John Butler Managing Partner of Amphora Ltd

John Butler

Managing Partner of Amphora Ltd

#soundmoneyconf

AMPHORA CAPITAL LLPPROTECTING WEALTH | ENSURING LIQUIDITY

CONFESSIONS......OF A FORMER “BOND BUG”

John ButlerManaging PartnerAmphora Capital

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The tech bubble: 1996-99Once upon a time, bonds were OUT: And equities, especially growth and tech, were IN. But the “Bond Bugs” were sceptical

S&P total return index

JPM Agg

Source: Bloomberg LP

The tech meltdown: 2000-03Then came the meltdown: And bonds had one of their greatest bull markets in history, bringing many “Bond Bugs” out of hiding

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S&P total return index

JPM Agg



The dollar meltdown: 2000-04Once USD rates fell to 2%, global investors determined that rates were undesirably low and sought yield elsewhere

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DXY dollar index

USD 6M LIBOR



The “Duration Paradox”As US rates plummeted, investors began to consider that the US might get stuck, like Japan, in a “liquidity trap”. Yield curves can do strange things as interest rates approach zero!


The zero bound

Yield

Maturity

(1)

(2)

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Bears position here

Bulls here

Bears position here

Bulls here

But rates were low everywhereThe ECB, BoE and BoJ were all slashing rates: And no one wanted a strong currency. Was there no place left to hide?


Interest rates, June 20036M 10Y

USD 1.0% 3.4%

EUR 2.1% 3.7%

GBP 3.5% 4.1%

JPY 0.1% 0.8%Source: Bloomberg LP

There was!When central banks seek to reflate, risk-averse investors can respond by hedging against inflation. As interest rates approach zero, so does the opportunity cost of holding real assets as a hedge

When insurance is cheap, you buy more: As global interest rates declined, so did the opportunity cost of holding real assets

Real assets are relatively fixed in supply: If fiat currencies offer little or no interest rate compensation for the actual or perceived risk of rising supply, investors will naturally turn to alternative stores of wealth

In an extreme case, investors could force the world onto a de facto gold standard: They need only value currencies as theoretical claims on official gold reserves!


A de facto gold standard?Simply divide the monetary base by the official gold reserves: And then exchange currencies based on these values


Equilibrium gold prices and implied FX rates under ade facto gold standard (as per August 2003)

Gold Equilibrium ImpliedM0 reserve (troy oz, mn) gold price USD rateUSD 710bn 261 2,716 1.00EUR 529bn 396 1,335 2.03GBP 39bn 10.1 3,878 0.70JPY 104tn 24.6 4,212,857 1,551CHF 41bn 57.3 717 0.26

Source: Official central bank statistics; DrKW Debt research estimates

All that glitters...The FX implications of competitive devaluation

Published September 2003


But I confess...Clearly I missed the boat: I was hardly the first to figure this out. The great gold bull market began in 2001, when I was still touting bonds as the superior store of value!


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JPM Agg

GOLD


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John Butler

Managing Partner of Amphora Ltd

#soundmoneyconf

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John Butler Managing Partner of Amphora Ltd