Escolar Documentos
Profissional Documentos
Cultura Documentos
Our Conviction
Due to structural over-indebtedness and the resulting addiction to low/negative real
interest rates, we believe that the traditional approach to financial markets and asset
management is no longer beneficial for investors.
Therefore, at Incrementum we evaluate all our investments not only from the
perspective of the global economy but also in the context of the current state of the
global monetary regime. This analysis produces what we consider a truly holistic view
of the state of financial markets.
Financial markets have become highly dependent on central bank policies. Grasping the
consequences of the interplay between monetary inflation and deflation is crucial for prudent
investors.
We believe that the Austrian School of Economics provides us with the appropriate
intellectual foundation for our investment assessment and decisions, especially in this
demanding financial and economic environment.
60
y = 4,3817e0,0002x
R = 0,9915
50
40
GDP
30
20
10
0
16
13
yoy Growth
10
7
4
1
-2
-5
1952
3
1959
1966
GDP growth
Sources: Federal Reserve St. Louis, Incrementum AG
1973
1980
1987
1994
2001
2008
50
40
30
10
0
1971
1981
Base Money
1991
GDP
2001
2011
Once upon a time, credit doubled every 10 years. Since 2008, total credit (or debt) growth in the US has
slowed significantly. In order to generate sufficient GDP growth in the current debt-based monetary system,
an expansion in overall debt levels is required. Central banks and governments have been stepping in to
compensate for the reluctance of banks and individuals to expand credit.
Sources: Federal Reserve St. Louis, Incrementum AG
Household
142 tn
33
120
56
Corporate
87 tn
80
38
19
26
40
58
33
22
20
2000
Government
37
45
2007
2014
Financial
Global debt levels have increased by USD 57 trillion since 2007 this amount is around three times
annual US economic output! New government borrowing has recorded the highest growth momentum!
Difficult for us to spot the infamous deleveraging!
Source: McKinsey Global Institute, Haver Analytics, World Economic Outlook, IMF, Incrementum AG
30
CPI yoy
20
10
0
-10
-20
1775
1795
1815
1835
1855
1875
1895
Classic GS
1915
1935
1955
1975
1995
3000
CPI Basket
2500
2000
1500
1000
500
0
1775
1795
1815
1835
1855
1875
1895
1915
1935
1955
1975
1995
1800
1500
1200
900
600
300
0
1971
1976
1981
1986
1991
1996
USD
CAD
Euro
2001
2006
2011
GBP
The debt based monetary system needs rising commodity (therefore implicitly also long term rising
gold) prices! Thats essentially why we left the Bretton-woods system after all, to be able to debase
fiat currencies permanently! The more (nominal) debt is outstanding, the greater the urge for
debasement (i.e. inflation)!
Sources: Federal Reserve St. Louis, Incrementum AG
80%
60%
40%
20%
0%
ECB
BoJ
Jan. 2007
BoE
Jan. 2010
SNB
FED
Jan. 2015
The days of restrained monetary policy appear to be over. Several major central banks have
expanded their balance sheets many times over since 2007. The ECB has pursued a comparatively
restrictive monetary policy since 2008 however, with the implementation of Euro-QE, things
are changing radically. The FED moving back to normality* before the next crisis? No chance!
23.41%
SNB
Federal Reserve
20.30%
13.90%
9.53%
6.94%
1.60%
Gold
EZB
In contrast to fiat currencies, gold supply has grown by only 1.6% per year. This clearly
underscores its relative scarcity!
1 Dollar =
255 mg Gold
1 Dollar =
125 mg Gold
100
1 Dollar =
47 mg Gold
10
1968
1972
1976
1980
1 Dollar =
18 mg Gold
1984
1989
1993
1997
2001
2005
2009
2014
Given its high stock-to-flow ratio, gold is far more stable than paper currencies. Hence, lets look at
the dollar from a stable point of view: one US dollar costs 27 milligrams of gold!
10
1980:
227 Beer/Ounce
200
150
2011:
138 Beer/Ounce
1971:
48 Beer/Ounce
Average: 87
Beer/Ounce
100
50
0
1950
1960
1970
1980
1990
2000
2010
Whereas the price of a Mass (1 liter) of beer at the Munich Oktoberfest has increased from EUR
0.82 in 1950 to EUR 10 in 2014, the price in gold terms is close to its historical median. This is all
the more astonishing, considering that it is not only buying a beer, but buying a beer at an event
that has enjoyed enormous hype over the past few decades, which has made the Wiesn beer more
valuable!
Sources: www.HaaseEwert.de, Historisches Archiv Spaten-Lwenbru, Incrementum AG
11
*Note: Deleveraging may have taken place in some parts of the economy but in aggregate the total debt/credit has kept on
growing; Please refer to: http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/
12
1000
70
500
90
S&P500
G/S-Ratio
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
110
1990
There has been an astonishing synchronization between equity markets and the gold-silver ratio until
2011. A rising stock market almost always coincided with a declining gold-silver ratio, i.e. with silver
outperforming gold. This may have been due to re-inflation being accomplished with conventional
monetary policy i.e., credit expansion by commercial banks in previous cycles . This affected the
real economy more quickly and fostered consumer price inflation. This time, re-inflation has been
attempted by means of central bank securities purchases, which has led to price increases in
investment assets, but has not been able to spur consumer price inflation.
Source: Bloomberg, Incrementum AG
13
1901: 25x
1966: 24x
20
10
2015: 27x
Average: 16.6x
0
1881
1889
1897
1906
1914
1922
1931
1939
1947
1956
1964
1972
1981
1989
1997
2006
2014
Shiller PE
Equity bull markets like the current one are usually not a positive environment for the gold price. From
this perspective, it is plausible that the continuation of the gold bull market should coincide with the end
of this equity rally. However, the Shiller-PE, which calculates the inflation-adjusted average priceearnings ratio (10 years trailing) since 1881, signals that the outlook for US stocks does not appear very
enticing. The current level of 27x has been exceeded only twice in history.
14
55 bn.
351 bn.
312 bn.
1,240 bn.
1,270 bn.
2,145 bn.
2,869 bn.
5,037 bn.
7,599 bn.
18,148 bn.
A glance at the market capitalization of gold mining companies shows a similar valuation
discrepancy. Currently, the Gold Bugs Index, which includes the 16 largest unhedged gold
producers, is valued at a mere USD 55 billion. Compared to the S&P 500, this market capitalization
is tiny, amounting to 0.3% of the index. The market capitalization of Microsoft alone is more than 6
times higher than that of all components of the Gold Bugs Index combined.
Sources: Blooomberg, Federal Reserve St. Louis, Incrementum AG
15
Gold Miners Are Dirt Cheap Not Only Compared To Other Sectors;
Relative To Gold They Are At The Lowest Level Since 1942!
7
Mean: 1.56x
0
1939 1943 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
BGMI/Gold-Ratio
The Barrons Gold Mining Index (BGMI) is the oldest available gold index. It recently
reached its lowest level relative to gold in more than 70 years. The current ratio of 0.4
is significantly below the long-term mean of 1.56. This is a clear indication of just
how undervalued gold stocks have become!
Sources: Nick Laird, Sharelynx.com, www.nowandfutures.com, Barrons, Incrementum AG
16
High Debt Levels And Rising Rates What Interest Rates Other Than
Zero Could Governments Be Able To Pay?
25
U.S. Recession
20
U.S. Recession
7/90 - 3/91
Credit Crisis
"Latin American
Debt Crisis"
"U.S. Banking
Crisis"
15
U.S. Recession
12/07 - 6/09
U.S. Recession
3/01 - 11/01
Credit Crisis
"S&L Crisis"
10
Credit Crisis
"Mexican Peso
Crisis"
Credit Crisis
"Dot Com Bust"
Credit Crisis
"Subprime Loan
Crisis"
Will 25 BP increase
+ quantitative
tightening pop this
bubble?
0
1975
1980
1985
1990
1995
2000
2005
2010
2015
This long-term chart of US policy rates reveals that rate hikes have always been followed by
recessions and financial crises. Low interest rates are a trap, as people and governments
engage in low marginal-return projects that cannot survive rate hikes. This time around talks
of a rate increase and quantitative tightening (which is happening via EM Central Banks
which have to sell T-bonds) could trigger the next crisis.
Sources: RealForecasts.com, Federal Reserve St. Louis, Incrementum AG
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60
50
40
30
20
10
0
1950
WORLD
1970
China
1990
Japan
2010
Germany
2030
South America
2050
2070
2090
18
The FEDs Dilemma: Delivering Rate Hikes And Popping The Bubble Or
Keep Procrastinating?
3
-1
19
2100
2000
1900
1800
1700
1600
09/2013
12/2013
03/2014
06/2014
09/2014
12/2014
03/2015
06/2015
We are convinced the FED would not stand by if the market fell another 10%-15%! Intervention via
communication or more easing if necessary would definitely be the result of a further declines in
equity prices. In this case fed-fund rates will drop like a stone. In or view an OTM equity put spread
could elegantly finance a call for the respective OTM call on the eurodollar (money market) future.
Sources: Federal Reserve St. Louis, Incrementum AG
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Silver
89%
1814-1830
-24%
-23%
-65%
-50%
-31%
-5%
5.60%
27%
44%
Commodities
40%
100%
Gold
1864-1897
1929-1933
2008
Deflationary periods represent a positive environment for gold, which is especially evident in the long
term. Gold has clearly gained in purchasing power during times of deflation. Moreover, this chart also
demonstrates clearly why gold in particular is a monetary asset, and not just another commodity.
BEWARE: Times of disinflation (defined as slowing consumer price inflation) are Golds enemy!
Sources: Roy Jastram, The Golden Constant bzw. Silver, the Restless Metal, Incrementum AG
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Our Approach:
Being Prepared For Inflation And Deflation!
Monetary Seismograph
22
Our 10 Conclusions:
In an over indebted world with insufficient real growth aggressive re-flation (i.e. higher nominal
growth) seems to be the only feasible way out for policy makers. NOTE: Reflation in the current
global USD-centric monetary order means a weaker USD - especially vs. oil/commodities.
The Problem is, deflationary forces have been massively increasing during the past 12 months, our
Inflation Signal once again has been signaling major deflation to us since the beginning of July!
Strong USD, weak oil, slowing growth (China!) could trigger debt defaults and send shockwaves
throughout the financial system which again would trigger another (deflationary) financial crisis.
The FED is NOT out of bullets, for now it is still reluctant to use them before we are at least close to
a full fledged crisis; currency swaps, QE and negative interest rates are all on the table.
Traditional protection for equities (puts) by now are somewhat expensive, especially in comparison to
some short term interest rates (eurodollar). In our opinion it is quite a safe assumption, that the FED
would reverse course if US equities sold off further 10-15%.
A major deflationary event and (potentially internationally coordinated) reaction of central banks could
finally be the trigger for the transition from deflation to stagflation!
Today ideas like a self sustaining recovery and escape velocity are pure fantasies as the debt
induced growth model of the past decades is very close to its limits.
Shorting equities is a tricky business in an increasing volatility environment but could prove to be an
interesting macro play until the FED gives in. Also watch out for a USD selloff when that materializes!
IV.
APPENDIX
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About Us
About the In Gold we Trust report:
The 9th annual In Gold we Trust report was written by Ronald Stoeferle. The last 3 years, it is co-authored by his fund management
partner, Mark Valek. It provides a holistic assessment of the gold sector and the most important influencing factors including: real interest
rates, opportunity costs, debt, demographics, demand from Asia, etc.
The In Gold we Trust report has been endorsed by the following highly renowned companies: Philoro EDELMETALLE GmbH, Mnze
sterreich AG, LPM-Group, Bullion Capital, GUSSA and Tocqueville Asset Management LP.
About Us
Our Investment Principles are based on the Austrian School of Economics. We sincerely believe that the
Austrian School of Economics provides us with the appropriate intellectual foundation especially in this
highly demanding financial and economic environment.
Austrian Investing
Precious Metals
Absolute Return
Bottom Up Fundamental Research
Incrementum AGs partners are highly qualified and have over 140 years of combined banking experience.
Prior to joining the company, the partners held positions at UBS, Dresdner Bank, Lombard Odier, Darier
Hentsch & Cie., Cantrade Private Bank, PBS Private Bank, Bank Leu, Pictet & Cie., Bank Sal. Oppenheim,
Merrill Lynch, Raiffeisen Capital Management, Erste Group and Socit Gnrale.
For further information please visit: www.incrementum.li
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For further information about the Austrian School please visit our webpage:
http://www.incrementum.li/austrian-school-of-economics/an-introduction-to-the-austrian-school-of-economics
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