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Long Term Investment Management represent the thoughts of Alessandro Sajwani, a Senior Investment Advisor for a large European Bank. This site selects a sample of articles from the Long Term Investment Management blog. I was originally trained in Physics, where I went on to research the optical... More
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Long Term Investment Management
  • Political Risk is Feeding the Natural Tendency for Deflation to Appear 2 comments
    Jun 28, 2010 6:14 PM

    Dear Reader and Fellow Investors,
    Having worked in a private banking environment over the last few years, I have often got frustrated with the greater emphasis on asset allocation rather than security selection.
    However, it seems that when macroeconomic conditions are in extreme conditions, asset allocation becomes justifiably important. This is similar to our arguments presented in a previous blog where we suggest asset allocation should become more important as risk assets reach valuations closer to the extremes of being over or under valued relative to “intrinsic value”.
    The extreme macroeconomic environment we indicate refers primarily to the strong reduction in private credit growth experienced in developed countries since 2008. Its affect has been subtly dampened by huge government intervention. With recent political talk shifting from who can print the most money to who can cut their budget the fastest – this lack of public credit into the economic system will reveal the cracks of significant under investment, weak credit growth and reduced consumer spending from the private sector. Indeed, such a rapid shift in political sentiment will bring to the fore the systems natural tendency to deflate with the current incentives and conditions in place, which it has been yearning to do for several years now, but governments have done such an admiral job in trying to hold it back.
    As a result, we are maintaining the principal concept of the asset allocation presented in this blog over the last few months, thereby holding our anxiety to buy more risk assets. Over the last few days we have increased the cash component further at the cost of reducing our senior high quality paper and sub investment grade bond exposure. A portion of such sales have been invested into equities. As a consequence our asset allocation has shifted slightly to:-
    Yours sincerely,
    Alessandro Sajwani
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  • martinalphafishing
    , contributor
    Comments (2) | Send Message
    I´ve had a look at your blogger page attached on your profile, i find your work interesting.


    I will ask the question here rather than on the blog.


    Noubini recently wrote an FT editorial discussing an issue you raised on how government resources should be used. he mentions that Greece should write down debt now rather than receive more funding and then have to do the same again. How do you see consumer credit reacting if that approach was used more consistently among countries?


    Its a tough one! let me know if you have any thoughts
    1 Jul 2010, 06:08 PM Reply Like
  • Long Term Investment Manage...
    , contributor
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    Author’s reply » I saw the editorial. It was an interesting piece, controversial as usual for Nourini, but I liked the reasoning put forward.


    The approach can easily be applied to consumer credit. Indeed, I believe it is being put into practice at this very moment. Many European banks (Spain especially from what I see) are extending loans, offering a loan on a loan or allowing a "grace period" where interest need not be paid etc, so that the loan is not recorded as being in default on the balance sheet. This makes bank accounts look better then they are.


    Though the action is similar in theory to what is mentioned by Nourini, it certainly is not by spirit. This is being done to not create panic on certain banks, rather than to clean the system. Its success relies on the hope next year will be better, so the original and the new loan can be paid back. Otherwise, the client will simply default on more debt than was originally lent.


    Those who have used capital ineffciently certainly should not be provided funds simply for the sake they used it inefficiently previously. This will help no one in the medium or long term. Haircuts, write downs, interest payment reductions etc can all be part of the solution. The end story is that people need to make losses for giving money to investors that invested in a poor manner. This is how lessons are learnt and how capital gets diverted to the most efficient users. This creates a recession, end of story. And a recession we must go through. Before I end this note, it must be noted that doing such a process with a plan would be worthy. marked to market losses can only create a vicious circle that can make a large bubble go into a large bust. Authorities must take responsibility for the economy not to go into either state due to the capital inefficiencies they generate.


    I hope I have answered your question.
    1 Jul 2010, 07:02 PM Reply Like
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