We continue to live in historic financial times and in particular in the first global, fiat money based inflation effort. Further to this we have zero interest rate policies in virtually every major market on the globe and the monetary base of the world’s reserve currency is up 150 percent in the last 24 months and growing. Suffice to say this is an experiment that has never before been tried on anything approaching this scale.In such an environment it can be a challenge to distill actionable investment themes from all the noise and uncertainty in the market place. This is why the compass we steer our funds by is value.
Ultimately investors must be in the business of buying cash flow inexpensively in order to generate long-term returns. If I had to label my approach it would be value investing informed by the Austrian School of Economics – value driven at the investment selection level with Austrian analysis at the macro level to provide insight into trends.
It is of trends that I want to speak more about today because we are in the midst of some unsustainable trends if history and Austrian Economics is a guide. It has been said many times before in one form or another but it bears repeating:
There is no way to create capital and the prosperity that flows from it other than through private savings and private production.
Sadly this is a message to which our governments, under the sway of Keynesian ideology, are unwilling to listen. It is axiomatic that all state spending requires that capital is first taken out of the hands of the private sector via taxes, borrowing or inflation and then deployed in loss-making (capital destroying) activities.
Printing money seems alluringly easy at first, but it does not create capital, and worse it causes long lasting harm to the production structure of the economy. In addition, monetary inflation has another more insidious effect. Because monetary inflation does not happen in the aggregate – does not increase the price of all goods and services at the same rate at the same time – monetary inflation benefits the groups who have first access to newly created money and inflating asset classes versus the rest of the participants in the economy. The net result is that wealth is quietly redistributed from the inflatees to the inflators – from savers to the government.
The Austrians are very instructive on the issue of the expansion of the state and its economic consequences. Based on events he witnessed beginning in the early part of the 20th century, Friedrich Hayek, the noted Austrian economist, wrote “The Road to Serfdom” as a warning to England and the United States against the damaging impact of socialist policies and “The Fatal Conceit” as a warning against intervention in markets and society at large. Despite the almost universal belief that more regulation and more government is needed, Hayek’s work should make us all reflect as to the true motives and consequences of these actions. Hayek once said “I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.” Please give this quote some thought as you watch the governments of the world pursue their current fiscal and monetary policies.
If you haven’t already, please take the time to read these books and perhaps also Frederick Bastiat’s seminal work “The Law”. I am confident that they will cast some light on what we are currently sowing and what we can expect to reap.
Equicapita is a Calgary based income trust which manages an RRSP and TFSA eligible SME private equity fund for retail investors.