1. summitV I E W summit creek
“Politics is the art of of a trade agreement between Taiwan
looking for trouble, and China. For two entities embroiled in
a dispute over sovereignty for the last 60
finding it everywhere, plus years, the signing of the agreement
summitVIEW
represents a form of detente. Bloomberg
diagnosing it incorrectly reports, “in the trade agreement between
the sovereignties China will also open
and applying the wrong markets in 11 service sectors such as
banking, securities, insurance, hospitals
and accounting, while Taiwan agreed
remedies.” to offer wider access in seven areas,
including banking and movies, the two
sides said. They also signed an agreement
Groucho Marx on intellectual property rights protection.”
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The agreement appears to reflect the
H ow about General Stanley McChrystal? Flying thoughts of Mohamed El-Erian, Chief
July 2010
from the opposite side of the planet to be fired by Executive Officer of PIMCO. El-Erian
the president certainly cannot be easy on the ego. stated in an article titled Driving Without
McChrystal’s visit to the White House lasted around a Spare, that the new normal is a world of
thirty five minutes or so. A life in the armed forces “changing risks and opportunities.” For
comes to a close in a brief firing from the Commander this global economic transition period,
in Chief. Nothing like going out with a bang is there? investment with the safest carry will be
“in sovereigns that, due to their economic
What is most interesting in the story is not so much that and financial fundamentals, are truly
a man was fired for insubordination. Of most interest core countries in the midst of the global
is a quote from Politico suggesting the writer of the paradigm shift.”
Rolling Stone article, Michael Hastings, was able to
write the piece because, as a freelance journalist and As readers of prior SummitVIEWs know, a
not a beat reporter, “burning bridges by publishing primary concern is the current level of risk in
many of McChrystal’s remarks” was not a worry to the system or, rather, the financial markets.
him. Frank Rich, in the New York Times on June 27, Relying on your local newspaper or news
2010 said, “Politico had the big picture right. It’s the program to provide the proper insight
Hastings-esque outsiders with no fear of burning likely will engender confusion and a belief
bridges who have often uncovered the epochal stories in false realities. If one were to follow the
missed by those with high-level access.” national media attention on the imminent
threat of inflation, the result would be a
Wow! How does one feel? Again, SummitVIEW is belief that the US is doomed to experience
reminded that what one often reads or hears in the inflation very soon. Reality is likely to be
news just may not be the full picture. Why would quite different. Recent housing data points
anyone want to report the ugly truth when spin to the continued decline in real estate
is so easily digested by the American populace? prices. Although there does exist pricing
What else is not being reported for fear of burning power in some industries, with a pillar
bridges? Where is Clark Kent when you need of economy, real estate, still experiencing
him? SummitVIEW is beginning to understand the declining values, the likelihood of inflation
motivations for the creation of Superman in 1939. See rearing its ugly head in the next few years
Rosenberg’s quote on page 5 titled, Daring to Compare is low. Wage increases? Not happening.
Today to the 30’s. Unemployment rate declining? Nope.
Another news item of interest is the announcement The data point most telling to SummitVIEW
see disclaimer on last page is that which is cited by David Rosenberg

2. summit creek
on page 4, in the quote titled The
Bottom Line. Rosenberg says “[t]he
world is awash with $222.5 trillion
of total liabilities across public
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and private sector claims, or the
equivalent of 362% of global GDP.
Extinguishing this debt will be
deflationary even as central banks
will be forced to print money as an
antidote and we are really in the
early stages of this deleveraging
cycle.” Rosenberg goes on to say
in Dinner with Dave from June 30,
2
2010 the following:
Resolving the pension crisis in the
July 2010
U.S. though [sic] a longer work-
life and higher contribution rates is
surely going to mean that deflation,
not inflation, as it pertains to many
discretionary segments of the
consumer spending pie, is going
to be the primary trend for some
period of time; likely five years or
more. In other words, the time to
be worried about inflation is really
beyond our forecasting horizon.
Think about the ratio cited above
for a moment. On a global scale
there exists over 4 times (and
rapidly approaching 5 times) loss of capital. In an environment where most
the level of debt as the level of annual global underfunded pension funds are holding out
production. As we all know most of that for the return of an equity bull market, the
debt is held in the developed world. Without underfunded state of pensions is likely to get
extend and pretend accounting standards in the worse than better in the near term.
banking and mortgage industries, where would
equity values be today? As leading economic 2010 is likely to go down in history as a
indicators roll over in the United States, few seminal year. The confluence of events shaping
choices are available that have not already been geopolitics and global economics are starting to
deployed. How do equity values hold up when make their mark. Although the events will be
the economic engine is slowing and leverage the focus of headlines, the response to the events
is excessive. As an investor one should seek is how our time will be defined. SummitVIEW
high earnings yield companies (that is low price holds to the belief that, although the transition
to earnings) with little to no leverage, if you to a new period of growth will be rife with
have to be in stocks that is. Otherwise, holding strife and stress, a new period of prosperity will
cash, high quality debt, and sovereigns of those emerge on a scale few can forecast.
countries that are recipients of the new economic
paradigm likely will prove prudent. Getting through a stormy sea of debt and traction-
less economic growth requires proactive risk
Protecting one’s wealth in this epochal transition assessment and management. As James Montier
is of primary importance. Long term asset of GMO LLC says, as quoted below, “[h]aving
performance averages are irrelevant when risk defined the [return] target, managers should be
is defined as the probability of the permanent given as much discretion as possible to deliver

3. that real return. This avoids the benchmark-
hugging behavior that is typically induced by
policy portfolios.”
Francois Trahan, Vice Chairman and Chief
Investment Strategist at Wolfe Trahan & Co.,
expects the forthcoming period of deflation to be
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reflected in the equity markets with lower price
to earnings multiples. In research titled Time
to Throw Out Your Textbooks, Trahan states, “the
fact is that the majority of empirical data show
that lower interest rates are consistent with
lower P/E multiples for the market.” Echoing
SummitVIEW’s sentiment that our time will be
defined by the responses to current economic
circumstances, Trahan goes on to say, “[w]e
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hope policy makers will be somewhat proactive
and the market won’t have to once again force
the “invisible hand”.
July 2010
In closing I turn to the words of Woody Brock:
To sum up, what we are experiencing is not an
event-driven turning point as in 1990, but rather
a conceptual revolution in which much received
wisdom about the role of the state and economic
prospects for the future is being stood on its head.
On both sides of the Atlantic, there is a sense that
the Social Contract has been broken, and that
government is the true culprit. What a change
from a year ago when bankers were deemed
the sole villains! The historian Simon Schama
detects the beginnings of the Age of Rage, and he
is probably right. The stakes are very high, and
the political and economic consequences will be
severe.1
Recent market volatility is a reminder to all
investors to fasten seat belts. The wild ride is
just leaving the station.
1. Brock, H. Wood, Profile May 2010, Is the “Age of Rage” at Hand? - Sovereign
Debt, the European Crisis, and the Euro, Strategic Economic Decisions, Inc.
www.SEDinc.com
www.summitcreekcapital.com

4. I Want to Break Free, or,
Quotes: Strategic Asset Allocation
≠ Static Asset Allocation
Driving Without a Spare
summitVIEW
Clients should liaise with their managers to
Over the next few years, Australia and Canada set a “realistic” real return target (recognizing
will constitute the analytical battle-ground as that available returns are a function of the
elements of the new normal come head-to-head opportunity set, not a function of the needs of
with those of the old normal. Our sense is that the fund). After all, the aim of investing must
the two countries’ exposure to the dynamic surely be “maximum real returns after tax” as Sir
components of global growth - through direct John Templeton observed long ago. None but a
trade links with Asia and the commodity angel - few very lucky fund managers get to retire on
will likely outweigh the drag from the legacy of relative performance.
household leverage (Australia) and the economic
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links to the U.S. ( Canada). Having defined the target, managers should be
given as much discretion as possible to deliver
For investors, this translates into a secular period that real return. This avoids the benchmark-
July 2010
of changing risks and opportunities: hugging behavior that is typically induced by
policy portfolios.
• The distribution of global outcomes is
going through a transformation, both in Of course, it creates problems for measurement.
terms of overall shape (flatter) and tails Indeed, as I mentioned at the beginning of
(fatter); this paper, the most common response when I
• It is a world where several of the old present these arguments is, “So, how should we
simplifying adages that once brought measure you?” This obsession with performance
comfort to investors - such as industrial measurement at the expense of investment sense
country governments constitute interest is disturbing to me. There is no easy mark to
rate risk while emerging economies judge fund managers against. This may actually
involve credit risk - require considerable be a good thing. It may force investors to allocate
refinement; capital on the basis of process: i.e., you will only
let managers that you trust and understand run
• It is a world that calls for a broader your money. [emphasis added]
investment universe and guidelines and
, for those who use them, revamped James Montier, GMO LLC May 2010, “I Want to Break
benchmarks that better capture the world Free, or, Strategic Asset Allocation ≠ Static Asset Allocation”
of today and tomorrow rather than that of
yesterday;
The Bottom Line
• It is a world of significant country, regional
and instrument differentiation when it The bottom line is that all levels of society, and
comes to harvesting equity and credit across most countries in the industrialized
premiums in high-quality corporates, world, have far too much debt and far too
financials and emerging markets; much debt-servicing costs in relation to income.
The world is awash with $222.5 trillion of
• It is a world where the currencies of the total liabilities across public and private sector
emerging (as opposed to submerging) claims, or the equivalent of 362% of global GDP.
economies will continue to warrant a Extinguishing this debt will be deflationary even
greater allocation over time; and as central banks will be forced to print money as
• It is a world where the safest of carry
an antidote and we are really in the early stages
will come from duration and curve in of this deleveraging cycle.
sovereigns that, due to their economic
and financial fundamentals, are truly David A. Rosenberg, “Breakfast with Dave,” Gluskin
core countries in the midst of the global Sheff & Co., June 22, 2010
paradigm shift.
Mohamed El-Erian, PIMCO, “Driving Without a
Spare,” Secular Outlook, , May 2010

5. Daring to Compare Today
to the 30’s In 2010, the authorities seem to have only two
choices: allow defaults, which lead to deflation
Coming off a crash (‘29) and rebound (‘30); and tremendous stress to the political system and
aftermath of an asset deflation and credit public order; or inflate so that debts lose their
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collapse banks fail (Bank of New York back significance, which eventually leads to hyper-
then, Lehman this time around); natural disaster inflation and tremendous stress to the political
(dust bowl then, oil spill now); global policy system and public order. Growth is a theoretical
discord (with the U.K. then, with Germany way out of this dilemma, but with shrinking
now); geopolitical threats; interventionist populations and increased regulation, Europe
governments; ultra low interest rates (long bond cannot manage this option. The US might, but
yield finished the 1930s below 2%); chronic the way will be difficult. Cascading defaults
unemployment (25% then, 17% now); deflation will strip away many entitlements upsetting
pressures; competitive devaluations; gold bull the rentiers [the debt owners, or, rather, the
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market (doubled in Sterling terms in the 30s); beneficiaries of the coupon payments] and those
debt defaults; sputtering recoveries and rallies; who had planned to become rentiers in the future.
onset of consumer frugality. Countries that choose to allow defaults will see
July 2010
their currencies rally as there will be a shrinkage
David A. Rosenberg, “Breakfast with Dave,” Gluskin
of currency outstanding increasing the value of
Sheff & Co., June 24, 2010
the rest, but collapsing equity markets will test
their resolve at every turn. We rentiers will be
How The Middle Class, Or lucky if we can enjoy our dotage.
The New Rentiers, Is Stuck John R. Taylor, Jr., Chief Investment Officer, “FX
Between Deflation And Concepts,” June 24, 2010
Hyperinflation For a glimpse of changed societal mores, this
headline speaks volumes.....
The world is currently overwhelmed with debt,
but underwhelmed with growth. Everyone is
trying to export, but no country has embraced
How Many Graduates
the concept of expanding domestic consumption. Does It Take to Be No. 1?
Although I personally like consumption, I am
an American and therefore over-borrowed and Principals say that recognizing multiple
unable to service the debt loads of my city, my valedictorians reduces pressure and competition
state, and my country, not to mention my own among students, and is a more equitable way
personal debt load. With the Americans no to honor achievement, particularly when No.
longer available as consumer of the last resort, 1 and No. 5 may be separated by only the
and no one else stepping up, global final sales smallest fraction of a grade from sophomore
will stagnate in the years ahead. As a result, science. But some scholars and parents have
global debt loads will become relatively larger. criticized the swelling valedictorian ranks as yet
If the world economic pie can not grow strongly, another symptom of rampant grade inflation,
thereby lessening the relative size of global debts, with teachers reluctant to jeopardize the best
the magic of compound interest will certainly and brightest’s chances of admission to top-tier
bankrupt many governments and commercial colleges.
entities. Currently there is a growing solvency
crisis impacting many Eurozone sovereigns and Winnie Hu, New York Times, June 26, 2010
another one that is occurring within many states
and jurisdictions in the United States. It seems
quite obvious that many of these problems will
lead to default and the loss of principal on a grand
scale. In the next few years, a greatly increased
percentage of all outstanding investment grade
global debt will default. Disclaimer: All material presented herein is believed to be reliable but we cannot attest to its accuracy. Neither
the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any
securities.
www.summitcreekcapital.com