections as fixing misquotations and never as what they really are: forgeries and falsifications.

A large part of the ministry also actively destroys all documents that have been edited and do not contain the revisions; in this way, no proof exists that the government is lying. Smith is a diligent and skillful worker but secretly hates the Party and dreams of rebellion against Big Brother.”

Wikipedia 1984

The bulge is depressing!

The bulge is also a reference to one whose belly is enlarged, presumably from imbibing too much!

Turning to investments …

In the category of too much of a good thing we would place ETFs aka. Passive investing.

September 1 – Bloomberg (Charles Stein): “Vanguard Group Inc. is on track for another record year of inflows as investors increasingly shun stock pickers. The world’s largest mutual fund company attracted $198.4 billion in the first eight months of this year, a 19% increase from the same period a year earlier… In 2015, Vanguard lured $236.1 billion, the most ever for the company. Vanguard is benefiting as investors, frustrated by the lackluster performance and high fees charged by active managers, are pouring money into low-cost funds that mimic indexes… Investors pulled $130.9 billion from active and exchange-traded funds through July 31, while adding $241.8 billion to passive funds, according to data from Morningstar… Vanguard had $3.3 trillion in U.S. mutual funds and exchange-traded funds as of July 31, 22% of the entire market…”

Clients know I am fond of reminding them that there are seasons for everything in investing and that trees don’t grow to the sky.

By definition, a passive investor has chosen to save money by not paying for research, does not care about economic statistics, and is not concerned about valuations.

Corporate insiders have taken advantage by reporting inflated non-GAAP earnings and borrowing record amounts of debt to buy back stock, make acquisitions, and fund current operations.

Take the curious case of Broadcom reporting record non-GAAP earnings despite GAAP losses, Charter Communications that went $91B into debt or Caterpillar whose management is not expecting good economic news next year yet the stock is up 28% ytd (11/7/2016) on index buying!

Pour Conclure

Given that Real Gross Domestic Investment has been rolling over since late 2014:



And long term interest rates have been rising since July of this year (not pictured).

When credit conditions tighten; the above-mentioned companies will have limited financial flexibility. They will be the worst performing securities in the next bear market as they issue stock to pay off their record debt!

Active management and financial statement analysis will regain its importance.

Article by Greg Silberman

Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.

Greg Silberman is the Chief Investment Officer of Atlanta Capital Group Investment Management [ACGIM]. Atlanta Capital Group Investment Management specializes in creating custom private market solutions for RIA/Family Office clients.

Advisory Services offered through Atlanta Capital Group Investment Management.

Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.


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