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Investment Thesis

The beginning point for the SLIF is a view of a changing world that has been unfolding over the last few years, severely affecting the way investment managers can and should invest their clients’ portfolios. Specifically, the Managers are concerned for the following reasons:

i) A rising debt pile: like in the 1970s, the cost of war in Iraq and the War on Terror have resulted in massive federal budget deficits and large deficits breed higher inflation. Also, as a consequence of the recent government initiatives to battle the credit crises, debt is now at record heights at the federal level, while it remains high at the corporate and consumer levels as well. Add to that, according to recent studies done by the IMF and the CBO, the present value of future Social Security benefits, Medicaid expenses and expected costs for Medicare, the total outstanding obligations are now running at a whopping total of 500% of GDP (i.e., the government's off-balance-sheet liabilities)! [1] Higher debt levels will limit the government’s ability to fight inflation with its trusted monetary tools, leaving inflationary pressures unchecked for longer.

ii) The oil crunch: oil is the single largest component of inflation and the problem is that the world is running out of cheap and ample supply of energy that could feed the planet’s growing appetite for crude oil. Moreover, petroleum is not just used as transportation energy but it is used in the creation of all sorts of products, hence entire industries need to be transformed to release the dependence on oil, which we see as only a distant possibility.

iii) The massive money supply growth of late: $13-$15 trillion is roughly how much money the U.S. has committed (so far!) toward rescuing the economy from the credit meltdown, housing collapse and recession since the beginning of 2008.[2] In inflation-adjusted terms, $15 trillion is more than the U.S. spent on the Louisiana Purchase. It’s bigger than the Marshall Plan and it is more money than the government paid for the Race to the Moon, the savings-and-loan crisis, the Vietnam War -- or all of the above combined.[3] Unfortunately, such rampant money creation, while it might save the US economy from sliding into a depression, will likely take its toll on the economy later in the form of rampant inflation.

As such, the Managers believe the next decade, like the 1970s early 1980s, will be a decade for real assets and therefore we plan to put our clients’ investments in such vehicles to allow them to benefit from this coming sea-shift in the investment world.

[1] ‘Damages’, Investment Outlook – by William H. Gross, Pacific Investment Management Company LLC, October, 2012

[2] ‘Financial Rescue Approaches GDP as U.S. Pledges $12.8 Trillion’ – by Mark Pittman and Bob Ivry, 2009-03-31, Bloomberg News.

[3] ‘Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy’ – by Barry Ritholtz, 2009, J Wiley & Sons, Inc.