We thank our good friends at Bienville Capital for permission to share their most recent Commentary & Strategy piece (the new website looks great guys). We have found the investment team at Bienville, whose roots originate from a Mobile, Alabama family office, to be insightful, independent and thought-provoking. We hope you enjoy their letter which provides an examination of the economic environment, policy decisions, and financial markets, in addition to their views for 2011. The full piece is available below along with a brief excerpt from the articulate Cullen Thomson (aka Double Down):
In a sense, the financial crises marked a critical inflection point: either the world would rebalance to more sustainable sources of growth, or, on the back of stimulus, continue to pursue the logically flawed policies of asset and credit-driven growth—the very same policies which led to the crisis in the first place. It is now clear that the path of political least resistance was chosen. As a result, the global economy has become more imbalanced with 45% of growth derived from countries running fiscal deficits of greater than 10%. Additionally, central bankers around the globe are now targeting asset prices in order to drive consumption while the emerging economies in Asia have fallen back into the illusory comfort of export-led growth. With China, Japan and Germany—the world’s 2nd, 3rd and 4th largest economies—running perennial trade surpluses, the burden of global demand is placed squarely on the already over-indebted countries of the west, specifically, the US and Britain.
Although the world today remains highly imbalanced, we are also careful not to underestimate the will of policymakers, or ignore the adept management and profitability of many high-quality companies over the near term. We would not at all be surprised by a further increase in equity prices.
Nonetheless, similar to banks in 2007, governments today rely more on access to capital markets to fund themselves than any time in history. Many countries in Europe are effectively insolvent, yet have avoided default as a result of recent liquidity (either provided by markets or from bailout vehicles and supranational entities). Liquidity, however, largely results from confidence. As confidence erodes, sovereign defaults will become more likely.
Finally, the fiscal deflation necessary to cover both the on-and-off-balance sheet liabilities around the world is politically impossible, which, combined with a hyper-expansionary Federal Reserve, provides a positive backdrop for gold, as well as other sound currencies. Although we may tactically alter our position size given the wild swings in sentiment that accompany it, gold is likely to remain a core position for the medium term.