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

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

Sep 21, 2023 211 likes •619 views

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 whos been swimming naked . Warren Buffett Andrew

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Turning of the Tide

Late Cycle

Andrew Shortreid, Aventine Investment Management Karl Schamotta, Cambridge Global Payments

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Turning of the Tide

Late Cycle

Andrew Shortreid, Aventine Investment Management Karl Schamotta, Cambridge Global Payments

When the tide goes out, you see who’s been swimming naked.

Warren Buffett

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

Financial Repression

Growth Model

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SLIDE 4

0.6 0.5 0.4 0.3 0.2 0.1

Currency Repression

Tax On Imports

USDCNY

1980 - 2015

Source: State Administration of Foreign Exchange, 2015

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SLIDE 5

40% 10% 20% 30%

BRA GER RUS AUS IND ITA FRA USA CAN RSA KOR MEX UK CHF JPY CHI

137th Lowest

Yield Repression

Tax On Savings

Average Real Interest Rate

1980 - 2014

Source: World Bank, 2015

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SLIDE 6

1000% 800% 600% 400% 200%

China

Monetary Repression

Tax On Wages

M2 Money Supply, Rebased to 100 Monthly, Not Seasonally Adjusted

2000 January - June 2015

Source: Federal Reserve, 2015

USA Japan Euro

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SLIDE 7

Europe North America South America World Africa Asia

5% 10% 15% 25% 20% 30%

Diminishing Returns

Manufacturing % of GDP

1972 - 2014

Source: World Bank 2015

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SLIDE 8

Slowing Absorption

Trade Surplus Narrowing

Current Accounts Constant Dollars, Billions 1990 - 2015

Source: International Monetary Fund, Cambridge Calculations, 2015

1500 1000 500

  • 500
  • 1000

ASIA JPY EU USA OTH CHI OIL

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SLIDE 9

Yijinhuoluoqi Nanguan Yuhong Kerqin Dongling Saihan Jinnan Dongsheng Dongying Rushan Rugao Zhuji Shuangliu Qionghai Wenchang

Resource Misallocation

Ghost Cities

Largely Vacant Urban Areas

2015

Source: Baidu Research, 2015

Xinghua Changshu Xiaoshan Donggang Binhai

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SLIDE 10

Resource Misallocation

Ghost Cities

Largely Vacant Urban Areas

2015

Source: Baidu Research, 2015

+ Commodities + Equities + Industry + Infrastructure

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2003 1993 1998 2008 2014 1988

100 80 60 40 20

Artificial Growth

Productive Outlets Shrinking

Gross Domestic Product Private Sector Debt Billions, Yuan

Source: Bank for International Settlements China, 2015

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SLIDE 12
  • 26.9%

USD

  • 2.2%

CNY

  • 5.3%

GBP

  • 7.2%

KRW

  • 11.2%

TWD

  • 13.5%

SGD

  • 15.6%

THB

  • 17.4%

CHF

  • 21.8%

NZD

  • 23.7%

EUR

  • 23.8%

DKK

  • 25.7%

SEK

  • 27.4%

CAD

  • 29.5%

MXN

  • 30.2%

MYR

  • 32.4%

INR

  • 33.9%

AUD

  • 34.9%

JPY

  • 36.4%

NOK

  • 51.3%

ZAR

  • 58.9%

BRL

Global Impact

Emerging Markets, Commodity Bloc

USD Exchange Rate, Change USD Trade-Weighted Broad Index 2011 September - November 2015

Source: Federal Reserve, 2015

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SLIDE 13

Australia Taiwan Korea Chile Japan Brazil Malaysia Phillipines Thailand Indonesia Singapore South Africa United States Argentina Russia Euro Area India United Kingdom

10% 20% 30%

Not World’s Growth Engine

Commodity Exposures Most Significant

Export Dependence On China

2014

Source: World Trade Organization, World Bank, 2015

% of Exports % of GDP

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900% 200% 300% 400% 500% 600% 700% 800%

Potentially Becoming Net Contributor

Income Redistribution Underway

Total Wage Bill of Urban Employed, % Change Gross Domestic Product, % Change

2000 - 2014

Source: National Bureau of Statistics, China, 2015

Wages GDP

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

300,000 250,000 200,000 150,000 100,000 50,000

Rebalancing Underway

Services Eclipsing Manufacturing

Value-Added, 100 Million Yuan

Source: National Bureau of Statistics, China, 2015

Primary Secondary Tertiary

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  • 500bn
  • 1000bn

500bn 1000bn

Capital Outflows Surging

Demand for International Assets

Net Capital Flows Current Prices, USD Equivalent

2000 Q1 - Q3 2015

Source: State Administration of Foreign Exchange, 2015

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SLIDE 17

PBOC Counteracting

Foreign Exchange Reserves

Billions, USD

2011 January - June 2015

Source: People’s Bank of China, 2015

4000bn 3800bn 3600bn 3400bn 3200bn

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0.160 0.156 0.162 0.158

SDR Inclusion Looming

Potential Devaluation?

USDCNY

2015 January - November 2015

Source: Federal Reserve, 2015

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180% 160% 140% 120% 100%

Commodity Cycle Incomplete

Potential For Further Depreciation?

Real Non-Fuel Primary Prices Index 2005 = 100, Deflated By Export Prices

1850 January - September 2015

Source: International Monetary Fund, 2015

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x

6% 4% 2% 8%

  • 2%

Exogenous Tightening

Central Bank Liquidity Injections % of Global Gross Domestic Product Net 12-Month Change 2005 - 2015

Source: Respective Central Banks, Cambridge Calculations, 2015

FED ECB BOJ ADV EM

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Stimulus Spending Increasing

Potential Canadian Dollar Volatility

Fiscal Spending Year Over Year, % Increase

2014 May - October 2015

Source: Ministry of Finance, China, 2015

0% 5% 10% 15% 35%

  • 5%

20% 25% 30%

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1,389

1,033

864

502

322

2001 2004 2007 2010 2013

Growth of Capital Flows

Global Currency Turnover / Gross Domestic Product Trillions USD

Source: Bank for International Settlements, International Monetary Fund, 2015

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“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

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z

Time Focus on the Slopes

Everything Important Happens at the Margins

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Loss of Pricing Power…

Growth, Year Over Year Inflation, Year Over Year 2010 - 2015

Source: Thomson Reuters

1.0% 0.5%

  • 0.5%
  • 1.0%
  • 1.5%

0.0%

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Pressuring Margins and Confidence

Business Confidence Operating Profit Margin 1985 - 2015

Source: Thomson Reuters

40% 20%

  • 20%
  • 40%
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Forcing Companies to Buy Growth…

Global M&A Volume, Billions Over $10bn, Percent

Source: Bloomberg

2015

4 40%

2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

3 30% 2 20% 1 10%

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SLIDE 28

…and Cut Jobs

12 Month Change Low-Paying Jobs High-Paying Jobs 2008 - 2015

Source: Capital Economics

200 100

  • 200
  • 400
  • 100
  • 300
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Leading to Lower Sales…

Retail Sales, Year Over Year Employment, Year Over Year 1996 - 2015

Source: Thomson Reuters

8%

  • 6%
  • 4%
  • 2%

0% 2% 4% 6%

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…and Higher Inventories

Customer Inventories 1997 - 2015

Source: Thomson Reuters, 2015

55 50 40 35

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CNY

0%

BRL

0%

RUB

11%

ZAR

16%

CAD

33%

IDR

32%

AUD

32%

USD

89%

GBP

63%

INR

61%

EUR

56%

THB

50% 44%

MXN JPY

44%

TWD

37%

KOR

36%

TRY

34%

Looking at the Bigger Picture…

Bloomberg Consensus 2016 Real GDP Estimate, Percentile of Trailing 10Y Sample

Source: Bloomberg, 2015

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55 53 51 49 47

World’s Factory Is In Trouble

Manufacturing Purchasing Manager Indices 2013 Oct - Sep 2015

Source: Institute for Supply Management, Markit ,2015

Taiwan China Indonesia Korea

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What Can Be Done About It?

Growth Decelerating As Inflation Decelerates Market Regime: Cooling Monetary Policy = Dovish Growth Decelerating As Inflation Accelerates Market Regime: Stagflation Monetary Policy = Handcuffed Growth Accelerating As Inflation Accelerates Market Regime: Warming Monetary Policy = Hawkish Growth Accelerating As Inflation Decelerates Market Regime: Perfection Monetary Policy = Neutral

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Q2 2015 Q3 2015 Q1 2015 Q1 2014 Q4 2014 Q3 2014

1.2 0.8

  • 1.2
  • 0.8
  • 0.4

0.4

  • 0.2
  • 0.4
  • 0.6
  • 0.8
  • 1

0.2 0.4 0.6 0.8 1

Q4 2013 Q3 2013 Q2 2014

What Can Be Done About It?

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Portfolio Implications

30% Frequency 3% Annualized Equity Return Cooling 10% Frequency

  • 6% Annualized Equity Return

Stagflation 45% Frequency 7.5% Annualized Equity Return Warming 15% Frequency 15% Annualized Equity Return Perfection

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Portfolio Implications

Average Rolling 52 Week 2012 - 2015

Source: Thomson Reuters, 2015

Global Real Estate Arbitrage Hedge Funds Synthetic Preferred Long Term Government Total Return Gold Emerging Equities Developed Equities High Yield Bonds GSCI

.11 .46 .60 .64 .69 .01

  • .41
  • .08
  • .04

.00

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Strategy

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

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

Benjamin Graham

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Thank You!

Andrew Shortreid

Aventine Management Inc. as@aventine.ca

Karl Schamotta

Cambridge Global Payments kschamotta@cambridgefx.com