maverick - aas econ€¦ · * aas economics does not provide investment advice. all models,...

* AAS Economics does not provide investment advice. All models, positions, signals and portfolios shown in this document are

computer generated, forward-looking, updated monthly and for general information only – they do not represent extant positions or

portfolios traded by AAS Economics.

P a g e | 1

Dr. Frank Shostak - Chief Economist/Director

[email protected]

Peter Stellios (M.Ec.) - Senior Economist

[email protected]

Derek Sicklen (B.Ec., Dip. Ed) – Consultant

[email protected]

Increases and decreases in money and credit

growth reliably lead economic expansions and

contractions. This cycle will be no exception.

Yearly Growth US Commercial Bank Total Loans (%)

-8

-4

0

4

8

12

16

2000:0

1

2001:0

1

2002:0

1

2003:0

1

2004:0

1

2005:0

1

2006:0

1

2007:0

1

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG COMM.BANKS TOTAL LOANS (YOY)

MONTHLY

%

THE

MAVERICK

August, 2017

“

“

mailto:[email protected]






P a g e | 2


[email protected]


[email protected]


[email protected]

Highlights

American Slowdown

Where has all the money gone?

Yearly Growth US Adjusted Money Supply (AMS) (%)

Economic growth to head south

Yearly US Real GDP Growth & Forecast (%)

0

4

8

12

16

20

2007:0

1

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US AMS (YOY)

MONTHLY

%

0

1

2

3

4

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

%CHNG US R.GDP (YOY)

MONTHLY

Forecast

%







P a g e | 3


[email protected]


[email protected]


[email protected]

Treasury yields to fall

US 10 Year Treasury Yield & Forecast (%)

S&P to flatline and then retreat

S&P500 Index & Forecast

Asset allocation still defensive with 70% allocations to bonds

AAS Economics Asset Allocation Model

0.8

1.2

1.6

2.0

2.4

2.8

3.2

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

YIELDS US 10YR T-NOTE

Forecast

%

MONTHLY

2,800

2,600

2,400

2,200

2,000

1,800

1,600

1,400

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

S&P 500

MONTHLY

IND

EX

Forecast

50

500

5000

50000

Jan

-73

Dec

-74

No

v-7

6

Oct

-78

Sep

-80

Au

g-8

2

Jul-

84

Jun

-86

May

-88

Ap

r-9

0

Mar

-92

Feb

-94

Jan

-96

Dec

-97

No

v-9

9

Oct

-01

Sep

-03

Au

g-0

5

Jul-

07

Jun

-09

May

-11

Ap

r-1

3

Mar

-15

Feb

-17

AASE Asset Allocation Strategy

S&P Total Return

50/50 Stocks/Bonds







P a g e | 4


[email protected]


[email protected]


[email protected]

Sector selection favours Healthcare, Utilities

and Consumer Staples

AAS Economics Sector Selection Model

Money differential models indicate significant weakness for several currencies against USD

ahead?: EUR

AUD

ILS

RBL

USD/EUR & Forecast

50

500

5000

50000

Jan

-73

Dec

-74

No

v-7

6

Oct

-78

Sep

-80

Au

g-8

2

Jul-

84

Jun

-86

May

-88

Ap

r-9

0

Mar

-92

Feb

-94

Jan

-96

Dec

-97

No

v-9

9

Oct

-01

Sep

-03

Au

g-0

5

Jul-

07

Jun

-09

May

-11

Ap

r-1

3

Mar

-15

Feb

-17

AASE Sector Rotation Strategy

S&P Total Return

0.9

1.0

1.1

1.2

1.3

1.4

1.5Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

Jan 1

8

12mma (inc. forecast)

AASE

Forecast

US

$ P

ER

EU

RO







P a g e | 5


[email protected]


[email protected]


[email protected]

AAS Economics (AASE) specializes in producing forecasts for the global macro

community using advanced monetary and econometric analysis. We use our

unique framework to generate specific, trackable predictions for over 50 world

markets and variables.

From these forecasts we construct model portfolios which can form the basis

of investible products.

We also build customized predictive models for clients with particular

interests.

We welcome enquiries and enjoy discussing our novel approach to economies

and markets.

Pick up an explanatory paper outlining our methodology here.

Email us at [email protected].




http://www.aasecon.com/uploads/9/8/0/8/98086168/the_aas_economics_framework.pdf





P a g e | 6


[email protected]


[email protected]


[email protected]

American Slowdown – it’s real and it’s coming

Things are changing Stateside. After almost a decade of money and credit pumping driven by the

Fed and, more recently, the commercial banks, the internal contradictions of this post-GFC

“rescue mission” are beginning to materialize.

The chimera of the “soft landing” still lingers in the dreams of economists and central bankers, as

it has at all times in the past. But now that we have such extreme levels of debt and leverage

(see chart) the downside risks are greatly magnified. Small changes to expectations driven by

small changes in monetary/credit aggregates can now, more than ever, manifest in dramatic and

unexpected ways in areas normally regarded as “safe havens”.

The post-GFC monetary party has ended and US money and credit growth are

slowing

This means that the monetary tailwinds of the post-GFC period have become

headwinds and economic aggregates and market assets are now facing a more

hostile environment

Our modelling shows Industrial Production and Real GDP growth are set to decline

significantly with this weakening comes the likelihood of rising unemployment

Inflation will remain subdued and the Fed funds rate should slowly decline

The bond bull market will resume and Treasury yield spreads should compress

The major stock market gains of the last 8 years are largely behind us and the

market looks poised to stall by year-end or early-2018

Our successful asset allocation model favours 70% Treasuries and 30% defensive

stocks

With equities our sector model is 1/3 equally weighted in Utilities, Healthcare and

Consumer Staples

In exchange rates our USD modelling sees significant weakness ahead in:

o EUR

o AUD

o ILS

o RUB







P a g e | 7


[email protected]


[email protected]


[email protected]

US Non-Financial Debt to GDP Ratio (%)

As the Fed is the primary driver of the “monetary mischief” that creates the cycle, here is the

current state of the Fed’s balance sheet.

US Federal Reserve Balance Sheet and Growth

Credit growth in the US appears to have peaked and the trend is now down.

120

140

160

180

200

220

240

260

Jan 5

5

Jan 6

0

Jan 6

5

Jan 7

0

Jan 7

5

Jan 8

0

Jan 8

5

Jan 9

0

Jan 9

5

Jan 0

0

Jan 0

5

Jan 1

0

Jan 1

5

DOMESTIC NONFINANCIAL DEBT TO GDP RATIO

QUARTERLY

%

0

1,000

2,000

3,000

4,000

5,000

-40

0

40

80

120

160

Jan 0

5

Jan 0

6

Jan 0

7

Jan 0

8

Jan 0

9

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

MONTHLY

FEDERAL RESERVE TOTAL ASSETS

YE

AR

-ON

-YE

AR

% (R

ed L

ine)

BIL

L. $







P a g e | 8


[email protected]


[email protected]


[email protected]

Yearly Growth US Commercial Bank Real Estate Loans (%)

Yearly Growth US Commercial Bank Business Loans (%)

-10

-5

0

5

10

15

20

2000:0

1

2001:0

1

2002:0

1

2003:0

1

2004:0

1

2005:0

1

2006:0

1

2007:0

1

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US COMM.BANK REAL ESTATE LOANS (YOY)

MONTHLY

%

-30

-20

-10

0

10

20

30

2000:0

1

2001:0

1

2002:0

1

2003:0

1

2004:0

1

2005:0

1

2006:0

1

2007:0

1

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US COMM.BANK BUSINESS LOANS (YOY)

MONTHLY

%







P a g e | 9


[email protected]


[email protected]


[email protected]

Yearly Growth US Commercial Bank Consumer Loans (%)

Yearly Growth US Commercial Bank Total Loans (%)

-15

-10

-5

0

5

10

15

2000:0

1

2001:0

1

2002:0

1

2003:0

1

2004:0

1

2005:0

1

2006:0

1

2007:0

1

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US COMM.BANKS CONSUMER LOANS (YOY)

MONTHLY

%

-8

-4

0

4

8

12

16

2000:0

1

2001:0

1

2002:0

1

2003:0

1

2004:0

1

2005:0

1

2006:0

1

2007:0

1

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG COMM.BANKS TOTAL LOANS (YOY)

MONTHLY

%







P a g e | 10


[email protected]


[email protected]


[email protected]

Yearly Growth US Commercial Bank Inflationary Credit (%)

Inflationary credit is credit growth in excess of credit funded by the production of real goods and

services (savings). It, along with central bank policy, is a central factor in money supply

fluctuations. Rising fractional reserve credit is indicative of money chasing assets and declining

credit is indicative of money leaving assets.

And, our favourite: adjusted money supply…

Yearly Growth US Adjusted Money Supply (AMS) (%)

-20

-10

0

10

20

30

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US BANKS INFLATIONARY CREDIT (YOY)

MONTHLY

%

0

4

8

12

16

20

2007:0

1

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US AMS (YOY)

MONTHLY

%







P a g e | 11


[email protected]


[email protected]


[email protected]

But it’s not just the US. Look at Europe, Japan and China…

Yearly Growth Eurozone Adjusted Money Supply (AMS) (%)

Yearly Growth German Adjusted Money Supply (AMS) (%)

-4

0

4

8

12

16

Ja

n 0

5

Ja

n 0

6

Ja

n 0

7

Ja

n 0

8

Ja

n 0

9

Ja

n 1

0

Ja

n 1

1

Ja

n 1

2

Ja

n 1

3

Ja

n 1

4

Ja

n 1

5

Ja

n 1

6

Ja

n 1

7

12mma

EUROZONE AMS

MONTHLY

YEAR-O

N-Y

EAR (

%)







P a g e | 12


[email protected]


[email protected]


[email protected]

Yearly Growth Japanese Adjusted Money Supply (AMS) (%)

Yearly Growth Chinese Adjusted Money Supply (AMS) (%)

As we have said several times in previous editions of The Macro Maverick, the recent change

in monetary conditions trends poses an increasing threat to activity and financial markets as we

move into 2018.

Increases and decreases in money and credit growth reliably lead economic expansions and

contractions. This cycle will be no exception.

-10

0

10

20

30

40

Jan 0

5

Jan 0

6

Jan 0

7

Jan 0

8

Jan 0

9

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

12mma

JAPAN AMS

MONTHLY

YEAR-O

N-Y

EAR (

%)

0

10

20

30

40

Jan 0

5

Jan 0

6

Jan 0

7

Jan 0

8

Jan 0

9

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

12mma

MONTHLY

YEAR-O

N-Y

EAR (

%)

CHINA AMS







P a g e | 13


[email protected]


[email protected]


[email protected]

In this issue we focus on the US but the outlook is similar across most of the major economies:

the slowdown cometh.

US economic growth to slow

At AAS Economics we have built a sophisticated global econometric model (“MENGER”, after the

famous Austrian economist) based around money supply dynamics. Currently we have over 300

equations and cover over 15 countries, and we generate forecasts for macroeconomic variables

and financial assets.

For the US economy our MENGER forecasts, which have proven reliable in the past, are showing

a significant slowdown in economic growth towards the end of 2017 and well into 2018. More

significantly, there is no material pickup in growth out as far as the forecast window permits, so

the forthcoming slowdown will be more extended than most analysts expect.

Most (though not yet all) measures of economic growth are losing upward momentum as the

change in money and credit conditions begins to bite.

Yearly Growth US Existing Home Sales (%)

-30

-20

-10

0

10

20

30

40

50

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US EXISTING HOME SALES (YOY)

MONTHLY

%







P a g e | 14


[email protected]


[email protected]


[email protected]

Yearly Growth US New Home Sales (%)

Yearly Growth US Industrial Production (%)

-60

-40

-20

0

20

40

2008:0

1

2009:0

1

2010:0

1

2011:0

1

2012:0

1

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

ACTUAL

12MMA

%CHNG US NEW HOME SALES (YOY)

MONTHLY

%

-20

-15

-10

-5

0

5

10

Jan 0

8

Jan 0

9

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

12mma

US INDUSTRIAL PRODUCTION

MONTHLY

YE

AR

-ON

-YE

AR

(%

)







P a g e | 15


[email protected]


[email protected]


[email protected]

Yearly Growth US Employment (%)

In the face of the slowdown in monetary pumping by the Fed and the commercial banks it is just

a matter of time before the major economic aggregates follow suit. The big questions are

“When?” and “How much?”.

On timing, we are seeing cracks starting to appear in the growth edifice in early 2018, becoming

more generalized as 2018 unfolds.

As to magnitude, our successful MENGER global macro model is suggesting real GDP growth

heading to levels below 1% p.a. by late next year. Here’s the modelling from MENGER.

-5

-4

-3

-2

-1

0

1

2

3

Jan 0

8

Jan 0

9

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

12mma

US EMPLOYMENT

MONTHLY

YE

AR

-ON

-YE

AR

(%

)







P a g e | 16


[email protected]


[email protected]


[email protected]

Annual US Real GDP Growth & Forecast (%)

Annual US Industrial Production Growth & Forecast (%)

We forecast annual real GDP growth, which closed at 2.1% in Q2, 2017, to ease to 1.9% by Q4

and to decline further – to marginally above zero – by Q4, 2018.

Consistent with the forecast decline in economic growth is a rise in the unemployment rate. Our

modelling suggests that the US unemployment rate should increase from 4.3% in July 2017 to at

or slightly above 5% by December 2018. At this stage – although, obviously, with higher forecast

error – the projected unemployment rate could approach 6% by December 2019.

0

1

2

3

4

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

%CHNG US R.GDP (YOY)

MONTHLY

Forecast

%

-4

-2

0

2

4

6

8

10

Ja

n 1

0

Ja

n 1

1

Ja

n 1

2

Ja

n 1

3

Ja

n 1

4

Ja

n 1

5

Ja

n 1

6

Ja

n 1

7

Ja

n 1

8

US INDUSTRIAL PRODUCTION

MONTHLY

YEAR-O

N-Y

EAR (

%)

AASE

Forecast







P a g e | 17


[email protected]


[email protected]


[email protected]

US Unemployment Rate & Forecast (%)

Inflation to remain benign

Annual headline CPI inflation, currently running at 1.7%, should remain essentially unchanged by

December 2018 according to the MENGER model.

Yearly US Headline CPI Inflation & Forecast (%)

The core CPI number, on the other hand, is predicted to rise just marginally by end 2018 from the

current 1.7% p.a. to around 1.9% p.a.

4

5

6

7

8

9

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

US UNEMPLOYMENT RATE

MONTHLY

%

Forecast

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

%CHNG US CPI (YOY)

Forecast

MONTHLY

%







P a g e | 18


[email protected]


[email protected]


[email protected]

Yearly US Core CPI Inflation & Forecast

Neither of these forecasts is cause for concern for either short or longer term rates.

Fed funds rate to resume its decline

If our assessment is correct and the economy slows over 2018 and 2019 it is likely that as time

progresses the expectations for further rate rises will diminish and the entire interest rate curve

will decline. This is exactly what our MENGER model is forecasting.

1.4

1.6

1.8

2.0

2.2

2.4

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

%CHNG US CPI LESS FOOD & ENERGY (YOY)

MONTHLY

%







P a g e | 19


[email protected]


[email protected]


[email protected]

US Fed Funds Rate & Forecast (%)

The model is suggesting that, after remaining essentially unchanged from current levels (1.15%

in July 2017) until December 2017, the market Fed funds rate should decline gradually over the

course of the next calendar year to levels approaching 1.10%, before perhaps falling further the

year after.

Treasury yields and spreads to decline

Against the background of benign inflation and a declining Fed funds rate, MENGER is predicting

that yields on the 10-year T-Note should continue their downward trajectory. Currently at 2.29%

(July) our forecast is for a yield closer to 2.15% by year end and as low as 1.6% by the end of

2018.

There should also continue to be yield compression across the US Treasury curve as the 10year-

2year spread, which settled at 0.94% as at end-July, eases by around 10bps by year end and

moves further – towards 0.7% – by the end of 2018.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

FEDERAL FUNDS RATE (MARKET)

Forecast

MONTHLY

%







P a g e | 20


[email protected]


[email protected]


[email protected]

US 10yr Treasury Yield & Forecast (%)

US Yield Spread: 10yr-2yr & Forecast (%)

Equities: S&P500 Index due to retreat in 2018

Opinions differ as to whether the US market is overheated.

Using the Robert Shiller methodology the picture looks as follows:

0.8

1.2

1.6

2.0

2.4

2.8

3.2

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

YIELDS US 10YR T-NOTE

Forecast

%

MONTHLY

0.4

0.8

1.2

1.6

2.0

2.4

2.8

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

YIELD SPREAD US T-NOTE:10YR VS 2YR

MONTHLY

%

Forecast







P a g e | 21


[email protected]


[email protected]


[email protected]

Real S&P Composite v. Cyclically-Adjusted P/E Ratio (CAPE) (1871-2017)

On this analysis the US stock market is back into the valuation extremes that existed in the late

1920s and mid-1990s, prior to the bursting of the tech bubble in 1999-2000.

Looking at forward P/E ratios, however, the image is slightly different and less concerning.

Real S&P Composite v. Forward P/E Ratio

Using technical indicators like RSI it appears that the Index is getting “warm” but is not yet, by

historical standards at least, in the “red hot” zone.

1929.09, 32.56

1999.12, 44.20

0

10

20

30

40

50

60

70

80

1

10

100

1,000

10,000

1871

1874

1878

1882

1885

1889

1893

1896

1900

1904

1907

1911

1915

1918

1922

1926

1929

1933

1937

1940

1944

1948

1951

1955

1959

1962

1966

1970

1973

1977

1981

1984

1988

1992

1995

1999

2003

2006

2010

2014

Real Index

CAPE

8

12

16

20

24

28

1986

:01

1988

:01

1990

:01

1992

:01

1994

:01

1996

:01

1998

:01

2000

:01

2002

:01

2004

:01

2006

:01

2008

:01

2010

:01

2012

:01

2014

:01

2016

:01

S&P FORWARD P/E

MONTHLY

RA

TIO







P a g e | 22


[email protected]


[email protected]


[email protected]

S&P Composite v. RSI (1871-2017)

The same can be said for z-scores. Here is a chart of the average of 1, 3, 5 and 10 year z-scores.

S&P Composite v. Average Z-Score (1871-2017)

The technical picture therefore is one of increasing risk but it is not suggesting an imminent

collapse.

-

50

100

150

200

250

300

350

400

1

10

100

1,000

10,000

1871

1874

1878

1882

1886

1890

1894

1897

1901

1905

1909

1913

1917

1920

1924

1928

1932

1936

1940

1943

1947

1951

1955

1959

1963

1966

1970

1974

1978

1982

1986

1989

1993

1997

2001

2005

2009

2012

2016

Index

RSI

-3

2

7

12

17

1

10

100

1,000

10,000

18

71

18

75

18

79

18

84

18

88

18

92

18

97

19

01

19

05

19

10

19

14

19

18

19

23

19

27

19

31

19

36

19

40

19

44

19

49

19

53

19

57

19

62

19

66

19

70

19

75

19

79

19

83

19

88

19

92

19

96

20

01

20

05

20

09

20

14

Index

Av Z-score







P a g e | 23


[email protected]


[email protected]


[email protected]

What is our modelling saying?

MENGER, which helped predict the crash of 2008 and the recovery of 2009, is suggesting that

the S&P is facing some headwinds from now until the end of 2018. At this stage a crash is not

forecast but there is always the risk that corrections in an environment of “enthusiasm” (as is

indicated by some of the technical indicators cited above) can sometimes become a little chaotic

as expectations adjust discontinuously to a changed economic environment.

Thus, for the time being, our positioning is defensive, given a forecast that has the index

meandering slowly lower over the course of the next year.

S&P 500 Index & Forecast

Asset allocation still defensive

Consistent with our recent editions of The Macro Maverick, our high-level asset allocation

across stocks, bonds and commodities remains defensive.

Currently, and for the remainder of 2017 our allocations are as follows:

70% Treasuries

30% equities:

1/3 Utilities

1/3 Consumer Staples

1/3 Healthcare

2,800

2,600

2,400

2,200

2,000

1,800

1,600

1,400

2013:0

1

2014:0

1

2015:0

1

2016:0

1

2017:0

1

2018:0

1

2019:0

1

S&P 500

MONTHLY

IND

EX

Forecast







P a g e | 24


[email protected]


[email protected]


[email protected]

These allocations are based on our successful long term asset allocation model, which in turn is

driven by the changes in money supply. The logic is simple: predict the cycle (using changes in

our proprietary measure of money supply (AMS)) and then allocate assets according to their

historical performance during those stages of the cycle. A more detailed description of our

business cycle asset allocation model is shown in the Appendix.

This approach is eminently testable and our modelling has shown the following proforma*

results:

AAS Economics Business Cycle Asset Allocation Model Proforma*

The approach has shown itself to be adept at capital preservation, which has been a major

contributor to its outperformance.

ANALYSIS*

Feb-1973 to Jun-2017AASE Approach* S&P Total Return

50/50

Stocks/Bonds

CAGR 14.77% 10.37% 9.20%

Max Drawdown -32.6% -50.9% -22.5%

Std Dev 13.4% 15.2% 8.7%

Return/Drawdown 0.45 0.20 0.41

Sharpe 3% 0.88 0.48 0.71

% Positive Years 88.9% 80.0% 84.4%

YTD 4.7% 11.6% 6.7%

1 Year Return 11.8% 16.0% 5.0%

3 Year Return 41.0% 36.3% 22.6%

50

500

5000

50000

Jan

-73

Dec

-74

No

v-7

6

Oct

-78

Sep

-80

Au

g-8

2

Jul-

84

Jun

-86

May

-88

Ap

r-9

0

Mar

-92

Feb

-94

Jan

-96

Dec

-97

No

v-9

9

Oct

-01

Sep

-03

Au

g-0

5

Jul-

07

Jun

-09

May

-11

Ap

r-1

3

Mar

-15

Feb

-17

AASE Asset Allocation Strategy

S&P Total Return

50/50 Stocks/Bonds







P a g e | 25


[email protected]


[email protected]


[email protected]

Sector allocations remaining defensive

Within the overall asset allocation framework we also run a dedicated equities-only proforma

portfolio. This portfolio omits the allocations to bonds and to commodities that characterise the

multi-asset model and concentrates solely on applying the business cycle analytical framework to

the selection of sectors within the equities market.

In our framework this means selecting among the various sector indices and allocating among

them according to the forecast stage of the business cycle using the following logic:

Changes in Money Supply Growth Changes in Stage of Business Cycle Changes in Sector Allocations

For the US market the proforma results have been pleasing, consistent with those of the higher-

level asset allocation experience cited above.

AAS Economics Business Cycle Sector Selection Model Proforma*

ANALYSIS*

Feb-1973 to Jun-2017AASE Approach* S&P Total Return

CAGR 14.75% 10.37%

Max Drawdown -38.1% -50.9%

Std Dev 15.3% 15.2%

Return/Drawdown 0.39 0.20

Sharpe 3% 0.77 0.48

% Positive Years 86.7% 80.0%

YTD 8.1% 11.6%

1 Year Return 17.3% 16.0%

3 Year Return 56.3% 36.3%







P a g e | 26


[email protected]


[email protected]


[email protected]

Our sector weightings are:

1/3 Utilities

1/3 Consumer Staples

1/3 Healthcare

US dollar to strengthen against many currencies

Our MENGER model produces forecasts for major and minor exchange rates, including:

EUR/USD

USD/JPY

GBP/USD

USD/CHF

AUD/USD

USD/SEK

USD/KRW

USD/ILS

USD/RBL

Cross rate forecasts are therefore easy to generate.

For several exchange rates we see the following trends for the USD:

50

500

5000

50000

Jan

-73

Dec

-74

No

v-7

6

Oct

-78

Sep

-80

Au

g-8

2

Jul-

84

Jun

-86

May

-88

Ap

r-9

0

Mar

-92

Feb

-94

Jan

-96

Dec

-97

No

v-9

9

Oct

-01

Sep

-03

Au

g-0

5

Jul-

07

Jun

-09

May

-11

Ap

r-1

3

Mar

-15

Feb

-17

AASE Sector Rotation Strategy

S&P Total Return







P a g e | 27


[email protected]


[email protected]


[email protected]

EUR/USD & Forecast

We see that the Euro should decline considerably over the next year or so, perhaps to levels

below those that prevailed at the bottom of the Global Financial Crisis and the European Debt

Crisis. A level of parity with the USD is possible.

USD/JPY & Forecast

With the Yen the forecast situation is nowhere near as dramatic. Here we see minor declines in

the Yen until early-mid 2018 and then a reversal of this trend.

Where we do see other significant changes are in the Australian dollar, the Israeli shekel and the

Russian ruble.

0.9

1.0

1.1

1.2

1.3

1.4

1.5

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

Jan 1

8


AASE

Forecast

US

$ P

ER

EU

RO

70

80

90

100

110

120

130

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

Jan 1

8


AASE

Forecast

YE

N P

ER

US

$







P a g e | 28


[email protected]


[email protected]


[email protected]

AUD/USD & Forecast

With the Aussie our MENGER model is forecasting a significant weakening of the local currency

versus the USD, with the possibility of a return to levels at or just above those of the GFC – i.e.

into the mid-60s.

USD/ILS & Forecast

0.6

0.7

0.8

0.9

1.0

1.1

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

Jan 1

8


AASE

Forecast

US

$ P

ER

AU

D

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.0

4.1

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

Jan 1

8


AASE

Forecast

SH

EK

EL P

ER

US

$







P a g e | 29


[email protected]


[email protected]


[email protected]

As far as the Israeli shekel is concerned, the rapid monetary pumping by the Israeli central bank

has laid the foundations for a significant decline in the exchange rate against the USD. Our

modelling predicts a large decline in the Shekel out till late 2018.

USD/RBL & Forecast

20

30

40

50

60

70

80Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6

Jan 1

7

Jan 1

8


AASE

ForecastUS

$ P

ER

RO

UB

LE







P a g e | 30


[email protected]


[email protected]


[email protected]

Appendix – AAS Economics Business Cycle Asset Allocation Model

As different sectors perform better or worse at different stages of the business cycle, we have

developed a sector allocation strategy based on forecast stages of the business cycle as driven by

changes in money supply. This model facilitates capital migration across sectors depending on

where each economy is forecast to be positioned based on recent shifts in money supply growth

and on the historical performance of each sector at each stage of the cycle. The logic is quite

simple:

Changes in Money Supply Growth Changes in Stage of Business Cycle Changes in Asset Allocations

The business cycle is divided into four notional stages and changes in money supply growth

provide forward-looking settings for the business cycle and thus for sector allocations.

Stage One is typically a recessionary or slowdown stage of the cycle and asset positioning is

particularly defensive in most economies. This is typically a difficult time for equities in general

and generally entails allocations to very defensive equity sectors such as Consumer Staples,

Healthcare and Utilities. There are generally large allocations to bonds in this stage.

Stage Two is moderately expansionary and recovery-based sectors have typically performed

well. Different economies, with different industrial structures, will have slight variations as to

which sectors are, in their cases, more “cyclical” when compared to other economies and thus

allocations may vary a little from country to country. Bond allocations are typically reduced in this

stage

Stage Three is more aggressive. Now the cyclicals may be performing well but the risks are

increasing and some of the more “non-cyclical” sectors may come into favour. Often industrials will

be performing well, enjoying the pull-up demand from other sectors. At this stage it is often

common to see increases in commodity prices (which may also appear earlier in the cycle in some

economies). Therefore allocations to commodity related stocks are more likely in this stage.

Stage Four is a downturn or weakening stage where risks are higher. At this time a defensive

posture is warranted. Sectors which perform relatively well typically include Consumer Staples,

Healthcare and Utilities. Bond allocations may increase but commodity allocations decline.

It is important to note that a continued uptrend in the overall market may nonetheless be

accompanied by important intersectoral changes as different sectors experience different stimuli







P a g e | 31


[email protected]


[email protected]


[email protected]

at different stages of the cycle. Thus it’s possible, for example, for a bullish overall stock index

forecast to be associated with a shift to a more defensive sectoral posture e.g. Stage Four.







P a g e | 32


[email protected]


[email protected]


[email protected]

Glossary

AMS This is the proprietary AAS Economics money

supply measure. It has its roots in Austrian

economics and……

Excess Money Growth This is AMS growth minus CPI growth minus

industrial production growth. It is designed to be a

barometer of surplus money in the system, being

the excess of demand (as measured by CPI and

industrial production) and supply (as measured by

AMS). In our framework excess money growth is a

key driver of asset prices.

Pool of Funding This is the stock of final goods ready for human

consumption. The state of the pool sets the limit

for economic growth.

Real Savings The amount of consumer goods produced locally

less the amount taken by the producers of these

goods.

The reshuffling process The diversion of real savings from wealth

generating activities towards activities that sprang

up on the back of loose monetary policy.

Productive consumption This is defined as consumption that is preceded by

production of wealth i.e. consumption that is

backed up by the production of wealth.

Non-productive consumption This is consumption that arises as a result of

monetary pumping and is not supported by wealth

production. This type of consumption weakens the

flow of real savings.

Unbacked loans (Inflationary Credit) This type of lending that is not backed up by real

savings. This type of lending is created through

fractional reserve banking i.e. lending out of "thin

air".







P a g e | 33


[email protected]


[email protected]


[email protected]

For More Information

AAS Economics (AASE) specializes in producing forecasts for the global macro

community using advanced monetary and econometric analysis. We use our

unique framework to generate specific, trackable predictions for over 50 world

markets and variables.

We also build customized predictive models for clients with particular

interests.

We welcome enquiries and enjoy discussing our novel approach to economies

and markets.

Contact us at [email protected].





maverick - aas econ€¦ · * aas economics does not provide investment advice. all models,...

Documents