Last month I wrote a long Newsletter about the battle between inflation and deflation. My heart (and experience) believed that inflation should prevail and encouraged me to (still) own assets. My head told me that deflation is in full force and is going to beat inflation in most economies and that therefore one would be wise to sell assets, and hold cash. I promised I would report back this month on the special case of asset values in commodity currency countries like NZ. I also introduced the concept of a “Robin Hood Economy”. Where (real) asset prices are falling relative to yields, i.e. P/E ratios and most other financial valuation ratios are falling.

This month the newsletter will be mercifully short, partly because it is being written in the lounge of Heathrow Airport. My thinking on the situation facing any economy has not changed. I still think, on balance, asset prices will (continue to) fall in the short term. But I do worry about a burst of inflation in the medium and long term from massive government deficit spending, asset market intervention and failure to sterilise this money creation i.e. failure to “mop up” the liquidity through issue of government bonds.

My feelings about the likely prevalence of deflation over inflation are summarised, by way of background, in the first three slides of the attached presentation which I gave to the Strategic Link agribusiness discussion group in mid-month.

What have I concluded specifically with regard to asset prices in NZ? A brief version of my conclusion is:

1) NZ is a commodity exporting country whose currency has traditionally traded in line with the prices of our export commodities.

2) Countries like NZ, like all world economies right now (and also like all sectors within those economies, some of which are likely to do worse than others), face either a very bad slump, or, in the best case, a “Robin Hood Economy” where cash flows are reasonable, but real values of assets fall.

3) The NZ export sector is fortunate that its currency can depreciate to keep its export prices attractive.

4) Falls in international commodity prices PLUS the dearth of candidates willing to lend to fund NZ’s currency account deficit means that the NZD is likely to continue to fall.

5) This, in turn, means that a Robin Hood economy is more likely than a slump for most sectors of the NZ farming industry. In fact, for NZD based investors in NZ farmland, reasonably decent cash flows, falling land values and a likely “window” where interest rates are low will present attractive buying opportunities in the medium term.

Investors not based in NZD may be less enthusiastic about the above opportunity (since it is predicated on the NZD continuing to tank). Even investors who are based in NZD would be wise, in my opinion, to continue to wait for asset prices to soften further.

The above logic is spelt out in somewhat more detail in the second section (five slides) of the attached presentation.

I also attach the October quarterly Newsletter from Jeremy Grantham of GMO. Grantham is, along with Buffett, one of the great investors of our age and I thought some of you might like to read his summary of what we can learn from the current crisis. If you want to get the benefit of Grantham’s research and humour each quarter then have a look at

I am trying to listen to logic (my head) and not just my heart i.e. I am currently more inclined to sell assets than purchase them. I therefore I continue to think this is not the right time to recommend that you invest in land via Craigmore Finance.

Added to the above, the decision by the NZ National Party to delay implementation of NZ’s greenhouse gas emission trading scheme also puts on hold one of the investment themes of Craigmore Resources.

You can see, dear readers, that I am still waiting for the moment to advise to you invest. Until that moment arrives I will down-grade the Craigmore Finance newsletter from Monthly to Quarterly. You will hear from me before the end of February.

In the meantime have a wonderful Christmas!

Kind regards,

Forbes Elworthy

GMO Quarterly letter – Reaping the Whirlwind click here to download pdf (604KB)

Published: 1 November 2008