e-fundresearch.com: What are your personal lessons learned from 2014 market developments?
Ronald Stöferle/Mark Valek: That the deflationary pressure within the system is far bigger than expected by the market. We can observe this by collapsing commodity prices, rallying USD, soaring bondprices and rapidly falling inflation expectations…
Hinweis: Ronald Stöferle & Mark Valek (Incrementum AG) sind Speaker
beim ARC Outlook 2015 am 21. Jänner in Wien
Therefore, the effort to get more money into circulation via credit expansion has at least partly failed. Demand for credit continues to be low. Bank reserves newly created by quantitative easing are parked as excess reserves with the central bank for now. QE nevertheless is not without consequences: the market-distorting effects of low long-term interest rates must not be underestimated. The already mentioned spectacular inflation of asset prices is merely a side effect of QE.
e-fundresearch.com: With regards to the new year 2015: How optimistic is your view into the future and what obstacles and challenges should investors be prepared to overcome in 2015?
Ronald Stöferle/Mark Valek: From our point of view, 2015 will be highly interesting from a macro perspective, as the monetary experiments currently underway resemble a walk on a knife's edge. A low rate of inflation can be driven up by brute force through decisive central bank action. Whether the flood of liquidity that is currently put at the banking system's disposal can really be removed in time is more than questionable. In a worst-case scenario, a loss of confidence in the currency may occur that can no longer be reversed. It was said in the 1920s that central bankers were like ships captains who not only refused to learn the basic rules of navigation, but even asserted that they were superfluous. At the moment the impression is that central bankers are attempting to cross the Pacific using a map of the Atlantic.
With their monetary interventions, central banks have entered terra incognita. Monetary policy doesn't work like a scalpel, but like a sledgehammer. Superficially, extreme monetary policy stimulus has calmed financial markets overall. The results, in terms of the real economy by contrast, continue to lag behind expectations. The often invoked 'self-sustaining recovery' is rather modest in many regions and is not 'self-sustaining' anywhere so far. It will probably still take months or years before the full extent of the collateral damage from these monetary measures will become visible. In our opinion, these will be predominantly negative. Interventions always result in keeping existing misallocations afloat, while new ones are added to them.
e-fundresearch.com: Why should investors consider an increase in allocation to your asset class in 2015?
Ronald Stöferle/Mark Valek: For the global economy, the question whether the tug-of-war between the “tectonic plates” of inflation and deflation will be decided in favor of one or the other will be very important. One thing is certain, the pressure that has been built up between them is becoming ever stronger. It is in our opinion by no means certain that inflationary forces will prevail. However, the socio-economic incentive structures and all-encompassing high indebtedness clearly suggest that in case of doubt, higher inflation rates will be tolerated. The political calculation is simple: there are few creditors and many debtors. True reform is politically unpalatable, as “austerity” is certain to lose elections. Inevitably, politicians will choose inflation. Should the inflation trend reverse, there would be excellent opportunities in inflation sensitive assets like gold, silver and mining equities.
