MANIAS Gold, All Assets MRB May13

7/27/2019 MANIAS Gold, All Assets MRB May13

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http://www.mrbpartners.com/research/themes/theme-report-macro-themes-manias-part-ii-january-17-2012/

http://www.mrbpartners.com/research/themes/theme-report-macro-themes-manias-part-i-january-10-2012/



2M R B P A R T N E R S I N C . w w w . m r b p a r t n e r s . c o m C o p y r i g h t 2 0 1 3 © ( s e e f i n a l p a g e f o r f u l l c o p y r i g h t )

mrb THEME REPORT April 30, 2013

Chart 1 Manias Of The Post-WWII Era

1970 1980 1990 2000 2010

1

2

4

8

16The WaltDisney Co.(Nifty Fifty)

Gold Price($/oz)

JapaneseTopix

U.S.Nasdaq

U.S. HomebuildersStock Prices

Note: All manias rebased to 1 at beginning of the decade

MRB Partners Inc © 04/2013

Part II

Mania Recipe

s2 s3.

chart 1

ssss,

ss (please see

“Bubbles In Recent History

2 s

3

Asset manias

Only a few





Bubbles In Recent History

Nifty 50:s

s, pricing in

Gold: s

s as it

Japanese Risk Assets:

s

s

s

Global Technology Stocks:

s





s

s

Global Housing:

1) Liquidity:

s

Cheap money





Charts 2A & 2B Ending A Crisis Boosts Global Liquidity And Triggers A New Bubble

2,000

1,000

Japan: Topix

100

120

140 Residential

Commercial

Land Prices / Income*:

1

2

3

Core CPI Inflation** (%YoY)

1986 1988 1990 1992 1994

Japan

G7

2

4

6

Policy Rate (%):

* Land prices to average monthly wage; rebased to January 1985 = 100** Excluding food & energy

1000

2000

4000U.S.: Nasdaq

5

6

House Prices / Income*

1

2

3Core CPI Inflation** (%YoY)

2

4

6

1995 1996 1998 2000 2002 2004 2006 2008 2010 2012

U.S.

G7Policy Rate (%):

* Average single family house prices to average non-farm weekly wage;source: National Association of Realtors & U.S. Bureau of Labor Statistics

** Excluding food & energy

MRB Partners Inc © 04/2013MRB Partners Inc © 04/2013

The collapse of the Japanese equity and property bubble...

...triggered a

...and aggressive globalmonetary easing...

...whichfueled tech

creation after thetech mania fueled a housing bubble

Herewe goagain...

...lots of liquidity a home

charts 2A2B).

Asset manias are

the mirror image





s

s. Thus, real interest rates

s), the

Theme Reports .

MRB Theme Reports, " ", ", December 11, 2012," ",

not enough...

to speculate

http://www.mrbpartners.com/research/themes/theme-report-could-the-world-follow-japan-into-deflation-december-11-2012/


http://www.mrbpartners.com/research/themes/mrb-global-inflation-are-we-headed-toward-an-argentina-outcome-november-20-2012/

http://www.mrbpartners.com/research/themes/theme-report-assessing-inflation-deflation-tail-risks-march-19-2013/



http://www.mrbpartners.com/research/themes/theme-report-em-inflation-temporarily-constrained-march-26-2013/



http://www.mrbpartners.com/research/themes/theme-report-u-k-inflation-less-than-meets-the-eye-april-16-2013/








http://www.mrbpartners.com/research/themes/mrb-global-inflation-are-we-headed-toward-an-argentina-outcome-november-20-2012/





chart 3

3) Theme:

An appealing

theme is critical

Chart 3 Risk On/Off Gives Way To An Upleg

100

200

300

Global: Stock / Bond Ratio*

98

100

102Leading Economic Indicator**

-10

0

10

1980 1985 1990 1995 2000 2005 2010

Global***U.S.

Industrial Production (%YoY):

* Global MSCI stock market total return index divided by 10-year globalgovernment bond total return index; rebased to January 1978 = 100

** Deviation from trend; includes OECD members plus six major non-OECD countries; source: OECD

*** Source: Netherlands Bureau for Economic Policy AnalysisNote: Shaded for NBER-designated U.S. recessions


Longer and mo

volatilethis tim





Chart 5

1964 1966 1968 1970 1972 1974 1976

40

80

MRB Manias Index*

* Average of Nifty Fifty (1960s), Gold (1970s), Japanese equities (1980s),Nasdaq (1990s) & U.S. homebuilders stocks (2000s); rebased at peak = 100;source: MRB Partners

Years


4) Catalyst: There is typically a catalyst that triggers

5) Accessibility:

are a few commonalities. Chart 4

), while

chart 5

Phase 1 (Bull-Run): Bubbles start as typical bull

Phase 2 (Pullback And Asymmetric Beta): Asset

Chart 4

P h a

s e 1

P h a

s e 3

P h a s e 5

Phase 6

Phase 2

Phase 4

Years

Phase 1: Bull Run

Phase 2: Pullback & Asymmetric BetaPhase 3: Parabolic Upleg

Phase 4: Correction & Failed Bounce

Phase 5: Crash

Phase 6: Revulsion


Stylized Mania





Chart 6 Asymmetric Beta Behavior

Nasdaq*Global**(for all panels)

200

400

800Stock Prices

0.4

0.8

Deviation From 52-Week Minimum (%)

1994 1996 1998 2000 2002

-0.2

-0.4

Deviation From 52-Week Maximum (%)

* Rebased to 100 at the beginning of the period** Rebased to 100 at the beginning of the period; source: MSCI


Larger gainsduring uplegs....

...and similar losses during

Reversed aft

necessarily mean that the asset has less of a beta than

term this as the “asymmetric beta phase” of a mania,

chart

6

theme will last. It is worth noting that the crash of

Phase 3 (Parabolic Upleg)

Phase 4 (Correction And Failed Bounce):

the tech crash (chart 7

prices from hitting new highs.

Phase 5 (Crash):

Manias follow a

common pattern





Chart 7 Investors Were Late To AcceptThe End Of The Tech Mania

1000

2000

4000

U.S.:Nasdaq

1996 1998 2000 2002

-10

0

10

20

Net New Cash Flow IntoU.S. Aggressive Growth Mutual Funds* (US$ bn)

* Source: Investment Company Institute


Well intothe crash...

...before investorsturned negative

Phase 6 (Revulsion): Following the crash, a lengthy

A Potentially Bubbly World

chart 8).

th MRB Theme Report 5).

th MRB Theme Report

5 MRB Theme Report , " MRB Theme Report , "This Is Not 1994

fertile for asset

speculation, but...

before new


http://www.mrbpartners.com/asset-allocation/asset-allocation-asset-allocation/theme-report-this-is-not-1994-march-27-2013/











April 25th MRB Theme Report

in economic growth in most economies. Thus, the global

chart 9).

policies. In turn, the migration into assets with higher

chart 10

(chart 11).

MRB Theme Report , "", April 25, 2013

Chart 8 Plenty Of Liquidity Being Created

2008 2010 2012

Reserves Held At Central BankCurrency In Circulation

4

8

G4 Change In Monetary BaseSince 2008* (% of GDP):

* GDP-weighted average of euro area, Japan, U.K. & U.S.


Chart 9 Fear Has Prevented Risk-Taking

20

30

40

50

U.S.:Cash Firepower* (% of GDP)

1960 1970 1980 1990 2000 2010

1

2

3

Interest On Cash Firepower* (% of Disposable Income)

* Cash in money market funds & savings deposits


Lots of cash...

...earninothing

http://www.mrbpartners.com/asset-allocation/foreign-exchange/theme-report-currency-wars-extreme-policies-april-25-2013/








Chart 10 The Great Migration

Cash

Government

Bonds

Investment

Grade

Corporate

Debt

Economic Risk Exposure

Emerging

Market

Debt*

High Yield

Corporate

Debt

High Dividend

Yielding

Defensive

Stocks

Growth

Sensitive

Cyclical

Stocks Asset

Mild

Appeal

Mild

Appeal

Reasonably

Attractive

AttractiveYields

NothingPoor

Value

Absolute Appeal

Expensive &

Vulnerable

* Local currency EM debt has considerably more absolute appeal than USD-denominated EM debt, albeit has more economic risk exposure MRB Partners Inc © 04/2013

Chart 11 An Abnormally Defensive Rally

100

140

Global Stock Prices*

80

100

Global Defensives / Cyclicals**:

Stock Prices*

1998 2000 2002 2004 2006 2008 2010 2012

-20

0

20

12-Month ForwardP/E Ratio*** (%)

* Local currency; rebased to January 1998 = 100; source: MSCI** Defensive sectors include: consumer staples, health care, telecom

services & utilities; cyclical sectors include: consumer discretionary,energy, industrials, materials & technology

*** % premium (+), discount (-) to global defensives


but...

...led by defensives

Relatively expensive

Final Word: The aggressive monetary support needed

Please Note: Part II

Phillip Colmar



http://www.mrbpartners.com/research/themes/theme-report-macro-themes-manias-part-i-april-30-2013/





mrb THEME REPORT May 8, 2013

Phase 6

Phase 2

Years


Chart 1

Phase 1: Bull Run

Phase 2: Pullback & Asymmetric Beta

Phase 3: Parabolic Upleg


Phase 5: Crash

Phase 6: Revulsion

P h a s

e 1

P h

a s e

3

P h a s e 5

while those in the healthier parts of the world are trying to suppress interest rates in order

to prevent currency appreciation (see the March 27 th and April 25th MRB Theme Reports2).

If anything, the amount of excess liquidity available to global capital markets will spur

more assets manias than during previous investment cycles. In fact, an environment of

rotating bubbles is possible over the next several years. Also, speculative surges couldprove stronger and/or persist longer (due to the lack of policy headwinds) and crash

phases could be more shallow and/or drawn out.

This report (Part II ) examines the asset markets that have been, or are most likely to

each asset class

is currently in and provide investment recommendations. In short, we highlight which

and likely to crash. Chart 1 provides a summary of our conclusions.

Fixed Income (chart 2)

"High Quality" Government Bonds (charts 3 – 4)

Theme: Although it may be an exaggeration to label the sovereign debt market

as being in a bubble, government bonds in many countries now exhibit similar

2 MRB Theme Reports, "This Is Not 1994", March 27, 2013 and "Currency Wars & Extreme Policies",April 25, 2013

Globalequitieslevered tobusinessspending*

Germanequities &residential/ commercial property

Select emergingmarket equities**

Chinesehousing

Swisshousing

Speculative- grade spread product

Hong Kong residential/commercial property

Investment-grade spread product

Canadian housing

Japanese sovereign debt

P h a s e 4

Australianhousing

Globaltechnology stocks

Japaneseequities &residential/ commercial property

U.S. bank stocks &housing

Periphery euro areabank stocks& housing

Base metals & energy

Energy & materials stocks Australian & Canadian equities

U.K. housingNon-Japan high-quality sovereign debt

Gold

Stylized Mania

Excess liquidity

return on capital

is greatest

Fear and

policy distortionshave created

bubble-like

pricing in "high-

quality" debt

* Includes capital goods and technology stocks geared to business spending
















Chart 2

P h a

s e 1

P h

a s e 3 P

h a s e 5

Phase 6

Phase 2

Phase 4

Years

Phase 1: Bull RunPhase 2: Pullback & Asymmetric Beta



Phase 5: Crash

Phase 6: Revulsion


Stylized Mania

characteristics. It has not been greed, but rather

fear that has driven investors into this asset class

most risky assets over the past several years. This

tendency has been reinforced by repeated growth

euro area sovereign debt crisis, and guarantees by

near zero for the foreseeable future.

In short, extreme investor caution and the chase for

“low risk” yield have led to a similar valuation endpoint

positive), most nominal government bonds are now

priced for years of economic stagnation. Rather than

this presenting a warning, investor sentiment towards

government bonds is holding near positive extremes.

In fact, many investors, commentators and academics

have tried to rationalize depressed interest rates

as an insurance premium against tail risks. Ignoring

traditional valuation metrics due to perceptions that

the world has fundamentally changed is also typicalduring the late stage of a mania.

Phase 4: Yields in most high-quality government bond

markets have been bumping along their bottom over

the past year. The exception is Japanese bond yields,

which plunged to fresh lows as the new leadership at

the Bank of Japan (BoJ) pledged to ramp up quantitative

across markets and the current global growth scare have

provided a bid for sovereign debt throughout the globe.

That said, we expect that yields in most markets have

already reached their secular lows. Even Japan may

have now bottomed. Indeed, sovereign debt markets

have already experienced the perfect storm of weak

manipulation. Government bond prices will likely

Chart 3

4

8

12 U.S.

U.K.

(for both panels)

5

10

1900 1920 1940 1960 1980 2000


Speculative- gradespread product

Investment-gradespread product

Japanese sovereign debt

Non-Japan high-quality sovereign debt





Chart 4

2

4

6

0

1

MRB Valuation Model***

Bonds

Bonds

1995 2000 2005 2010

25

50

75

alue Measure;

standardized


Extremely overvalued

Still lotsof bulls

only strengthen from current levels in the event of a

prolonged and/or deep global recession (and provided

that this outcome does not result in sovereign debt

strains in G7 countries). More likely, as the global

economy continues to strengthen (which we expect),

interest rates, and investors will continue to migrate

into assets with greater economic risk exposure. In

interest rates will rise, or it will fail and the country

will experience a sovereign debt crisis over the next

few years3. Regardless, 10-year JGBs are unattractive

at current yields.

Recommendation:

MRB Strategic Trader

MRB Quarterly Global Fixed Income

Spread Product (chart 5)

Theme:

banks will have to keep short-rates anchored for the foreseeable future in an attempt

to stimulate growth. Correspondingly, market participants have aggressively targeted

3 For further details on Japanese debt dynamics, see the MRB Country Report ," ", May 1, 2012

The "search

for yield" hasremoved the

absolute appeal

of most

spread product

http://www.mrbpartners.com/all-reports/strategic-trader-%e2%80%93-april-2013/

http://www.mrbpartners.com/asset-allocation/global-fixed-income/global-fixed-income-quarterly-march-7-2013/

http://www.mrbpartners.com/research/country-regions/country-report-%e2%80%93-japan-part-i-%e2%80%93-may-1-2012/

http://www.mrbpartners.com/research/country-regions/country-report-%e2%80%93-japan-part-i-%e2%80%93-may-1-2012/







Chart 5

2

4

6

8

U.S.

Euro Area

(for both panels)

10

20

1998 2000 2002 2004 2006 2008 2010 2012

* Source: BofA Merrill Lynch


No absolutevalue left

Still room torun in a low yield world

However, the “safest” yield plays are now expensive

and vulnerable.

Phase 3: Yields for investment-grade spread product

have collapsed to historical lows, due to bothdepressed underlying government bond yields and

historically compressed spreads. There is no absolute

return appeal left in these assets, with current

valuations now at extremes that are consistent with

late- of the . The “search for

yield” will likely persist, but spreads no longer provide

asset class over the next year. Investors have alsopiled into speculative-grade debt, causing spreads to

narrow to depressed levels. However, yields are still

mildly attractive in this yield-starved world. Thus, we

expect further absolute returns, albeit single digit

gains over the next year (i.e. these debt markets are

consistent with mid-).

Recommendation:

Commodities (chart 6)

Gold (charts 7 – 8)

Theme: Gold is a leading barometer of excess liquidity

and thrives in a world with low real interest rates

Chart 6

P h a

s e 1

P h

a s e 3

P h a s e 5

Phase 6

Phase 2

Phase 4

YearsPhase 1: Bull Run

Phase 2: Pullback & Asymmetric Beta



Phase 5: Crash

Phase 6: Revulsion


Stylized Mania

Base metals & energy

Energy &materials stocks

Gold





Chart 7

100

400

1600

500

1000

1500

2000

0

5

1970 1975 1980 1985 1990 1995 2000 2005 2010


as part of a renormalization process from oversold

and undervalued levels) was initially boosted by the

collapse in interest rates and the monetary policy

response to the fallout from the technology mania.

Likewise, fundamentals for the precious metal

strengthened further during the Great Recession

and euro area debt crisis, as central banks worked

aggressively to stimulate their economies.

sovereign debt, along with fears of “printing money”,

have caused investors to search for a “hard currency”

alternative. In this regard, gold is a long call option on

a collapse in the world’s reserve currencies and the risk

their debt problems (so far this has not been the case).

All of these factors triggered a stampede into gold,

causing it to surge until mid-2011.

Phase 5: Gold prices have closely traced the typical

bull run from 2001 to early 2008, nearly quadrupling in

price (i.e. ). Gold prices then fared relatively well

metal declined by 31%, the setback was brief and not

nearly as deep as most other risk assets (including

global equities). Likewise, gold held up during the 2010 and 2011 double-dip scare

and managed to outperform during the rally phases (i.e. ). This “asymmetric

we disagree, this sort of “bulletproof logic” is typical in triggering a parabolic upleg

(i.e. ). Indeed, gold prices surged 65% in the year leading up to their August

). The asset has since

broken lower in a series of waves (i.e. ).

to cut positions (see the November 8th 2011 MRB Theme Report 4). Still, we hesitated

4 MRB Theme Report , "Gold: Favorable Liquidity Tailwinds, But Expensive Insurance", November 8, 2011

Gold is following

the typical

...it is now in

the crash phase

http://www.mrbpartners.com/asset-allocation/commodities/srategy-insight-gold-favorable-liquidity-tailwinds-but-expensive-insurance-november-8-2011/








Chart 8

800

2004 2006 2008 2010 2012


P h a s e

1

Phase 2

P h a s e

3

Phase 4

P h a s

e 5

in adding short positions until earlier this year as most

actively engaging in competitive currency devaluation.

large increase in global liquidity, an environment

increased monetary stimulus has panned out, with the

BoJ recently committing to ramp up its quantitative

to anchor interest rates. Yet, gold has been unable to

rally, highlighting how crowded and overvalued this

asset had become.

Heading forward, fundamentals will gradually

deteriorate for gold. Many investors have bought

alleviating the need for the hedge). In addition, real interest rates have bottomed and

will gradually grind higher, increasing the opportunity cost of holding a zero yielding

asset. This will not be an overly bearish trend, but it is a risk given the valuation starting

for gold. Sentiment measures and net speculative positions suggest that investors are

still not negative on gold, but this is typical until the crash phase is quite extended.

Recommendation:


Base Metals & Energy (charts 9 – 10)

Theme:

industrialization and wealth creation within emerging Asia. The potential for a dramatic

increase in Chinese commodity consumption has already captured the imagination

of the masses. At this point, everybody in the investment community has seen the

Gold is extremely

over-loved and

overvalued, and

fundamentals

will deteriorate

The structural

bull run in

economically-

sensitive

commodities

has ended







100

200

300

0

50

1800 1825 1850 1875 1900 1925 1950 1975 2000

March 2013 = 100


11 yrs

23 yrs

18

yrs

8 yrs

!

9 yrs

11 yso fa

Chart 9

charts showing the long-term rise in the quantity of

energy, base metals and agricultural commodities

demanded if China’s per capital income/consumption

counterparts, let alone that of the developed world.

This triggered an extended bull market starting early

last decade, and a parallel capital spending binge.

That said, we suspect that the structural bull market in

economically-sensitive commodities has now ended

(see the September 25th and October 2nd MRB Theme

Reports5). Investors should keep in mind that history

has been largely unrewarding for natural resource

investments over the long haul. There have been several

powerful and extended bull markets over the past twocenturies, corresponding to either supply disruptions or

the early years of a persistent demand shock (i.e. before

commodity producers are able to respond). However,

an eventual supply response has always ensured that

real natural resource prices resume their long-term

downtrend and relative pricing power ultimately shifts

back towards the more technologically or intellectually

enhanced parts of the value chain. Compared with past

episodes, the current bull-run has been extended interms of both magnitude and duration.

Moreover, the fundamental tailwinds have eroded

since 2008. Aggressive monetary policy and dislike for

However, this tailwind has masked the deterioration

in the demand/supply balance for commodities, which

is more important over the long term. The global

economy and commodity consumption has expanded

at a much slower pace since the Great Recession, with

a large portion of the developed world deleveraging,

emerging markets unable to export as much, and

China targeting a slower economic growth rate. At the

Chart 10

1998 2000 2002 2004 2006 2008 2010 2012

300

600

r; rebased to January1998 = 100

supply


5 MRB Theme Reports, "End Of The Commodity Boom (Part I)",September 25, 2012 and "End Of The Commodity Boom (Part II)",October 2, 2012

http://www.mrbpartners.com/asset-allocation/commodities/theme-report-end-of-the-commodity-boom-part-i-september-25-2012/


http://www.mrbpartners.com/asset-allocation/commodities/theme-report-end-of-the-commodity-boom-part-ii-october-2-2012/














same time, a dramatic ramp-up in capital spending

over the past decade has increased commodity supply,

particularly for base metals.

Industrialization of emerging Asia (and the emerging

world in general) will remain a compelling longer-termtheme, but this does not imply ever rising commodity

prices. The analogy would be that the technology

revolution continues today, yet the NASDAQ stock

index peaked in 2000 and remains far below its high.

Phase 5: Base metals and energy have deviated from

the due to the macro environment

over the past several years. In short, after an extended

bull market, a sharp speculative surge in commodities

(particularly oil prices) took hold in 2008, as investors

began to extrapolate the positive fundamental

correcting dramatically in 2008, economically-sensitive

commodity prices rebounded sharply with some base

these commodities are in the early stages of .

Recommendation:

Energy & Materials Stocks (charts 11 – 12)

Theme: There are cyclical and secular cross-currents for the energy and materials

sectors, with the former likely to become mildly positive and the latter negative

(see the April 19th MRB Weekly Macro Strategy ). Over the next few months, a slowly

improving global growth outlook should boost cyclical demand for economically-

Chart 11

0

3

0

10

98

100

102

1998 2000 2002 2004 2006 2008 2010 2012

istrationics


The secularoutperformance

of energy

and materials

stocks is over

http://www.mrbpartners.com/asset-allocation/weekly-macro-strategy-april-19-2013/

http://www.mrbpartners.com/asset-allocation/weekly-macro-strategy-april-19-2013/





Chart 12

Energy Stock Prices* (LS)

150 –

300 –

1 –

2 –

4 –

1998 2000 2002 2004 2006 2008 2010 2012

Materials Stock Prices* (LS)

Industrial Metals*** (RS)

150 –

300 –

1 –

2 –

4 –

* U.S. dollars; rebased to January 1998 = 100; so*** U.S. dollars; rebased to January 1998 = 100; so


sensitive commodities (from depressed levels) and

spur a rebound in relative earnings for these sectors.

In the past, commodity demand has been correlated

with the global leading economic indicator, implying

that commodity prices should strengthen in the comingmonths. However, economic activity is likely to improve

at an historically slow pace and the secular commodity

outlook is more challenging than in the last decade as

new supply is coming on stream and demand drivers

are less favorable (as noted above). Correspondingly,

the beta of commodity prices to global growth will be

lower than in recent cycles, which will translate into less

relative earnings upside for the energy and materials

sectors, even during upswings. Moreover, relativevaluations for energy and materials stocks are still more

consistent with a secular bull market than with the

mature outlook that is now the reality.

Phase 5: Price performance of these equity sectors

are highly correlated with the underlying commodities

and have also therefore entered (i.e. the bear market or crash phase) of the

. That said, we expect these stocks to hold up better than their

underlying commodities, given that valuations are arguably more appealing and the

broad equity market should provide some underlying support. Correspondingly, these

stocks may not crash, but rather decline in a series of waves.

Recommendation:

Regional Risk Assets (chart 13)

Hong Kong: Residential/Commercial Real Estate (chart 14)

Theme:

directly capitalize on the Chinese industrialization process. The corresponding wealth

Energy and

materials stocksshould hold

up better than

the underlying

commodities

The positive Hong

Kong property

story is well

understood and

largely priced





gains translate into stronger domestic growth and

participants have mandates allowing them to play this

theme, Hong Kong is open for international real estateinvestment (unlike mainland China).

and inappropriately accommodative monetary policy has helped fueled domestic growth

conditions. In turn, the combination of a strong economy (i.e. increased wealth gains)

and depressed interest rates (i.e. low mortgage rates) has turbo-charged a speculative

frenzy in the Hong Kong real estate market. Finally, the currency peg helps alleviate

exchange rate risk for international investors as well as provides a “free” call option for

those looking to bet on the end of the peg (and a revaluation of the Hong Kong dollar).

Phase 3: Hong Kong real estate prices have already been experiencing a parabolic

upleg for some time, making this asset class consistent with late- of the MRB

already extreme. Timing an exit will be critical for investors. Manias often end up falling

on their own weight but clear catalysts for a crash in Hong Kong real estate prices

would be a hard landing in the Chinese economy or revaluation of the Hong Kong

Chart 13

P h a

s e 1

P h

a s e

3

P h a s e 5

Phase 6

Phase 2

Phase 4

Years

Phase 1: Bull RunPhase 2: Pullback & Asymmetric Beta



Phase 5: Crash

Phase 6: Revulsion


Stylized Mania

Globalequitieslevered tobusinessspending*

German equities& residential/ commercial property

Select emergingmarket equities**

Hong Kong residential/ commercial property

Canadianhousing

Chinese housing

Swiss housing

Australian housing

Australian &Canadian equities

U.K. housing

U.S. bank stocks &housing

Chart 14

Residential (RS)

200 –

400 –

1 –

1 –

Hong Kong: House Prices

8100 –

200 –

Real House Prices*

0

10

1995 2000 2005 2010

= 100


Surging pricesfueled by...

...very easy policy

This is the most

rewarding, but

dangerous phasefor Hong Kong

property investors

* Includes capital goods and technology stocks geared to business spending





dollar (neither is likely at this point). Still, escalating

force a material tightening of credit conditions to

curb speculation, as occurred in China. Combined with

frothy valuations, this could lead to a peak.

Recommendation:

China: Housing (chart 15)

Theme:

extremely frothy, residential property in mainland China

has not yet run ahead of underlying fundamentals. The

increase in Chinese home prices in recent years has

been outpaced by rising per capita household income.

despite concerns by some observers. Select high-end

That said, the Chinese property market shares similar

positive underlying fundamentals as Hong Kong.

monetary policy. Interest rates are being held well below economic/wage growth.

This macro environment tends to fuel housing demand and typically results in rapid

used credit controls to limit bank mortgage lending. See the December 4 th MRB China

Country Report 6 for further analysis on China.

Phase 2: Chinese housing has already experienced an extended traditional bull

market, with gains in line with positive underlying fundamentals (i.e. ). Housing

corrected modestly in 2009 and 2011-2012 (due to policy tightening) before recovering

6 MRB Country Report , " ", December 4, 2012

Chart 15

0

4

8

100

150

200

2006 2008 2010 2012

60

80

au of Statisticsional Bureau of

Statistics


Affordability hasimproved

Chinese housing is

not in a bubble...

...but has

this tendency

http://www.mrbpartners.com/research/country-regions/country-report-china-december-4-2012/










rapidly (i.e. typical of ). There is now a tendency

for the property market to shift into and

experience a parabolic upleg, given inappropriately

suppressed borrowing rates. This was evident by the

surge in house prices in 2007 and again in 2009-2010.

However, policymakers are trying to prolong the

controlled bull-run through the use of credit controls.

credit controls will need to be continuously imposed

in order to prevent a surge in home prices. Even then,

importance. There is very limited downside risk to

Chinese housing as policymakers are not looking for

a contraction (merely trying to slow appreciation) and

lending restrictions can be unwound rapidly if needed.

Recommendation:

Germany & Periphery Euro Area: Real Estate & Equities (charts 16 – 18)

Theme:

sovereign states into a monetary union, the decision to adopt a single currency (and

normal cyclical trends to become more structural in nature.

The formation of a single central bank in January 1999 initially resulted in monetary

conditions which were far too accommodative for the faster growing and more vibrantperiphery economies (including Greece, Ireland, Italy, Portugal and Spain), while

Germany). The result was a massive decade-long regional wealth transfer and the

building of substantial excesses/imbalances within the periphery countries.

The tables have turned in recent years. The credit binge in the periphery came to an

Chart 16

0

2

4

Euro Area:

1999 2000 2002 2004 2006 2008 2010 2012

Euro Area

6

10

14

*** Source: Eurostat


Germany needs

tightening

Periphery requires QE

Massive

divergen

healthy economy

and overly

easy policy...

...the reverse

is true for

the periphery





Chart 17

90

100

110

Real**

(for both panels)

House Prices*:

100

200

300

1995 1996 1998 2000 2002 2004 2006 2008 2010 2012

Periphery Euro Area***

* Rebased to January 1995 = 100 Spain


Now it'sGermany's turn

shock. In contrast, extended restructuring and

economic underperformance in Germany and other

have left these countries structurally sound and

competitive. These members are now experiencing a

more sustained cyclical economic recovery, albeit with

some weakness in recent months.

The current divergences in economic trends within

the euro area will persist, given that there is a lack of

policy tools within the common currency zone to help

redistribute growth away from the stronger/healthier

members to the weaker periphery economies. In

fact, due to the rigidities within the euro area, the

macro/policy factors that typically help redistributegrowth will instead foster further divergences. The

process is now more advanced. The country has at

Phase 1 (German Real Estate & Equities):German risks

assets are in a traditional bull-run phase, with prices

rising in line with improving underlying fundamentals.

Indeed, German stocks have outperformed within the

region but have not yet received a relative valuation

lift, even compared with the periphery markets (on a

12-month forward P/E basis). Discrimination and strong

builds and investors begin to search for solid growth

opportunities. Similarly, German house prices have

after declining since the mid-1990s. Relatively solid

domestic growth and employment, coupled with the

inability for monetary conditions to tighten, is a recipe

for substantial residential and commercial real estate

price appreciation.

Phase 5 (Periphery Euro Area Housing & Bank

Stocks): Many of the periphery euro area countries

had housing bubbles that are still in the process of

Chart 18

(for both panels)

100

200Stock Prices*

1999 2000 2002 2004 2006 2008 2010 2012

10

20

30


Germany outperforms...

...but hasnot yet beenre-rated





for the euro area authorities in order to resolve the

debt crisis (see the February 27th MRB Theme Report 7

for details on the

). In the interim, weakness

systems and relatively tight policy conditions, should

act as a weight on house prices in these countries.

Likewise, the poor macro backdrop and ongoing house

banking sector).

Recommendation:

Switzerland: Housing (chart 19)

Theme: The Swiss National Bank (SNB) has been

aggressive in attempting to shield the economy

independence and adopting the euro area’s monetary policy. Conceptually, as long

as this policy remains in place, it is equivalent to Switzerland being a member of the

already outliving its usefulness, given that Switzerland does not have the same cyclical

or structural headwinds. Monetary conditions are now too accommodative, much like

our analysis for Germany (see above).

system with excess liquidity, at a point when the monetary transmission mechanism is

7 MRB Theme Report , "Can The European Monetary Union Be Salvaged? ", February 27, 2013

Chart 19

Real**

90

110

130

0

4

1995 1996 1998 2000 2002 2004 2006 2008 2010 2012

0

5

Mean

tional Bank


Housingboom...

...fueled by easy policy

Swiss credit

and housingbubbles will be

fueled as long

as the currency

ceiling persists

http://www.mrbpartners.com/research/policy/theme-report-can-the-european-monetary-union-be-salvaged-february-27-2013/









not impaired (as is the case in much of the euro area).

Broad money and credit are now expanding at a healthy

rebounded sharply, signaling that economic growth

will accelerate. Indeed, business activity is recovering

and both employment and housing activity/prices

are very strong (with the latter materially outpacing

incomes). Trade and current account balances remain

in healthy surpluses. To dampen property price

appreciation, the Swiss authorities have increased

capital requirements for banks in their mortgage

materially slow the housing market.

Phase 3: early- in the . The adoption

of extremely accommodative policy in Switzerland is

causing the housing bull-run to outpace underlying

fundamentals. There is also the potential for a

speculative surge in prices. That said, if the SNB

abandons its currency ceiling or implements

materially tighter credit controls, we would shift this

asset back to late- as a parabolic upleg would

likely be avoided.

Recommendation:


Emerging Markets: Select Equity Markets (charts 20 – 22)

Theme:

for their exports, most do not face domestic deleveraging headwinds. Indeed, most

emerging markets have limited imbalances and superior fundamentals than advanced

economies, making them a less risky proposition. This has not yet been discounted

Chart 20

2

3

Prices*

0

20

8

12

16

10

20

30

1990 1995 2000 2005 2010

Financial / IBES*** U.S. dollars; source: IMF


Cheap...

...despite befundament

Massive gap

Willrebound as investor builds

EM equitieswill come back

in favor...

...focus on

domestically-

geared and non-

commodity stocks

http://www.mrbpartners.com/all-reports/strategic-trader-january-10-2012/

http://www.mrbpartners.com/all-reports/strategic-trader-january-10-2012/





in the equity market. In fact, a cloud of mistrust still

particularly China.

Moreover, global economic uncertainty has

encouraged investors to favor stocks with stable cash

continue their leadership. This, along with a strong

home bias, has contributed to the underperformance

of growth-sensitive emerging market equities.

However, as the global economy continues to

strengthen and investors gradually become more

search for stocks with strong earnings potential will

develop. Correspondingly, realization of the relativelystrong growth and lower risk backdrop in the emerging

world will attract more global capital, pushing equity

valuations in select markets to a decisive premium.

equity sectors and bourses outside of commodity-

based economies have the most upside potential.

Phase 1: Emerging market equities are still in a

traditional bull market phase (i.e. late). They

have experienced lower volatility than their developed

market counterparts in recent years, but this and their

relatively favorable fundamental backdrop is not yet

change, there will be an increased potential for a

parabolic upleg and a substantial re-rating in some of

these equity markets.

Recommendation:

MRB Quarterly Emerging Market Equities

Chart 21

2006 2008 2010 2012

0.0

0.2


Chart 22

40

60

80

100

8

10

12

2000 2002 2004 2006 2008 2010 2012

* Source: IMF

** U.S. dollars; source: IMF


Healthy public

Lots of reserves

http://www.mrbpartners.com/asset-allocation/global-equities/emerging-market-equities-quarterly-april-4-2013/






Chart 23

100

140

Stock Prices*

100

120

140

Stock Prices*

1998 2000 2002 2004 2006 2008 2010 2012

0

25

* Local currency; rebased to January 1998 = 100; es;


New highs,but...

...defensihave led

?

Relativelycheap

Global: Equities Levered To Business Spending

(charts 23)

Theme: Increased uncertainty and poor risk appetites

have encouraged investors to focus on defensive

stocks. Although aggregate global equity benchmarkshave gained ground since June, they have been driven

predominantly by defensive sectors. Heading forward,

we expect cyclical sectors to take leadership as

investors gradually gain comfort in the sustainability

of the global economic recovery.

Among cyclical stocks, we prefer those levered to

should favor capital goods stocks and business-

geared technology (including software and services).

held back spending due to economic and political

uncertainty. There is room for an improvement

as these clouds start to clear in the months ahead

(see the February 12th MRB Theme Report 8). Also,

historically depressed interest rates help to improve

net present value estimates and should bolster capital

Phase 1: Capital goods and technology stocks

(including those focused to business spending, such

as software & services) have strengthened along

with the rally in equity benchmarks. However, they

have trailed the improvement in underlying fundamentals as well as their defensive

counterparts. These stocks should start to outperform as global growth strengthens

further, albeit it will likely still take a few years before investors start to speculate

on these assets.

Recommendation:

April 2nd April 23rd

MRB Theme Reports 9

8 MRB Theme Report , "U.S. Business Investment: Back On Track ", February 12, 20139 MRB Theme Reports " Assessing Prospects For The Global Capital Goods Industry ", April 2, 2012 and

"Global Technology: Superior Growth At Bargain Prices", April 23, 2013

Capital goods and

technology stocksare appealing

http://www.mrbpartners.com/research/country-regions/theme-report-u-s-business-investment-back-on-track-february-12-2013/

http://www.mrbpartners.com/asset-allocation/global-equities/theme-report-assessing-prospects-for-the-global-capital-goods-industry-april-2-2013/


http://www.mrbpartners.com/asset-allocation/global-equities/theme-report-global-technology-superior-growth-at-bargain-prices-april-23-2012/




















Australia & Canada: Housing & Equities

(charts 24 – 25)

Theme: Australian and Canadian risk assets are an

extension of our analysis of economically-sensitive

commodities. Other regional commodity-based markets

are also tied to this theme. However, we single out these

two countries, given that they have become heavily

levered and reliant on the natural resource boom.

natural resources and have experienced tremendous

windfall gains over the past decade on the back of

rising commodity prices. This created substantial

activity, employment and consumption. At the same

subdued in these economies due to currency strength

banks (particularly the Bank of Canada) inappropriately

overemphasized the economic drags resulting from

currency strength. In short, policymakers compromised

long-term economic stability for short-term gains.

Overly accommodative monetary conditions led to

substantial imbalances, including housing bubbles

and excessive household sector leverage. The

Australian and Canadian economies also have

advanced Dutch disease, vulnerable banking

systems, and a lack of competitiveness (see the

November 6th and January 29th MRB Country

Reports10). Correspondingly, both countries are

now at risk as the commodity boom ends and thecorresponding wealth and employment tailwinds fade.

Phase 3 & 4 (Housing): Australian house prices peaked in late 2010 and contracted

mildly throughout much of 2011 and 2012. Real estate prices are regaining traction

due to recent RBA rate cuts, but upside will prove limited as commodity producers

are now moving to slow their investment and hiring plans (i.e. the asset class is in

Chart 24

Real House Prices**

120

180

240

Australia

100

130

160

100

120

140

U.S.

Household Debt

100

150

1998 2000 2002 2004 2006 2008 2010 2012

* Rebased to January 1998 = 100** Rebased to January 1998 = 100; deflated by head


Excessivehousehold debt

Banks arevulnerable

Substantialhousing booms

10 MRB Country Reports, "Canada: More Cracks In The Foundation", November 6, 2012 and

"The Australian Boom: Not Over, But Past Its Prime", January 29, 2013

Australian

and Canadian

risk assets

have peaked

http://www.mrbpartners.com/research/country-regions/country-report-canada-november-6-2012/


http://www.mrbpartners.com/research/country-regions/country-report-australia-january-29-2013/












). The Canadian housing market has surged

in recent years but is now showing evidence of

cracks due to extreme valuations, overbuilding and

tightening credit conditions (i.e. late-).

Phase 5 (Equities): The Australian and Canadianequity markets have similar vulnerabilities as the

global materials and energy sector. Normally, we

would expect the national bourses to hold up better,

However, the substantial imbalances within these

focused stocks also at heightened risk.

Recommendation:

U.K.: Housing (charts 26 – 27)

Theme:

late-1990s (due to overly accommodative policy and

inappropriately lax bank lending standards) made

prices during the Great Recession was not as dramatic and prices have edged higher

linked to short-term variable interest rates. Thus, central bank rate cuts immediately

foreclosure rates. Currency depreciation also helped by making London property

Chart 25

Australia (LS)

80 –

120 –

8 –

1 –

130 –

190 –

250 –

1 –

1 –

2 –

60

80

100

4

8

1

Australia

90

100

110

4

6

8

1995 2000 2005 2010

* U.S. dollars; rebased to January 1995 = 100; soada


housing bubble

was much larger

remains intact





However, underlying fundamentals are poor.

unable to match the increase in the cost of living,

as a percentage of disposable income mushroomed last decade to levels well above

th MRB U.K. Country Report 11 and

the April 16th MRB Theme Report 12

Phase 4:

expect to be a failed bounce (i.e. the asset class is late in ). Already, home prices

outside of the internationally-appealing London property market are declining. Our

expectation for a broadening recovery in the global economy and improvements in

11MRB Country Report , "U.K.: Living On Borrowed Time", December 18, 2012

12 MRB Theme Report , " ", April 16, 2013

Chart 27

200

300U.K.*

U.S.**(for all panels)

House Prices

100

140

Household Debt

40

60

1995 2000 2005 2010

Household Debt

* Source: U.K. Office for National Statistics


U.K. has alarger bubble

More leveredthan the U.S.

Chart 26

5

6

7

8U.K.:

0

2

2001 2002 2004 2006 2008 2010 2012

* Source: Eurostat r National Statistics


Realwages arecontracting

Lack

of jobs

housing is only

a matter of time

http://www.mrbpartners.com/research/country-regions/country-report-u-k-december-18-2012/












may need to back away from their tightening

measures and the central bank must stay aggressively

stimulative to keep housing propped up.

Recommendation:

U.S.: Housing & Bank Stocks (chart 28)

Theme:

is over (see the May 7th MRB Theme Report 13). Home

prices have bounced sharply over the past year and

homebuilders are seeing a rebound in sales activity,

and mortgage rates plunged). Lending standards are

tighter than last decade, but have eased since 2008.

Moreover, the overhanging stock of unsold homes has steadily declined because of the

lack of new supply since 2007 and an expanding population. Also, sales have recently

been boosted by large-scale purchases from investment pools buying properties to

rent (i.e. part of the search for yield theme), albeit it is hard to forecast whether this

source of demand will persist.

gradually improving over the past year.

Phase 6:

oversold/undervalued levels, the upleg should slow beyond the next few months.

Low interest rates will remain supportive, but house prices are more likely to grind

of the

). A generation of owners and speculators/investors has been burnt,

so one should be wary of expecting a return to more normal conditions. Likewise,

more appealing than their European and Canadian counterparts.

13 MRB Theme Report , "U.S. Economy: Solid Foundations", May 7, 2013

Chart 28

100

120

140

Real**

U.S.:

2

4

1995 2000 2005 2010

2000 –

3000 –

* Rebased to January 2000 = 100reau


housing and bank

stocks is over...

...but further

upside should

be more

grinding thanthe recent bounce

http://www.mrbpartners.com/research/country-regions/theme-report-u-s-housing-solid-foundations-may-7-2013/








Recommendation:

MRB Theme Report

Assets Exiting The

A lengthy range-trading environment typically unfolds following a post-bubble crash (as

outlined in Part I of this MRB Theme Report 1). The asset class that was once the focus of

attention/speculation becomes shunned and does not participate in the next investment

cycle ( of the ). Prices spend years locked in an extended

consolidation. Once this revulsion phase ends, the asset begins to experience cyclical

swings in line with shifts in underlying fundamentals (much like experienced before it

underwent a mania). These may or may not turn into future mania candidates. There are

a couple asset classes that have recently advanced to this point:

Global Technology Stocks: The technology sector was largely ignored by investors

for a decade following the post-bubble crash in the early 2000 s. However, underlying

fundamentals have improved materially over the past several years, and the painful

memories of the tech fallout have now been overshadowed by housing busts and

repeated debt crises. As the hunt for yield among investors slowly gives way to the

search for growth, we expect a gradual migration towards cyclical stocks, favoring

be future mania candidates (see above). See the April 23rd MRB Theme Report 14 for

further analysis on the global technology sector.

Japanese Real Estate & Equities: Japanese policy blunders following the bursting of the

domestic asset bubbles in the early 1990s, led to more than two decades of economic

The policy initiatives are already helping halt the contraction in domestic real estate

prices. Also, they have attracted the attention of international investors, leading to strongequity gains. Japan should be able to sustainably exit the revulsion phase provided that

th MRB Weekly Macro

Strategy

Final Word:

14 MRB Theme Report , "Global Technology: Superior Growth At Bargain Prices", April 23, 2013

Investors

should gradually

migrate towards

tech stocks

The revulsion

towards Japanese

risk assets

is over...

...provided

policymakers

follow through

plans



http://www.mrbpartners.com/asset-allocation/asset-allocation-asset-allocation/weekly-macro-strategy-april-12-2013/












Candidates For Manias In The Distant Future

The two mania candidates listed below should be on investor radars. However, neither

frenzy, for the foreseeable future. They are merely meant to provide longer-term ideas.

For now, investors should remain focused and continue to allocate capital to the themes/candidates listed above.

Environmentally Friendly Equipment & Products

receiving increased media attention. The world is gradually waking up to the consequences

that our choice of life-style is having on the planet. In response to this shift in public

interest, companies are taking interest in green initiatives and both portfolio managers

(which include environmental, social and governance factors).

That said, it is still early for the environment and related equipment/products to be a

broad-based investment theme. At the moment, these investments are largely reserved

for those that are interested in making a statement and reducing their carbon footprint

to minimize the burden placed on future generations. In this regard, it is bit more like a

charitable contribution than an opportunistic investment.

the environment: industrialization of emerging Asia is leading to massive air pollution

and global commodity extraction damages the land as well as uses up non-renewable

tighten environmental regulations and enforce taxation or other penalties to account for

especially given the tough economic environment and ongoing deleveraging pressures

in much of the developed world.

It may be only once the environment deteriorates to the point where there becometangible consequences to the existing generation, that public outcry will force a

substantial change. There is plenty of evidence showing the longer-term problems

resulting from our current actions, but these will be paid by future generations. The

massive buildup in sovereign debt over the past few decades within the developed world

grandchildren. Change will likely take a crisis, or at least compelling evidence that the

deterioration in the environment causes a material reduction in health conditions across

There is increasedawareness

about the

environment...

...but it is early

for this to be a

mania theme

Not many willpay substantially

more for green

products, or

to clean up

the planet,

unless there

are immediate

consequences...

deleveraging

and the EM is

industrializing





the globe (e.g. air quality via global wind patterns). If the consequences remain isolated

to those in the emerging world, it is unlikely that material change will be demanded by

governments and consumers in wealthier nations.

Recommendation:

Biotechnology

For years, investors have prematurely suggested biotechnology as a potential theme.

Indeed, most structural changes become recognized by the public well before they turn

into true investment themes. For the latter to develop, there needs to be an immediately

in recent decades. Moreover, as the baby boomer generation ages, there is becoming

an increased demand for medical advancements. However, the testing/trial process is

if life-expectancy rates start to decline materially in advanced economies (there are

drop could occur due to the quantity/quality of food consumed or the quality of air

breathed. In this respect, this investment theme may be linked to our previous regarding

the environment: widespread awareness of the linkages between the environment and

future generations. This would enact environmental change and heighten demand as

well as investment in medical solutions to increase longevity.

Recommendation:

Phillip Colmar

health solutions

are provided,

biotech isunlikely to

become a bubble



mailto:clientrelations%40mrbpartners.com?subject=

http://www.mrbpartners.com/my_mrb

http://www.mrbpartners.com/research/policy/policy-monitor-quarterly-february-28-2013/

http://www.mrbpartners.com/research/country-regions/country-report-india-march-5-2013/


http://www.mrbpartners.com/asset-allocation/global-equities/theme-report-currencies-equity-positioning-march-12-2013/


http://www.mrbpartners.com/asset-allocation/global-equities/regional-equities-quarterly-march-21-2013/


http://www.mrbpartners.com/research/themes/theme-report-this-is-not-1994-march-27-2013/



http://www.mrbpartners.com/asset-allocation/global-equities/theme-report-u-s-profit-margins-still-not-reverting-to-the-mean-april-9-2013/

http://www.mrbpartners.com/research/country-regions/theme-report-u-k-inflation-less-than-meets-the-eye-april-16-2013/

http://www.mrbpartners.com/asset-allocation/foreign-exchange/foreign-exchange-quarterly-april-18-2013/




http://www.mrbpartners.com/asset-allocation/foreign-exchange/theme-report-em-currencies-paid-to-wait-for-growth-may-2-2013/


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MANIAS Gold, All Assets MRB May13

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