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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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  • Macroeconomic Update / 2011 - Stabilization not Normalization
    The events in global economics last year were highly alarming, the sovereign debt crisis in many countries have worsened significantly and we are facing a situation today where a large number of governments, countries and individual states are facing technical bankruptcy. Of course, central banks and the IMF can put together bailout programs, the Fed can engage in further quantitative easing programs but all of these measures will come at a price. It would be outright foolish to believe that all this liquidity can be created out of thin air without real economic consequences. These consequences do not come overnight but actually might take 2-3 years until we see the negative impacts. It is understandable that today’s central bankers are highly concerned about the reemergence of deflation and its destructive effects on the economy. One only needs to look at the situation in Japan, where the economy has been in deflation for most of the last 20 years. A bit more than 20 years ago, Japan’s leading equity index, the Nikkei, stood at 39’000 points and it has only recently gone back up over 10’000 points. Two decades of devastating losses in equity markets, this tells us that structural problems can take a very long time to correct. Another example are U.S. equity markets, where market indices are pretty much back to the levels seen in the year 2000. This is not only a lost decade of flat performance, but, once the decreasing value of the U.S. currency is taken into consideration, an outright shocking loss that highlights the true dimension of the problem. We believe that many western nations have entered a prolonged period of deep structural change that will take many years to be completed. For decades western nations have enjoyed increasing prosperity and that resulted in a steep increase of government spending and a never ending increase in the build-up of welfare states. This has resulted in the huge amounts of government debt in many major economies today and the problem is now made worse by changing demographics, chronic overregulation and the wrong economic incentives. The large debt burden faced by many countries is in sharp contrast to the very healthy balance sheets of many large corporations and this has led to a situation in which many large multinational corporations’ bonds are perceived to be safer than government paper of individual countries. This is fascinating and shows us the limits of text book economics as we know it. Wasn’t the yield on government bonds considered the benchmark for the risk free return? Didn’t they tell us that over a long period of time equities should outperform bonds? Well, tell that to someone who was invested in Japanese equities for the past 20 years and the chances are that they do not agree with textbook economics anymore.
    But let us go back to the basics of today’s situation. The world economy is expected to grow at a rate of about 6% this year, after a strong recovery of almost 7% last year. That’s not a bad number you might say. The problem is that global growth is spread very unevenly these days, with an ever growing share coming from emerging markets such as China, India and Brazil, while western markets are only experiencing anemic growth. While new emerging markets present very attractive opportunities for large international companies, it means that export oriented businesses in saturated western economies should do reasonably well and therefore outperforming firms with a focus on domestic business. Here a big problem for the U.S. and the European Union becomes obvious as many companies do not have a high enough focus on exports. Take for example the European Union and compare France and Germany. It is very clear that Germany is much better positioned to take advantage of the export opportunities that these new emerging markets present. Just think of cars like Mercedes, Volkswagen or BMW, they are market leaders in most of these emerging countries. Now think about the French carmakers for a moment…think a bit harder…do you even now the names of these producers…Renault, Citroen and Peugeot, but these producers are all significantly less successful in those new markets.
    Feb 01 6:13 AM | Link | Comment!
    First of all, we would like to wish all our readers a happy and prosperous New Year; we hope you all had a good start. About one month after we celebrate the New Year in the western world, the Chinese are going to celebrate their New Year at the beginning of February. 2011 is the year of the rabbit, which is following the year of the tiger. The Chinese believe that the year of the rabbit will bring a general consolidation in life, a time to calm down and recover. It is a time that is good to make things more stable, to focus on life and quality time with friends and family and also a year to be patient and not to “push the river”. In Chinese traditions, the rabbit is the sign of the moon, while the peacock is the sign of the sun, together they are the Yin and Yang of life and anyone making supplications for wishes to be fulfilled are certain to get what they want in the year of the rabbit. Don’t worry, our newsletter has not changed its focus from economics to philosophical issues, but, given the volatility of financial markets and the overall global economy in the past few years, I certainly think we could use a year of stabilization. And, while we hope for another good year, we certainly think it is better to rely on independent thinking and a sound, well thought out investment strategy. If, however, we get a bit of extra help from the Chinese rabbit, we certainly wouldn’t mind.The performance of global financial markets certainly gave investors a chance to earn decent returns but it required proactive action, especially on the currency front, to generate profits. Most major equity markets finished the year strong with index levels rising between 5% and 10% just in the last quarter of 2010. This came as a surprise to many investors, especially given the turbulence encountered in the fourth quarter of 2010, such as the European sovereign debt problems or the increased tensions on the Korean peninsula. Given the outlook for continued moderate economic growth in most parts of the world, it is clear that the rally has been driven by excess liquidity which needed to be invested. Many, especially large institutional investors, are forced to put some of their cash to work and it is therefore not surprising that we saw global equity markets finishing the year strong despite the above mentioned problems. We had already discussed the chances for a year-end rally in our last update in late October and we are therefore pleased to see that this rally has indeed taken place. The need to invest excess cash was also the main driver behind the strong start to the New Year and it seems that an increasing number of investors have become more positive with regards to the outlook for global equity markets.
    While we think that there is a realistic chance to finish the year 2011 with higher equity markets, we are strongly convinced that a simple buy and hold strategy will not result in optimal performance and we think the right timing will be crucial in 2011. This means that investors should be prepared to hedge their investment exposure in anticipation of a potential market selloff and use a potential correction to take advantage of attractive investment opportunities.We expect the liquidity driven rally to gradually weaken in coming weeks as markets look for additional catalysts to support further price increases. One primary focus area is corporate profits for Q4/2010 and for Q1/2011. We think that it will become increasingly difficult for companies to generate substantial profit growth, given that the basis for comparison will be 2010 when we already realized a significant jump in corporate profitability from very weak 2009 levels. In our view, it is highly doubtful that companies are able to match the high expectations that the market has and we feel that the risk is significantly skewed to the downside. In combination with other negative factors such as renewed sovereign debt fears and possible geopolitical events, such as a further increase of tensions on the Korean peninsula, we think the risks for a broader market correction are significant during the later phase of Q1 and early Q2 and we think it is wise to be ready to hedge market exposures.
    There are clear signals from central banks around the world that they plan to continue their expansionary monetary policies, that have clearly supported equity and bond markets in the last couple of months. The Federal Reserve made it very clear that they plan to do whatever is needed to bring the economy back on track and will add further stimulus if needed. This places the U.S. among the group of countries which are expected to raise rates at a relatively late point in the current economic cycle. The very low yield levels in the U.S. combined with fears about further increased monetization of debt have pushed the U.S. Dollar to new lows versus most major currencies.
    We are strongly convinced that the economic problems seen in 2010 will not go away anytime soon and that we will have to deal with sovereign debt issues for a long period of time, these problems are not reversed overnight. The excess spending in the welfare states, as we have today in many countries, is indicative of systematic overspending by many governments. In the future, the fact that changing demographics, due to an aging population in most countries will make the situation even worse, is a real concern to us and we are worried that many countries may seek to solve the debt problem by creating inflation. So far inflation does not seem to be a big problem, but, the excess liquidity is certainly there and will eventually find its way into the economy. To make the story worse, we are concerned that once the economy gains some momentum, that the increase in the velocity of the money flow will push inflation significantly higher. Don’t count on the central banks to withdraw this excess liquidity on time. History repeats itself and history teaches us what this could lead to.
    Feb 01 6:10 AM | Link | Comment!
  • Macroeconomic Update – Austerity vs. controlled government spending…
    While there has been positive economic activity in Asia, Brazil and other markets such as Australia, the picture in Europe and the U.S. remains in sharp contrast. Economic activity is comparable moderate in both regions but the strategies to improve the situation are quite different. While an increasing number of European states have implemented aggressive spending cuts, the U.S. is trying to improve economic sentiment with controlled government spending, a more aggressive monetary policy and more government involvement. In Europe the rather aggressive spending cuts are already starting to impact GDP growth and the impact in 2011 looks like it might be even stronger. Portugal, for example, is expecting economic growth below 0.5% and we feel that this might even turn into a slightly negative number. Export oriented economies like Germany are doing better with GDP growth expected to be in the area of 1.5% next year; possibly even slightly above that number. It is therefore understandable that countries like Japan and the United States have no real interest in a strong currency, since that would decrease exports. While Japan has been an export country for decades, the situation with the U.S. is different. A weaker U.S. Dollar will not have such a strong impact on exports and will therefore be less beneficial when trying to improve GDP growth. In terms of deficits, Japan is probably in even worse shape than the U.S. The main advantage that Japan has, however, is that its people have huge private savings and typically a lot less leverage.

    A high level of savings is on one hand a problem, Japanese consumption has been weak for a long time already, but the vast amounts of savings is acting as a backstop for the Yen. With the U.S. Dollar, things are much worse since private savings are relatively low and typically people have a lot more leverage. We believe that the deleveraging (reducing debt and consumptions) that has recently started could continue for years and the housing market, as one example, might stay at depressed levels for quiet some time to come.  The government can only do so much to improve the situation and we are skeptical about government spending that only promotes consumption. In this context some of the proposed spending plans by the current administration are understandable from an economical point of view. The problem is that the amount of debt is already at such elevated levels that it is very difficult to find the political backing for additional investments. Did you note the subtle difference here, I am saying investments NOT spending; that is an important difference. Infrastructure related investments, which tend to create true economic value would be especially important. Measures that just aim to promote simple spending or temporarily cut taxes will only have a positive impact short-term. The problem is that the current administration does not seem to have enough backing to pursue some of its plans and the mid-term elections are expected to bring a big shift in political power. However, the problems in the United States as well as in Europe are deeper. The reason why both have lately seen their currencies weakening significantly can’t only be attributed to the debt problem. We are much more worried about the loss of fundamental trust in these economies and a tendency to correct failures of the past by implementing more and more regulation. In this context, we also need to rethink what makes a country and ultimately a currency strong, it goes far beyond monetary policy and gold backing. The value of a currency is a dynamic measure based on a number of factors that include economical and political factors. The ever increasing amount of laws and regulations has just made it a lot harder and less attractive for businesses and entrepreneurs to take risk and make investments that would spur real economic activity. That is the reason why the degree of regulation in developed economies tends to correlate negatively with its economic competitiveness. So while it would be very critical to deregulate markets and providing people with the right incentive to produce, the common answer to economic problems has been more regulation and laws in order to regulate the economy back to some perception of sanity. It is more likely leading to insanity.

    Disclosure: "No positions"
    Oct 29 9:56 AM | Link | Comment!
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