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Thursday, April 30, 2009

Bullish On SOuth Africa!

Money & Investing

Short the West

Daniel Fisher, 04.16.09, 06:00 PM EDT
Forbes Magazine dated May 11, 2009
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David Murrin smells opportunity in the demise of industrial democracies.

One theory has it that the decline of Rome began when its leaders determined they could get grain more cheaply by ship than overland across Italy. What seemed like a stroke of genius at the time ultimately drove the empire into bankruptcy as it tried to defend far-flung overseas trade routes.

David Murrin thinks a similar scenario is playing out today, only this time Americans are wearing the togas. Murrin, 46, is chief investment officer of Emergent Asset Management, a U.K. private equity and hedge fund firm.

Murrin has been steering Emergent, with an estimated $1 billion under management (he won't say exactly how much) into African farmland, Russian oil companies and emerging-market currencies. The moves are bets that the West, most notably the U.S., will be on the losing side of 21st-century history as Asian economies outbid it for commodities and outpace it in economic growth.

"America and the Western, Christian empire are about to jump off a cliff," says Murrin. "Along with that will come a decline in the dollar."

Murrin is a geophysicist with strong interests in military history and classic sailing yachts. Before entering the financial world he did geophysical surveys in the jungles of Papua New Guinea, where he spent time observing tribes like the Hauna. That led him to view people as subject to collective emotional behavioral patterns. We are, he says, inescapably captive to me-too behavior.

"We think we're clever. We think we're intelligent. But we have repetitive behavior patterns, and we can't change them," he says. Emergent "makes money when people are herding."

Murrin migrated from geophysics in 1986 to trading currency, bullion and equities for JPMorgan. He cofounded Emergent in 1997 with former colleague Susan Payne and sold a minority interest to Canada's Toronto Dominion Bank that same year.

Emergent's Alternative fund, which invests mostly in currencies and emerging-market debt, returned 75% last year (after fees) and 15% annually over the past decade, the firm says. Its smaller Ballistic fund, which focuses on long and short equity positions, returned 9% last year and an average 20% over the past three years. Emergent's funds are not widely available to U.S. investors, but many of the markets in which it's active are accessible through other funds.

Headquartered in Haslemere, a bucolic town an hour south of London, Emergent employs 15 people to scour global debt, equity and currency markets for pricing that's gone out of whack with long-term trends.

One of those trends is the "supercycle" of growing global demand for scarce resources, which will drive their prices to previously unthinkable heights. He has a lot of company in that view, going back to Thomas Malthus. A lot of like-minded investors got crushed last year betting oil would go to $200 a barrel. Murrin claims to have escaped this fate by taking weakening stock prices as a sign of temporary weakness and going short crude oil.

"Why would you be long oil when you're bearish on equities?" he asks, as if the question answers itself.

These days Murrin thinks inflation will be fueled by a combination of U.S. fiscal abandon and rising Asian demand, making everything more expensive in dollar terms. Price increases of 5% a year are manageable in China, where the economy is growing 8% annually, Murrin says. But when China exports 5% inflation to the U.S. and the economy here is growing at only 3% a year, the result will be a decline in real U.S. output, living standards and international clout.

As China's economic might increases, it will project greater military power as well, he figures. The U.S. will become stretched in defending its far-flung economic and political interests, just like the Roman and British empires before it.

"Name me a huge economic power that did not militarize," Murrin says. "There's a naval arms race in Asia as countries look to defend their commodity trade routes."

One beneficiary of the tension in Asia will be South Africa, with its wealth of gold and other commodities. Murrin formed a fund that will own 370,000 acres of South African farmland by midyear, with plans to increase productivity through improved farming methods. Eventually it will make a nice asset for a sovereign-wealth fund or Middle East nation worried about its food supply.

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