Summary

Derek Sicklen began by establishing that AAS see economic growth cycles always as a product of the expansion and contraction of the rate of money supply growth and that inflation, likewise, is always a product of the expansion of the money supply. And in this process, defining money supply is critically important. AAS have their own definition of money supply informed by the principles of Austrian economics. In their analysis when new money is created, when money is destroyed or the rates of growth of that money change then those changes - that new money reaches people, reaches economic actors at different rates and at different times. This means that there are measurable time lags between the changes in the rates of growth of money supply and the effects of those changes on economic fundamental variables on asset returns and on comparative dynamics between countries. Their particular definition of money supply, which includes government balances with the central bank allows them to capture the impact of fiscal policy and model that immediately into the effects of money supply growth, and therefore the effects on the economy and markets. AMS growth is a very accurate predictor of changes in economic growth in a large range of economies. As well as industrial production growth, AAS use AMS changes to predict what's going to happen to PMIs. Many people look at PMIs as themselves being good leading indicators, but what AAS see in their analysis is they can get a substantial lead on PMIs using adjusted money supply growth. Therefore, AMS not only predicts the underlying growth indices, but it predicts the leading indicators of those growth indices.

AAS have shown with forecasts the usefulness of fluctuations in AMS in predicting economic growth. The cyclical nature of fluctuations in money supply growth effectively provides a proxy for the business cycle and because of the lags between this proxy and the business cycle, it allows AAS to create a forward-looking business cycle for each of the multiple countries that we track. This allows them to map out for each country essentially a stylized business cycle, enabling identification of assets that are likely to outperform or underperform in the predicted stage of the cycle. These estimates of outperformance or underperformance are as far out as nearly two years in the US, for example, and this allows them to map out asset locations at both the asset class level, but also beneath that in the sub asset class level for a range of countries.  Within those asset classes they can ascertain historically outperforming assets or sectors for any particular stage of the cycle, and they do this across 15 or 16 different economies across the asset classes.  AAS see that we are already in a very dangerous type of investment environment. The focus of horizon of most people is the short term and nobody is ready to plan long-term because the fundamentals are deteriorating and it's not possible to plan longer term. Therefore, they see a developing emphasis more on the short-term basis type of investment. With a 70s style horizontal type trend AAS believes that following the money supply and liquidity could alleviate the problems at least on a short-term basis.

The United States has seen the most dramatic increase in money supply since the Federal Reserve system was created in 1913. AMS or money supply growth rates were nearly 80% as a response to the effects of lockdown. This was the principal policy response to COVID 19 across major economies and there have been significant spikes followed now by sharp declines in the rates of growth of money supply. These have significant implications. In the short term, AAS see stronger growth in the US, Eurozone - Germany, Australia and Sweden and weakest growth in Japan, China and Brazil. But they find quite a similar pattern in most of these economies, which is that growth rates start to deteriorate as we start to move into 2022

AAS also uses AMS as an indicator of inflation pressures, they show that as we move into 2022 and the latter part of 2021 the greatest likely pressure on prices is to manifest in Brazil, Hong Kong but also, in Asia including Korea. In some of the major economies, including the US, we are going to see a significant increase in inflationary pressure as 2022 unfolds. Similarly, it’s also case also for the Eurozone; the UK; Sweden, Israel and China. These are forces are the lagged impact of previous money supply changes, and they cannot be unwound. They are likely to materialize regardless of any instant policy change. AAS’ growth charts paired with their inflation charts show the likely simultaneous emergence, at a higher level of simultaneous deterioration, of economic growth - that is: the manifestation of significant growth headwinds in line with increased inflationary pressures. An increased downward pressure on growth rates and increased upward pressure on inflation rates; an unhappy place for monetary regulators, asset managers and asset returns.

This is compounded by a downward pressure on most of the major stock indices. In the US AAS see the manifestation of all those forces while the European economy and the European stock markets appear to be most supported by trends in their underlying monetary liquidity. India is also well-supported as we go into the early part of 2022. AAS see a situation where that support starts to decay as we get towards the end of 2021 and move out into 2022 and we are likely to see increased downward pressure – that is a reduction in the liquidity support for these stock indices as we move into 2022 – with Switzerland being the main exception.

Yield curve risks - the strong outlier is America, where AAS see a significant pressure in at least the first quarter of next year on bond yields, particularly at the long end. As the first quarter of 2022 unfolds AAS see quite significant pressure being applied towards a steepening of the US yield curve. There will be significant upward pressure in US, UK and Eurozone, but that subsides from the middle of 2022 onwards for those countries where the lags allow them to forecast out that far. For most countries the lag effect of previously existing monetary policy is now impacting their economies, and those forces are locked in and will manifest regardless of immediate money supply induced policy changes.

Dr Frank Shostak also addressed the destructive forces in the US. This massive increase in money supply means the Fed, and in conjunction with the government, are providing massive support to spending, destroying the ability to produce. America now has massive consumption on a relative basis with no production of wealth. The other destructive forces in the United States; a large government, a budget deficit of currently around 3 trillion. Biden is not like Reagan or Thatcher, who understood the meaning of the word “wealth” and instead there will be a lot of shocks. At present. AAS expect, from a liquidity perspective, a possible sharp decline in the stock market. Gold, which came under pressure recently, and in line AAS’ predictions, could benefit next year temporarily.

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