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NR & Cie SA

Gérants de Fortune

Membre du OAR-G

6, rue du Conseil-Général

1205 Genève

Tel.: 0041 (0) 22 320 64 12-13

Fax: 0041 (0) 22320 64 11

 

…It is Elementary Mr Sherlock Holmes: The Growth Rate Should be Higher than Interest Rates

Part Α: Todays Problem

The great classical economist D. Ricardo is regarded as the  father of the Equivalence Principle: When the Government borrows in order to spend,  the citizens will reduce private consumption since they can be certain that they will be taxed in the future. Therefore, we have an equivalent reduction in private spending, irrespective of whether government spending is financed by present taxation or issuance  of bonds (future taxation). Consumers are either perfectly rational or care about the future generation.

  As contemporary Greeks we presented our own version of the Equivalence Principle: We will consume today together with the Government and the equivalent payment will come from our children, grandchildren and European partners. Was it lack of rationality, lack  of concern about the future generations or …something worse ? Unfortunately for the present generation, the long term party, where of course some had greater appetite than others, was abruptly interrupted by the markets.

In Greece we love  scenarios and conspiracy theories. We look for people spreading fake news, conspirators, and for exploitation scenarios where foreigners will cheaply acquire the state property. Responsibility  rarely belongs to us  We will not follow this line of thought .We will prefer instead to discuss a series of bitter truths:

Α) The famous by now ratio of Debt to GDP depends on  the interest rates and the rate of growth . For this ratio to decrease, the numerator should increase at a  slower rate than the denominator. It is therefore necessary that the nominal rate of interest is lower than the growth rate.  This  condition is  extremely difficult to  be fulfilled under current circumstances!

 

Β) Markets have been disappointed by the Greek approach to the solution of the debt problems. As a consequence they lead the two-year rates to over 25 % and the 10-year ones to over 15%. The intervention of the IMF (that we foresaw as necessary in January 2010) and of  the EU decreased borrowing rates considerably with the €110b loan at 4.75%. Unfortunately, the growth rate of the economy is way too negative. The main reasons are the  heavy and complicated tax system and the existing contractionary fiscal policy  that reduce aggregate demand. Recently signs appear that the public opinion has started to accept that a that the following fiscal policy mix as absolutely necessary : deep public spending cuts is  as well as a simpler system of lower flat  tax rates rates  that will eventually increase tax revenues. Unfortunately, these policies are not implemented for  political, social  and other reasons!

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End 2010 Report

Strategic and Tactical Allocation for 2011

We all know that in financial Investments :  “The rear view window is much clearer than the front view”  and 

“Hindsight is always 20/20 (perfect)”

Moreover, we would like to state emphatically that  :

"Strategy (not Tactics) will determine long- lasting success", and

"Investments should be approached with the planning involved in a marathon race and not as sprint event". 

Year 2010 ended on a very positive note. December provided an excellent Santa Claus rally of about 8%.  Since the July lows the US market appreciated by about 28 %. Moreover, since the March 2009 lows the recovery in the US indices has now surpassed 85%. Patient strategic investors were happy to enjoy the spectacular rallies! 

 

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September 2010 Report

"Park Avenue apartments belong to the optimists"

We would like to repeat our longer term view :

Valuations relative to bonds and cash are compelling.

Following the worst decade since the 1920's (all possible decades are included) we believe that the future of business is brighter and that equities will outperform alternative assets.

Our view about the financial system and the western world was emphatically presented in December 2008 in an environment of maximum pessimism. Indeed year 2009 proved to be one of the best in history. The courageous risk-takers took advantage. Year 2010 to-date has generated a correction amid concerns about the strength of the recovery and sovereign bond issues.

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