Late Cycle Turning of the Tide Andrew Shortreid, Aventine - PowerPoint PPT Presentation

Late Cycle Turning of the Tide Andrew Shortreid, Aventine Investment Management Karl Schamotta, Cambridge Global Payments

Late Cycle When the tide goes out, you see Turning of the Tide who’s been swimming naked . Warren Buffett Andrew Shortreid, Aventine Investment Management Karl Schamotta, Cambridge Global Payments

Peak GDP Growth Surplus Investment Income Human Capital Physical Capital Financial Repression Growth Model Financial Capital

0.6 0.5 0.4 0.3 Currency Repression Tax On Imports USDCNY 0.2 1980 - 2015 Source: State Administration of Foreign Exchange, 2015 0.1

40% 30% 20% Yield Repression Tax On Savings 137th Average Real Interest Rate Lowest 1980 - 2014 Source: World Bank, 2015 10% BRA GER RUS AUS IND ITA FRA USA CAN RSA KOR JPY MEX UK CHF CHI

China 1000% 800% 600% Monetary Repression Tax On Wages M2 Money Supply, Rebased to 100 Monthly, Not Seasonally Adjusted 400% 2000 January - June 2015 Source: Federal Reserve, 2015 USA Euro 200% Japan

Africa 30 % 25 % 20 % World Asia 15 % 10 % Diminishing 5 % Returns Manufacturing % of GDP 1972 - 2014 Source: World Bank 2015 South America Europe North America

1500 Slowing Absorption Trade Surplus Narrowing Current Accounts EU 1000 Constant Dollars, Billions JPY 1990 - 2015 CHI Source: International Monetary Fund, Cambridge Calculations, 2015 500 ASIA OIL USA -500 OTH -1000

Nanguan Kerqin Yuhong Dongling Saihan Resource Misallocation Binhai Dongsheng Yijinhuoluoqi Jinnan Ghost Cities Dongying Rushan Largely Vacant Urban Areas 2015 Donggang Xinghua Source: Baidu Research, 2015 Rugao Changshu Shuangliu Xiaoshan Zhuji Qionghai Wenchang

Resource Misallocation + Industry Ghost Cities Largely Vacant Urban Areas + Infrastructure 2015 Source: Baidu Research, 2015 + Commodities + Equities

100 80 2014 60 Artificial Growth Productive Outlets Shrinking Gross Domestic Product 40 Private Sector Debt 2008 Billions, Yuan Source: Bank for International Settlements China, 2015 20 2003 1998 1993 1988

-26 .9% -2 .2% GBP KRW TWD SGD THB CHF NZD EUR DKK SEK CAD MXN MYR INR AUD JPY NOK ZAR BRL USD CNY -5 .3% -7 .2% -11 .2% -13 .5% -15 .6% -17 .4% -21 .8% -23 .7% -23 .8% -25 .7% -27 .4% -29 .5% -30 .2% -32 .4% -33 .9% -34 .9% Global Impact -36 .4% Emerging Markets, Commodity Bloc USD Exchange Rate, Change USD Trade-Weighted Broad Index -51 .3% 2011 September - November 2015 -58 .9% Source: Federal Reserve, 2015

Australia Taiwan Korea Chile Japan Brazil Malaysia Phillipines Thailand Not World’s Growth Engine Indonesia Commodity Exposures Most Significant Singapore Export Dependence On China 2014 South Africa United States Source: World Trade Organization, World Bank, 2015 Argentina % of Exports % of GDP Russia Euro Area India 10 % 20 % 30 % United Kingdom

Wages 900% 800% 700% GDP Potentially Becoming Net Contributor 600% Income Redistribution Underway Total Wage Bill of Urban Employed, % Change 500% Gross Domestic Product, % Change 2000 - 2014 400% Source: National Bureau of Statistics, China, 2015 300% 200%

300,000 250,000 200,000 Rebalancing Underway 150,000 Services Eclipsing Manufacturing Value-Added, 100 Million Yuan Source: National Bureau of Statistics, China, 2015 100,000 Primary Secondary Tertiary 50,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Capital Outflows Surging 1000bn Demand for International Assets Net Capital Flows Current Prices, USD Equivalent 2000 Q1 - Q3 2015 500bn Source: State Administration of Foreign Exchange, 2015 -500bn -1000bn

4000bn 3800bn PBOC Counteracting 3600bn Foreign Exchange Reserves Billions, USD 2011 January - June 2015 Source: People’s Bank of China, 2015 3400bn 3200bn

0.162 SDR Inclusion Looming 0.160 Potential Devaluation? USDCNY 2015 January - November 2015 Source: Federal Reserve, 2015 0.158 0.156

Commodity Cycle Incomplete Potential For Further Depreciation? Real Non-Fuel Primary Prices Index 2005 = 100, Deflated By Export Prices 180% 1850 January - September 2015 Source: International Monetary Fund, 2015 160% 140% 120% 100%

8 % Exogenous Tightening Central Bank Liquidity Injections 6 % % of Global Gross Domestic Product Net 12-Month Change 2005 - 2015 Source: Respective Central Banks, Cambridge Calculations, 2015 FED ECB BOJ ADV EM 4 % 2 % x -2 %

35% 30% 25% Stimulus Spending Increasing Potential Canadian Dollar Volatility 20% Fiscal Spending Year Over Year, % Increase 2014 May - October 2015 15% Source: Ministry of Finance, China, 2015 10% 5% 0% -5%

Growth of Capital Flows Global Currency Turnover / Gross Domestic Product Trillions USD Source: Bank for International Settlements, International Monetary Fund, 2015 1,389 1,033 864 502 322 2001 2004 2007 2010 2013


 “Non-financial firms that use derivatives are typically larger and more profitable, and have lower volatility of earnings than those that do not use derivatives” Bank of Canada Use of Financial Derivatives by Canadian Firms Autumn 2014

Focus on the Slopes z Everything Important Happens at the Margins Time

1.0 % 0.5 % Loss of Pricing Power… 0.0 % Growth, Year Over Year Inflation, Year Over Year 2010 - 2015 -0.5 % Source: Thomson Reuters -1.0 % -1.5 %

40 % 20 % Pressuring Margins and Confidence Business Confidence Operating Profit Margin 1985 - 2015 -20 % Source: Thomson Reuters -40 %

4 40% Forcing 3 30% Companies to Buy Growth… 2 20% Global M&A Volume, Billions Over $10bn, Percent Source: Bloomberg 1 10% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

200 100 …and 0 Cut Jobs 12 Month Change -100 Low-Paying Jobs High-Paying Jobs 2008 - 2015 -200 Source: Capital Economics -300 -400

8 % 6 % 4 % Leading to 2 % Lower Sales… Retail Sales, Year Over Year 0 % Employment, Year Over Year 1996 - 2015 Source: Thomson Reuters - 2 % - 4 % - 6 %

55 50 …and Higher Inventories Customer Inventories 1997 - 2015 Source: Thomson Reuters, 2015 40 35

89 % Looking at 63 % 61 % the Bigger 56 % 50 % Picture… 44 % 44 % Bloomberg Consensus 2016 37 % 36 % 34 % Real GDP Estimate, 33 % 32 % 32 % Percentile of Trailing 10Y Sample Source: Bloomberg, 2015 16 % 11 % 0 % 0 % BRL CNY RUB ZAR IDR AUD CAD TRY KOR TWD JPY MXN THB EUR INR GBP USD

55 Taiwan 53 World’s Factory Is In Trouble China 51 Manufacturing Indonesia Purchasing Manager Indices Korea 2013 Oct - Sep 2015 Source: Institute for Supply Management, Markit ,2015 49 4 7

Growth Accelerating Growth Accelerating As Inflation Decelerates As Inflation Accelerates Market Regime: Perfection Market Regime: Warming Monetary Policy = Neutral Monetary Policy = Hawkish What Can Be Done About It? Growth Decelerating Growth Decelerating As Inflation Decelerates As Inflation Accelerates Market Regime: Cooling Market Regime: Stagflation Monetary Policy = Dovish Monetary Policy = Handcuffed

1.2 0.8 Q4 2013 Q3 2013 Q2 2014 0.4 What Can Be Q3 2014 Done About It? -1 -0.8 -0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1 Q4 2014 -0.4 Q1 2014 Q1 2015 Q3 2015 Q2 2015 -0.8 -1.2

15% Frequency 45% Frequency 15% Annualized Equity Return 7.5% Annualized Equity Return Perfection Warming Portfolio Implications 30% Frequency 10% Frequency 3% Annualized Equity Return -6% Annualized Equity Return Cooling Stagflation

.69 .64 .60 .46 .11 Portfolio .01 - .41 - .08 - .04 .00 Implications Synthetic Gold GSCI High Yield Emerging Developed Arbitrage Global Preferred Bonds Equities Equities Hedge Average Rolling 52 Week Total Real Estate Funds Return 2012 - 2015 Source: Thomson Reuters, 2015 Long Term Government

Strategy Allocate Risk, Not Capital Diversify By Regime Focus On Adding Value

“The essence of portfolio management is the management of ‘risks,’ not the management of ‘returns’.” Benjamin Graham

Thank You! Andrew Shortreid Aventine Management Inc. as@aventine.ca Karl Schamotta Cambridge Global Payments kschamotta@cambridgefx.com