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April 2013
Achtung Baby
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April 2013
Achtung Baby
April 2013
Achtung Baby
Epic
that over 97% of its assets are invested in Spanish Government
Bonds. Considering that in 2007 less than 50% of its assets were
invested this way, as well that 70% of purchases in 2012 occurred
during the last few months of the year, this all-in strategy need only
be described with one word epic.
Of course, odds are this epic strategy will only end in disaster. First of
all, the high concentration of investment is embarrassing for
whomever is in charge of the fund. Fund managers, investment
committees, and trustees have a fiduciary duty to the owners of the
fund. Objective #1 for this group is to preserve capital and the
diversification of assets, neither of which is being achieved. Next, this
is really no different than directly raiding the pension fund assets.
This is a shameful act and ultimately someone will have to pay for
this Spanish mistake, which naturally leads us to Germany.
Germany
In simple terms, the generosity threshold of the average German is
pretty close to being breached. Recall that initially Germany was
required to only pay 21.72% towards any bailout. Granted this is a
lot to pay, and a lot to swallow, especially for many Germans who
believe they shouldnt have to pay anything for the poor money
management skills of other European countries.
Table 1 shows the exact bailout commitment for each Euro-zone
country. While this table hasnt been bantered around any research
reports for quite some, we believe it is worthwhile as it provides a
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Achtung Baby
Merkels
coalition
Source: bundestag.de
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Achtung Baby
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Achtung Baby
21 months in recession
Depressing
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From another perspective, in 2002 global equity markets declined 30%, but this was over a 10-month period. Painful, yes but there
were no jolting -15% declines over 2 days. Mathematically, the -30%
decline should have felt twice as bad when compared to a -15%
decline. However, when the decline is spread out over a longer
period, people become somewhat desensitized to the loss. As such
the psychological damage from the gold experience feels worse.
More importantly however, when financial markets experience
significant and rapid price changes, you know something is afoot.
In our opinion the primary reason for the sell-off is attributed to gold
being used in just about every hedge, carry, and pair trade known to
mankind. Its been no secret that since the central banks began
printing money, many investors have been LONG GOLD and SHORT
YEN/EUR/Treasuries/Oil to name a few. Considering gold was trading
in a weak technical range, for the fireworks to begin all it needed was
a single very large seller and off she went.
Also of significance was the impact of margins. When trading in any
type of commodity or currency, investors typically only need to pay
about 5% of the actual amount due. The other 95% is in effect
borrowed and when there are significant moves in the underlying
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Achtung Baby
QE5?
investment, the buyer has to contribute more money to maintain
margin otherwise his margin is called and his position is forcefully
liquidated. And this is when the golden snowball really stated to roll.
The really important point to understand is that today global financial
markets are all interconnected. Commodities are connected to
stocks, stocks are connected to bonds, bonds are connected
currencies, currencies are connected to interest rates, interest rates
are connected to central bankers, central bankers are connected to
gold, and everything is connected to inflation and deflation.
Sadly, pretty well all investors today are ignoring the signals and
messages produced by the central banks and their money printing
ways. Most want to believe that the World has returned to the typical
business cycle and the reaction by stocks and bonds simply
represents a normal investment experience.
We know this message is falling on deaf ears, yet it is a message that
warrants repeating. It is fact, the major central banks are all trying to
out-print each other with the hope that their currency will fall,
business profits will rise, employment will rise and the glory days will
return. Yet, the overwhelming tide of sluggish economic growth is
telling in simple terms, the World is increasingly becoming caught in
a deflationary trap and the window to escape is getting smaller and
smaller.
Yet, although the global economy is caught in a deflationary trap,
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Achtung Baby
the World has a head start in the latest round of currency devaluation
schemes.
As all markets and financial phenomena are interconnected, investors
should also consider what happens next with the Australian Dollar.
The AUD has skyrocketed 80% since the dark days of 2009, yet for the
past 2 years the currency has become the epitome of stability. Since
money never sleeps, expect a breakout move at some time soon.
Chart 2 (next page) shows the AUD is poised to break out of a
narrowing technical trend, and when you consider the recent
disconnect between commodity prices and AUD, the break in trend is
likely to be on the downside.
Our Strategy
Despite volatile, headline producing moves, global stock markets
continue to tread water and have traded flattish since the end of
January. During this time, we have waited patiently for sentiment and
technical measures to lead the way to a re-entry point. Yet, various
sentiment indicators still signal downside risk, while the combination
of fewer and fewer stocks making new highs, combined with
weakening emerging markets are signals for investors to remain
cautious.
As all financial markets have corrections the time between such
downturns vary. Yet, it is worrying that it has been 100 days since
American stocks have declined -5%, 382 days since a 10% correction
and 1,031 days since a market drop of over 20%. The message is loud
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Achtung Baby
AUD inflection
point approaching
It is unusual
for AUD to
disconnect
from
commodity
prices
Source: TheShortSideOfLong.blogspot.com
Copyright 2012 Ned Davis Research, Inc. Further distribution prohibited without prior
permission. All Rights Reserved. See NDR Disclaimer at
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Source: Markit Economics, IceCap Asset Management Limited
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Achtung Baby
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