Update No. 35 – 27/11/11

Full website: www.eternalgrowthpartners.com

For some reason, despite no particular announcements of note by our holdings, we widened the performance differential between EGP Fund No. 1 Pty Ltd and the benchmark by 5.07% this week (to 13.62% since inception 8 months ago).  I wish I could say this were because of our stellar price performance, unfortunately it has far more to do with the substantial decline in the market this week (the fund assets rose by a fraction under 1%, the rest is explained by the benchmarks fall through week).  In any case, as I have remarked often before, as long as we lead our benchmark we will be pleased, because in the long run, the benchmark will likely provide an adequate return on capital, so if we exceed that then our return should be better than adequate, if we exceed it by enough, our return might even be very good.

I have talked quite a bit over the past few weeks about OWS (Occupy Wall Street) and the operation of the Free Market and its benefits. A variety of topics probably not perfectly related to my key goal with EGP Fund No. 1 Pty Ltd, which is to identify and purchase undervalued equities and make market beating returns – believe me when I say, whatever intellectual diversions I might take, I always return to that ultimate goal!  I will divert once more into a subject which touches on one of my great passions, the Free Market.

My (most recent) excursion into this area started with an article declaring Australia, for the second year in a row the second happiest place in the world to live.  I beg to differ; I believe there is nowhere better.  This article led me to another from the ABC website, which postulates which must exist first, economic freedom and the market economy, or political freedom and human rights? After thinking on that, I found myself wondering about how I would achieve the level of economic prosperity I desired had I been born in a third world country? It appears economic freedom would seem to be the driver via the worlds ‘black market’ economy.  I had my eyes opened to this economy through this article on Foreign Policy magazines website, the industrious and hard-working operating within ‘System D’ certainly seem to be gaining impressive prosperity.

It seems intuitive to me that there must be a fairly substantial black market economy globally, but the article linked above indicates the global black market employs in the order of 1.8 billion workers and generates about $10 trillion, or around 1/6 of global economic output, or about twice the output of China (who have the second highest economic output globally).  This is extraordinary and one clear consequence of this global black market is rising global prosperity as discussed in Update No. 33.  Economics is not a zero-sum game, everyone gains in a world of free-trade; it is important we remember this in periods of global economic weakness such as that currently prevailing. – Tony Hansen 27/11/11.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	.98579	(-9.06%)	(-1.42%)
S&PASX200TR	35632.05	34200.68	30273.18	(-11.48%)	(-15.04%)
EGP 20	1000.00	883.67	759.74	(-14.02%)	(-24.03%)

EGP Fund No. 1 Pty Ltd. Down by 9.06%, leading the benchmark by 2.42% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 1.42%, leading the benchmark by 13.62% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 14.02%, lagging the benchmark by 2.54% since July 1^st.  Since inception the EGP20 is Down by 24.03%, lagging the benchmark by 8.99% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 11.48% since July 1^st. The benchmark is Down 15.04% all-time (since April 1^st 2011).

Update No. 34 – 20/11/11

Full website: www.eternalgrowthpartners.com

I talked last week about how globalisation, and in particular free-trade appear to be dragging more and more of our global citizens out of poverty.  The evidence empirically demonstrates that each passing year fewer people in both a proportionate and an absolute sense live in poverty. I have therefore a very strong attachment to the idea of free trade, and it is for this reason I found this article on the Institute of Public Affairs website so agreeable.  I should point out that the IPA are chiefly right-wing cheerleaders, but though they drift in that direction, there is still considerable merit in much of what is published on the site.  I point out the right-wing affiliation/tendency of IPA for much the same reason I denoted the leftist views of the sites I directed readers to in Update No. 31, I never wish to be seen to push a particular belief or set of beliefs.  I read widely on a variety of issues (chiefly related to economics/finance) in order to properly inform my view of the world and how it operates, for as Desiderius Erasmus said “In the land of the blind, the one-eyed man is king”, knowledge is power, I never limit my reading based on the ostensible ideology of the author, a good idea is good regardless of its source.

Back to free trade, and the basis of the IPA article linked above points out that whilst quasi-protectionists/free-trade skeptics such as Paul Howes, Tony Abbott and Barnaby Joyce take understandable umbrage at the effects for example of distortions such as the Chinese Government propping up inefficient/marginal state-owned enterprises with taxpayer funds.  The author rightly points out why we are the ultimate beneficiaries of these actions:

“China is a developing country. Yet it is taxing its citizens in order to prop up businesses, which then go sell their products below the market cost to rich countries. These subsidies are a direct wealth transfer from third-world taxpayers to first-world consumers.”

The obvious concern is that propped up/subsidised for long enough these businesses eventually cause competitors drop out of the marketplace and the subsidies can be removed.  What they probably don’t realise or consider though if this is the true aim, is that in a dynamic capitalist marketplace, if the subsidies were what squashed competitors; their removal will lead to inevitable new entrants.

I have also mentioned before the folly of the Chinese artificially holding down their currency.  This, in the short-term inevitably leads to better terms of trade (your exports are cheaper than they should be & imports correspondingly dearer than they should be), but will also lead to the Chinese government and citizens holding large quantities of foreign bonds/cash, which will at some point be worth less (not necessarily worthless) as you eventually can’t keep the currency suppressed.  The piper must always be paid, eventually – Tony Hansen 20/11/11.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.97611	(-9.95%)	(-2.39%)
S&PASX200TR	35632.05	34200.68	31733.38	(-7.21%)	(-10.94%)
EGP 20	1000.00	883.67	801.18	(-9.33%)	(-19.98%)

EGP Fund No. 1 Pty Ltd. Down by 9.95%, lagging the benchmark by 2.74% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 2.39%, leading the benchmark by 8.55% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 9.33%, lagging the benchmark by 2.12% since July 1^st.  Since inception the EGP20 is Down by 19.98%, lagging the benchmark by 9.04% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 7.21% since July 1^st. The benchmark is Down 10.94% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 33 – 13/11/11

Full website: www.eternalgrowthpartners.com

A fall in our asset value this week can be attributed to a fall in the value of one of our thinly traded stocks on very thin volumes, which will most likely correct itself next week.

Another quick note on the OWS (Occupy Wall Street) protests and one of my favourite subjects - perspective.  I stumbled across this article a couple of weeks ago, which redefines ‘the 1%’ in terms of global inequality.  I then found the same sentiments basically plagiarised here.  I would suggest almost all of those people protesting how hard they have it may just be surprised to find that they are in fact part of ‘the 1%’, when the net is cast globally, you need only earn US$34,000 to find yourself in this category, I’m there – I hope you are too.  How many of the OWS protestors would like to see their taxation change (increase) in order to make the conditions of ‘the 99%’ globally more equitable?  Just reminds us that we tend to look at things through the prism of what we know. Perhaps (see below) we can wait on the improvements that have been steadily happening over time to continue the great equalisation…

When considering global living conditions, a fact that passed last week, which may have gone unnoticed by many was the arrival on our planet of the 7 billionth living human.  Statistically this occurred on 31 October 2011, although these things are obviously hard to get exactly right, but it bears considering.  The obvious concern (at least to me) is how well as a global average, all these additional people are living.  I thought this article from Felix Salmon made for interesting reading on the subject.  I think this article draws attention to something very important that probably goes unconsidered – the power of industrialisation, capitalism and (relatively) free trade globally to improve lives.  The statistics in the article (which by the way are adjusted for purchasing power – this is important) suggest that the proportion of the world’s population living in absolute poverty (less than $1.25 per day, adjusted for inflation) has declined from about 84% in 1804 to about 12.7% today.  There are actually less people living in absolute poverty today than there were 200 years ago and we have 7 times as many humans on the planet – that is extraordinary.  Obviously, crossing the line from absolute poverty to poverty, whilst very good for those achieving the transition, still leaves an enormous gap to living in conditions you or I would consider tolerable, but the trend is obvious and in time it would seem possible that really abject poverty will be virtually eliminated if we continue to innovate and improve.

Despite 99% of people globally earning less than US$34,000, it is very plainly evident that living conditions have improved inexorably for the last 200 years, and are likely to continue to improve substantially further.  When we think about how hard we have it, it pays to bear this in mind, were you transported back in time 200 years, you could be assured that you would not live nearly as well as you do now.

Malthusian thinking from more than 200 years ago indicated this massive human disaster, driven by over-population should have occurred by now.  Bear in mind when Thomas Malthus made his predictions, the population of the world was less than 1 billion people.  Given that it is now over 7 billion, he was obviously mistaken.  I think the only error he really made was underestimating the ingénue of humans.  At some point not long after Malthus made his predictions, human productivity, particularly in the field of agricultural productivity took off in a way that no-one had (or likely could have) anticipated.  You would be a fool to bet against human industry I think, there are still enormous tracts of land in countries like Ukraine, which evidently possesses some of the most fertile black-soil in the world – that have never been farmed using modern techniques.  You would be courageous to nominate a point at which a Malthusian disaster will occur, I certainly don’t expect to see one in my lifetime, I doubt my children will see one – Tony Hansen 13/11/11.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.99070	(-8.6%)	(-0.93%)
S&PASX200TR	35632.05	34200.68	32631.34	(-4.59%)	(-8.42%)
EGP 20	1000.00	883.67	814.08	(-7.88%)	(-18.59%)

EGP Fund No. 1 Pty Ltd. Down by 8.6%, lagging the benchmark by 4.01% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 0.93%, leading the benchmark by 8.35% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 7.88%, lagging the benchmark by 3.29% since July 1^st.  Since inception the EGP20 is Down by 18.59%, lagging the benchmark by 10.17% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 4.59% since July 1^st. The benchmark is Down 8.42% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 32 – 06/11/11

Full website: www.eternalgrowthpartners.com

I have been harping for a couple of months now that I don’t think the economic situation in the U.S. is nearly as bad as it is consistently being portrayed.  To this end, I found this article very interesting in the way it articulates a number of positive factors in the American story that are being overlooked.

I also consistently point out that the U.S is the world’s primary economic engine.  Although China is a large and increasingly important player on the world scale and will inevitably become the world’s largest economy, consistently overlooked (at least in mainstream media) are the demographic issues China will face, predominantly caused by the ‘One-child policy’, but exacerbated by a disproportionately high male population, evidently caused by selective abortions and female infanticide (however it has happened, there were apparently 118 males born for every 100 females in 2010).  Some interesting writings about these various demographic issues are available here, here and here.

This graph and the one in the third link above are particularly instructive; one doesn’t need a background in economics to picture the likely problems such a demographic set-up will create. In Europe, the elder share of the population passed 10 percent in the 1930s and will not reach 30 percent until the 2030s, a century later. China will traverse the same distance in a single generation.

The upshot of these demographic issues has basically been the fact that China has been in a ‘Demographic Sweet Spot’ for about 25 years, with an ever-increasing proportion of the population becoming ‘working-age’.  Evidently the peak of this has passed (most likely in 2010) and will probably lead to China having the shortest ever reign as the most powerful economy in the world (depending of course how they handle their ascent).

In any case, China will be extremely important to the world economy for the foreseeable future, I just think it should be borne in mind that the country will also face an unprecedented demographic challenge that will likely lead to severe and prolonged economic stagnation following almost immediately after an extraordinary and prolonged economic boom.  The next 10 or 20 years will likely be very good for China, although they should start to face a business cycle that more closely resembles Western cycles.  After that, it is much harder to tell, those that can correctly pick and time the turning points and their specific effects could do very well – Tony Hansen 06/11/11.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.02024	(-5.88%)	2.02%
S&PASX200TR	35632.05	34200.68	32302.32	(-5.55%)	(-9.34%)
EGP 20	1000.00	883.67	808.92	(-8.46%)	(-19.11%)

EGP Fund No. 1 Pty Ltd. Down by 5.88%, lagging the benchmark by 0.33% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 2.02%, leading the benchmark by 11.36% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 8.46%, lagging the benchmark by 2.91% since July 1^st.  Since inception the EGP20 is Down by 19.11%, lagging the benchmark by 9.77% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 5.55% since July 1^st. The benchmark is Down 9.34% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com