THE ECLECTICA FUND – SEPTEMBER 2008

“I must confess that my gut feeling is that today’s central bankers really might dare to halt inflation; in which case the whole bull market since Q1, 2003, which has been based on rising inflationary expectations, might suddenly have to adjust. Five years ago there was a flight from cash to property. Today we may be witnessing a flight from property (and its leveraged financial derivates) to cash. Should such an assertion prove valid, the parabola of speculation in financial innovation will complete its dislocation, reducing prices across a broad spectrum of asset classes…We figure that today’s crowded stock markets are likely to panic in the autumn. Hot sectors such as resource stocks could fall perhaps 30% to 40% which would return them to their rising mean price. With the economy unlikely to respond to lower interest rates, Treasuries could continue their summer rally and with a full blown deflationary shock the US$ could even rally owing to a scarcity of dollar cash.” 

Extract from The Eclectica Fund Monthly Newsletter, August 2007

This excerpt from our monthly newsletter from August highlights the macro framework we have been trying to follow in the portfolio. We are now seeing evidence of all the trends highlighted above: price deflation across the full range of risk assets, in particular commodities and their related shares, a rally in government bonds, and a reversal of the downtrend in the US dollar. The only problem is that we were a year early: this was written in August 2007, not 2008. The intervening period has been immensely frustrating, but our time is coming.