Goodman:Dundee Annual Report

7/31/2019 Goodman:Dundee Annual Report

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DUNDEE CORPORATION

2011 ANNUAL REPORT


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Chairmans Report

Sacred cows make the best hamburger.Mark Twain

Fellow shareholder:In the period starting December 31, 1991 to December 31, 2011 the compounded annual return on

the share price of Dundee Corporation was 17.01%. The following comparisons are revealing:

x The TSX - 6.31%

x The Bank of Nova Scotia - 11.90%

x Nike - 12.60%

x Berkshire Hathaway Inc. - 14.70%

x Apple - 18.30%

More than a year has passed since the sale of DundeeWealth Inc., and while this transaction was

emotional, this sacred cow produced filet mignon. It has enabled the Corporation to execute on its

long standing plans to become a merchant bank and to focus primarily on real estate, energy,

resources, agriculture and infrastructure.

A team of executives and managers have been assembled and they are at the centre of this new

direction. Ned Goodmans dream to build a true Canadian alternative to traditional financing and

banking is taking shape with a consistent vision and concentration on opportunities in those sectors

that have been chosen to be in our focus.

This is the new Dundee, a partner, a principal, an advisor and always entrepreneurial in an exciting

world, made rich by limitless possibilities that lie before us, particularly, those that build upon and

reflect the power of our past.

I look forward to reporting the compounded annual return on the share price of Dundee as of

December 31, 2031.

Sincerely,

Harold (Sonny) Gordon, Q.C.


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1

DearFellowShareholders,

InanhistoricalfinancialbookbySatyajitDascalledExtremeMoney,Ifoundtwoparagraphsvery

insightful.IwishtostartmyAnnualReportwiththosewords:

The Masters of the Universe and their cult of risk had come to dominate

economies and lives.MarshallMcLuhan argued that any technology graduallycreates a totally new environment. The human race created money and the

finance economy. Somewhere thereafter, money and the finance economy

recreated the human race, not always for the better. Governments and policy

makersnowplay financial gamesandpumpmoney into theeconomy to try to

restore growth and stability. There is increasing risk of a furthermore severe

crisis,witha lossof confidence in government, riskfree sovereigndebtand,of

course, money itself. The risk of unavoidable financial, economic and social

dislocationiseverpresent.

BenBernanketoldtheUSCongressthatthefuturenowwasunusuallyuncertain.

JohnMaynardKeynesunderstooduncertainty:

By uncertain knowledgeI do not mean merely to distinguish

what isknownforcertainfromwhat isonlyprobabletheprospect

ofaEuropeanwarisuncertain,orthepriceofcopperandtherateof

interest twenty years henceabout these matters there is no

scientificbasisonwhichtoformanycalculableprobabilitywhatever.

Wesimplydonotknow.

Thefuturehadalwaysbeenuncertain.Humanabilitytopredictandcontrol

the economic future had been an illusion. It was hubris arrogant,

excessive pride in achievements. In the end, Nemesis, the goddess of

retributionanddownfall,endsalldreams.

AssuggestedinlastyearsAnnualReport,thestockmarketcontinuestobeinarangeboundscene

andtreadswater,goingupanddowninaccordancewiththelatestnewsabouttheEurocrisis,the

MiddleEastaffairsandtheenormouslevelofUSandEurodebtthatshouldbeundergoingamassive

deleveraging.Thedebt loadofadeficitdriven$16 trillionand$60 trillionof IOUs for theUnited

StatesischangingtheentirecultureoftheUSandhowtheyarebeingperceivedbytherestofthe

world.Arangeboundglobalstockmarketwillstaywithusforalongtime.

Most investors,whileworriedabout the stockmarket,areunderestimating thepotential riskand

disruptivenessfromtheexistenceandattemptedeliminationofveryhighglobalfinancialleverage.

Wearecontinuingtolivewithanexpandingeraofglobalfinancialinstability.Theeraofbeingfullyinvested inabroad indexorETFormutual fundsandadjustingdiversification inaccordancewith

howacurrentindexlooks,isdeadandhasreallybeendeadformanyyears.

Theyear2011wasaverybusy, importantanda reasonablysuccessfulyear forourcompany.We

soldourDundeeWealthsubsidiarytoScotiabank, later intheyearacquiredandprivatized100%of

DundeeCapitalMarkets.We soldourposition inBreakwaterataprofit, ranourcapitalmarkets,

brokerageand investmentbankingoperationsatasmall lossandsoldother investmentsatminor


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DUNDEECORPORATIONCONSOLIDATEDBALANCESHEET(expressedinthousandsofCanadiandollars)

31Dec11 31Dec91

ASSETSCash 112,263$ 6,687$

Loansandaccountsreceivable 304,049 46,819

Investments,realestateandresourceassets 2,796,991 384,878

Otherassets 513,606 11,958

Incometaxesreceivable 6,270 (1,385)

3,733,179$ 448,957$

LIABILITIES

Accountspayableandaccruedliabilities 226,779$ 4,653$

Corporatedebt 532,833 130,510

Otherliabilities 905,639

1,665,251$

135,163$NONCONTROLLINGINTERESTS (134,862) (95,009)

NETASSETS 1,933,066$ 218,785$NETASSETSREPRESENTEDBY:Sharecapital,includingpreferenceshares 347,617$ 390,793$

Deficit 1,552,789 (171,643)

Accumulatedothercomprehensiveincome(loss) 32,660 (365)

1,933,066$ 218,785$

Tocontinue

with

my

macro

economy

comments

of

last

years

annual

report,

Ihave

to

report

that

therehasnotbeenmuchofachange inposition inthe last12monthstocategoricallychangeour

views.WithyearsofknowledgeandexperienceIdoknowthatfinancialmarketshavetheabilityto

correctthemselvesbothon theupsideanddownside.And Idounderstand that financialmarkets

cannotanddonotpredictthestateordirectionoftheeconomywithanyaccuracy.

OurmissionistooperatetheNewDundeeasclassicmerchantbankersandentrepreneurship.This

oldstylebusinesshasbeenabitovertakenby thepostmodernshipofcapitalismwhere risksare

takenbytheentrepreneurinordertopromulgateanewbusinessidea,andmakeitwork.Ourmain

goal is to create a new product or entity that willmakemoney. Clearly, at the outset, classic

merchant banking focuses on one aim:making asmuchmoney as possible. There is no hidden

agenda.Businessisbusiness,andthebottomlineistheonlyfactor.Classicentrepreneursdonotgo

intobusinessthinkingaboutallthebenevolentthingstheymaybecapableofdoingwiththemoney.

Whilewedo strive tomake theworldabetterplace, it isnoton theagendaat the timeofdue

diligenceandinvestment.However,wearephilanthropic,basedonoursuccess.

Merchantbankinginitsclassicsenseoftheword,reallycametoanendonbothWallStreetandthe

City of London during the GreatDepression. The Glass Steagall Act putWall Street out of that

businessforawhile.ButmerchantbankersofLondonkeptuptheirefforts.TheCityistraditionally

proudeven to thisdayof thehigh standardsof integrity that camewith theearlydaymerchant


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4

banking.Theyareproudof theemphasisplacedon trustandverbalpromises.Sincemyprevious

days ofmerchant banking personally being involved duringmuch ofmy fifty year career in the

business,atimewhenbillionsofdollarsofsecuritieswasdoneorally,immensedealsclosedwitha

handshakeoroverthetelephone,onlylatertobeconfirmedinwriting.

Today,ascomparedtothedaysofthe1800sandtheIndustrialRevolution,MerchantBankershave

to lookabroad to theemergingandpreemergingmarkets tobeable tododeals thatjustify the

expense of high caliber peoplemoving around theworld. The costs are high but the potential

rewardsarelikewisehigh.

The Brits in those early days, knew theymust trade orperish and had a head start in the new

countries inAsiaandAfricaonwhichtheyhadtheterritorytothemselves.Today inresourcesand

otherbasic industries thecountries thatneedmerchantbankersare in the same territoryAsia,

Africa, Latin America. The English in the 1800s also had the emergingUnited Stateswhichwas

sharedwiththeearlyWallStreetbankersGoldmanSachs,Lehman,Morganetc.

Thereremainplentyoflucrativeopportunitiesinmanycountrieswhereyouneedavarietyofspecial

injectionsinordertoeventravelthere.Wedogotherebutwearefortunateherethatwehavetheentire untapped northern part of Canada Nunavut; northern Ontario; northern Quebec and

Saskatchewanasourathometerritory.

Thetypicalmerchantbankingperson isoftencharacterizedbyaprofusionofthoughts.Wealways

assumethateverybodyunderstandswhatwearetalkingaboutwithoutrealizingthatweknowmore

about the subject being tackled than anyone else. We delegate authority freely, very seldom

worried aboutdetail that canbebetterproducedbyothers.Merchantbankersoperatewithout

worryofincidentalearlyproblemsbecausetheyenterthetransactionwithfullabilitytocopewith

them.

Thisthrust

of

our

projected

success

isnot

ego;

its

that

we

wake

up

every

morning

knowing

that

our

daywillbetoenjoywhatwedo.Personally,IhavekeptwhateversanityIhavebyoperatingwithan

oldmerchantbankersadvice,Amanwhohasnopersonalenemieshasmanypersonalfriends.A

goodmerchantbankeralwaysunderstandstheextentoftheriskbeingtaken.Riskandrewardare

alwaysmeasuredagainsttheprobabilityofloss.

Asclassicalmerchantbankerswesenseandworkwiththreecardinalqualities.First,tobeableto

put oneself into the situation of the first owner, or of the personwith whom one negotiates.

Second,courageasoneapproachesacertaintaskthatmaybescary.Third,cautiontoknowthe

extentofallrisks.

Toomanysocalledandfailedmerchantbankershadahistoryoftoomuchcourageandnotenough

caution;ofunderestimatedrisksandbitterfailures.Thebankingcrisisofthethirtiesandthoseeven

more recently, had toomany people disregard and not consider the extent of the risk. A good

bankeralwaysknowstheextentoftherisk,andallowsforit.

The history ofmerchant banking as outlined by theDeutsche Banks guiding spirit ofmerchant

bankingGeorgVon Siemenswhobuilt thatbankduring18701900.Hewasamanof strong

opinionswhooftenhadtobitterlyfightthecontrolofhisconservativeboardofdirectorstoachieve

hissuccess.Heisquotedassaying,whentwentyfourmenmanageabank,theresultisthesameas


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whenagirlhastwentyfouradmirers;noneofthemmarriesher,butattheendshehasababy.My

personalexperiencewithbanksandbankerscanverifythatitstillisthesame.

ButVonSiemensoncemadeaspeechdeclaringaboutmerchantbankersthat,Weare inasense

theleadersofthespiritofenterpriseofthenation.

ThenewDundeeandourDundeeMerchantBankhaveasourmissionandvisiontobethespiritof

merchantbankingenterpriseglobally inourchosenareasofresources,agriculture,realestateand

infrastructure.

Thebasicaimofourmissionistocontinuethegoodtraditionofaclassicalmerchantbankinghouse

whilebuildingonourreputation.Wewillfighttopreserveourgoodname,show ingenuityandbe

allowedtodoconstructivethingsforourclientsandourcommunity.Thisisnothingmorethanthe

originalbasicaimofthegreatmerchantbankersintheirearlydaysinLondon.

Likethoseoldtimers,wewillspendblood,sweatandtearstobetherewhensomethinggoeswrong

tomakeitrightagain.Wearelessworriedaboutfinanciallossesthanbythelossofreputation.We

expect that therewillbe somemistakes,butnot toomany. We regardmistakesaspartof thelearningcurveandwehavealreadymademany.

Wetakepride inbeingcapableofhelpingtobuildthereputationof littleknownclientcompanies,

sothatourDundeesponsorshipbecomesmoreimportanttothecompanythanitspastrecord.

WeexpectthatifDundeeapprovesofacompanyafterduediligence,wewillalwaysbepreparedto

invest our ownmoney and others should be prepared to investwith us. This iswhere a great

investmentandmerchantbankacquiresprestige.Ourmottoandformulaisthatwedonotintendto

sellanyideaoranythingtothirdpartiesthatwewouldnotbuyforourownaccount

Breakingnews:

While Iwastrying tocomplete thismessageonApril19th, the InternationalMonetaryFundcame

outwithitsworldEconomicOutlookReportwarningthatthereis:RiskofcollapseofEuroandfull

bloompanicinfinancialmarkets.ThestatementwasthattheEurozonecouldbreakupandtrigger

afullblownpanicinfinancialmarketsanddepositorflight,aswellasaglobaleconomicslumpto

rivalTheGreatDepression.

Toquotethereportdirectly,theysaid:thepotentialconsequencesofadisorderlydefaultandexit

byaEuroareamemberareunpredictableif suchaneventoccurs it ispossible thatotherEuro

economiesperceivedtohavesimilarriskcharacteristicswouldcomeunderseverepressureaswell,

with full blown panic in financial markets and depositor flight from several banking systems.

UnderthesecircumstancesabreakupoftheEuroareacouldnotberuledout.

Evenwithout theApril19thmissive,wehaveknownthat financialmarketstodayhavecausedthe

investing public (including me) to be totally confused by biased, misinterpreted and incorrect

actuality that is presented by themedia at large, who today have the propaganda ability of a

Goebbels.Thishascreatedadiversioninthethinkingofthemassesbasedonthosebademotionsof

fear,greedandhope.Wehavebeenlivingthroughsuchatimeaswewitnessthefinancialmarkets

ebbandflowbasedonnottotallyunderstoodmacroeconomicevents.Theworldremainsinamajor


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financialcrisisandcentralbankersaretakingextremegambleswhichcouldhaveseriouslongerterm

negativerepercussions.

GeorgeSorosasksthequestion:Whendothereflexiveconnectionswhichareendemicinfinancial

marketsturnintoselfreinforcing,historicallysignificantprocesseswhichaffectnotonlypricesinthe

financialmarketsbutalsothesocalledfundamentalsthatthosepricesaresupposedtoreflect?He

thensubmitsanhypothesis,thathastobetested,thattherehastobebothsomeformofcreditor

leverageandsomekindofmisconceptionormisinterpretationinvolvedforaboombustprocessto

develop.HegoesontosaythatMisconceptionsplayasignificantroleinthemakingofhistory.

Whilehismessagewasparticularlyrelevantinunderstandingthe2008marketcrisisandbust,italso

helps to give someunderstanding to the current turmoil inEuropeand theUnited States that

misunderstanding andmisconception of the degree of impact of the vast quantity of sovereign

creditandleverage,especiallyintheUnitedStatesanditsreservecurrencydollar.

Historically,be itforastate,acompany,oran individual,anexcessofdebtand/orcreditdoesnot

lead to good things, especiallywhenwe have to dealwith fiat currencies as the only available

resourcetoachieverepayment.

Toomuchleveragewithdebtandcreditisresolvedinusuallyoneoffourways:

1. Repayinacurrencyacceptabletothelender

2. Begandreceiveforgivenessofthelender

3. Donotrepay,acceptdefaultandfacebankruptcyproceedings.

Thereisafourthwayonlyifyouareasovereignstatewithyourownfiatcurrency.Inthatcaseyou

merelyprintmorecurrencyandhopethatitremainsacceptabletorelievetheeconomicturbulence.

Manyyears

ago,

awise

man

by

the

name

of

Ludvig

von

Mises

said:

There isnomeansofavoiding the finalcollapseofaboombroughtaboutbycredit

expansion.Thealternativeisonlywhetherthecrisisshouldcomesoonerasaresultof

a voluntary abandonment of further credit expansion, or later as a final and total

catastropheofthecurrencysysteminvolved.

Today, after the financial crisis of 2008,we arewitnessingmassive printing of fiat currency by

virtuallyalloftheimportantnationsoftheworld,butespeciallythethreesupercurrenciestheUS

dollar,EuropesandGermanysEuro,andtheChineseYuan.

Historyof thousandsofyearshasproven thatwecannotprintourselves toprosperity,and the

currentcentralbankershavenot figuredout somethingnewandcreative.But theyareusing the

same tools and calling them by different names. Printing fiat currency by buying garbage debt

ownedby the commercialbanking community is reallyprintingnew fiat currencybut they call it

quantitativeeasing.Sincethe1970stheUShas ledtheworld inmoneyprintingandtheUSdollar

hasfallenfrombeingabletobuyonedollarofgoodsin1970tothedollaronlybuying1718centsof

goods today. This is inclusive of the early dollar debasement from 1970 to 1977 when the

purchasingpowerof thedollar fellby fiftypercent.Allof thisexpansionof thecreditsystemand

buildingthebalancesheetoftheFederalReserveundertheguidanceofmanyFedgovernorsfrom


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ArthurBurnsinthe1970sand,ofcourse,throughAlanGreenspanand,today,BenBernanke.They

alldiditbecausetheyhadto,andtheycould.Therewerecontinuoustimeswhenitwasrequiredto

paperovertheeconomiccracksthatemanatedfromtheforcefulgrowingoftheUSeconomysothat

politicians could get reelected. Eventually, as they are facing it today, those economicproblems

becamedeepholes.Onethingthatoftenoccurs,isthatwetendtokeepdiggingwhenwearestuck

inahole.ContinuingtodigmeansthattheUSrequires increasingamountsofmonetaryexpansion

anddebtinordertoseducethepopulationaboutAmericanprosperity.

Before2008,thereweremanyinstancestocorrectthosedebtandcreditimbalancesbutforpolitical

reasons itwaseasier topush them (or,as theysay,kick thecan)hoping thatsomethingwould

happeninthefuturesothatwewillachieveaselfcorrection.

Butinstead,wehad2008,aperiodthatwillremaininthememoryofmostofusforalongtime.And

asaresultofthatfinancialcrisisitwasnecessarytodoevenmoreprintingsothattheAmericanand

Britishbankscouldbebailedoutandsubsidiescouldbeprovidedtothebeatenindustriesandmany

unemployed.

Time after time, financial economies, when in distress, cause the smartest of the political andfinancialadministrators to forgetabout the long termconsequencesandgoonwith thequick fix

without resolvinganyof theobviousproblems.Politiciansareonlyjudgedbyquicksolutions that

lastuntilthenextelection.Theydonothavethepoliticaltimetogoforalonglastingpermanentfix.

Historyislitteredwiththeremainsofdeadcurrenciesthatwereallowedtodiebecausethequickfix

wasmoreexpedientthanbitingthebulletofpermanentrepair.

Becauseofthequickfixsolutionsoverthosemanycenturiesofdeadcurrencies,nationshadtolive

withbudgetdeficitstofightwars,keeptheKingorPresidentinfineluxurylivingandfinewine,and

ofcoursethewholeprocesscontinuestobuildupdebt.Debtthatbecomesmoreandmoredifficult

tolivewithandeventuallysomethinghastogive.Asaglobaleconomy,wecannotachieveorkeep

prosperityby

continuing

to

take

on

debt

and

printing

money.

Or

to

bring

itback

to

abusiness

company.Wheretoomuchdebtmustbeforgiven,defaulted,orwehavetoprintnewequityand

facethedilutionofequity. BillGross,thebondmavenofPIMCO,recentlyputitonthelinewhenhesaid:A3050yearvirtual

cycle of credit expansionwhich has produced outsized paranormal returns for finance assets

bonds,stocks,realestateandcommoditiesalikeisnowdeleveragingbecauseofexcessiveriskand

thepriceofmoney iszerobound. Wearewitnessingthedeathofabundanceandtheborningof

austerity,forwhatmaybealong,longtime.

GrossmadethisstatementinFebruary2012,almostatthesametimethatWarrenBuffettgaveusa

clueof something thatwillcomeoutwhenhisAnnualReportofBerkshireHathaway is released.

Buffettisadvisinginvestorstostayawayfrombondsbecauseoflowinterestratesandinflation.He

included bonds with other holdings that are tied to currencies. They are among the most

dangerousofassets over thepast century these instrumentshavedestroyed thepurchasing

power of investors inmany countries, even as their holders continued to receive payments of

interestandprincipalhighinterestratesofcoursecancompensatepurchasersfortheinflation

risktheyfacewithcurrencybasedinvestmentsandindeedratesinthe1980sdidthatjobnicely

currentrateshoweverdonotcomeclosetooffsettingthepurchasingpowerriskthat investors

areassumingrightnowbondsshouldcomewithawarninglabel.


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JeremyGrantham,anothersuperblongterminvestor,saidonFebruarythethirteenth,thedayafter

GrossandBuffett, thatweare literally runningoutofexpletives todescribehowmuchwehate

bonds.Yieldsarepitiful,dangersofevenaslightrecoverythatcouldwreakhavocforlongduration

portfolios,loom,andmonetarypoliciesgloballycertainlyhaveaddedtothespectreofrisingyields. Thesecomments,whicharesimilartothosewemade in lastyearsAnnualReport,followthevery

recent releasemadebyBenBernankeoftheUSFederalReservewhenhesaidTheFedhaskept

borrowingcostsnearzeroandeconomicconditionsmaywarrantexceptionallylowlevelsfor

ratesthroughatleastlate2014toboosttheeconomyandputmoreAmericansbacktowork.

The fact is that the world, and especially the US, is obliged to go to a serious program of

deleveraging their credit debt position.No one likes deflation and theonly cure for deflation is

inflation.Andinflationatleasthasananswerofeconomicgrowth.John Paulsens year end letter to his clients says that he expects that Greecewill soon default

becausetheyhavetocomeupwith14.5billionEurosbyMarch20thandwillnotbeable tomeet

thatpaymentunlesstheygetmorerescuebailoutmoney. Iftheydonotgethelpforthispayment,he toobelieved thatwe can see thebeginningof thebreakupof theEuro.Hebelieves that the

Greekswilldefault.Toquotehim,WebelieveaGreekpaymentdefaultcouldbeagreatershockto

the system than Lehmans failure immediately causing the global economies to contract and

marketstodecline.TheEuro isstructurallyflawedandwill likelyeventuallyunravel.Towhichwe

addIsallhappening.

By the timeanyone is reading this, thedefaulteventwillbebehindus,but JohnPaulsen isnota

dummyandwhilehiscommentsarenotfoolish,heshouldtakealookatSpain,Italyandnoweven

Franceafter the recentelection.Thebreakupof theEuroandadefaultbyGreecehasdisastrous

negativeimplicationsandevenifGreeceissomehowsaved,theEurocrisisisnotoverandmayeven

becomeworse,

but

this

isnot

an

unknown

to

the

powers

that

still

have

some

powder

to

provide

delaystotheultimatenegativity;butwewillbelivingintroubledEuropeantimesforsometime.Theresultantrecessionand low interestrateshascausedarise inUShouseholddebtfrom47%of

GDPin1980to97%oftotaloutput inQ42008.Thisisanever increasingburden,andtheFedhas

been forced intoa seriesof lower lowsand lowerhighson itsbenchmark lending rates.Keeping

rateslowisanattempttomakedebtservicelevelsmanageablebythegovernmentandtokeepthe

consumer afloat.Theproblem is this endlesspursuitofunnaturally low rateshas soaltered the

FederalReserve'sbalancesheetthatMr.Bernankewillbehardpressedtosubstantiallyraiserates

tocombat the likely inflation,onceconsumerandwholesalepricesbegin to significantly increase

becauseofthemassiveprintingofmoney.Butit'snotonlythesizeoftheFederalReservebalance

sheetthatissodaunting;it'sthemakeupandalltheothercentralbanksfinancialsthat'sbecoming

trulyscary.

Togetbacktoourthematicconcern,wemustshowagreementwithwhattheMinisterofFinanceof

BrazilsaidinSeptember2010whenhedeclaredthattheworldhasenteredaperiodwhichhecalled

acurrencywarandthatiswhatwearelivingthroughtoday.


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Thethreesupercurrenciesoftheworld:

Thedollar US

Theeuro Europe

TheYuan China

are in a currency war and all other currencies around the world are feeling the unexpected

consequenceofthiswar,whichcentersaroundthereservecurrencystatusoftheUSdollar.

Ashestatesonaregularbasis,BenBernankecontinuestodeludehimself,andtriestodolikewiseto

theworldpublicthatwhenthetimecomeshewillbeabletoshrinkthesizeoftheUSbalancesheet

and reduce themonetarybasewith ease and impunity.And along thewayhehasalsodeluded

himself,orisbasicallyhoping,andlyingtous,thatinflationwillbeeasilycontained.

Isaythatheliesbutletsrememberthathisjobdescriptionsaysthathemustkeepmonetaryand

economicpolicyoutof instability.Assuchheknowsthathecannotbesayingordoingthingsthat

willcausethecitizenpopulationtoseeandfeelthattheyliveinanunstableenvironment.Hisother

jobistoarrangethefinancialcoffersoftheUSsuchthatunemploymentshouldnotbeaproblem.

Heisfailingonbothofhismandatesandwhileheisallowedtofoolhimself,weshouldnotlethimfoolusaswell.

Ihavejust reada recentlypublishedbookwrittenby JamesRickardCurrencyWars.Forme it

turnedthelightsonwithwhatishappeningintheworldofglobaltrade,themacroeconomicscene

and investmentprospects.Rickard simplisticallymakesourDundeebusinessplanofdefiningour

emphasis to specialize in hard asset investments, assets like resources, real estate, energy,

infrastructureandagriculture.

Mypreviousfirm,Beutel,GoodmanandCompanystartedasapartnershipofinvestmentcounselors

in1967.Littledidweknowthatwechoseprobablythetoughesttimetobranchoutstartingasan

investmentcounsel

just

before

the

1970s.

But

once

we

figured

out

the

scene

we

were

able

to

prosper both for our clients and for the partnership itself. Thatmacroeconomic scene is being

replayedtodayonamoreglobalbasisbutsimilartothelater1960sand1970s isthatmanyofthe

socalledexpertsineconomicsandtraditionalinvestmentobserversdonotgenerallytellushowto

protectourselves from theeconomicproblems that lieahead.According toRickard,and Iagree,

Notonlyhavetheirtheoriesfailedtopreventorpredictcalamity,theyaremakingthecurrencywar

worse.ThisUSFederalReservehasengagedinthegreatestgambleinthehistoryoffinancewitha

sustained effort to stimulate the economy by printing money on a trillionsofdollars scale. Its

solutionspresenthiddendangerswhileresolvingnoneofthecurrentdilemmas.

Rickardtellsusthat inthe last100yearswehavehadtwoseriousepisodesofCurrencyWar.The

first tookplace in the1920sand1930swhenPresidentRoosevelt legally confiscatedall the gold

from the citizenry of the US and, within months, raised the price versus the dollar from

$20.67/ounceto$35/ouncea+70% increaseanouncesettinguptheUSdollarasthe reserve

currencyoftheworld,amysticphenomenonthatexistsevenuntiltoday.

The dollar persists as the acceptable reserve currency, notwithstanding the fact that in 1971,

PresidentNixonactuallycancelledtheBrettonWoodsAgreementandtooktheUSdollaroffthegold

standard.Theperiodofthe1970smentionedabovewasthetimeofthesecondglobalcurrencywar

whichwascausedagainbyaPresidentsaction.


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Wearecurrentlylivingthroughanewtimeofeconomicandfinancialeventswhicharerelatedtoa

newglobalcurrencywar.Awarwhichemanatesdirectlyfromthefinancialcrisisof2008,whichas

Ihave statedmany times will remain in thememoryof investors fora long time.Thecurrent

currencywarstartedin2010.

Currency wars have happened many times in history and they always end with a destructive

outcomeoftheglobaland internationaleconomy.Wearewitnessingmuchofthistodaywiththe

Eurocrisis, themanipulationof theChineseYuan, theFederalReserve imposedvery low interest

rates,andoverallmassiveprintingofUnitedStatesdollarswhicharebackedbynothingmorethan

thesuggestionthatweshouldtrustinGod.

Rickard introduceshisbookbysaying,currencywarsareoneofthemostdestructiveand feared

outcomes in international economics.Atbest theyoffer the sorry spectacleof countries stealing

growth from their tradingpartners.Atworst, theydegenerate into sequentialboutsof inflation,

recession,andsometimesactualviolence.

Currencywarsalwaysendbadly,and the recentheadlinesabout thedebasementof thedollar,thepriceofgoldandotherhardassets,bailoutsoftheUSandEurobanks,Greece,Ireland,Portugal

and now Spain, the British banking community, currencymanipulation by all nations and China,

alongwiththemanyothernationsincludingarecent$1billionworth,seriouspurchaseofgold,by

eachofRussiaandMexicoareallindicatorsoftheproblem.

Thegreatestthreat,whichmosttraditionaleconomistsfailtogivemuchissuebysayingthattheUS

dollar can be theonly acceptableworld reserve currency, is the actual potential collapseof the

currencies,especiallytheUSdollaritself.

Weare inaglobalcurrencywarand traditionallycurrencywars resultoften in stagflationand/or

inflationwhich

can

only

be

corrected

by

higher

interest

rates

and

austerity;

but

none

of

the

three

supercurrencycountriescanpoliticallylivewithausterityandhigherinterestrates.

TheUShas:

x Toomuchdebt

x APresidentialelection

x Massiveunemployment

x Adysfunctionalpoliticalsystem

Europealsohasmanyproblems:

Weallknowtheproblemsthere;butthey,likewise,havethesameproblemoftoomuchdebtwith

GermanytryingtokeeptheEurotogetherforapurposethatseemstobemoreforpoliticalegoand

economicfiscaladvantage.

And this is allhappeningwhile at the same time the emergingnationsof theworld aremoving

towardsthemodernityoflifethatwe,inthesubmergingworld,haveachievedoverthelast100to

150years.Youknow:refrigeration,TV,goodhousing,insidetoilets,cars,etc.

Infact,notonlyaretheemergingnationsquicklymovinginarapidpositivedirectionwiththeirlow

wagecosts,theyarebeginningtoexportandimportgoodsandservicesatafasterratethantheso


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11

calleddeveloped,ortoday,submerging,countries.Allthewhilewe inthesubmergingnationsare

slackingoff,feelingrichandhappyand,intheUS,arguingamongstthemselvesaboutanelection.

The world is transitioning very rapidly and, unfortunately,we are living through this transition

duringthethirdcurrencywarsince1930.Currencywarsarenotpretty,butastheemergingworld

continueson theway toprosperity theworldwillneedmoreof the stuff that comesoutof the

groundresources,agriculture,energy.

Artificiallowinterestratesareachievedbyinflatingthemoneysupply.Lowinterestratescheatthe

saversandpunishthethrifty.Theyaresupposedtopromoteconsumptionandborrowinginsteadof

savingandinvesting.Manipulatinginterestratesisimmoral.

Acentralbankfoolingwithinterestratesispricefixingandaformofcentralplanning.Pricefixingis

atoolofsocialismanditdestroysproduction.Noonereallyknowswhattherateshouldbe,butby

keeping ratesunduly low foranextendedperiodof time theadministrationhasput the fearand

uncertainty in theminds of the publicwhile they arebuying toxic low interest treasury bills for

financialsafety.

Zero interestrateshavetakenmonetarypolicy intounchartedwaterswatersofuncertainty.But

onefacthaschangedfiscalpolicydoesnothavemucheffectonamonetaryequationandthose

unfunded future liabilities of worries about money will likely raise the spectre of inflationary

expectations.Intodaysuncertaineconomicposition,bothpoliticiansandcentralbankersareflying

blindorsailinginthedarktryingtofigureoutwherethegoodorbadwindscomefrom.

Withoutoversightorsupervisionandinsecurity,theFederalReserveandothercentralbankerscan

inflatecurrency,creatingnewmoneyandcreditoutofthinair.Inflation(evenifitisquiet)facilitates

deficits, needlesswars and excessivewelfare spending.Debasing a currency is counterfeiting. It

stealsvaluefromeverydollarearnedorsaved.Itrobsthepeopleandmakesthempoorerandisthe

absoluteenemy

of

the

working

for

wages

population.

And

inflation

isaregressive

form

of

taxation.

AttheendofMarch2012,BenBernankesaid:

WhileI'mencouragedbytheunemploymentrate'sdropto8.3percent,furtherimprovementinthe

job market will require continuing the central banks easy monetary policies. Faster economic

growth isneededtokeeptheunemploymentratemoving lower,andwithGDPgrowthof22.5%,

goodfornochangeintheunemploymentratelongterm,furthergrowthisrequiredtosignificantly

lower theunemployment rate.Therefore, theFed shouldbe targetingat least44.5%growth for

several years. Economic theory tells us that monetary policy loses its effectiveness if the

unemploymentratestayshighfortoolong.

WeclearlycanseemorepainonthehorizonwhentheeffectsofQuantitativeEasing2(QE2)wear

off and that all themarket really cares about ismore freemoney, regardless of the long term

negativeeffects.Lestweforget,thisisanelectionyear,andBernankeisappointedbythepresident,

notelected.

MichaelSnyderofBusinessInsiderwroteonMarch26th:

TheU.S.dollarhasprobablybeentheclosestthingtoatrueglobalcurrencythattheworldhasever

seen. Fordecades,theuseoftheU.S.dollarhasbeenabsolutelydominant in internationaltrade.


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12

Thishashad tremendousbenefits fortheU.S. financialsystemand forU.S.consumers,and ithas

giventheU.S.governmenttremendouspowerandinfluencearoundtheglobe.

Today,morethan60percentofall foreigncurrencyreserves intheworldare inU.S.dollars.But

therearebigchangesonthehorizon.ThemainstreammediaintheUnitedStateshasbeenstrangely

silentaboutthis,butsomeofthebiggesteconomiesonearthhavebeenmakingagreementswith

eachothertomoveawayfromusingtheU.S.dollarininternationaltrade.

Therearealsosomeoilproducingnationswhichhavebegunsellingoilincurrenciesotherthanthe

U.S.dollar,whichisamajorthreattothepetrodollarsystemwhichhasbeeninplacefornearlyfour

decades. And big international institutions such as theUN and the IMF have even been issuing

officialreportsabouttheneedtomoveawayfromtheU.S.dollarandtowardanewglobalreserve

currency.

ThereignoftheU.S.dollaras theworldreservecurrency isdefinitelybeingthreatened,andthe

comingshiftininternationaltradeisgoingtohavemassiveimplicationsfortheU.S.economy.

A lotof this isbeing fueledbyChina.Chinahas the second largesteconomyon the faceof theearth,andthesizeoftheChineseeconomyisprojectedtobefirstby2020.

SoChinaissittingthereandwonderingwhytheU.S.dollarshouldcontinuetobesosuperiorwhile

Chinaisabouttobecomethenumberoneeconomyontheplanet.

Over the past few years, China and other emerging powers such as Russia have been quietly

movingawayfromtheU.S.dollarininternationaltrade.ThesupremacyoftheU.S.dollarisnotwhat

Americansbelievethatitis.

AstheU.S.economycontinuestofade,itisgoingtobereallyhardtoarguethatthedollarshould

bethe

primary

reserve

currency

of

the

world.

Things

are

rapidly

changing,

and

most

Americans

have

noideawherethesetrendsaretakingus.

WhileEuropehasbeenpreoccupiedwithapossiblerestructuringofGreece'sdebt,hugerisks lurk

elsewhereespecially inthebalancesheetoftheEuropeanCentralBank.Theguardianofthesingle

currencyhastakenonbillionsofEurosworthofriskysecuritiesascollateralfor loanstoshoreup

thebanksofstrugglingEuronations.Since thebeginningof the financialcrisis,banks incountries

like Ireland,Portugal,SpainandGreecehaveunloaded risksamounting toseveralhundredbillion

Euroswithcentralbanks.Thecentralbankshavedistributedlargesumstotheircountries'financial

institutions toprevent them fromcollapsing.Theyhaveacceptedsecuritiesascollateral,manyof

whicharetoputitmildlynotparticularlyvaluable.TheECBislendingtotheEurobanksandthe

banksarePonzilikedepositingthemoneybackintotheECB.

LetsnotforgetthattheUnitedKingdomssterlingcurrencywasoncetheworldsreservecurrency.

From1870toaround1933,ittook$5USdollarstobuyonepoundsterling.From1933to1948this

ratiodeescalatedtoalittlemorethanhalfthatrate1=$2.50,Itwasin1992thatGeorgeSoros

mademostofhismoneyandsomeofhisreputationasbeingastutewheninspiteoftheBankof

Englandsbestefforts tomanage their currencysdevaluation sterling valuation gotaway from

themand the currency collapsed fromabout$1.751.80 to theUSdollar to$1.50.There isno

guarantee that theUS dollar can be defended any better than the pound sterling. Sterlingwas


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13

removedastheworldsreservecurrencyafterthesecondworldwarBrettonWoodsAgreementand

was replacedby theUSdollar.Twoworldwarswere followedbysocialismwhichbankrupted the

poundatthattime.MostAmericanshavenotyetcaughton,but their relativeeconomic importance,superiority,and

poweraregraduallyslippingaway.WhileitistruethatAmericalikelyhasthebestcards,itwillhave

toholdontothemandlearntoplaythembetter,otherthansolelytoassistthePresidentinwinning

anelection.TheUStoday istheworlds largestdebtor.Weallthink itsdebt is$16trillionbut its

muchmoreundermodernaccounting.TheUSandtheworldarepotentiallylookingatanunknown

triggering eventwhich could cause a dramatic dollar crisis. It could be the end of the dollars

dominant role as theworldsmoney andwill cause a dramatic dollar crisis and cause unknown

consequences.InNovember2011, theMcKinseyGlobal Institute,partof theconsultingorganizationMcKinsey&

Company,prepareda210page studyentitled:ResourceRevolutionMeeting theWorldsEnergy,

Materials,FoodandWaterNeeds.

TheMcKinseyGlobalInstitutewasestablished in1990asthebusinessandeconomicresearcharmofMcKinsey&Companytodevelopadeeperunderstandingofthequicklyevolvingglobaleconomy.

TheprefacetotheirreportdeservestoberepeatedbeforeIstatesomeofthespecificobservations

theirreportoutlines:Overthepastcentury,progressivelycheapernaturalresourcesunderpinned

globaleconomicgrowth.

Theystatethattheirreportaimstooffernewinsightsintohowdemandforresourceshasevolved

andhowitislikelytodevelopoverthenext20years.Itanalyzeshowdemandcanbemetthrough

expandedsupplyandhigherresourceproductivitywithinnovationpotentiallyplayingacentralrole

as new technologies scale up across resource systems. It is speaking to the major resource

companiesand

the

environmental

risks

that

quantify

options

for

addressing

them.

The

report

also

examines what policymakers and the private sectormight do to overcome potential resource

constraints.

Amajorconclusionfromthereport isthat:3billionmoremiddleclassconsumersareexpectedto

be intheglobaleconomyby2030andat least$1trillionandperhapsasmuchas$3trillionmore

investment in the resources system is needed each year before then, tomeet future resources

demandsofland,food,energyandmaterials.

Thestudiesmainfindingsare:

1. In the last ten years alone a 100 year decline in resource prices has been reversed as

demandforthemhassurged,withthevolatilityofresourcepricesatalltimehighs.

2. Theyoutlinefivefactorsthatcouldmakethenexttwentyyearsquitedistinctasshortlived

higherandvolatileresourcepricescaughtuponsupplyandhighpricescurtaileddemand:

I. Uptothreebillionmoremiddleclassconsumerswillemergeoverthenext20years,

fuellingdemandforarangeofresources;


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14

II. Expanding supply and adding capacity could run into logistical and political

difficulties,makingaddingcapacitymorecostly;Demandissoaringatatimewhen

finding new sources of supply and extracting them is becoming increasingly

challengingandexpensive.

III. Priceshocksinoneresourceinonemarketcaneasilyandrapidlyspreadtoothers.

IV. The impact of strongly rising demand for resources on the environment could

restrictsupply.

V. Policymakersmayfacenewdemandsfromabillionconsumerswhostilllackaccess

tobasicneedssuchasfood,energyandwater.

These five factorscould imposeasignificantnegative impactoneconomicgrowth, thewelfareof

citizens(especiallywith low incomes)aswellaspublicfinancesandcouldoverallraisegeopolitical

concerns.

LetmenowoutlinethoseindividualpartsoftheMcKinseyreportthatparticularlyaffectourDundee

businessplan.

1. Acombinationofrisingdemand foragriculturalproductsandslowingagriculturalgrowthcould mean that over the next twenty years from 2010 there is a global need for an

additional175million to220millionhectaresofcropland inorder tomeet foodand feed

demand.

2. Urbanexpansion globally couldencroachonanadditional30millionhectaresofexisting

cropland.

3. Supplyexpansionofresourcecouldbedifficultgiventhatasignificantportionof reserves

areincountrieswithpoliticalorinfrastructurerisks.Weare livingthroughaglobalgameofchicken.Theworld isnotyetreadytoaccept2to3billion

moremiddleclasscapitalists.The impactof thesemassesand their relianceonaglobalcurrency

otherthan

the

dollar

could

cause

achain

reaction

of

dollar

dumping

in

exchange

for

something

they

consider better. Dumping of dollars and US bondswould cause a recession andmaybe even a

depression in theUnited Statesalongwithmanyother countries in theworld.When itbecomes

moreobviousthatthedollarisintroublethefirstsellerwilltakethesmallestlossasachainreaction

becomesunstoppable.Since the financial bust of 2007, the international economy haswitnessed tectonic shifts and a

reorderingofpower relationshipsas ithas struggled to recover from thegreatestblow since the

1930s.Developingemergingcountrieshaveprovidedtwothirdsofalleconomicgrowthoverthelast

five years,helping compensate for the stumbling industrializedworld.Developing countrieshave

alsobecomethesourceofeconomicideas,developmentmodels,investmentandevenforeignaid.

Thestockmarketsofmanyofthedevelopedworldwillcontinuewithupanddownspurtsandstarts

formanyyears.

Inparticular, thereareabillionpeople inAfricawithahighgrowth rate.Theirpopulation,while

growing,isbecomingbettereducated,saferandbeginningtogrowtheirindustryandwealth.

As the CEO of our company, shareholders should know that I think long term. And as such I

recognize for investment thosemanydeveloping countries inourworld that are transitioning to

modernlivessimilartoours.Thisisachangethatstartedabout100yearsagoandcameafterover

100,000yearsofveryminorprogress.Onehundredyearsagowehadabout1.6billionpeopleinour


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15

world.Today,wehavesevenbillionwhosoonwillcreate23billionmoremiddleclasscapitalists,all

tryingtoachieveourlifestyle.Assumingthatwearestillinthebearstockmarketthatstartedin20002001WhatistheAnatomy

ofaBearMarket? RussellNapierwroteabookofthatname in2005whereinhedocumentedthe

similarityof thebottomsof fourofthegreatBearMarketsof the20thCenturythebearmarket

bottomsof1921,1932,1949and1982.

HeexplainshimselfintheIntroductionbysaying,Thisbookwaswrittenthroughafrustrationwith

moderncapitalmarketstheoryandalsothemostavailablefinancialhistorybooksTheaimofthis

bookistoprovideapracticalhistoryoffinancialmarkets.

Strategically, he has determined that great bear markets have long lifelines and that equities

become cheap slowly over a period of 10 to 14 years. If the current secular bearmarket really

startedin2000,wemaybegettingveryclosetoabuyingopportunity.

x TheUSequitymarketsreacheditshighestevervaluationinMarchof2000,andallextremesof

valuationhavefollowedthisslowmovetoundervaluationwhichhasnotyethappened.

x Withexceptionof192932,bearmarketsactuallyoccurredagainstabackgroundofeconomic

expansion

x Inflationadjustedearningsgrowthrangedfrom67%to+28%.Thenominalearninggrowthin

allfourbearmarketsrangedfrom67%to+119%

x Amaterialdisturbance to thegeneralprice levelwas thecatalyst to reduceequities tocheap

levels.

x In periods of price disturbance, there is great uncertainty as to both the level of future

corporateearningsandthepriceofthekeyalternatelowriskassetgovernmentbondswhichalwaysleadthemarkettodeclineforequityvaluations.

x Allfourbearmarketbottomsoccurredduringaneconomicrecession.

x Thereturnofpricestability,followingaperiodofdeflation,signalsthebottomofabearmarket

inequities.

x Stabilizingcommoditypricesaugersmoregeneralpricestabilityaheadandsignalstherebound

inequityprices.Andofallthecommoditiesthepriceofcopperhasbeenaparticularlyaccurate

signalofbetterequityprices.

xTo

assess

whether

price

stability

issustainable,

investors

should

look

for:

low

corporate

inventory levels; rising demand for some products because of lower prices, and whether

producershavebeensellingbelowcost.

Toaddtotheconfusionofabearstockmarket,itisinterestingthattheworldeconomyinaggregate

hasgrownmoreduringthelastfiveyearsthaninanyfiveyearperiodsincetheSecondWorldWar.

Chinas supplyledmodel has been funded in an undisciplinedmanner by a communist policy

directedCentralBank.Anymisallocationofcapital couldupsetanapplecart. Inaddition,Chinas


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16

dynamic growth has triggered a rising protectionist backlash yet to be displayed in total by the

poweroftheDemocratsintheUS.

Fromthedaysofthe17thCenturytulipbubbletothemorerecentdotcombubble,thecycleoffear

andgreedhasalltoooftengonetoextremes.

AsLawrenceSummers,theexUSTreasurySecretaryandanotedeconomisthasrecentlysaid:lack

offeargivescauseforconcern,andthemomentsofcomplacencyhavebeenmomentsofgreatest

danger.Overthepast20yearstheworldhasconfronted:

x The1987marketmeltdown

x Thebankingcrisisoftheearly1990s

x TheMexicanneardefaultinearly1995

x TheAsiancrisisin1997

x Longtermcapitalin1998

x Thedotcombustin2000,and

x September11in2001

x 20072008!

Whileeachoftheseeventsisunique,therecorddoessuggestthatcrisesoccurinaboutoneoutof

everythreeyears.Hewentontosay:perhapsthemainthingwehavetofearislackoffearitself.

Today, the US Federal Reserve, under the guidance of its Chairman is engaged in the greatest

gambleinthehistoryoffinance.Beginningin2007,theFedfoughtoffeconomiccollapsebycutting

shortterm interestratesand lendingfreely.Eventuallyratesreachedzero,andtheFedappearsto

beoutofbullets.AreWeLike1974?

My investment career started in1962. I spent5yearsuntil1967at several securityanalysisand

portfoliomanagementpositions.

I started as a statistician for a small brokerage firm; I soonwent tojoinAustin Beutel as the

portfoliomanagerof theEdperpartof theBronfman family,where I stayed for2yearsbefore

joiningFrancis IDuPontastheheadoftheCanadianResearchDepartment. I lasted there for less

thanoneyearbecauseIwouldnotaccepttheinterferencefromtheheadofficeofthecompanyon

WallStreetIquit,andAustinhiredmeback,whereIstayeduntil1967whenAustinandIbothleft

toformBeutel,Goodman&Company.

Wegathered

some

assets

to

manage

quite

quickly

and

in

1968

Seymour

Schulich

joined

us,

soon

followedbyDavidWilliams,whomovedusintothepensionfundmanagementbusiness.

From1969to1982wedominatedtheCanadianpensionfundinvestmentmanagementbybeingin

positiveperformanceduringaperiodthatourcompetitors,thenownonexistentbrassplaquetrust

companies,werefaltering.Wedidsobyincludinginourinvestments,oil,gold,realestateandother

commodityrelatedcompaniesinanticipationofinflation,whichquicklycame.


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17

Weweresubjected, soonafter1970,witha confluenceofeventsvery similar to thosewhichwe

currentlyface:

x Fallinginterestrates

x adislocationofthebondmarket

xa

collapse

of

the

US

dollar

x fallingglobal(westernbased)economicactivity

x forcedsellingbybanksandother financial institutionsbecauseofafallingbondandstock

market

x plummetingassetmarkets

x abankingcrisis

x risingoilprices

x and in 1971, theUS closing the goldwindow and abandoning their part of the Bretton

WoodsAgreement

x by 1974US short interest rateswerebeing cutaggressivelyand corporate spreadswent

from1%to3%

xthe

dollar

lost

16%

versus

the

Deutsch

Mark

(todays

Euro)

x goldjumpedfromafixed$35priceto$100andthenashighas$175in1974

x theinflationratewentthroughtheroofgloballyunderthedoublewhammyofgoodsandoil

prices

x insurancecompanieswerefightingwithreachingtheirinsolvencyratiosandwereforcedto

selllikefoolsandthestockmarketcollapsedtheDowJoneswentfrom800to570

x theoilpricewentfrom$3to$15andtherewasanalloutwarintheMiddleEast

While1974isnotrememberedfondlybymostpeople,itwasthetimethatAustin,Seymour,David

andIprosperedandgatheredaccountsthatweneverbelievedwerelikelyforabunchofunknowns

fromMontreal.

By1974,theworldwasfacedwiththefailureoftheUKsecondarybankingsystem,thefailureofthe

FranklinNationalBankintheUSandoftheHerstattBankinGermany.

Thesefailuresbroughtoutthe lifeboatsoftheUKgovernmentwhoproppeduptheirsickbanking

system inamannersimilartotodayandby1975theUSstockmarkethaddoubled from its lows,

verysimilarto2011.

Afterthecrisisof1974itbecameclearthatmostoftheupwardmovementincommoditypriceswas

due tostockpilingof inventorieswhichon liquidationcausedacollapseofcommoditypriceswith

theexceptionofoilinwhichOPECdefendedtheprice.

Have we just lived through 1974 again? It feels like it, but there are a number of significantdifferences:

x Banksaremuchmoreessentialthantheywereinthosepastdays.

x By1974stockmarketsweredirtcheapWarrenBuffettstartedhiscareerwithBerkshire

Hathaway.Today,stockmarketsarenotcheapifinterestratesreturntomean.

x Todaycommodityinventoriesarenotbuiltup;infactforsomewemaybeshort.


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18

x Chinaand Indiaand infrastructureexpenditurewillkeep commoditypriceshigh forquite

sometime.

x Infact,thewholeprocessofglobalizationandnewtechnologymakesitdifferent.

x Thefinalstockmarketbottomdidnottakeplaceuntil5or6yearslater.

While

we

have

been

very

clear

to

our

shareholders

that

our

target

markets

for

investment

are

those

industriessuchasrealestate,resources,energy,agricultureandinfrastructure, letmenowoutline

someofourinvestmentandculturalthinkinginadditiontothecowboyethicsthatwillcomelater

inthisreport.Whentheworldiszaggingitisveryhardtozig;butoneofmyfavouritequotesisby

an unnamed real estate investor, who said, Nonconformity is the highest form of social

attainment.Healsosaidthathehadalowbullshitmeterandifsomethingdidntsoundcommon

senseplausible,hesgonemetoo.

Thecontrarianphilosophyalsomeansthatweshouldalwaysquestionauthorityaswellasthecrowd

andmedias reaction toanything.Tokeep the languageclean Iwillnotquote the realestateguy

againbutaddmyownwordstothis,Whenthemassesstartallrunningonewaywithoutaskingthe

questionWhy?,andwhentheeventalsodefiesanylogicthatIcandetermineinmyheadandon

my10fingersIcallitBS.

Contrarytocommonopinionthatwe invest inassetsthatisonlyhalftruewe investinpeople.

Goodpeoplewillcreategoodassetsorfindothers.Badpeoplewillmessthemupandalwaysneed

moremoneythantheythought,andtoomanyenduphittingthewallleavingtheproblemstous.

Becauseweknow thatgreatbusinessesof startupventures can takeanywhere from five to ten

years to build and bloom,we pay attention to themacroeconomic future for the product, the

industryandthegeographicallocation.Duringaperiodoffivetotenyears,badmacrowouldmean

badtimesandbadtimesrequiremoremoneywhen itisdifficulttoraise.Goodtimes,goodassets

andgoodmanagementwillbeagoodinvestment.

Significantandexceptionalassetmanagement for thehighnetworthmarket segment isa target

thatwearepreparingto reach.Theoverallclientswithin thatsegmentofpopulationcommanda

disproportionateshareof investmentmanageableassets.Surveyshaveshownthatalmost85%of

wealthy individuals,unlike their lessaffluentpeers,arenow facingan increasinglyoverwhelming

number of investment choices as well as complex tax, diversification, and estate and planning

needs.

Lacking adequate time, expertise as well as inclination to obtain same, most high net worth

individuals are seeking outside help.We intend to, once again, grow our 50person investment

advisor/retailbrokeragegroupwhichhasbeendramaticallyreducedinsizeasaresultofthesaleof

the1100DundeeWealthmutualfundadvisorstotheBankofNovaScotia.

Ourclientswillbeabletoenjoythedepthofexperiencethatwebringtoassetmanagementaswell

as being exposed to the new issue positions that our institutional team provides for large

professionalaccounts.

WeareastockbrokerandmanyCanadianandUSstockbrokerslikeMerrillLynch,MorganStanley

andCanadianbanks,havebeenverysuccessful inprovidingtheirbrokeradvisorswithafeebased

assetmanagementplatform.


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WhenweannouncedthesaleofDundeeWealth,wecalledourselvesassetmanagers;butasidefrom

our shares inScotiabankandsome incidental resourcepositions,our realestateassetsandsome

subadvisorwork forDynamicFunds,wewerenotreallyassetmanagers forthirdparty investors.

Weareabouttochangethatandnotbygoingbackintothemutualfundbusiness.Ourphilosophyis

longterminvestmentandwaitingforthefatpitchthatWarrenBuffettoftentalksabout.

Wehavetoyedwiththeideaofcreatingaglobalresourcefundwithoutsideinvestors.But,believeit

or not, those large sovereign funds and large pension fund investors are not interested in the

resource industrywitha long termholdingperiod.Theyall seem towant toknowwhenweare

goingtoreturntheirmoney,andourinvestmentphilosophyisevergreenlongterm.

We are looking toworkwith those themes thatwilloutdo inflation,whichwe expectwill come

duringthosefivetotenyearsthatwearelookingforwardto,inthebuildoutofourinvestment.We

remainconsistent;ourinvestmentoutlook isfivetotenormoreyears.Wehavegivenuptryingto

convincethosewhowillbethefirsttopackupandheadforthedoor,(asthemutualfundindustry),

becauseweknowthattheleastknowledgeablearetheleastcommittedtothelongtermgainsthat

weexpectfromtheindustrieswehavechosenforinvestment.Wealsoknowthatinvestorsarebest

servedwhenmarketsandgoodcompaniesareinabearishcorrection.

Our choice of vehicle for investing is going to be closedend funds. Because they are themost

misunderstood tool for investors, closed end funds are called funds, but they really behave like

individualstocks.Butunlike individualequitiesthey involveabitmoremathand insightthaneven

mutual funds to determinewhen there is a good time to invest. Throughoutmy career I have

workedon theprocess thatwhensomething isdifficult, investorswhoareprepared towork,are

curiousandintelligentareabletobettersucceed.

Thestatisticsshowthatthetargetaudienceforclosedendfundsismostlyhighernetworth,higher

risk,longertermprofileinvestors.Beingthatishowwewoulddescribeourselvesandourcompany,

wewill

create

vehicles

that

will

provide

excellent

potential

gains

and

keep

shareholders

more

comfortableandevenachievebettergainsthanwecouldwithmutualfunds.

Unlikeamutualfund,aclosedendfunddoesnotneedtomaintaincashreservesortosellsecurities

tomeet daily redemption. Thiswill give us as the fundmanager,with our ownmoney likewise

invested, the flexibility to invest in less liquid securities, startupprivatecompanies, thinly traded

bondswith higher yields or securities in those countries that cannot be accepted by traditional

means because they dont yet have fully developed publicmarkets. In addition, unlikemutual

funds,wecanbedirectorsandadvisorstoourinvestedcompanies,andforthebetterideaswecan

ownmorethantenpercentofthecompanyandwecanevenusesomeleveragetoincreasegains.

TherearecurrentlymanymillionUShouseholdswhoownclosedendfunds.Thesehouseholdsare

mostly retiredwithhigher incomeandwealth,aswellasexperienced investors thatownorhave

ownedabroadrangeofequityandfixedincomeinvestments.

Asmanyofyoumayknow,Ihavebeen,andremain,abigfanofWarrenBuffettandhisinvestment

styleandthecultureofBerkshireHathawayaclosedendfund. Warrentellsusthatoneofthe

key elements to successful investing is having the right temperament, andmost people are too

fretful,theyworrytoomuch.Asdiscussedelsewhereinthisreport,successrequirespatience,but

also aggressiveness,when value presents itself. Our investment team and I have years of hard


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20

earned lessonsthathastaughtus inrealtimesothatwecanproperlyactforour investors inthe

samewayweactforourselves.

Inourchosenareasofinvestmentwebringexpertiseandapassionateinterestinwhythingsare

happening. Warren Buffett calls his investment style focus investing, and thats why while at

Dynamicwe created theDynamicFocusPlusFundsandwe still subadvise to theDynamicFocus

PlusResourceFundwhichhasarecordgoingbackto2000withareturnof16.2%perannum.

Ourphilosophy,likeBuffetts,istorecognizeabigideaandafatpitchwhenitcomesalong,anddo

soduringatimewhentheyarenoteasilyrecognizedanddontnecessarilycomealongveryoften.

Butweremainprepared.Diversificationwillnotbeourpriority;wewillconcentrateonthoseareas

thatwehaveagreatersuretyofsuccess.ToquoteCharlieMungerondiversification:whenyoumix

raisinsandturds,youvestillgotturds.

TheInstituteforFiscalStudieslookedatInflationoftheBritishexperienceoverthelast10yearsand

found that: inflation is concentrated on food and energy, two items which absorb a higher

proportion of the spending baskets of the poor than of the rich. As a result, lower income

households tended toexperiencehigher inflation rates than thehigher incomegroups in the lastdecade.Theworstratesofallaresufferedbythesinglepensioners.ThedetailsrefertoBritainbut

theylikelyhaveabroaderscopethanthat.

Therewas a report submittedby The ReflectionGroup to the European Council in Brussels in

December2007.Theintroductiontotheirreportwasthefollowing:

OurfindingsarereassuringneithertotheUnionnortoourcitizens:aglobaleconomiccrisis;states

comingtotherescueofbanks;agingpopulationsthreateningthecompetitivenessofoureconomies

andthesustainabilityofoursocialmodels,downwardpressureoncostsandwages;thechallenges

of climate change and the increasing energy dependence; and the Eastward shift in the global

distributionof

products

and

savings.

And

on

top

of

this,

the

threats

of

terrorism,

organized

crime,

andtheproliferationofweaponsofmassdestructionhangoverus.

ThatwasafairsummaryofthethreatsfacingEurope,probablynotcompleteinDecember2007but

itwaswrittenand reportedonpriorto the fullextentof theeconomic, fiscal,and financialcrises

thatwereyettocomein200809aswellasmorerecentlyin201011.

Yet,outofthistheReflectionGroup,aninformalEuropeanThinkTank,wasoptimistic,saying:

TheEUcanbeanagentofchange in theworld.Theonly thing theydidnotsay is,Wehavea

bridgetosellyouanditstollswillfixalloftheEUsproblems.

TheEUappearstobecurrentlyrunbynewlypositioneddreamerswithafalseimagination.Europeis

poor in raw materials and lacks energy resources. Even if they find some, the environmental

regulationsaresofiercethatitwouldbedecadesbeforetheycanfixthatproblem.Europeisfinding

itdifficulttomaintainitscurrentstandardofliving.Thisismadefurthernegativewhenitisrealized

thatinthefuture,EuropewillnotbeabletorelyonanAmericanand/orBritishastheNATOsafety

net.Theyhave theirownproblems.Add to theabove thatEurope isbeholden toRussia for their

supplyofnaturalgas.


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WhentheEUwasestablishedandlaterenlargedwiththeEuroacceptedasEUcurrency,itsfounding

fathersdidnotrealizetheproblemsthatwouldcomeaboutbecauseofthedisparitiesofthevarious

economieswithoutany fiscaldirection.Each individualEUmember country is responsible for its

ownbudget,set itsowntaxrates,bankregulationsandsocialspending. Theeconomicunionwas

notapoliticalunion,norwerethereanyfiscalresponsibilities.

Lookingahead,and in retrospectof the2007 reportby theReflectionGroup,WalterLiqueur, the

authorofTheLastDaysofEurope,determinedthatEuropehadthreelikelyscenarios:

Itwillfallapart

Itwilltrytomuddlethrough

Or Itwillbecomefarmoreunifiedandcentralized

Butthecomingyearswillbeverydifficult forEurope.Toreduce theirhighdebttheyneedsteady

growthduringanenvironmentofcutbacks,bailoutsandausterity.Socialsecuritypaymentswillbe

difficulttoliveuptoandunemploymentwillcausemoredifficultyand,likely,socialunrests.Europe

has been in decline for the last 100 years and nothing has happened to eliminate the current

muddlethroughprocess.TheEurozonefinancialcrisisremainsaproblem.

Pleaseexcusemeforrepeatingaportionfrom lastyearsAnnualReport,butthecommentsapply

evenmore today. In fact,probablymore sobecausewehave seen the IMFmuchmoreactive in

recentweeks.

Weare currentlywitnessing the buildoutofaplan todevalue theUSdollar visvis

otherworldcurrencies.Thisisagreyswanthathasahighprobabilitytoturnintoablack

swanatsomepoint.Wejustdontknowtheeventualoutcomeandtiming.Overthenext

one and a half years President Obama will have to eliminate at least half of USunemploymentorfacebeingaonetermPresident.Theonlywayhecancreatejobsisto

produce things. In order toproduce things at competitiveprices is to have acceptable

lower wages to increaseproductivity or to create an undervalued currency. Just as

RichardNixonclosedthegoldwindow40yearsago in1971causingthepriceofgoldto

risefrom$35anouncetotoday$1500anounce,BarackObama(ortoday,MittRomney)

willhavetodosomethingjustasphilosophicallyunexpectedanddramaticallydifferent.I

dontknowwhatitwillbebutitislikelythatoverthenext12monthswewillseeanew

worldreservecurrencyandsomekindoftradeprotection.The impactofeitherofthese

events has unknown consequences and as such, in my view, the proper investment

strategytodayistostayoptimisticbutplanfortheworstandhopeforthebest.

AynRand,

in

her

classic

book,

Atlas

Shrugged

said:

Whenyouspendmoneyinpaymentforyoureffort,youdosoonlyontheconvictionthat

youwillexchangeitfortheeffortofothers.Itisnotthemoochersorthelooterswhogive

valuetomoney.Notanoceanoffearsnoralltheguns intheworldcantransformthose

piecesofpaper inyourwallet into thebreadyouwillneed to survive tomorrow.Those

piecesofpaper,whichshouldhavebeengold,areatokenofhonoryourclaimuponthe

energyofthemanwhoproduces.Yourwalletisyourstatementofhopethatsomewhere


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22

intheworldaroundyouaremenwhowillnotdefaultonthatmoralprinciplewhichisthe

rootofmoney. AynRandwouldnotbelieve that today,when youowngoldyouare

fightingeverycentralbankintheworld.

Manyyears laterwhenhevisited theUSonJanuary16th,2011,ChinasPresidentHu

Jintao said: The current international currency system is theproduct of thepast,

adding later, Themonetarypolicyof theUnited States has amajor impact ongloballiquidityandcapitalflowsandtherefore,theliquidityoftheUSdollarshouldbekeptata

reasonableandstablelevel.Hethencommentedonthe2008financialcrisissayingthat,

Its root cause lies in the seriousdefectsof theexistingfinancial system,adding that

global institutionshadfailedtofullyreflectthechangingstatusofdevelopingcountries

intheworldeconomyandfinance.

HewentontosuggestthatwhatChinaandmostoftheG20wantisareliable,disciplined

andapoliticalunitofaccountforglobaltrade.Letsnotforgetthatheistheleaderofthe

countrywiththelargestholdingofglobalforexreservesandeffectivelyspeaksforChina

andanother143membersoftheInternationalMonetaryFundwhohaveaccumulatedin

excessof

$5.4

trillion

in

forex

reserves,

$3

trillion

of

which

are

held

in

US

dollars

and

over

$1.5billioninEuros.

With the above inmind, letme describe how the InternationalMonetary Fund sees

themselvesasdescribed in their2009AnnualReport. The IMFendorsed thefollowing

broadprioritiesfortheperiodahead:

1.Reassessingthe institutionsmandatetoencompassthefullrangeofmacroeconomicandfinancialsectorpoliciesonglobalstability;

2.Continuingtostrengthenitsfinancingcapacity,tohelpmemberscopewithbalanceofpaymentproblems, includingfinancialvolatility,andreducetheperceivedneedfor

excessivereserveaccumulation;

3.Sharpening

multilateral

surveillance

and

better

integrating

it

into

bilateral

surveillance

and undertakingfurther strengthening of crosscountry, regional, andmultilateral

surveillance;and

4.Reformingfundgovernancetoincreasetheinstitutionslegitimacyandeffectiveness.

Itgoesonwith,inlinewiththeIMFCsendorsementofobjectiveslaidoutbyG20leaders

inApril2009,theIMFmovedswiftlyonseveralfrontstoensurethatresourcesavailable

toitwouldremainsufficienttomeetthosegoals.

There are 197 member countries in the IMF, including China, Russia, United Arab

Emirates,SaudiArabia,Brazil,India,Japan,Germany,France,theUS,theUKandCanada.

Chinais

the

largest

gold

producing

nation

in

the

world

and

after

India,

China

is

the

second

largest importer of gold. China is building their own gold reservepoolwhich is likely

understatedtobeonly1.7%oftheirtotalreserves.

There isnogoldbubbleyet.AsAynRandmade itclear,gold ismoney,andmoney is

scarceand isbeingmassivelyprintedbycountries thatarecreatingmountainsofdebt;

debtthat isnotrepayableunderourcurrentglobalmonetarysystem.Therehastobea

change.Achangetoanewandmorerespectedfiatcurrencythathasacceptablebacking


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23

suchthatitcanbeusedtosettleaccountsbetweennationsthataretradinginourworld

ofglobalization. Ithas tohappenbeforewefall intoaglobalcrisisofcredibilityofall

currencies.

ItiscleartomethattheIMFisbeinganointedastheGlobalCentralBankandjustasthe

USdollarhasfueled theglobaleconomyforover50years,hopefully the IMFandSDRs

willtakeoverfuelingtheglobaleconomyinthefuture.ThishastohappensothattheUSandtheworldcanpreemptthenegativitythatwillcomewiththecollapseoftheUSdollar

asareservecurrency.

Theabovewaslastyear,prethewholecrisisofEuropeinwhichtheIMFhadmuchinputattempts

tofix.

ButtogetbacktothepresentandtocontinuewiththeInternationalMonetaryFund,Iamproviding

areportwrittenthismonthofApril2012byJosVials,aFinancialCounselorandDirectorofthe

IMFsMonetaryandCapitalMarkets.

GlobalFinancialStability:What'sStillToBeDone?

Thequestforlastingfinancialstabilityisstillfraughtwithrisks.ThelatestGlobalFinancialStability

Reporthastwokeymessages:policyactionshavebroughtgainstoglobalfinancialstabilitysinceour

September report; but current policy efforts are not enough to achieve lasting stability, both in

Europeandsomeotheradvancedeconomies,inparticulartheUnitedStatesandJapan.

Muchhasbeendone

Inrecentmonths,unprecedentedpolicystepshavebeentakentoquellthecrisisintheEuroarea.At

thenationallevel,strongerpoliciesarebeingattemptedtobeputinplaceinItalyandSpain;anew

agreement has been reached onGreece; and Ireland and Portugal aremaking good progress in

implementingtheirrespectiveprograms.Importantly,theEuropeanCentralBank'sdecisiveactionshave supportedbank liquidityandeased funding strains,whilebanksare reinforcing their capital

positionsunderthePonzischemeandguidanceoftheEuropeanBankingAuthority.

Butwehavenotexitedthecrisis,becauselastingstabilityisnotyetensured.Indeed,wehavebeen

reminded inrecentweeksthatsentimentcanquicklyshiftandrekindlesovereignfinancingstress,

leavingmanysovereignsandbankingsystemscaughtinaviciouscircle.

Furthermore,pressuresonEuropeanbanksremainfromhighrolloverrequirements,weakgrowth,

alongwith the need to strengthen balance sheets, including by shrinking. Some deleveraging is

healthywhen banks increase capital, cut noncore activities, and reduce reliance on wholesale

fundingthatresultsinmorerobustbalancesheets.

But like Goldilocks, the amount, pace, and location of deleveraging must bejust right at the

aggregatelevelnottoolarge,toofast,ortooconcentratedinoneregionorcountry.

So far current policies have prevented a generalized "credit crunch", but we still anticipate a

considerablesqueezeoncreditwhichwillimpedegrowth.WeestimatethatlargeEuropeanUnion

based banks could shrink their combined balance sheet by asmuch as $2.6 trillionor about 7

percentoftheirtotalassetsbytheendof2013,withaboutaquarterofthatshrinkageleadingtoa


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cutback in lending.Overall,weestimatethatdeleveragingbyEUbankscouldreducethesupplyof

creditintheeuroareabyabout1.7percentovertwoyears.

However, ifcurrentpolicycommitmentsarenot implementedandfinancialstresses intensify,the

downside risk of a largescale and synchronized deleveraging could do serious damage to asset

prices,creditsupply,andeconomicactivityinEuropeandbeyond.Inthisscenario,weestimatethat

largeEUbankscouldshedatotalof$3.8trillion,or10percent,oftheirtotalassetsbytheendof2013.SucharetrenchmentbyEUbankscouldreduceeuroareacreditsupplyby4.4percent;and

GDPcouldfallby1.4percentfromthebaselineaftertwoyears.

OutsidetheEuroarea,theregionmostaffectedbythedeleveragingprocess isemergingEurope.

And other emergingmarkets are unlikely to remain immune.While emergingmarkets generally

have substantial policy buffers, such an external shock could combine with homegrown

vulnerabilitiesandfurtherundermineglobalstability.

Unaddressed fiscal challenges in the United States and Japan represent latent risks to global

stability. Both countries have yet to forge amuchneeded political consensus formediumterm

deficit reductions. TheUnited States is also grapplingwithhighhouseholddebtburdens and an

overhangofhomeforeclosures.

Sohowcanweachievelastingfinancialstability?

IntheEuroarea,policystepsareneededalongseveraldimensions:

Topreventthematerializationofdownsiderisks,continuedadjustmenteffortsareneededatthe

national level, especially by countries currently under strain. Those reform efforts are being

bolsteredbya financingbackstop thathas recentlybeen strengthened. This Euroarea "firewall"

shouldalsobeabletotakedirectstakesinbanksinordertohelpbreaktheadversefeedbackloop

betweensovereignsandbanks.

Toensureanorderlyprocessofbankdeleveraging,closemacroprudentialoversightbyEuropeanbanking authorities of bank business plans is called for. And greater efforts are needed to

restructureviablebanksandresolveweakbanks.

To strive for better andmore balanced growth, accommodativemonetary policies need to be

combinedwithasufficientlygradualwithdrawaloffiscalsupportincountriesnotsubjecttomarket

pressures,andwithstructuralpoliciestoliftpotentialgrowthrates.

Toprovideavisionof"moreandbetterEurope",aroadmapforamore integratedeconomicand

monetaryunion shouldbe laidoutandcommitted to.Thisencompasses twokeyobjectives: (i)a

trulypanEuropeanframeworkforbanksupervisionandresolutionaswellasdepositinsurance;and

(ii)greaterexantefiscalrisksharing,forexample,throughsomecentralfinancingmechanisms.Iam

wellawarethatthiswillnotbepoliticallyeasy,norimmediatelyachievable.Butaconsensusneedstobeforgednowtohelprestoreconfidence.

BeyondEurope, it isessential to startaddressingnow themediumterm fiscal challenges in the

UnitedStatesandJapan.ThisshouldbeaccompaniedbystrongereffortstoaddressUShousehold

debtandacceleratehousingmarketreforms.

Policymakersinemergingmarketsshouldnottakestabilityforgranted.Giventherisksinadvanced

economies,policyroommayneedtobeusedtocushionexternalshocksandvolatilecapitalflows.


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Homegrown vulnerabilities, like those linked to persistently rapid credit growth, need to be

addressedtoincreaseresilience.

Noneofthesepoliciesareeasyandsomearepoliticallydifficult.ButIbelievetheyarewithinreach.

Let'snotmissthisopportunity.Policymakersandpoliticiansmustactnowandinclosecollaboration

to end this crisis once and for allthis timemust be different. (End Jos Vials). (Underlined

sentencesareDundees).

As a direct result of that 2009G20meeting, the IMF is today used as a secretariat, a research

department,astatisticalagencyandpolicyrefereeoftheG20.Thisgivesthetwentylargestnations

intheworldaccesstoenormousexpertisewithouthavingtobuildandcreateanexpertstaffofits

own.ThismeansthatwhiletheIMFrepresents197countriesitisbasicallytakingitsleadfromthe

twentylargestandimportantcountries.ThisgivestheIMFastrongpositionintheworldsfinancial

affairs.

Asaresult,aftermanyyearswithoutanyrealpower,theInternationalMonetaryFundhasemerged

asanimportantglobalorganizationwithadiscerniblemission,positionedasaBankfortheworldortheworldscentralbank.

WeshouldrememberthattheUSledbySecretaryGeithnerwasconstantlychidingtheChinese

about themanipulationof theircurrencyvaluationagainst thedollarandotherworldcurrencies.

TheChineseplayedthegameandallowedveryminoryuanappreciationdenyingthattheywerea

currencymanipulatorandfacedbeingbrandedonebytheUSTreasury.ClearlytheUSwaslefton

itsowntocountertheactualyuanmanipulationandcheapentheUSdollar.Andbythemiddleof

2011theUnitedStateswasemergingasanearlywinnerinCurrencyWarIII.Likeotherwarswonby

the US, they unleashed a secret weapon, which was to increase the nations debt, called

QuantitativeEasingorQE.QEisreallynothingmorethanincreasingthemoneysupply.Astheydid

in1971theUSactedunilaterallyandquietlyunderanewnametodebasethedollarthroughthe

printingpress.

QEwasa2009policybomband itwas followedbyasecondbombofCurrencyWar IIIand itwas

called QE2, dropped near the end of 2010. By usingQE1 andQE2, the US started to generate

inflation abroad as well as at home and increased the cost structure of almost every major

developingandemergingexportnationintheworld.

QuantitativeEasingisnothingmoresimplethanjustprintingnewcurrencyandtheFederalReserve

buyingTreasurydebtand illiquidjunk securities froma selectgroupof their commercialbanking

shareholders.WhentheFedbuysthesesecuritiesheldbythebankstheysimplyprintanddistribute

newfreshlyprinteddollars.

Whatismoney?Historyshowsthatwhatwasalwayschosenasmoneyhadatleastfivepropertiestoit:

1. Ithadacceptedvaluetoeveryone,butitusuallywassomethingthatwasvaluedbythe

peoplefirst.

2. Itwasdurableithadtoholditsvalueaslongaspossible.

3. Itwaseasilydivisiblecanbebrokenupintosmallerpieces

4. Ithadtobeconsistentinvalueandquality

5. Ithadtobeconvenienttouse


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Manydifferentcommoditieshavebeenusedasmoneybuttwoofthemstandoutgoldandsilver.

Ironicallyasitmaysoundtoday,theGreeksweretheclearestthinkerswhenitcametomoney.They

createdthe first InternationalCurrencywithalloftheabove fiveattributes.Themaincurrencyof

Greece was the Athenian Drachma. It was a silver coin that stayed constant from 600 BC to

AlexandertheGreat300AD. Itstayedatexactly67gramsof finesilver (.430grams=1ounce).

AlexandertooktheDrachmatoIndiaandAsiaandevenasGreecesfortunesdeclinedandwastaken

overbyRome itsvaluedidnotreallyfall.BytheendoftheDrachmas lifeitstillcontainedatleast

65gramsofsilver.

Noothercivilizationhaseverhadaninternational(i.e.reserve)currencythatstayedthesamevalue

during itsgreatest influenceofabout1000years,andas itdeclined inpoweroveraperiodof600

years.WhateverGreecehad,nootherworldcurrencysincethenhasbeenabletokeepitsvaluefor

anysignificantperiodoftime.

Currency debasement since that time around 300AD was a regular event regardless of which

civilizationorcountryhadacurrency.Andthis includestheUSevenafter itconfiscatedalltheUSgold in1933,which iswhentheUSdollarbeganto lose itsvalue.Sincethen,realassetsofalmost

anykind,neededmoredollarstobepurchased,meaningthatthevalueofthedollarhassignificantly

declinedbygovernmentspurposefulactions.

In the last100years,wehave lived through twocurrencywars;CWIwhich Ijustmentionedand

CWIIwhichexistedduringthelate1960sandthe1970s.Andin1971whenPresidentNixonsawthat

theUSwas losing itsgoldtocountries likeFrancecashing intheirUSdollarsandaskingforgoldat

$35anounce,PresidentNixonessentially,withthesamepoliticalpower thatPresidentRoosevelt

confiscatedgoldunilaterally,passedaUSlawwhichsaidthatonecouldnotconvertdollarstogold

anymore.

Asassetmanagerswearealways very concernedofbeingable to recognizewhena company is

goingthroughaseriouschangebecauseoftheirowndoingorachangeintheir industry.Theearly

recognitionofthesekindsofchangescreatesexcellentbuyingopportunitiesoranecessitytosell.

And todaywe arewithin a global currencywarnot unlike thatwhichoccurred in the 192030s

whichcausedPresidentRoosevelt toconfiscateallprivatelyownedgoldat$20.67andsoonafter

raised its price to $35 andused it to back theUS dollarmaking the dollar the global reserve

currencyapositionwhichtodayitisonitswaytolosing.

Centralbankhoardingofgold in1970ushered inthefamousgoldbullmarket.Withcentralbanks

moving tobenet goldpurchasers in2009 for the first time since1988, the same startinggun is

ringingouttoday.Thepriceatwhich theUSDwouldbe fullybackedbygold (as itwasduringthe

peakofthe70smania)issaidtobe$6,300.Sothereisacaseforgoldbeingcheap.Moreover,the

70sbullmarketwas facilitatedby tightenergymarkets,overlyaccommodativecentralbanksand

nervousnessthatpolicymakershadlosttheirway.Soundfamiliar?

Central banks aren't known for their investment acumen. Some commentators havemockingly

suggestedthattheReserveBankofIndia'srecentdecisiontobuy200mtonnesofIMFgold,signals

thetopofthemarketinthewaythatheavysellingbytheUKsignaledthebottomin1999.


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Thisiscute.ButIthinkit'swrong.Liketoday,centralbanksweren'tbuyinggoldinthelate1960sto

prop itup, theywereabandoningattempts topropup thedollar.Goldhas felt frothy lately,but

IndiaspurchaseofIMFgoldeerilyparallelstheFrenchpurchasesofthelate1960s.Andpolicywinds

areblowing in its favour.Bybuying gold,have India,Russia,MexicoandChinajust sounded the

samestartingguntheFrenchdid in1965?Today, India isbuyingoilfrom Iran,andthecurrency is

gold.SomuchforthePetrodollar!

Gold isn't intrinsicallysaferthananyotherasset.There isnothingmysticalabout iteither.Likeall

other assets, it goes up and down according to its fundamental drivers. But what are these

fundamentaldrivers? How can somethingwithno cashflowor earningspowerbe valued? The

simpleanswer,Mr.Buffett,isthatitcantbe,andthat,plusscarcity,iswhatgivesititsvalue.

The price of gold will be unaffected by any decline in industrial demand because there is no

industrialdemand! Tovaluegold ithelpstounderstandthatpapermoneywastraditionallybased

on the stock of gold (and silver). Paperwas always redeemable into gold or silver. Themoney

supplywashistoricallygoldbacked.

Full redeemability was increasingly watered down after WW1 so that by the time the Bretton

Woodssystemwas imposedfollowingWW2,onlycentralbankshadtherighttoconvertpaperfor

gold.Butwhenthatbrokein1971becausedollarholdershadbecomedistrustfulofUSpromisesto

restrain itsdollarprinting,the linkbetweenpapermoneyandgoldwasseveredcompletely.Since

then,papermoneyhasbeenbackedbynothingmorethancentralbanks'promisestomaintainthe

moneysupplyatastablelevel.

TheUSdollarisonly15%backedbygoldevenatcurrentprices.In1980thedollarwas140%backed

bygold.Today itsbacking isdown to10%ofwhat itwas in1980.Themonetarybasehasgrown

muchfasterthanthegoldprice.Goldischeap,Mr.Buffett.

KeepingwithtraditionofmentioningbothWarrenBuffettandDonCoxeswordsofrecentwisdom,I

can refer toMr.Buffetts recent commentsaboutgold in theFortuneMagazine,whichhas since

beenrepeated inhisAnnualReport.Hesaid that if in1965you invested$100 intheS&P500and

$100ingold,theS&P500wouldhavereturnedyou$6072andgoldwouldbeworth$4455.Hechose

1965becausehesaidthatswhenhestartedhiscareeratBerkshireHathaway.

Ichoosetogoforwardto1971whenPresidentNixontookgoldofftheguarantyofUScurrencyand

thepriceofanounceof goldwas$35with theBuffett S&P500around $102;whichmeans that

(usingmentallyroundedarithmeticasIwritethis)the$100S&Pinvestmentwouldbeworthtoday

around$1300;notbad,butthe$100dedicatedtogoldwouldhaveboughtapproximately3ounces

whichwouldbeworth3x$1550,or$4650.Sorry,Warren,but I think thatDonCoxe iscorrect

whenhesaidinanswertoaquestionaboutthesameFortunearticle:

TheOracle,remember,livedalargerpartoflifewhenitwasillegalforAmericanstoown

goldandBenGraham,hismentor, livednearlyallofhis investment lifeatatimewhen it

wasillegal.Itwasnotanoption;sowhathedidwasdevelopthetheoryoffreecashflows

fromcompanies,andofcoursethereisnofreecashflowoutofabarofgold.

Overthe40yearsendinglastAugust,youwouldhavebeenbetteroffowningabarofgold

thanowningtheS&P500.


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Everyonewhohaswealthtoprotectshouldhavesomethingingold,becausethingscould

goseriouslywrong.

Hey,Don,withbothofuspickingonamanweadmire,itmustmeanthatwhileweappearoldwe

areyoungerthanWarren.

Fortherecord,Don,likemeandMcKinsey,isoftheviewthatthebullmarketforcommoditieshasmore time to run. ToquoteDon, Whats goingon in the leadingThirdWorld countries is ina

compressedtime frame;thestoryofwhathappened inNorthAmericawhen itcametochallenge

andeventually surpass thewealthofEurope.Weare still in theearlyphaseof thisbigchange In

these countries,aspeoplego fromhavingan incomeof$400ayear toan incomeof$4000, the

resultshowsupinthepriceofcommodities.

TherecentMcKinseyreportonresources,andmanyotherreports,hasrejectedMalthus,theClubof

RomeandPresidentCartersGlobal2000doomsdayperspective.Therewillnotbeshortagesofraw

material,andpollutionwillbehandledwellaswegrowtheprosperoushungryworldinthefuture.

Thisperiodaheadofus isgoingtousea lotofstuffthatcomesfromthegroundandthoseofus

whowillbeprovidingfoodforthesenewmasseswillhavetoworkalotharder.InarecentarticleintheLondonFinancialTimes,GillianTeltwroteaboutmeetingsthatshehadwith

manyof thehundredsofbankerswhooperate smallbankswithin theFederalHome LoanBanks

system. She concluded that theUS communitybank fit the times. As compared to the large

global banks these entities have lending abilities that are concentrated on particular regions or

sectors;whilespecializationhasbeenunfashionableinrecentyearsbecauseitwasthoughttomake

thesesmallerbanksvulnerable.

Shegoesontosaythatfinanceispronetopendulumswingsandwhileitusedtobeassumedthat

itwasgoodtobeaglobaldiversifiedbankinggiantitisnowquestionable.

Therearegoodeconomicandpoliticalreasonswhyspecialistorcommunitybanksareintunewith

the times.As such, therealso is room forus to succeedasan investmentandmerchantbanker.

Whilesmallercommunitybankswithassetsunder$1billionrepresent lessthan11percentofthe

bankingassets,theyprovidenearly40percentofthe loansthebanking industrymakestosmaller

businesses.Whilewearenotabank,wedohavecapitalandinourareasofspecializationwehave

theexpertiseanddesiretobeoffinancialhelptosmallbusinesses.

Evenmore importantly, the clientsof these specialistbanks report that these smallerandmore

agilebankingcompanieshavedoneasgoodajobasgiants (ifnotbetter)atassessingcredit risk,

becausetheygettoknowtheirclientswell.Inaddition,theirexecutivesdonothavetoputupwith

theintensebureaucracythatenjoyanyTooBigtoFailprotectionandthusknowthattheymustbe

perfectandconservativeintheirjudgmentsoncreditrisk.Shesaysthatbankercanmeanarange

ofthingsandnotallofthesemeaningsarecreditfriendly.AtDundeewearemerchantbankersand

weprovideinvestmentbankingbut,thankfully,wearenotabank.Weareanxioustoshowthatwe

can successfully competewith the Big Six Canadianbanks in territory thatwehave chosen to

operate.While theglobaleconomycontinues its travels throughuncertainty,and toomuch sovereignand

privatedebtisbeingbuiltup,wedoappeartobeenteringanenvironmentwhich,atsomepossibly


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29

neartime,coulddeliversomeexcellentbuyingopportunitiesmuchasthelate1970sdid.Evensowe

remainconcernedaboutthoseunintendedconsequencesthatmayemanatefromthehugeamount

ofdebtand increasingdeficitsbeing ratchetedupby theUnitedStatesandEurope.There isvery

little flexibilityavailable fromcentralbankerswith interest ratescontinuing tohoveraround zero

percentanddeficitsintheUScontinuingtoincrease,forsureatleastuntilaftertheNovember2012

presidentialelection.Both the sizeofdeficitsand interest ratesare reminiscentof the1930s,an

environmentthatdidnotreallygetbetteruntilaftertheBrettonWoodsAgreementandWorldWar

IIfifteenyearslater.

Theneweconomicsratherthanworryingaboutdemandandsupplyandjobstodecideoninterest

ratesandmoneysupply,theynowrelyonborrowingmoneyfromthefuturebyprintingpromissory

notesorbonds.Mostgovernmentswiththeprivilegetodosohavedoneso.Theythenusethenew

availability ofmoney in publicworks and like plastic surgery, the economy can become falsely

inflatedallowingthemtoborrowevenmoremoney.If theUS continues to increase their debt at a rate double their growth inGDP theywill soon

resembletheGreekconundrum.FromJune2003toDecember2010USdebthasgrownby10.26%

per annumwhile the nominalGDP grew at 4.5%. That is not a sustainable situation. ThebattlebetweenMittRomneyandBarackObamawill tellthe tale. Ifsignificant fundamental reduction in

expendituresattheFederallevelisnotsoonachieved,thentheUSisinserioustroublebecausein

thiselectionyearPresidentObamawillnotbeabletocutanything.ForatleastthelastfiveyearstheUSsolutiontothecreditcrunchwastotakeonmorecredit,andit

continues.Today,totalUScreditmarketdebtamountsto$54trillion,andasDavidRosenbergonce

describedin2009inhisinimitableeconomicterms:

Amazing.Itslikegivinganotherbottleofscotchtothedrunkensailor,buthey,wecanthavethe

economyweakgoingintoamidtermelectionyear,canwe?It isnotclearthatBernanke'saimofdrivingdo

Documents

Goodman:Dundee Annual Report