MAVERICK - AAS Econ · AASE US Long-Only Sector Proforma Portfolio* AASE US Long-Only Sector...

* 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.

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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]

As the outlook for most equity markets

deteriorates there is a renewed need to

consider long/short as a component of

capital preservation.

S&P500 Index & AAS Economics Forecast

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US S&P500

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THE

MAVERICK

September, 2017

“

“

mailto:[email protected]






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Highlights

Time for Long/Short at this Stage of the Cycle

The rate of money creation by major central banks is slowing dramatically. The rate of decline in annual money supply growth in the US, for example, is the sharpest since the 1950s (see chart below).

Maximum 12mth Contraction in US Money Supply

Growth (% pts)

Our forecasts for major equity markets, driven largely by these changes in monetary conditions, are reflecting this new environment and the picture is deteriorating.

S&P500 Index & AAS Economics Forecast

STOXX50 Index & AAS Economics Forecast

Nikkei225 Index & AAS Economics Forecast

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The time has come to consider adding more

protection to stock portfolios. Previously we

have done this in the long-only space through

the use of aggressive, business-cycle-driven

sector rotation strategies such as that for the

US, shown in the chart opposite.

AASE US Business Cycle Equities Proforma*

Now it may be time to add more downside

protection by increasing the weighting to

long/short equity strategies. Here we take the

same business cycle approach we have used

in the long-only world and apply it to

long/short. Proforma results suggest that this

may be a viable option for reducing

drawdowns in the challenging period ahead.

Return Comparison in Negative S&P Years*

AASE Eurozone Long/Short Proforma NAV*

AASE Japan Long/Short Proforma NAV*

50

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AASE Sector Rotation Strategy

S&P Total Return

Negative

S&P Return

AASE

Approach

1973 -13.40% 5.53%

1974 -26.46% -17.96%

1977 -7.16% 1.49%

1981 -4.92% 14.08%

1990 -3.10% 6.71%

2000 -9.10% -6.53%

2001 -11.89% 56.25%

2002 -22.10% -0.52%

2008 -37.00% 19.60%

Average: -15.02% 8.74%

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AASE Japan Long/Short Proforma

TOPIX

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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





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Long/Short Positioning for the US Cycle

As the economy moves inexorably through its cycle (courtesy of the monetary expansion and

contraction of central and commercial banks) different sectors win and lose. Within those sectors

there are individual companies whose fortunes wax and wane.

Although we are not stock pickers our highly effective monetary analysis has provided us with a

window into the relative performance of equity sectors over the duration of the business cycle

and this allows us to help clients with their choices of individual issues.

Our method is to use changes in our measure of money supply, which is a compilation of various

components of conventional money supply together with others which derive from the principles

of Austrian economics. These changes in adjusted money supply affect the business cycle with

lags and we have studied these lags over many countries and many decades.

We normalize the growth rates of adjusted money supply and thereby create a notional monetary

cycle which is divided into four stages corresponding to the following diagram. Each of these

stages corresponds to a lagged stage of the business cycle.

Using the stage of the business cycle in sector weighting has worked well in

proforma models in the long-only world

The same paradigm applies in long/short

Index shorts or futures are used to reduce borrow costs

Testing suggests a reduction in drawdown by over 10%, lower volatility, and

correlation to equities at 0.46

Currently our model portfolio is market neutral with equal (33-1/3%) long positions

in Technology, Consumer Staples and Healthcare and a 100% short position in S&P

500 Index.







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AASE Business Cycle Staging Approach

A fuller description of the framework is provided in the Appendix.

Using this approach we are able to stage the business cycle and test how various assets have

performed historically in each of these stages. In the long-only equities world we notionally

allocate capital to the sectors of the market which the modelling has shown have done well in the

upcoming stage. Conversely we reduce weightings to sectors which have done poorly.

The proforma results of this process are shown in the tables and charts below.

AASE Business Cycle Model

Positive Growth

Negative Growth







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AASE US Long-Only Sector Proforma Portfolio*

AASE US Long-Only Sector Proforma NAV*

The same process can be applied in the long/short space.

We have introduced short selling in order to reduce the correlation with the Index while

preserving capital during market downturns. We use a similar staging methodology but we

introduce shorting as an overlay. In order to reduce the risks of high borrow costs all shorting is

done via the Index itself, either using ETFs or futures.

For each stage we assign a weight to each sector and these weightings represent the long sector

positions of the portfolio. We simultaneously allocate a weighting to the Index – in the US model

the S&P 500 Index – which is held as a short position. In summary, then, the portfolio is

ANALYSIS*

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

CAGR 14.74% 10.35%

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 9.2% 11.9%

1 Year Return 18.4% 16.2%


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S&P Total Return







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constantly long various sectors and short the Index in different percentages, depending on the

stage of the cycle as determined by the monetary economic analysis combined with backtesting.

The ungeared Index (short) versus Sector (long) configuration in each of the stages is as follows:

Thus in stage 2, for example, the ungeared portfolio is 60% net long while in stage 3 it is 40%

net long.

The actual gearing of the portfolio, however, is 2:1 – i.e. for each one dollar held the portfolio is

notionally managed as two dollars. Therefore the numbers above are doubled in the geared

portfolio.

For our notional US long/short portfolio*, which is geared 2:1, the proforma performance

statistics are as follows:

AASE US Long/Short Proforma Portfolio*

Stage Weightings Stage 1 Stage 2 Stage 3 Stage 4

Index 50% 20% 30% 40%

Sectors 50% 80% 70% 60%

ANALYSIS*

Feb-1973 to Aug-2017

AASE L/S Equity

StrategyS&P Total Return

CAGR 12.57% 10.35%


Std Dev 15.1% 15.2%


Sharpe 3% 0.63 0.48


YTD 1.8% 11.9%



Correlation to S&P500 0.46 1.00







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AASE US Long/Short Proforma NAV*

AASE US Long/Short Proforma Yearly Returns*

AASE Approach S&P Total Return AASE Approach S&P Total Return

1973 5.53% -13.40% 1996 1.42% 22.96%

1974 -17.96% -26.46% 1997 -17.16% 33.36%

1975 33.96% 37.22% 1998 69.57% 28.58%

1976 -9.75% 23.93% 1999 68.65% 21.04%

1977 1.49% -7.16% 2000 -6.53% -9.10%

1978 -2.33% 6.57% 2001 56.25% -11.89%

1979 1.95% 18.61% 2002 -0.52% -22.10%

1980 21.36% 32.50% 2003 53.08% 28.68%

1981 14.08% -4.92% 2004 0.90% 10.88%

1982 0.52% 21.55% 2005 2.43% 4.91%

1983 17.24% 22.55% 2006 14.61% 15.79%

1984 21.77% 6.27% 2007 4.15% 5.49%

1985 22.29% 31.73% 2008 19.60% -37.00%

1986 18.58% 18.67% 2009 6.65% 26.46%

1987 -3.56% 5.25% 2010 25.02% 15.06%

1988 11.15% 16.61% 2011 9.63% 2.11%

1989 16.62% 31.68% 2012 8.98% 16.00%

1990 6.71% -3.10% 2013 22.84% 32.39%

1991 34.14% 30.47% 2014 4.87% 13.69%

1992 12.15% 7.62% 2015 7.79% 1.38%

1993 23.25% 10.08% 2016 14.81% 11.96%

1994 8.48% 1.32% 2017 1.79% 11.93%

1995 17.67% 37.58%







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What appears as quite striking from these statistics is the performance comparison during years

when the S&P 500 return was negative. Since 1973 the average notional return of the portfolio

during negative S&P500 years was 8.74% while the average negative year for the S&P itself

was -15.02%. Preservation of capital during equity market drawdowns has been a major

objective of the AASE long/short approach.

Return Comparison During Negative S&P Years*

Given our medium term outlook for the S&P 500 (see the chart below) this may prove to be a prudent position to take.

S&P 500 Index & AASE Forecast

Negative

S&P Return

AASE

Long/Short

Model

1973 -13.40% 5.53%

1974 -26.46% -17.96%

1977 -7.16% 1.49%

1981 -4.92% 14.08%

1990 -3.10% 6.71%

2000 -9.10% -6.53%

2001 -11.89% 56.25%

2002 -22.10% -0.52%

2008 -37.00% 19.60%

Average: -15.02% 8.74%

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How is the US long/short portfolio currently positioned? As at September, 2017 the portfolio notionally holds the following positions:

AASE US Notional Long/Short Portfolio

September, 2017

Business Cycle Stage: 1

Long: Technology 33.33% Consumer Staples 33.33%

Healthcare 33.33% TOTAL 100.00%

Short: S&P 500 Index -100.00%

Net: 0.00%

Gross: 200.00%

Looking ahead to October, 2017 there is no change in the business cycle stage as determined by

US money supply dynamics and thus the portfolio composition will remain as above for October.

Long/Short Positioning for the Japanese Cycle

As with the US it is possible to apply our business cycle model to Japanese equities.

Again, as with the US we have used the TOPIX Index as the shorting vehicle and this can be

done using ETFs or through the futures markets.

The outlook for Japanese equities has deteriorated, in line with that for the US

Our proforma long-only sector model, driven by our business cycle analysis, has

shown protective characteristics in the past

By using the same method in a long/short context the proforma results suggest

greater downside protection combined with higher absolute return







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The business cycle modelling in the long-only world produced significantly better proforma

results than were delivered by the TOPIX Index over the test period. These are shown in the

tables and charts below

AASE Japan Long-Only Sector Proforma *

AASE Japan Long-Only Sector Proforma NAV*

ANALYSIS

Jan-1988 to Aug-2017AASE Approach* TOPIX

CAGR 3.90% -0.22%


Std Dev 17.7% 19.1%


Sharpe 3% 0.05 -0.17


YTD 3.9% 6.5%



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TOPIX







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When the process is applied in a long/short framework the results look even more promising*.

CAGR increases while maximum drawdown is reduced from 47.5% to 25.9%. Standard

deviation is also lower while the correlation with the Index drops from 0.85 to 0.39.

AASE Japan Long/Short Proforma*

AASE Japan Long/Short Proforma NAV*

ANALYSIS

Jan-1988 to Aug-2017AASE Approach* TOPIX

CAGR 8.80% -0.22%


Std Dev 16.6% 19.1%


Sharpe 3% 0.35 -0.17


YTD 0.7% 6.5%



Correlation 1.00 0.39

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TOPIX

50/50 Stocks/Bonds







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AASE Japan Long/Short Proforma Yearly Returns*

The ungeared Index (short) versus Sector (long) configuration in each of the stages is as follows:

As with the US model, the portfolio is geared 2:1 and thus in the portfolio these percentages are

doubled.

Once again there has been a large disparity of returns between TOPIX and the model in years

when the TOPIX return was negative. This reinforces the capital preservation characteristics of

the AASE long/short approach.

AASE Approach Topix AASE Approach Topix

1988 12.70% 36.57% 2003 -23.24% 23.76%

1989 -5.09% 22.25% 2004 5.22% 10.15%

1990 4.25% -39.83% 2005 38.08% 43.50%

1991 6.62% -1.10% 2006 4.26% 1.90%

1992 16.31% -23.74% 2007 0.27% -12.22%

1993 23.91% 10.07% 2008 36.79% -41.77%

1994 16.39% 8.32% 2009 15.55% 5.63%

1995 0.80% 1.19% 2010 5.03% -0.97%

1996 9.34% -6.77% 2011 -9.30% -18.94%

1997 40.97% -20.12% 2012 -6.17% 18.01%

1998 9.54% -7.49% 2013 29.83% 51.46%

1999 3.36% 58.44% 2014 2.91% 8.08%

2000 3.31% -25.46% 2015 9.83% 9.93%

2001 1.86% -19.59% 2016 15.29% -1.85%

2002 17.82% -18.30% 2017 0.73% 6.51%


Index 50% 20% 30% 40%

Sectors 50% 80% 70% 60%







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Return Comparison During Negative TOPIX Years*

The average negative year for the TOPIX was -17.01% whilst in these negative TOPIX years the

average notional return for the model portfolio was 11.29%.

As with the S&P 500 outlook, capital preservation may be important given our forecast for the

Nikkei.

Nikkei Index & AASE Forecast

The current structure of the model portfolio for the Japan long/short proforma is as follows:

TOPIX

Negative

Return

AASE

Model

1990 -39.83% 4.25%

1991 -1.10% 6.62%

1992 -23.74% 16.31%

1996 -6.77% 9.34%

1997 -20.12% 40.97%

1998 -7.49% 9.54%

2000 -25.46% 3.31%

2001 -19.59% 1.86%

2002 -18.30% 17.82%

2007 -12.22% 0.27%

2008 -41.77% 36.79%

2010 -0.97% 5.03%

2011 -18.94% -9.30%

2016 -1.85% 15.29%

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JAPAN NIKKEI 225 INDEX

MONTHLY

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AASE

Forecast







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AASE Japan Notional Long/Short Portfolio

September, 2017 Business Cycle Stage: 4

Long: Utilities 40.00% Consumer Staples 40.00%


Short: TOPIX Index -80.00%

Net: 40.00%

Gross: 200.00%

Long/Short Positioning for the Eurozone Business Cycle

The Eurozone, like the other markets addressed here, lends itself to a business-cycle-based

approach to equity investing.

The business cycle modelling in the long-only world produced significantly better proforma

results than those delivered by the Stoxx Index over the test period. These are shown in the

tables and charts below.

Our forecast for the STOXX 50 Index suggests considerable downside over the next

year

Although our long-only sector model shows excellent capital protection

characteristics, it may be time to consider an increased weighting to long/short

strategies that can offer additional protection

We have applied the same business-cycle-based approach to long/short and the

proforma results suggest better performance on both return and risk/return bases







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AASE Eurozone Long-Only Sector Proforma*

AASE Eurozone Long-Only Sector Proforma NAV*

By applying our long/short model to the Eurozone (using the Index as the shorting vehicle) the

performance advantages obtained from the long-only AASE model are further enhanced.

The CAGR increases by 3.4% pts p.a. while the maximum drawdown declines from 41.7% to

25.3%. Standard deviation also declines whilst the correlation with the Index drops from 0.84 to

0.29.

ANALYSIS*

Jan-1999 to Aug-2017AASE Approach* Stoxx 50E

CAGR 9.0% -0.2%


Std Dev 16.4% 18.5%


Sharpe 3% 0.36 -0.17


YTD 3.9% 4.0%



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AASE Eurozone Sector Rotation Strategy

EuroStoxx







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The summary tables and charts are shown below.

AASE Eurozone Long/Short Proforma*

AASE Eurozone Long/Short Proforma NAV*

ANALYSIS*

Jan-1999 to Aug-2017AASE Approach* Stoxx 50E

CAGR 12.4% -0.2%


Std Dev 13.1% 18.5%


Sharpe 3% 0.72 -0.17


YTD 1.2% 4.0%










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AASE Eurozone Long/Short Proforma Yearly Returns*

The Eurozone long/short framework has also performed well during periods of downturn in the

broad equities index. Since 1999, in every year that the Stoxx return was negative the long/short

portfolio returned a positive proforma result. This reinforces yet again the capital preservation

characteristics of the AASE long/short approach.

Return Comparison During Negative Stoxx50E Years*

Perhaps even more than with the S&P500, the challenging outlook for Eurozone stocks places a

significant degree of importance on utilising capital protection strategies over the next 12-18

months.

AASE Approach Stoxx 50E AASE Approach Stoxx 50E

1999 23.91% 32.06% 2009 3.57% 21.14%

2000 27.82% -2.69% 2010 16.87% -5.81%

2001 7.50% -20.25% 2011 9.01% -17.05%

2002 19.93% -37.30% 2012 1.58% 13.79%

2003 24.88% 15.68% 2013 11.07% 17.95%

2004 11.96% 6.90% 2014 5.19% 1.20%

2005 17.46% 21.28% 2015 5.90% 3.85%

2006 26.67% 15.12% 2016 14.97% 0.70%

2007 5.52% 6.79% 2017 1.18% 3.98%

2008 6.11% -44.37%

Stoxx 50E

Negative

Return

AASE

Approach

2000 -2.69% 27.82%

2001 -20.25% 7.50%

2002 -37.30% 19.93%

2008 -44.37% 6.11%

2010 -5.81% 16.87%

2011 -17.05% 9.01%







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Stoxx Index & AASE Forecast

The ungeared portfolio weightings in the model portfolio, by cycle stage, are as follows:

As with the other countries, we have applied a 2:1 gearing ratio so that the numbers in the table are doubled in in the model portfolio. The current model portfolio composition is as follows:

AASE Eurozone Notional Long/Short Portfolio September, 2017

Business Cycle Stage: 4

Long: Industrials 20.00% Oil & Gas 20.00%

Basic Materials 40.00%

Telecom 20.00% Consumer Disc 20.00%

Financials 20.00% TOTAL 120.00%

Short: Stoxx Index -80.00%

Net: 40.00%

Gross: 200.00%

4,000

3,600

3,200

2,800

2,400

2,000

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

EUROZONE STOXX50E INDEX

MONTHLY

IND

EX

AASEForecast


Index 50% 20% 30% 40%

Sectors 50% 80% 70% 60%







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Long/Short for Australia using the Business Cycle Model

As we have demonstrated in the past, in the long-only world the business cycle model can be

used with Australian equities.

The long-only business cycle modelling has produced significantly better proforma results* than

were delivered by the All Ords Index over the test period. These are shown in the tables and

charts below.

AASE Australia Long-Only Sector Proforma*

ANALYSIS*

Apr-2000 to Aug-2017AASE Approach* All Ords Index

CAGR 10.14% 3.57%

Maximum Drawdown -24.0% -51.4%

Standard Deviation 12.8% 12.9%


Sharpe 3% 0.56 0.04


YTD 8.8% 1.0%




The outlook for Australian equities does not look as severe as that for the US,

Japanese and Eurozone equities, but contagion risk is omnipresent

Our proforma long-only sector model*, driven by our business cycle analysis, has

shown protective characteristics in the past and has outperformed the All Ords

Index in both absolute and risk-adjusted terms

This performance advantage is extended in the long/short model with more than

double the returns of the Index and significantly higher Sharpe ratio







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AASE Australia Long-Only Sector Proforma NAV*

As before, when the process is applied in a long/short framework the results look even more

impressive. The shorting vehicle is the Index.

Whilst drawdown increases marginally, the CAGR also increases further rising from 10.14% to

12.54%. Although standard deviation also increases too, the Sharpe ratio rises from 0.56 to

0.64. Furthermore the correlation with the Index drops from 0.77 in the long-only equities

model to 0.33 in the long/short.

The summary tables and charts are shown below.

50

500

Ap

r-0

0

Jan

-01

Oct

-01

Jul-

02

Ap

r-0

3

Jan

-04

Oct

-04

Jul-

05

Ap

r-0

6

Jan

-07

Oct

-07

Jul-

08

Ap

r-0

9

Jan

-10

Oct

-10

Jul-

11

Ap

r-1

2

Jan

-13

Oct

-13

Jul-

14

Ap

r-1

5

Jan

-16

Oct

-16

Jul-

17


All Ordinaries Index







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AASE Australia Long/Short Proforma *

AASE Australia Long/Short Proforma NAV*

ANALYSIS*

Jan-1992 to Aug-2017

AASE

Approach*

All Ords

Index

CAGR 12.54% 5.00%

Maximum Drawdown -28.7% -51.4%

Standard Deviation 14.9% 13.2%


Sharpe 3% 0.64 0.15


YTD 5.6% 1.0%

1 Year Return -3.1% 4.5%



50

500

5000

Jan

-92

Feb

-93

Mar

-94

Ap

r-9

5

May

-96

Jun

-97

Jul-

98

Au

g-9

9

Sep

-00

Oct

-01

No

v-0

2

De

c-0

3

Jan

-05

Feb

-06

Mar

-07

Ap

r-0

8

May

-09

Jun

-10

Jul-

11

Au

g-1

2

Sep

-13

Oct

-14

No

v-1

5

AASE Australia Long/Short Proforma

All Ordinaries Index

50/50 Stocks/Bonds







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AASE Australia Long/Short Proforma Yearly Returns*

Whilst in some years the long/short model has experienced negative returns similar to those of

the All Ords index, on the majority of occasions the long/short model showed positive returns

during negative All Ords Index years. The average negative All Ords year during the test period

was -12.69% while during these same years the average proforma return of the long/short

model was -0.09%.

Return Comparison During Negative All Ords Years*

The ungeared portfolio weightings for each business cycle stage are shown in the table overleaf:

YEARLY

ANALYSIS*AASE Approach All Ordinaries

YEARLY

ANALYSIS*

AASE

ApproachAll Ordinaries

1992 17.37% -5.50% 2005 12.99% 16.18%

1993 55.54% 35.50% 2006 20.51% 19.87%

1994 -9.96% -12.15% 2007 6.04% 13.76%

1995 1.96% 15.69% 2008 6.83% -43.01%

1996 16.77% 9.88% 2009 58.48% 33.43%

1997 34.46% 7.26% 2010 2.09% -0.73%

1998 5.78% 4.56% 2011 -12.67% -15.18%

1999 38.29% 15.27% 2012 9.83% 13.46%

2000 6.43% 1.48% 2013 14.14% 14.76%

2001 23.39% 6.51% 2014 9.62% 0.66%

2002 -15.15% -11.44% 2015 10.84% -0.82%

2003 1.37% 11.11% 2016 3.11% 7.01%

2004 31.86% 22.60% 2017 5.64% 1.00%

All Ordinaries

Negative

Return

AASE Model

1992 -5.50% 17.37%

1994 -12.15% -9.96%

2002 -11.44% -15.15%

2008 -43.01% 6.83%

2010 -0.73% 2.09%

2011 -15.18% -12.67%

2015 -0.82% 10.84%







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Again, these are doubled, with gearing of 2:1 in the long/short portfolio. Actual model portfolio

composition for September, 2017 is as follows:

AASE Australia Notional Long/Short Portfolio

September, 2017 Business Cycle Stage: 3

Long: Oil & Gas 15.00%

Basic Materials 15.00%

Telecom 36.67% Consumer Staples 36.67%


Short: All Ords Index -60.00%

Net: 80.00%

Gross: 200.00%


Index 50% 20% 30% 40%

Sectors 50% 80% 70% 60%







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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







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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.







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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".







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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].





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