Debasement Inflation

http://dealbook.nytimes.com/2010/11/18/from-russia-expert-a-gloomy-outlook/?emc=eta1

William F. Browder was on the front lines of investing in Russia from 1996 to 2005. He was one of that country's most prominent and vocal investors with a fund that rose from $25 million to $4.5 billion by the end of 2005. Browder focused on under-researched Russian companies that were trading at sharp discounts to their more widely followed peers.

In 2005, he was expelled from Russia after the Kremlin turned against him. Many believe the "expulsion" was because of his criticism of some of Russia's prized companies like Gazprom. The story of what actually happened there reads like a crime novel. Fareed Zakaria's interview with him on "Fareed Zakaria: GPS" (CNN) is both gripping and sad.

Fortunately, he escaped Russia with most of the money from his very well known fund "Hermitage Capital." He then started a new fund in London called "Hermitage Global."

Browder's new fund invests globally so it's making bets on what the worldwide economy is doing and specifically avoids Russia where, he says, "I think it is a place to avoid both for financial and moral reasons."

Interviewed after speaking at Columbia Business School a few weeks ago, Browder made several points which are hard to disagree with:

(1) Rising prices and no growth are a given in developed countries,
(2) Central banks in the developed world are printing money so we want to own "hard things" that can't be printed,
(3) His fund owns gold,
(4) Emerging markets went thru this a decade ago in the Asian financial crisis: their currencies aren't going to go thru "debasement" (Browder sees the emergence in developed countries of "DEBASEMENT INFLATION" - rising prices with no growth) again,
(5) Hard assets in emerging markets are a BETTER STORE OF VALUE FOR INVESTORS - over there, it's right to own gold mining stocks and real estate developers,
(6) He sees the world in the SECOND STAGE of the worldwide financial crisis: governments won't be able to borrow much more - ergo, they will be forced to print money,
(7) People are going to lose big in long term bonds,
(8) The next stage of the world economy: a "collapse of currencies" or a crisis of confidence in developed market currencies and you can't bail out currencies once they start collapsing,
(9) If Browder were finishing business school right now: he'd become an expert in the U.S. residential real estate market - it's 50% off its peak and will become an inflation hedge in the U.S. as others start printing money.

We see Browder's perspective as a highly informed one. How many people grow a fund from $25 million to $4.5 billion in Russia and get out of their with that fund substantially intact when Putin turns against them? And, today, Browder's new fund is investing in the "world." We like his odds and we respect his perspective.