DEBT STORM – Lending, Extending & Pretending

Ottawa March 23, 2015

Presentation Outline

A.  ROCKLINC Investment Partners B. Key Financial Challenges C. Investment Strategy D. What went wrong? E. Towards a Solution F. Final Solution

A.  ROCKLINC Investment Partners •  Private investment firm – founded in 2010 •  Focus – Create portfolios of quality assets customized to our

client’s needs •  Strong Advisory Board •  Investing based upon: –  Independent thinking, reject consensus thinking –  Deep understanding of all investments –  Current realities rooted in an understanding of the past –  Interdisciplinary approach – build a worldview

ROCKLINC Investment Partners •  Jonathan Wellum, BComm. BSc, MA, MBA, CFA

–  Leadership: •  President & CEO of RockLinc Investment Partners •  Member of the McMaster University Investment Pool Committee •  Board Member CNCF •  Senior Fellow Cardus •  Past CEO and CIO of Portland Investment Counsel

–  Performance: •  Recipient of Canada’s Top 40 under 40 - 1999 •  Fund Manager of the Year in 1997 at the Canadian Mutual Fund Awards

Gala •  Fund Manager of the Year in 1995 - Investment Executive Magazine

B. Key Financial Challenges 1.  Debt & Derivatives 2.  Unfunded Liabilities 3.  Aging Demographics 4.  Unjust Weights & Measures •  Interest Rate Manipulation •  Value of our Money

1. Debt & Derivatives

•  Since 1970 debt levels throughout the developed world have escalated

•  Personal debt as a % of income has tripled •  Sovereign debt has virtually tripled as a % of GDP

(OECD – 40% in 1970; 110% in 2014 and climbing) •  Corporate debt has increased lock step

Debt & Derivatives •  Savers have become debtors •  Consumption at the expense of investing •  Sovereign debt – beyond repayment in “real

dollars” •  Financialization – “debt is capital” and

recapitalization = printing money – no concept of collateral

•  Derivatives – “weapons of mass financial destruction” approaching $1.0 quadrillion

GLOBAL Credit Market Debt 2014 - $230tr (3x World GDP)

Debt, Debt and More Debt

Debt/GDP (2014)

Debt/GDP (10 year change)

Debt’s Diminishing Returns

Debt’s Diminishing Returns

Cdn Consumer – 163% (50% in 1970)

Ontario – Buried in Debt

•  Ontario Debt 2015 - $290 billion •  Ontario Projected Debt will be surpass

50% of the Federal Government Debt ($620 billion) within 24 months

How to get out of Debt?

•  Higher growth rate (GDP) •  Lower interest rate •  Bailout – debt forgiven •  Fiscal plan – “austerity” •  Print money – create inflation (implicit default) •  Explicit default – change the original terms of

debt contract

2. Unfunded Liabilities

Governments have made enormous promises without setting aside the needed money •  Promises facilitated by the use of fiat currency •  Promises are typically “off balance sheet” •  Examples Include:

–  Pensions (Public Sector, Social Security) –  Medical Promises – Medicare, Medicaid, OHIP –  Social Welfare Programs

“Decadent Democracies”

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years.” (Alexander Tyler – 1780)

3. Demographics •  Low fertility rates, abortion,

the undermining of the family coupled with debt is leading to societal collapse in many countries.

•  1.3 children per woman. This is devastating for “indebted economies built on perpetual growth” (100 to 23 in 3 generations)

0   20   40   60   80   100   120  Number  of  People    

Grandparents  

Grandkids  

Great  Grandkids  

Workers Per Retiree is collapsing

Demographics

•  Lack of actuarial integrity in numbers •  Abortion (800m globally in last 35 years) •  Undermining of the family unit •  Secularization of the West

4. Unjust Weights & Measures

Bible has much to say about this topic Deuteronomy 25:15; “A full and fair weight you shall have, a full and fair measure you shall have, that your days may be long in the land that the Lord your God is giving you.” Proverbs 20:10; “Unequal weights and unequal measures are both alike an abomination to the Lord.”

Unjust Weights & Measures Unjust weights = oppression, injustice and violence Hosea 12:7; “A merchant, in whose hands are false balances, he loves to oppress.” Ezekiel 45:9-10; “Thus says the LORD: Enough, O princes of Israel! Put away violence and oppression, and execute justice and righteousness.… You shall have just balances, a just ephah, and a just bath.”

Today’s Unjust Weights and Measures

“Interest on debt grows without rain” - Proverb

The two most important measures and weights in an economy are: 1.  Price of money (interest rates) 2.  Value of money (purchasing power) Both have been corrupted by a debt based system that is out of control.

Interest Rates – US Treasuries

Interest Rates – Manipulating Asset Prices

Interest Rates – European Rates Collapsing

Euro-Area Negative-Yield Bond Universe Expands to $1.9 Trillion

88 of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index have negative yields! Euro-area bonds make up about 80 percent of the $2.35 trillion of negative-yielding assets in the Bloomberg Global Developed Sovereign Bond Index, the data show. (Bloomberg – Feb. 2015)

Unjust Weights & Measures Federal Reserve ($4.5 trillion)

Money Printing/QE

Unjust Weights & Measures Money Creation Out of Control

Unjust Weights & Measures Velocity of Money

Velocity Collapsed Fed wants this to increase!

Unjust Weights & Measures – No Standard for Money Creation

Unjust Weights & Measures

Minsky Moment – The point in debt inflation where the cash generated by assets is insufficient to service the debt taken on to acquire the asset.

Perpetual debt and fiat money ensure that we will have our Minsky Moment! QE kicks the can but cannot solve the problem! WHY?

ZIRP, NIRP & QE are Destroying our Economy!

1.  Structurally low interest rates feed “a culture of instant gratification”. Present consumption takes priority over long-term investing (capital accumulation). Easier for governments to promise services, they cannot afford, especially in a decadent democracy.

ZIRP, NIRP & QE are Destroying our Economy!

2.  Low to negative interest rates punish savers and reward debtors. It is a tax on wealth and savers! The longer this manipulation goes on the greater the misallocation of capital. Uneconomic deals become economic. Share repurchases and increasing dividends replace capital expenditures.

ZIRP, NIRP & QE are Destroying our Economy!

3.  The combination of low interest rates and increasing money supply (QE) in the financial system leads to asset price inflation, and excessive leverage. It does not drive wage increases or productivity growth.

ZIRP, NIRP & QE are Destroying our Economy!

4.  Human behaviour is negatively shaped in an environment of low interest rates and monetary debasement! Frugality, thrift and prudence are replaced by debt, dependence and overconsumption. Debasement of money leads to the debasement of manufacturing and production. Quality products become cheap, shoddy - obsolescence is a core strategy!

ZIRP, NIRP & QE are Destroying our Economy!

5.  Acquisition of personal wealth and capital becomes more difficult, money is not money, since it is not a store of value. Only ownership of scarce and productive assets can protect against inflation and deflation.

6.  Incentives for fiscal discipline on the part of governments decreases as central banks monetize deficits and debts. State grows, personal freedom and liberties contract.

ZIRP, NIRP & QE are Destroying our Economy!

7.  Low interest rates and QE encourage “zombie-banks” and “zombie-corporations”. The healthy process of creative destruction is minimized. Banks and insurance companies loaded up on overvalued long-term debt (one person’s liability is another person’s debt) will be eviscerated when normalcy is restored!

ZIRP, NIRP & QE are Destroying our Economy!

8.  Unjust redistribution of wealth takes place in an environment of ZIRP and QE. Newly minted money is not uniformly or simultaneously distributed to the total population. Monetary expansion is never neutral! There is a permanent transfer of wealth from those who get access to the money last to those who receive it first!

C. Investment Management Protect Clients From Unjust Weights & Measures! 1.  Diversify – Asset Class, Sectors 2.  Quality – Balance Sheet /Counterparties 3.  Minimize Debt Levels 4.  Minimize Paper Assets – Products of

Financialization 5.  Invest in Tangible, Scarce & Productive

Businesses 6.  Own Monetary Substitutes – Gold and Silver

Investment Strategy Fiat Currencies – Paper will test zero value!

•  Central bankers over time undermine the value of fiat currencies – 97% loss of purchasing power (USD) - 100 years. Historically all fiat currencies without collateral will test zero. (3.75% pa inflation)

D. What went wrong? World View Shift

There is a flow to history and culture. This flow is rooted and has its wellspring in the thoughts of people. People are unique in the inner life of the mind, what they are in their thought world determines how they act. This is true of their value systems and it is true of their creativity. It is true of their corporate actions, such as political decisions, and it is true of their personal lives. The results of their thought world flow through their fingers or from their tongues into the external world. This is true of Michelangelo’s chisel, and it is true of a dictator’s sword. Francis Schaeffer, How Should We Then Live.

World View Shift

•  Secularization of the West – loss of Judeo-Christian foundation

•  Postmodernism – rejection of truth, loss of moral authority, death of our universities

•  Philosophy of selfishness, greed, envy and lack of long-term discipline

•  Buy now, pay later mentality throughout the culture, encouraged by government policy, economic folly and fiat currency

World View Shift

•  Christopher Dawson – “A secular society that has no end beyond its own satisfaction is a monstrosity – a cancerous growth which will ultimately destroy itself”

•  Other indicators of social breakdown – divorce, undermining of heterosexual marriage, pornography, abortion, euthanasia, suicide, falling educational standards, government dependency

World View Shift – Economic Impact

•  Economics is a metaphysical science not a mathematical one. Spiritual values are more important than physical assets

•  An economy is the sum of the spiritual and mental qualities of its people. Economic output is only as strong as the values of the society

•  A free market economy requires strong values. A nation whose values are in decline will witness a decline in its economy

E. Towards a Solution There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. Ludwig von Mises

Towards a Solution 1.  Increased institutional competition – schools,

businesses, government, charities and nations 2.  Protect private property 3.  Downsize the State – responsible to the people 4.  Collateralize currency – eliminate fiat

currency, which leads to collective corruption

Towards a Solution 5.  Increased investments in science and

technology – drive innovation and productivity 6.  Reinvigorate the family unit as the pillar for

educating and equipping the next generation of citizens and leaders (State cannot replace the family)

7.  Reject the tyranny of moral relativism and secular humanism which is destroying the moral fabric of our culture and economy

Towards a Solution

8. We need Entrepreneur’s of Life a)  Purpose b)  Truth c)  Character vs. Personality/Celebrities d)  Focus e)  Providence f)  Perseverance

F. Final Solution

•  GRACE – Our world needs to experience God’s amazing grace!

•  II Corinthians 8:9 – infinite gift •  Why I am a Christian? Grace not works! •  Christ alone can liberate us from our

massive debt and balance the books with our Holy God, through the gospel of grace!

Final Solution Romans 5:1 “Therefore, since we have been justified by faith, we have peace with God through our Lord Jesus Christ.”

II Corinthians 5:17 “Therefore, if anyone is in Christ, he is a new creation. The old has passed away; behold, the new has come.”

Final Solution

•  As individuals and nations we must acknowledge God (Daniel 4:34,35 & 37)

•  The only hope we have for ourselves is to give up hope in ourselves and place it in Jesus Christ. Jesus plus nothing equals everything!*

•  Jesus Christ gives us inexhaustible grace in an exhausted world.*

•  It really is finished! * Pastor Tullian Tchividjian

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