Tokyo Electric Power Co.’s nuclear power plant experienced two explosions today that significantly increase the chance of more radiation leaks. These leaks are not expected to be on the same level as Chernobyl however given recurring aftershocks it seems hard to rule anything out at this time.
This has direct implications on Japanese stock markets, of which we have little to no exposure to; it has indirect implications on global markets due to the size of Japan’s economy and the threat that a significant slowdown there could spread to other economies. Most non-Asian markets are down 1.5% to 2% (at the time of this writing), which does not qualify as an extreme move, but still warrants caution. The USD, CHF and JPY, as well as US Treasuries, are up on a flight to safety. Most commodities are down on global slowdown concerns; natural gas is up as this catastrophe represents a significant setback for nuclear power.
First and foremost, our hearts go out to everyone that has family or friends in Japan, or that is in anyway affected by the events in Japan. With that said, we are weighing our long-term investment philosophy versus the extremely unique and highly unpredictable nature of the current situation, and may decide to temporarily reduce our higher beta equities allocations, such-as emerging markets, as well as other allocations should the situation deteriorate further. As of this writing no action has been taken.
To be clear, we are invested for the long-term and do not let day-to-day or even month-to-month swings strongly influence our decisions (and neither should you). However given the unpredictable nature of this event, combined with the unprecedented (and possibly escalating) unrest in the Middle East, we may err on the side of being overly cautious, reduce some of our exposure and wait for more clarity on the global outlook.
If you have any questions/comments please do not hesitate to contact us.
To monitor the events in Japan in near real-time: http://live.reuters.com/Event/Japan_earthquake2
Sincerely,
James & Adam
Tuesday, March 15, 2011
Friday, March 4, 2011
A Note to US Taxpayers with Hidden Assets Offshore
For all US taxpayers that have an unreported offshore account (or that have a friend with one), the IRS has re-implemented a program to repatriate hidden offshore assets. It appears that the IRS is turning up the heat and progressively making it more difficult, if not impossible, to hide assets offshore.
“U.S. taxpayers with hidden offshore accounts have until Aug. 31 to decide whether to disclose their holdings to the government without being criminally prosecuted, the Internal Revenue Service said.” To read more see “IRS Giving Partial Amnesty to U.S. Taxpayers With Hidden Overseas Accounts”.
While we do not provide tax advice nor any tax-related services, we are here to help anyone that would like to learn more about their options or be put in touch with a tax specialist. Please do not hesitate to contact us.
“U.S. taxpayers with hidden offshore accounts have until Aug. 31 to decide whether to disclose their holdings to the government without being criminally prosecuted, the Internal Revenue Service said.” To read more see “IRS Giving Partial Amnesty to U.S. Taxpayers With Hidden Overseas Accounts”.
While we do not provide tax advice nor any tax-related services, we are here to help anyone that would like to learn more about their options or be put in touch with a tax specialist. Please do not hesitate to contact us.
Inflation Has Escaped
Despite the S&P 500 equities index setting a new 52-week high and finishing up nearly 3.5% for the month, February was a nerve-racking and at times sleepless month. But things could have been a lot worse.
Last month we spoke about how unrest in Egypt and Tunisia could spread to more strategically important oil producing countries and produce 1979-like inflation. Well the unrest spread and commodities prices rose– WTI crude oil topped $100; gold, cotton and food indices made all-time highs; silver multi-decade highs, etc., etc. (see CRB commodity index chart at right ). Despite widespread unrest and rapidly increasing energy prices, it appears that extraordinarily loose monetary policy led by Quantitative Easing in the US, but implemented by most developed countries’ Central Banks, has helped mitigate any negative impact on developed equity markets.
However, loose monetary policy is proving to be a double-edged sword and inflation is on the precipice of spiraling out of control. Not necessarily because central bankers have pushed it too far or because the US dollar is in a downward death-spiral as many doomsayers predict, but because of wildly unpredictable factors beyond the control of central bankers and government officials alike.
Which makes me think of Jurassic Park. Bear with me...
Jurassic Park, a novel by Michael Crichton and movie by Steven Spielberg, is “often considered a cautionary tale on unconsidered biological tinkering. [Jurassic Park] uses the mathematical concept of chaos theory and its philosophical implications to explain the collapse of an amusement park showcasing genetically recreated dinosaurs.” (http://en.wikipedia.org/wiki/Jurassic_Park)
Rearrange some of the characters and you could be talking about our current predicament: inflation (the dinosaurs), quantitative easing (biological—read economic—tinkering) and unrest in the Middle East (chaos). Central bankers have successfully engineered inflation designed to stimulate growth, reduce unemployment and increase consumption. However, now that they have succeeded, their creation appears to have taken on a life of its own; chaos has set in; the beast has escaped from the park!
With that said, our portfolios are now firmly biased toward inflation risk. As recently as mid to late-2010 we were on the fence between deflation/inflation and our portfolios reflected our lack of conviction. Starting in late 2010, we progressively began adding and/or increasing allocations to securities that should outperform in an inflationary environment (and the resulting rising interest rates)—TIPS, precious metals, energy, agriculture, infrastructure, and floating rate bank loans.
Furthermore, we are closely watching the USD index for a clear break below its long-term resistance (see chart below). While we already have significant non-USD exposure through non-US equities, should the dollar index make a significant move lower we will move excess cash and cash-equivalents into a basket of non-USD currencies.
Bottom Line: Inflation is a major and growing risk. The rapid accent of energy prices has the potential to reverse economic progress made since ‘08/09, which will be negative for equities, however positive for most real assets as long as the rise is orderly.
Last month we spoke about how unrest in Egypt and Tunisia could spread to more strategically important oil producing countries and produce 1979-like inflation. Well the unrest spread and commodities prices rose– WTI crude oil topped $100; gold, cotton and food indices made all-time highs; silver multi-decade highs, etc., etc. (see CRB commodity index chart at right ). Despite widespread unrest and rapidly increasing energy prices, it appears that extraordinarily loose monetary policy led by Quantitative Easing in the US, but implemented by most developed countries’ Central Banks, has helped mitigate any negative impact on developed equity markets.
However, loose monetary policy is proving to be a double-edged sword and inflation is on the precipice of spiraling out of control. Not necessarily because central bankers have pushed it too far or because the US dollar is in a downward death-spiral as many doomsayers predict, but because of wildly unpredictable factors beyond the control of central bankers and government officials alike.
Which makes me think of Jurassic Park. Bear with me...
Jurassic Park, a novel by Michael Crichton and movie by Steven Spielberg, is “often considered a cautionary tale on unconsidered biological tinkering. [Jurassic Park] uses the mathematical concept of chaos theory and its philosophical implications to explain the collapse of an amusement park showcasing genetically recreated dinosaurs.” (http://en.wikipedia.org/wiki/Jurassic_Park)
Rearrange some of the characters and you could be talking about our current predicament: inflation (the dinosaurs), quantitative easing (biological—read economic—tinkering) and unrest in the Middle East (chaos). Central bankers have successfully engineered inflation designed to stimulate growth, reduce unemployment and increase consumption. However, now that they have succeeded, their creation appears to have taken on a life of its own; chaos has set in; the beast has escaped from the park!
With that said, our portfolios are now firmly biased toward inflation risk. As recently as mid to late-2010 we were on the fence between deflation/inflation and our portfolios reflected our lack of conviction. Starting in late 2010, we progressively began adding and/or increasing allocations to securities that should outperform in an inflationary environment (and the resulting rising interest rates)—TIPS, precious metals, energy, agriculture, infrastructure, and floating rate bank loans.
Furthermore, we are closely watching the USD index for a clear break below its long-term resistance (see chart below). While we already have significant non-USD exposure through non-US equities, should the dollar index make a significant move lower we will move excess cash and cash-equivalents into a basket of non-USD currencies.
Bottom Line: Inflation is a major and growing risk. The rapid accent of energy prices has the potential to reverse economic progress made since ‘08/09, which will be negative for equities, however positive for most real assets as long as the rise is orderly.
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