On Whales and Planktons, Why Europe, Austeriy versus Spending and an Ayurvedic Approach to Sleep Disroders -Part 3!

From: Aditya Rana
Date: Sat, Jun 2, 2012 at 2:32 PM
Subject: On Whales and Planktons, Why Europe, Austeriy versus Spending and an Ayurvedic Approach to Sleep Disroders -Part 3!


Bill Gross, who co-runs the world’s largest bond manager PIMCO, has written an interesting monthly newsletter on the state of the current global monetary system in his usual inimitable style, replete with allegorical references. He makes the point that the low yields of government bonds in the developed world are due to central bank actions rather than private investors, and this coupled with the deteriorating quality of government credit, is likely to lead to a breaking point in the global system. To summarise:

-The economic and financial food chain can be compared to the food chains existing in the oceans where the mighty whales depend on the lowly plankton for their survival. In the financial world, the Fed and its member banks are the “whales”, while the small investors earning 0.01% on their deposits are the “plankton”.

-We have reached a point where the profits and compensation of the top 1% of the population (financial and non-financial) dominate wages of the 99% creating a massive imbalance.

-The global monetary system has evolved in the direction of always cheaper credit, finally reaching a point where it can no longer promote growth and a fair distribution of the benefits. The future therefore may not be so beneficial for the “whales” of the financial system.

-The global monetary system is basically how the world conducts and pays for commerce – and is highly dependent on the balance between the powerful creditors and the smaller debtors. The evolution of this system from a gold standard to a dollar based system relied on the “good behaviour” of the G-7 central bankers to keep a judicious supply of money and target inflation at 2%. This led to the “great moderation” and the ascendancy of the “whales”.

-However, in the aftermath of the crisis of 2008, actions by fiscal and monetary authorities have prevented significant haircutting of the approximately $200 trillion of financial assets in the system, but in the process have increased the risk and lowered the return on sovereign debt which forms the core of global assets.

-By increasing the risk and lowering the return of previously “risk-free” debt the global monetary system has reached a potential breaking point. With US debt being downgraded to AA+ and offering negative 2.0% real yields, creditor “whales” are being forced to move on the margin to real assets such as land, gold and tangible things or even cash.

-As the monetary system transitions to a new regime, it is typically the creditors (barring voluntary defaults) which establish the rules of the game, like France under Charles de Gaulle did in the 1960s by forcing the US to move to a new dollar standard. With dollar serves now held by countries like China, who may at the margin move assets to higher returning commodity/real assets, thereby bringing about a sudden or gradual reconfiguration of the dollar-based credit system.

-Additionally, private investor may also broaden their guidelines beyond their index constrained holdings, thereby changing the way in which credit is funded and disbursed – and cause a shift towards hard money or non-dollar based currency systems.

-This transition points towards higher global inflation as a solution to over-indebted balance sheets in the public and private sectors. Bond investors should therefore emphasise relative higher quality sovereign debt ( US, Mexico, Brazil) and intermediate maturities. Equity investors should favour stable cash-flow global companies with exposure to higher emerging market growth.

-Investors should be prepared to expect lower returns as the global monetary system transitions from excessive credit expansion to deleveraging economies and financial markets. This is because historically leverage always involved borrowing at a short-term rate and lending longer at a higher and riskier rate, practically guaranteeing returns over the policy rate for the last 30 years.

-However, with deleveraging producing narrower yield margins, lack of asset price appreciation and slowing lending (and borrowing), combined with negative real rates of 2-3%, the ability to lever financial returns has been negatively impacted thereby reducing return expectations for bond, equity and all other financial assets.

A wonderful illustration of the core issues facing global financial markets – low expected returns, higher inflation and riskier and low rate sovereign debt. As highlighted in previous newsletters, weighting asset portfolios towards EM equities and bonds, high quality multinationals, commodity stocks, land, gold and cash should provide the ability to generate reasonable (5-7%?) real returns after inflation.

The key point made by Gross in the above note is that leveraging by borrowing short and lending long has boosted financial returns over the last few decades. The graph below illustrates this rather well:

-Bonds have now outperformed stocks going back to November 1980 (10.7% annualized vs. 10.4% annualized) and has more than doubled the performance of stocks over the past 15 years (239% vs. 108%). Note the chart below is total returns including reinvestment coupon payments and dividends.

The disappointing US jobs data yesterday increases the likelihood of further QE by the Fed, either at their end-June meeting (in which case the market is likely to bottom sometime over the next few weeks) or later in the summer (in which case the market is likely to fall further ). While the US provides some upside into the year-end, it is Europe which offers the compelling valuations as a recent piece by Morgan Stanley argues:

-“The euro-zone is less levered than the US, UK or Japan”.

-“Investors obviously face unusually high macro risk in Europe. But it’s also clear that risky assets in Europe now offer a substantial discount because of that risk. European equities now trade near their 2009 valuation low. Developed world equities excluding Europe remain above that 2009 valuation nadir”.

-“While Europe is cheap on average, equities in the peripheral markets range from very cheap to highly distressed. Italy, Ireland, Spain and Portugal are on G-D price-earnings of less than 8 times. Based on long-run return history, buying equities at 8 times has generated 12% real return per year on average over the following decade. Extrapolating from a best-fit curve suggests annual average real return of 25% over the following decade (a total 10 year real return of around 845%)”.

– Great 10 minute panel discussion between Paul Krugman and two others on the austerity versus spending debate. The duo make the usual sensible sounding arguments in favour of austerity-a country should act in the same way as a household when you have too much debt-i.e. cut spending; focus should be on expanding the private sector vis-a-vis the public sector etc . Krugman’s responses effectively demolish these arguments by starkly highlight the simplicity and inaccuracy of these views and their lack of any relevant real historical experience!


An Ayurvedic Approach to Sleep Disorders – Part 3 (Dr. Vasant Lad):

To follow-up on last week’s newsletter which dealt with the relation between sleep disorders and depression, the two types of depression and their general treatment, we now look at specific treatments for the three doshic types of depression:

Vata-type depression with fear, anxiety and insomnia:

-Abhyanga (whole body massage) with sesame oil followed by a hot shower.

-Gentle yoga asana followed by calming pranayama (yogic breathing).

-Powder of dashamula 500mg, ashwagandha 400mg, vidari 300 mg, jatamansi 200mg three times a day.

-Triphala (1/2 tsp) nightly with hot water.

-Basti (enema) made from a tea containing 1 tbsp each of dashamula, guduchi and brahmi.

-Vacha oil (nasya-nose drops).

Pitta-type depression with competitiveness, failure, anger, hate, envy, or jealousy:

-Abhyanga (whole body massage) with sunflower oil followed by a hot shower.

-Yoga asana followed by cooling pranayama (yogic breathing).

-Powder of shatavari 500mg, gulvel sattva 300mg, kama dudha 200mg, shankhpushpi 200mg three times a day.

-Bhumi amalaki 1 /2 tsp nightly.

-Basti (enema) made from a tea containing 1 tbsp each of guduchi, shankhpushpi and jatamansi.

-Brahmi ghee (nasya-nose drops).

Khapa-type depression with attachment, greed, possessiveness, hypersomnia and emotional eating.

-Abhyanga (whole body massage) with sesame oil followed by a hot shower.

-Vigorous Yoga asana followed by heating pranayama (yogic breathing).

-Powder of punarva 500mg, chitrak 200mg, kutki 200mg, sarasvati200m g three times a day.

-Bhibhitaki 1 /2 tsp nightly.

-Basti (enema) made from a tea containing 1 tbsp each of punarnava and brahmi.

-Brahmsi ghee (nasya-nose drops).

-Anu tailam or vacha powder nasya.

Note that vata and khapa types of depression are relatively easy to manage but pitta-type depression can become serious requiring medical help.

Here is wishing everyone peaceful sleeping!



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