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* 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
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
“
“
* 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 | 2
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 3
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 4
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 5
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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 info@aasecon.com.
* 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 | 6
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 7
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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. $
* 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 | 8
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 9
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 10
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 11
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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 (
%)
* 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 | 12
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 13
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 14
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
(%
)
* 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 | 15
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
(%
)
* 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 | 16
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 17
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 18
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 19
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
%
* 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 | 20
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 21
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 22
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 23
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 24
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 25
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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%
* 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 | 26
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 27
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
12mma (inc. forecast)
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
12mma (inc. forecast)
AASE
Forecast
YE
N P
ER
US
$
* 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 | 28
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
12mma (inc. forecast)
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
12mma (inc. forecast)
AASE
Forecast
SH
EK
EL P
ER
US
$
* 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 | 29
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
12mma (inc. forecast)
AASE
ForecastUS
$ P
ER
RO
UB
LE
* 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 | 30
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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
* 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 | 31
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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.
* 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 | 32
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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".
* 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 | 33
Dr. Frank Shostak - Chief Economist/Director
fshostak@aasecon.com
Peter Stellios (M.Ec.) - Senior Economist
pstellios@aasecon.com
Derek Sicklen (B.Ec., Dip. Ed) – Consultant
dsicklen@aasecon.com
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 info@aasecon.com.
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