Highlights of the conversation John Budden

Highlights Of The Conversation John Budden-PDF Download

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Frank Shostak, I believe that it is quite likely that based on the falling growth momentum of. monetary aggregates the US economy is heading for a slowdown or even a. China will be an important trigger Money supply was once growing at 40. currently it s roughly 4 5 All the misallocated activities are struggling at the. moment and this might trigger a lot of trouble for example in commodities. I view the whole central bank system as one central bank that is guided by the. Federal Reserve It s one system with various branches So if things are going to get. nasty and deflationary in the US it will be very hard to imagine that other central. banks will not struggle,Zac Bharucha, In the last 35 years we have periodically seen market interventions by central. banks But we have never experienced permanent distortion of asset markets to. micro manage markets It is very difficult to understand how this new regime affects. markets So from your point of managing a fund it is definitely a very challenging. environment, Yes we had a weak yen but nobody has achieved a significantly weaker currency. Why Because they are all copying what is coming out of the Fed They name their. programmes slightly differently but it s all the same. I d really love to say that gold has found its bottom that it s a screaming buy bla bla. bla but I don t have that confidence, Fact is that money is parked malinvestments are built up but if the economy. weakens then the magic hand will come up and help us to some more. malinvestments further down the track So I find it s a very kaleidoscopic world. where the mixture of technical and fundamentals makes me as an absolute return. investor think that having lots of cash is not the worst idea. Mark Valek, Based on our inflation model it seems that the tug of war between inflation and.
deflation is very intense these days At the moment we can see quite a lot of signs. that this current disinflationary move is fully intact right now and that it will. continue We are actually not ruling out the possibility that disinflation is going to. turn into outright deflation with knock on effects on asset prices We therefore hold. some out of the money puts on the Nasdaq 100 in the tactical book of our fund. TRANSCRIPT OF THE CONVERSATION,Ronald Stoeferle, Gentlemen it s a great honor to welcome you to the third advisory board meeting of. our Austrian Economics Golden Opportunities Fund Unfortunately Rahim. Taghizadegan is not able to join us today, It is a great pleasure to announce that Dr Frank Shostak will be joining our Advisory. Board Let me give you a brief overview of his background. Frank has over 35 years of experience as a market economist central bank analyst. and builder of large scale macro econometric models His analysis covers stock. bond currency and commodity markets He is highly regarded in the financial. community for economic framework which places heavy emphasis on monetary. data and its effects on various markets, Frank holds a PhD MA and BA honours from South African universities as well as. BA in Economics from the Hebrew University in Jerusalem He was also professor of. economics at the Witwatersrand University in Johannesburg and the University of. Pretoria He is one of the world leaders in applied Austrian School of Economics He. is also an adjunct scholar at the Mises Institute in the US. From 1974 to 1980 Frank was head of the econometric department at Standard. Bank in Johannesburg South Africa In 1981 he headed an economic consulting. firm Econometrix in Johannesburg for 5 years Frank has been an economist and. market strategist for MF Global Australia and AAS economics Since July 2012 he. has been chief economist at MMG Zurich, Frank again many thanks for joining the board and a big WELCOME. Mark Valek, Let us start with a short description of our fund s inflation signal I depict a graph of.
our inflation signal as well as the Gold Bugs HUI Index since January 2014 We are. very happy with our signal so far even though the signal has been quite volatile this. year Usually the signal is rather long term and should not switch too often but it. would seem that the inflation deflation tug of war is very intense these days. The signal switched to neutral at the beginning of August and then very quickly it. indicated disinflation once again A rather dramatic move in the USD. commodities gold and silver followed As can be seen on the following chart we. are glad that the signal works so well in real time and provided us with downside. protection, Development of Inflation Signal and HUI Mining Index. Incrementum Inflation Signal HUI Mining Index,01 2014 03 2014 05 2014 07 2014 09 2014. Source Incrementum AG, The second chart that we want to highlight is the Commodity index Fortunately we. were able to profit from the move, Development of Inflation Signal and Bloomberg Commodity Index. Incrementum Inflation Signal Bloomberg Commodity Index 360. 01 2014 03 2014 05 2014 07 2014 09 2014,Source Incrementum AG.
We also want to point out that the growth of monetary inflation is currently slowing. down dramatically as can be seen in the next chart The bars in the chart represent. the combined balance sheets of the Federal Reserve European Central Bank Bank. of England Swiss National Bank People s Bank of China and the Bank of Japan. Trillion USD, 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014. Combined balance sheet Fed ECB BoE SNB PBoC BoJ Gold. Source Incrementum AG, One can also see that monetary inflation is losing momentum in the broader. monetary aggregates,Source EcPoFi com, And finally our last chart shows that High Yield spreads are actually widening. Source Yahoo Finance, Therefore we can see quite a lot of signs that this current disinflationary move is. fully intact right now, So let s start with the first question According to some metrics the pace of.
monetary inflation is cooling down Could there be a significant correction crash. looming for asset markets,Heinz Blasnik, First of all we have to say that by its very nature a crash is a very low probability. event However if we look at what central banks have done since 1987 they have. become much more activist and have continually increased the size of their. interventions, This means Not only has the amplitude of asset bubbles increased but also the. probability of crash like events, The money supply metric that is most important is US money supply Every other. market is to some extent following the US If we look at the broader money. supply growth it has slowed quite a lot recently but it is still historically high. In detail narrow money supply AMS has actually increased recently as banks have. increased their lending while the Fed has tapered QE Therefore US money supply. growth is not that negative, However we have to consider that in an inflationary bubble it is bad news when. the momentum of monetary growth is slowing down Moreover we cannot state a. priori what level of money supply growth is necessary to support an asset bubble. So the demand to hold money has increased considerably However I believe that it. is decreasing slightly in the US as general economic activity has increased recently. Investor sentiment is extremely bullish However we do not have a situation like in. 2000 when every Tom Dick and Harry became a day trader simply because retail. investors have been hurt too much by the bubbles First they lost a lot of money in. stocks in 2000 and then in stocks and houses combined in 2008 So they are not as. easily enticed to invest in stocks anymore, However investor sentiment amongst professional traders is very positive at the.
moment I think this is a very strong warning signal but definitively not a timing. With regards to leverage of investors it s at a record high The likes of margin debt. and hedge fund leverage are at record highs Having a look at the Shiller P E. valuations are at the 93rd percentile since 1870 In terms of price sales the market. is the most overpriced ever, Regarding the recent weakness in high yield bonds central bank policy has led to. another yield chasing rally These bonds pay interest that is not really rewarding the. holders for the risk that is taken But investors are taking these risks anyway as. according to rating agencies the expected default rate is at an all time low So. investors feel that they are actually not taking too much risk. The most important point banks are no longer making the market anymore because. of legislation the likes of Frank Dodd etc Banks do not do any prop trading in high. yields anymore This means that it has become a very vulnerable market While. there has been a huge amount of issuance liquidity levels have fallen This will have. a major influence if the market goes down, And the last point the market internals Small cap stocks Russell 2000 have. started to underperform and break down and this suggests that market liquidity is. not high enough anymore to lift all boats So the danger of a severe market. correction has increased further This is clear When it is going to happen I am not. sure But it s probably not too far away,Mark Valek. Give us a call the day before please laughs,Zac Bharucha. Let s have a look at hedge funds this year Whilst long only funds have performed. quite decently hedge fund of funds have performed 2 5 year to date Global. macro funds have not performed at all And a typical hedge fund across all. strategies has returned only 3 8 this year, So the conditions as you have probably also experienced have been very difficult.
this year The whole term structure is so low and stock buybacks have propelled. equity markets very strongly So for people trying to hedge risks this year has been. very tough, In the last 35 years for the more senior gentlemen on this board we have. periodically seen market interventions by central banks But we have never. experienced permanent distortion of asset markets to micro manage markets It is. very difficult to understand how this new regime affects markets So from your. point of managing a fund it is definitely a very challenging environment. Jim Rickards, I totally agree with Zac I am talking to very very experienced fund managers every. day and they all agree that it s the most challenging and difficult investing. environment that they ever had, We have this dynamic tension between inflation and deflation and people do not. know which way to go Many fund managers are betting on falling bond prices. However real rates are quite high at the moment If we look at Spanish 10 year. bonds at 1 75 and US notes at 2 5 there s something terribly wrong So I think. we are experiencing a deflationary rally in bonds and hedge funds have been on the. wrong side,Frank Shostak, I believe that it is quite likely that based on the falling growth momentum of. monetary aggregates the US economy is heading for a slowdown or even a. If we were to have a scenario with slowing economic activity and disinflation then. we can be sure that the FED would become very loose again and reactivate QE The. FED will probably be pushing on a string again as the banks will probably not play. the game of re leveraging again during a soft period of the economy. Regarding the crash there is a possibility for a crash The bottom line of the. economy is in very poor shape Let s metaphorically say that we are running a. company with 10 activities and 6 are profitable and 4 are losing money As a CEO. you have to restructure the four loss makers in order not to bleed the profitable. ones But central banking activities are in play they are allowing the unprofitable. business activities to prevail and they are hurting the business. Therefore we may be in the situation where we are on the verge of having 4. profitable and 6 loss making companies At the end of the day money printing. only creates the illusion if the bottom line is simply not there The pool of wealth is. under pressure Money printing will definitely not help. Heinz Blasnik, Let s take a look at corporate profits Even if corporations report good earnings for a.
while as many have recently this happens against a backdrop of vast monetary. growth and monetary pumping We have to consider that monetary calculation is. actually falsified and therefore much of the profit that is reported is only illusory. Much of this profit represents capital consumption Sooner or later there will be a. point when it all comes up In 2008 the big mortgage lenders and building. companies looked very profitable but their profits were only an illusion So we are. awaiting the moment when the illusion will be unmasked again. Frank Shostak, That s the point and we are on the verge of it Many symptoms point to this. outcome We should not forget the Chinese China will be an important trigger. Money supply was once growing at 40 currently it s roughly 4 5 All the. misallocated activities are struggling at the moment and this might trigger a lot of. trouble for example in commodities,Mark Valek, Jim could you share your thoughts regarding currency wars and the latest. disinflationary move with us,Jim Rickards, Sure The market expects interest rates to be raised by mid 2015 This leads to all. kinds of dynamic outcomes including a strong dollar capital outflows from. emerging markets unwinding of the carry trade weak commodities and so on. Highlights of the conversation Jim Rickards We are seeing growing deflationary pressure in the Incrementum Inflation Model and in my own model From my point of view the only reason the Fed will raise rates is inflationary pressure If there would be one economic number that is important for the Fed at the moment it would be real wages Yellen looks at real wages as the thermometer of

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