By Joe Ueberroth/Marina Dockage/December 2011
To say that these are turbulent times for U.S. investors is stating the obvious. Most macro trends are negative, and market forces are unpredictable, resulting in great uncertainty and volatility in the market place. Businesses face strong headwinds, companies are having difficulty forecasting, customers lack confidence and operators are focused on short term issues. The investment waters have been choppy, and it appears that it will continue this way for the foreseeable future.
In this difficult investment environment, more and more investors are seeking safe harbors. There is clearly a growing trend by corporations and investment professionals toward overweight cash or treasuries, looking for clarity and hoping for better times. Bellwether Financial Group, a firm where the author is the chief investment officer, is also attempting to de-risk; however, the company’s strategy is to get out of cash and treasuries and buy. Bellwether is an active investor in both the agricultural and marina industries. The company is focusing on assets that are difficult to replicate, believing that they will appreciate significantly in the rough waters ahead.
Investing in marinas has not always been a scary proposition. In the 1990’s, the inflow of capital into U.S. markets was unprecedented, and the overflow buoyed most asset classes. The 400 percent increase in the Dow Jones in this 10-year period is a perfect illustration of the rising tide in this investment period (see Fig. 1). In the marina business beginning in the 1990’s until the financial crisis of 2008, the industry enjoyed favorable market trends, and investors were rewarded as the tide continued to rise. In 2008 when the investment waters retreated and investors had to take a serious look at what was beneath the waterline, they realized that most asset classes in the marine industry were not positioned well for the downturn.
These market changes emphasized that it is imperative as an investor to understand the investment environment and the investor must relentlessly test core assumptions.
With its understanding of important macro factors, Bellwether Financial Group of Newport Beach, Calif., believes that marina assets are a good investment, as it diligently follows: demographics, public sector debt, inflation and advancements in technology.
From a global perspective, the demographics are chilling. Since 1998, in the U.S., China, Western Europe and Japan, there are more people over the age of 60 than there are under the age of 15. This is unprecedented, and the trend continues to increase every year. The implications of these demographics are enormous politically, socially and economically. It impacts almost all sectors of life, ranging from health services to education to tax revenues to entitlements to consumer trends.
Although some sectors will benefit from an aging population, the overall economic implications are not positive. A core assumption of a large portion of the investing public is that if a country has a lot of people, this fact alone will fuel its economic growth for the foreseeable future. This is a dangerous assumption, and any investor should remain cautious in approaching new markets.
Public sector debt is the one issue that will define this generation. Public debt in all major economies is both unsustainable and understated. Most analyses of sovereign debt are incomplete because they focus solely on the federal level. To ignore the debt and deficits on the local level is h to ignoring corporate debt held by company subsidiaries. Even more disconcerting is that there is no political will or intellectual honesty being applied to prudently solve the issue.
In the U.S., most investors realize that the Fed (Federal Reserve Bank) is providing clarity as it relates to treasuries and the U.S. dollar. It will be devaluing both until there is sound fiscal policy in Washington, D.C., and a strong economic recovery. The question that arises for investors is how long will it last and will treasuries and cash continue to be safe harbors in these difficult times? With the public sector debt and the Fed position on fiscal policy, concerns about the U.S. dollar and U.S. treasuries remaining safe havens are real.
Today, there is also much discussion regarding inflation versus deflation. From a pedestrian perspective, it is interesting that academics exclude energy and food when establishing inflation figures even though they both are significant components of American public spending. Even with the academic adjustments, there is really not much merit in the debate between inflation versus deflation. Historically, from 1675 to 1942, the chance of having a year inflation versus a year of deflation was roughly 50/50 gyrating from one year to the next. However, since 1942, the U.S. has not had a single year of deflation. The Fed targets an inflation rate and appears to be quite effective in this arena.
Finally, advancements in technology, as well as the speed of the advancements, are not only fascinating but are clearly a catalyst for growth and improvement for most sectors of society. Technology has been a game changer for businesses and entire industries. This, any investors of who do not factor the impact of technology across any and all industries do so at their own peril. As an active investor in the marina industry, technology is impacting investments in ways never imagined 10 years ago.
As for the immediate future, this investor is exiting cash and treasuries based on the assessment that inflation is not only here to stay but is also on the rise. Yes, housing prices continue to decline, but it was a bubbly, and prices will soon begin to stabilize. There is inflation in most other components of the economy, and there are even signs of wage inflation globally. While the Fed is committed to devaluing the dollar and holding interest rates artificially low, there is growing concern that treasuries could be the next bubble.
In these turbulent times, investors believe that treasuries are safe and are willing to hold them for long durations for ridiculously low returns or even negative returns when one factors in either inflation or dollar devaluation. Some investors and economist are now testing the soundness of the theory that treasuries will continue their historical role as a safe haven in turbulent times. What happens if, or more likely, when the Fed has a failed auction? If this occurs, treasury values would be destroyed, particularly treasuries that are of significant duration. It was just a couple of years when financial institutions told the public that auction rate securities were safe and liquid and compared them favorably to treasuries. Those financial institutions were right until they were wrong. Years later, there are still companies out there that have portfolios of auction rate securities that they cannot liquidate without a severe reduction in principal.
The strategy of purchasing marine assets is an inflation hedge and the protection of capital. In these volatile times, Bellwether is focused on quality over growth and does not predicate investments on conditions improving. It believes the industry provides the opportunity to purchase unique, quality assets that will appreciate during times of inflation.
For the present and immediate future, the supply of marina assets will remain static. In addition, the marine industry is one of a handful of industries that actually benefits from an aging population and globalization. Based on these factors, there continues to be attractive investments in the marine industry. Lastly, a marine investor knows that a bad day boating is still a pretty good day.