On Living in a QE World, Asset Returns Forecast, and an Ayurvedic Home Remedy!

From : Aditya Rana Date: 2012/2/5
Subject: On Living in a QE World, Asset Returns Forecast, and an Ayurvedic Home Remedy!


Global markets have had a great start to 2012, driven by improving fundamentals and unprecedented levels of monetary easing by central banks around the world. While the economic fundamentals, particularly in the US, have shown signs of improvement the likelihood of sustainable growth at levels comparable to previous post-recovery periods (for developed economies) remains low. However, central banks around the world have engaged (and are likely to continue to do so) in QE policies on a scale which has no historical precedent, thereby providing a strong underpinning to financial markets. James Bianco (via Big Picture) , who runs Bianco Research, posted an illuminating piece on the extent of QE undertaken by the major central banks. To summarise:

-The eight largest central banks – the Fed, ECB, the Bank of Japan (BOJ), the Bank of England (BOE), the Bundesbank, the Banque de France, the People’s Bank of China (PBOC) and the Swiss National Bank (SNB) are all engaged in massive increases of their balance sheets via increased banking reserves – i.e. Quantitative Easing (QE) , with most of them making all-time highs.

-For sake of comparison, the balance sheets are converted into US$, and the four biggest are presented below in the graph. The largest balance sheet is of the PBOC (about $4.5 trillion), followed by the ECB ($3.6 trillion) , the Fed ($2.9 trillion) and the BOJ ($1.8 trillion).

-The other four central bank balance sheets are somewhat smaller ranging from the Bundesbank ($950 billion) to the SNB ($400 billion).

-The following graph depicts the total balance sheets of all eight central banks – they have almost tripled over the last six years from $ 5.42 trillion to $15 trillion (as of October 2011) and are still rising.

-The purpose of QE (as explained by the BOE) is to increase bank reserves by purchases of fixed-income securities, thereby pushing yields lower and making them unattractive for investors to hold and pushing them into higher risk assets like stocks. The rising stock prices translates into higher economic growth via the wealth effect.

-So how does the size of the eight central bank balance sheets ($15 trillion) compare with the total capitalization of the world’s stock markets ($48 trillion) historically?

-Prior to the 2008 crisis ( as shown in the graph below) , central bank balance sheets were less than 15% of the world stock markets – rising to 37% in the aftermath of the Lehman collapse, as market capitalizations fell dramatically and balance sheets expanded via “lender of last resort” loans.

-Recently, they have risen back to 33% of (much higher) global stock markets, with the balance sheet expansion coming via QE expansion which entails “printing money” rather than lender of last resort loans which merely shifts assets around in the system.

– “Central banks are ruling markets to a degree this generation has not seen. Collectively they are printing money to a degree never seen in human history”.

– “The tipping point between balance sheet expansion being bullish for risk assets versus bearish is impossible to know. Given the growth rate of central bank balance sheets around the world over the past few years, we might not have to wait too long to find out. Enjoy it while it is still bullish”.

Central bank QE policies are the single most important factor at work today – impacting both financial markets and global economies providing an attractive risk/reward scenario for investors – if economic growth accelerates, risk assets rise even though the requirement for further QE eases somewhat, while if economic growth decelerates, risk assets (after an initial downdraft) recover rapidly as the prospects for further QE increases. So provided one is able to withstand market volatility, it makes sense to build exposure to risk assets on market downturns and keep a core long position during market upturns (with perhaps some trimming of long positions when markets get euphoric).

A balanced portfolio diversified between global energy and commodity stocks, US high quality, EM stocks (China, India, Brazil and select others), EM local currency and US$ bonds, US credit, cash and gold should be able to provide a 5 to 7% real per annum return over a 3 to 5 year time horizon. As I noted in my last newsletter of 2011, that following the simplistic “reversal of fortunes” principle the major markets likely to outperform in 2012 were the market which underperformed in 2011 – i.e. India, China, Brazil and Europe. While a month does not a year make, it is interesting to note the relative performances in January of the major stock markets:

-For investors with a long-term investment horizon, it is instructive to note the latest 7-year forecast of real returns made by the well known value money manager GMO. They expected EM stocks to be the best performing asset class with an annual real return of 6.8%.

“Everybody is Unhappy” – a relevant quote for current markets from the legendary strategist and investor Bob Farrell:

“Money managers are unhappy because 70% of them are lagging the S&P 500. Economists are unhappy because they do not know what to believe: this month’s forecast of a strong economy or last month’s forecast of a weak economy. Technicians are unhappy because the market refuses to correct and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S. they have missed a big double play: a big currency move plus a big stock market move. The public is unhappy because they just plain missed out on the party after being scared into cash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise? Frustrating the majority is the market’s primary goal.”

… Bob Farrell, Merrill Lynch; September 1989

An Ayurvedic Home Remedy (Dr. Vasant Lad, Dr. Bhagwan Dash):

Diabetes is a rapidly growing global epidemic , and Ayurveda has a long tradition in managing it. It is viewed to be a metabolic khapa (water element) type disorder where the body’s digestive fire (agni) is diminished leading to high blood sugar in the blood. To treat high blood sugar the following herbal mixture is recommended:

guduchi 1part, shardunika 1 part, kutki 1 part, punarnava 2 parts. 1/2 tsp 3 or 3 times day with warm water.

-A simple, yet effective, way to control blood sugar is to use turmeric. Have a capsule of turmeric a few minutes before meals, 3 times a day. Clinical studies have shown turmeric to potentially reduce the requirement for insulin for insulin dependent persons.

-To help regulate blood sugar levels, take 1/2 tsp of ground bay leaf and 1/2 tsp if turmeric, mixed in 1 tbsp of aloe vera gel before lunch and dinner.

Karela (bitter gourd) is useful in treating this condition, with the juice of the leaves and fruit of the plant in doses of 30 ml twice a day on an empty stomach.

Shilajeet (Himalayan mineral pitch) is highly recommended for diabetes.

-Follow a khapa pacifying diet, especially avoiding excess intake of sweets, carbohydrates, and dairy products, while increasing intake of fresh vegetables and bitter herbs.

-Keep a glass of water in a copper vessel overnight and have it in the morning.

-Helpful Yoga postures include Sun Salutations, Peacock pose, Locust pose, Forward bend, Leg lift, Chest-knee pose and Alternate Nostril breathing.

A quote sent by a friend: “Be like the sun for grace and mercy. Be like the night to cover others’ faults. Be like running water for generosity. Be like death for rage and anger. Be like the Earth for modesty. Appear as you are. Be as you appear.” ― Rumi




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