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Daniel Zurbrügg
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Daniel Zurbrügg is the Managing Partner of Swiss Infinity Global Investmetns GmbH(, a Swiss based independent asset management firm. The firm provides clients with independent investment research, asset management and asset protection services. With a global network... More
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  • Stay Tuned For The Release Of Our Latest Investment Update (To Be Released October 6. 2014

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    Oct 02 9:56 AM | Link | Comment!

    The sovereign debt crisis has been the main headache of global financial markets for the past two years and hardly a week passed by without more news regarding the financial problems of Greece, Portugal, Spain or the U.S., just to name a few. Still today, many fear that a debt related financial and economic collapse is on the horizon. The popular argument is always the same: Too much debt.

    We remain concerned about the debt problems of many nations and believe that it will take several years to improve this situation. However, in our view, the current discussion is too much focused on the debt side of the equation. Yes, too much debt is not good, but what makes it even worse is when there are no assets and income to cover and support the debt. In that sense, looking at a country is not much different from reviewing a company and analyzing its financials; just what financial analysts do the whole day. Interestingly, in the discussion about sovereign debt the comparison between nations is often done based on an overly simplistic view. There is one aspect of the comparison that is a lot different when reviewing the financial standings of a nation. Unlike a private company, a nation with its own central bank can determine the value of its currency by "printing" more money if needed. This is for example the case in the U.S. where the Federal Reserve has been engaging in a large scale asset purchase plan (quantitative easing). Skeptics often refer to this as "printing money out of thin air" and they see this as a first step towards high inflation, possibly even hyper-inflation. This is not wrong, but also not fully correct. It depends what the newly created liquidity does and if it finds its way into the real economy. What we are seeing in today's situation is that most of that new liquidity isn't doing much at all, the main effect has been that the banks deposit more money back at the central banks. This in turn is helping the banks to earn risk-free profits so they don't have to actually lend money to somebody which would actually increase the risk for the banks. Since the actual money flow is not increased, the risk for inflation is well contained and as long as there is not a real pick up for credit from households and businesses, it is very unlikely that we see a sharp spike in yields in most major economies. Despite some encouraging signs in recent weeks the actual velocity of the money flow remains very slow. Velocity is an indication of the speed at which money is flowing in the financial system. Increasing velocity is an indication of improving economic activity, something that has not really happened so far. Also, given the fact that commodity prices have fallen sharply in the past months (see chart "Commodity prices" below), the risk of seeing a sharp increase in inflation is almost zero.

    The chart above clearly shows the slowing growth momentum that is currently seen in most major economies. Slower growth has direct implications on the commodity market where prices have moved sharply lower in the recent past. Charts from BIS

    Actually, the risk of seeing negative inflation rates in many economies is significantly higher. Central banks see this and since most of them fear deflationary tendencies, they will all keep loose monetary policies. In a global context it does not even make much of a difference if the U.S. Federal Reserve is going to reduce its asset purchase program eventually. Other central banks, especially the Bank of Japan, have already started to make up for that. "QQE", quantitative and qualitative monetary easing as the Japanese program is called is even more aggressive than the Fed's program. It aims to almost double the monetary base within the next two years (!!) and buy back bonds and other securities on a very large scale. The goal is to reduce yields across the whole yield curve, especially at the longer end and by doing so to encourage consumption and investments. What is different with the program in Japan is that the government is also planning to increase investments, this in sharp contrast to the U.S. and Europe where governments are actually cutting back their spending.

    The charts above show the effects of central bank intervention and how this impacts interest rates, despite a small increase in the last couple of weeks, interest rates in many markets are still near record lows, with expected increases not coming before mid 2014

    It remains to be seen which is the better way and for different countries different strategies might be right. Japan has very high levels of debt but it also has a high level of domestic savings, so it looks like this is sustainable. In the U.S. the situation is slightly different due to the lower savings rate. Just cutting spending is not going to solve the problem. What is needed are public investments that make sense and that have real economic returns. So the discussion should be which strategy is appropriate for a given country. With regards to Japan and the U.S. there needs to be a more forward thinking strategy. For the European countries, this is a slightly more challenging issue. Countries such as Italy, Spain or Greece are not poor countries, actually these governments own some very valuable assets, the problem is that those countries need to make more reforms and increase privatization of state owned assets and this is something that is much harder to do in Europe. Reforms take time and they are usually only done under pressure; the liberalization of the job market in Europe is a good example of that. However, the current economic situation is creating the pressure needed to jump start reforms.

    Monetary and fiscal policies are also impacting financial markets, especially stock markets. Lower yields typically increase the present value of stock investments, but this is only one influence. Equity prices also react to interest rates because the lower these rates are the less attractive the bond market is and the more attractive equities are on a relative basis. The chart below illustrates this very clearly. Stocks have been doing much better than other investments (such as bonds and commodities). We expect interest rates are going to remain supportive for stocks for quite some time to come. Yields might go up slightly but on a relative basis they still remain exceptionally low.

    Low interest rates are making equity investments more attractive on a relative basis again. With yields remaining low for longer, the chances for a continuing outperformance of stocks versus bonds and precious metals seems very likely

    We regard the current discussion and speculation about when the Federal Reserve is going to stop its asset purchase program as a non event. In our view it makes no difference and it is not changing the fact that rates are going to remain at very low levels. A sudden and sharp increase in yields would put the current, already fragile, recovery at risk. Also other markets are going to see very low interest rates for probably years to come. For many central banks price stability is not a very important goal anymore as other measures such as GDP growth or employment numbers are the main focus.

    Aug 20 4:54 AM | Link | Comment!
  • Global Macro - New Normal Or The Big Turn?

    Global Macroeconomic & Market Update / New Normal or the Big Turn?

    The good news first: Global GDP continues to recover and is projected to be around 3.5% for 2013 and about 4.1% for 2014 according to the latest estimates. However, advanced economies continue to experience little to no economic growth which is going to have an impact on the job market in those countries. We believe that this is not going to improve much in the coming months and think it will take at least another 6-12 months before we are starting to see increased hiring activity. The recent U.S. Jobs Report for February, which showed a gain of 236'000 jobs (forecasted 165'000) came as a big surprise to many and the market reacted positively to the news. We feel that the jobs report needs to be put in the right context in order to see how good or bad things are. We have often argued that it is not so much about the headline numbers but much more about the quality of the jobs being created. Looking deeper, these numbers tell a different story. Since 2008, the U.S. lost about 8.9mln jobs and since the end of 2009 the economy only created 5.7mln new jobs. So if the job creation continues at the same speed, it will take another two years or so just to get back to the levels prior to the recession of 2008. What is even more disturbing is the fact that the jobs being created are not of the same quality as the jobs that were lost. Also, more and more people only work part time; while a changing lifestyle might explain some of that, most people simply can't find full time employment anymore. (We also need to mention here that in the meantime the preliminary job numbers for March came in much weaker than anticipated). The situation in other countries, for example Spain and Italy, is similar or even worse. Young people in particular are struggling to find jobs. This in turn is creating serious social economic problems. The worsening job situation will continue to force structural reforms intended to liberalize the job market which will hopefully change things to the better, but we can't see much of an improvement in the next 12-18 months.

    While the outlook for developed countries remains weak, growth in emerging economies is accelerating with GDP in those regions growing by about 5.5% in 2013 and 5.9% next year. This is encouraging and we expect the improving growth momentum of emerging markets to have a positive impact on developed economies eventually. The improving business conditions in emerging economies are especially visible in the earnings numbers of large companies operating globally.

    Global equity markets seem to already anticipate the improving outlook and have started to rise since the fourth quarter of last year. There are a number of reasons for the recent positive developments of equity markets. While the overall improving economic outlook is clearly helpful, the lack of investment alternatives has been another important reason for the surge of equity prices. In a world of record low interest rates, the bond markets are not a real alternative. Other investments such as precious metals have also become less attractive on a relative basis considering the steep outperformance in the last decade. With fair valuations, good dividend yields and the outlook for improving corporate profits, global equities are again a very attractive place for investors. The chart below shows the strong performance of global equity markets in recent months, with the chart on the right hand side showing the declining volatility of markets, another sign that some of the negative pressure is gone. So in short, there is a compelling combination of various factors that have driven equity markets in recent months and the outlook for the next 12-18 months doesn't seem to be very different.

    Explaining the recent surge in equity markets is therefore relatively easy but for long-term investors the main question is whether this outperformance has a chance to continue for a longer period of time. We even ask the question: Could there be a structural bull market for equities coming? Considering the huge market challenges we had in recent years, this question seems a bit over ambitious. There are, however, some interesting points to think about. Historically, interest rates have followed a 30 year cycle from peak to trough. In this last cycle, interest rates peaked in the early 80's and have since then trended lower and since yields are now close to zero, it seems realistic that we are nearing another turning point. Stock market cycles are usually shorter than that of bond markets, typically 15 to 20 years. Stock markets have gone nowhere since the peak in 2000 so it also seems realistic to assume that this cycle seems to be in a mature state.

    So is it possible that the recent surge in stock prices is the start of a longer-term bull market? Eventually central banks have to normalize monetary policies and there will be less cheap money flowing into markets. Many fear that once this starts to happen, equity prices are going to drop significantly. Again, looking at history, this concern doesn't seem justified. Actually, the opposite is true. Turning points in interest rate cycles have normally also been turning points for equity markets and rising yields do not cause a selloff in equities. This means that in coming years we could see the current spike in equity prices turn into a structural bull market for equities, even if central banks eventually start to hike rates.

    Another indication that the pressure is easing - falling bond yields/increased refinancing

    Higher interest rates are not always a bad sign for an economy and as long as the increase takes places over a certain period of time, higher rates are not necessarily triggering a selloff in equity prices. While interest rates remain low in many parts of the world, we believe that yields are slowly starting to turn around. Over a time frame of 12-18 months we see a continuing normalization of interest rates, higher economic activity and renewed growth momentum in corporate profits.

    What are the risk factors that could bring back renewed, negative market volatility? A few come to mind, but we think that neither the European debt crisis nor the U.S. deficit story are changing things in a meaningful way. We are more concerned about geopolitical events such as the situation with North Korea or Iran. Especially close we are watching the situation with North Korea with great concern. While the recent actions by the North Korean regime have failed to impact markets negatively, the risk in our view is that a small event or accident could trigger military actions from North and/or South Korea. Such an event could further destabilize the region and cause enormous uncertainty among financial markets worldwide. For now, we still think this is a low probability event but it needs to be monitored very carefully.

    Tags: Global Macro
    Apr 18 10:16 AM | Link | Comment!
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