In the following, I try to answer some of the main questions people have posted on the blog in the past few months. Due to technical problems that have now been resolved, I have only just seen these questions. I believe however that they are still relevant.

1. Questions about “Market analysis”

What are the ‘real’ causes of the financial crisis?

The main reason, in my opinion, is excessive debt. In light of this, I don’t believe that policies designed to stimulate even more consumer debt (for example the "cash-for -clunkers" subsidy) or forcing banks to give out loans (when these loans are not sufficiently guaranteed) are really the right solution. Similarly, replacing an overindebted private sector with an overindebted public sector doesn’t really seem like a good idea, either.

Do you believe that a new bubble is starting to form?

It’s hard to say. And yet, financial history shows us that periods of very low interest rates generally give rise to bubbles. These bubbles tend to form on assets that capture investors’ imagination (e.g. technology stocks at the end of the 1990s). From this point of view, the most likely bubble candidates today are emerging markets and commodities/precious metals given the Asian industrialisation theme.

What about gold?

I have always said that buying gold is a speculation and not an investment. This is due to the fact that gold has no intrinsic value, unlike stocks, which represent a claim on a company’s future earnings (cash flow, dividends, etc) or its assets. As gold does not generate interest or produce cash flow (and has only a limited economic utility), its only worth is what an investor is willing to pay for it at a certain moment in time.

To quote Warren Buffett: "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Having said that, there are times when a speculation does make sense. Currently, there are plenty of arguments in favour of gold:

- The very low level of interest rates considerably lowers the opportunity cost of an ‘investment’ in gold;

- The fear of seeing governments printing money to finance their excessive debt results in a loss of confidence in paper money;

- After having doubled between 1980 and 1999, the production of gold has since stagnated;

- Demand from Asian countries, especially China and India is strong.

Inflation or deflation?

Currently deflation is a reality, while inflation is a possibility. What I mean by this is that the current economic environment, which is characterised by rising unemployment and production overcapacities, is clearly deflationary. In the longer term, there is a risk that the monetary and budgetary policies currently being implemented will result in rising inflation. However, high budget deficits do not necessarily lead to high inflation (as the Japanese situation has shown for many years). A lot will depend on the way the authorities act in the future. 

2. Questions about “Fund management”

Why do you not hedge part of your exposure to Asian stocks?

Our outlook for the Asian markets is positive in the long term and we prefer to restrict our hedging to the US and European markets.

Why do you have USD positions?

Experience shows that the dollar is currently inversely correlated with the stock markets (it depreciates when the stock markets rise and appreciates when they fall). In light of this, it deserves a place in BL-Global Flexible, the aim of which is to have a portfolio that can stay the course in various economic and market scenarios.

Isn’t there a risk of a crash on the bond markets?

The risk is linked to the prospect of soaring inflation coming back again. As explained above, it will be important to keep an eye on this, but currently we are in a deflationary scenario that is rather favourable for the bond markets (by the bond markets, I mean government bonds, which make up most of our bond holdings in BL-Global Flexible).

Apart from the inflation risk, there is the possibility that a government can no longer repay its debt, a risk that increases in a deflationary environment. This risk cannot be overlooked and is more important for the eurozone given that recourse to printing money (the central bank prints money that it uses to buy bonds a government issues to finance its deficit) is much more difficult than in the case of the US for example. This is why the only eurozone bonds held by BL-Global Flexible are those issued by Germany and the Netherlands.

Performance of BL-Global Flexible since start of year?

The fund has gained 12.21% since the start of the year.