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Input 15.09.2022

“The energy of the mind is the essence of life” Aristoleles

Good day,

Expect price inflation at the end of the year to be around 8.0%, down a bit from the peak of 9.1% in June, but still high. Inflation will likely fall to around 3%-4% by the end of next year since it remains a question to what extend energy prices are manipulated by political sources.

Oil prices did correct more than -30% from peak prices from USD 130/barrel, and consum-ers keep paying high gasoline prices at the pump – vide our reflections from 13.5.2022 on taxes imposed – is this part of the “green inflation”?

Why is gold peaking? Gold’s reputation as a reliable hedge against inflation seems at risk. Is there something we are not aware of? In mid-2022, measures of U.S. inflation were hitting multi-decade highs. The last time the U.S. experienced out-of-control inflation was in the 1970s and early 1980s. Looking back at this period provides insight into why investors think of gold as a hedge against inflation.

Oil price shocks and energy shortages drove average annual inflation in the U.S. to around 8.8% from 1973 to 1979. During those six years, gold won over many investors as a top inflation hedge since the yellow metal generated an impressive 35% annualized return.

Gold’s performance since that time has been disappointing. From 1980 to 1984, annual inflation averaged 6.5%, but gold prices fell 10% on average each year. Returns not only fell short of the inflation rate, but they also underperformed real estate, commodities and the S&P 500.

Annual inflation averaged about 4.6% from 1988 to 1991, but gold prices fell approximately 7.6% a year on average. Gold may not have offered the best protection against inflation over the past two years, but it has certainly outperformed another widely touted inflation hedge: crypto currencies – which have a dirty little secret that is very relevant to the real world: it uses a lot of energy. How much energy? It is estimated that Bitcoin consumes electricity at an annualized rate of 127 terawatt-hours (TWh). That usage exceeds the entire annual electricity consumption of Norway.

https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220317_2~dbb3582f0a.en.html

At least politics, and not central banks can control it, such as the mania around Electric vehicles (EVs), where we question their true footprint on sustainability. EVs have no tailpipe emissions. Generating the electricity used to charge EVs, however, may create carbon pollution. The amount varies widely based on how local power is generated, e.g., using coal or natural gas, which emit carbon pollution, versus renewable resources like wind or solar, which do not. Lithium-ion batteries are expensive to manufacture, partly due to the high cost of cobalt, mainly mined in the Democratic Republic of Congo (DRC). Cobalt extraction is the largest source of DRC’s export income, and the country accounted for more than two-thirds of global cobalt production in 2021. While some carmakers have started building cobalt-free batteries—many Tesla batteries now rely instead on lithium phosphate—the demand for the hard, lustrous gray material is only likely to increase. The same is true for lithium, nickel, and other materials inside these batteries, which are mined in Russia, Indonesia, and other places where environmental oversight is often poor, labor standards are often lax, and where mining companies have been known to fuel conflicts with local communities. The European Union already regulates EV battery disposal under an “extended producer responsibility” scheme and is set to update its regulations to set specific targets for minerals recovery.

The Economist article of 8 September 2022 puts it in a nutshell: “For a year Europe has lived under the shadow of an energy blockade as Vladimir Putin threatened to turn off the gas taps to the continent. Now the threat has become reality and the prospect of a cold, dark winter is hitting home. On September 5th Russia said it will shut down its Nord Stream pipeline for as long as Western sanctions are in place, sending benchmark gas prices surging by another 30%; they currently stand at the equivalent of around $400 for a barrel of oil. At today’s futures prices, annual spending on electricity and gas by consumers and firms across the European Union could rise to a staggering €1.4trn, up from €200bn in recent years, reckons Morgan Stanley, a bank. The energy shock is now a full-blown political and economic crisis. Already 14% of families in Britain are behind on their utility bills. ArcelorMittal, a steelmaker, will shut down a plant in Bremen. As consumers and businesses reel and a recession looms, behind the scenes there is chaos in energy markets. Because Europe’s power prices are set by the costs of the marginal producer, which is often gas-fired, the gas surge has become an electricity shock, too. Everything that is happening around us triggers sustainable behaviour, which all of us born before the millennials still do/should remember. The question remains, however, how (green) politics, Germany being a bad example, deals with all this.

In the past, the top of an inflation cycle was a great time to reenter the stock market. After the December 1974 inflation peak of 12.2%, the S&P 500 gained about a 37% annual return, after posting around a 26% loss the prior year, according to data from the NYU Stern School of Business on “Historical Returns on Stocks, Bonds and Bills: 1928-2021.”

It is very likely that interest rates are peaking as well, especially considering the sharp upside correction, in comparison with the past – this again could stimulate stock markets.

Certainly, there is a lot of skepticism currently that the recent positive trends in equity markets can be regained. Positioning among investors is very defensive and concerns that earnings estimates might be too high given the more difficult macro environment are abundant.

So far, companies have proven resilient. In particular, high profit margins have been maintained despite continued price pressure.

The risk of a significant slowdown in growth or a recession remains above average due to the persistently restrictive monetary policy and the geopolitical situation. The inversion of the yield curve signals the danger of a hard landing for the economy.

The ongoing adjustment of monetary policy and uncertainties regarding the economic development will keep financial markets in a more volatile environment.

Successful investors follow a long-term strategic asset allocation plan. Adherence to that plan is a prerequisite for reaching the financial objectives set out.

On our portfolio assessment platform (https://jacotpartners.shinyapps.io/jp_portfolio_assessment/) various strategic asset allocations can be modeled and compared.

We remain at your disposal for additional information.

Best regards

Your JIMAG Team

Input 20.06.2022

“The greater the obstacle, the more glory in overcoming it.” – Molière.

Good day,

Now the pandemic and war in Ukraine have triggered a once-in-a-generation reimagining of global capitalism. Everywhere you look, supply chains are being transformed, from the $9trn in inventories, stockpiled as insurance against shortages and inflation, to the fight for workers as global firms shift from China into Vietnam. This new kind of globalisation is about security, not efficiency: it prioritises doing business with people you can rely on, in countries your government is friendly with. It could descend into protectionism, big government and worsening inflation. Alternatively, if firms and politicians show restraint, it could change the world economy for the better, keeping the benefits of openness while improving resilience.

Interest Rates. The Federal Reserve increased the funds rate by 75bps to 1.5%-1.75% during its June 2022 meeting, instead of the 50bps initially expected, after the inflation rate unexpectedly accelerated last month to a 41-year high. It is the biggest rate increase since 1994, and Chair Powell signalled a similar move could come at the next meeting but he does not expect 75bps moves to be common.

Consumer Behaviour.

New technology has empowered consumers. They have unlimited access to information and demand products and services when they want. Social media has given consumers a bigger voice and new channels to communicate with brands and share their opinions with peers. Interesting link to read; https://www.forbes.com/sites/forbesbusinesscouncil/2022/03/03/14-business-leaders-share-their-predictions-for-consumer-behavior-in-2022/amp/

CBOE Volatility Index. When the VIX gets to be above 20, you can expect volatility to be higher than normal over the next 30 days. This level is typically reached during times of market stress such as when there are concerns about an economic slowdown or recession. Interesting is the observation, that the Bankruptcy of Lehman Brothers and COVID had a major impact than the latest inflation and growth concerns. This could result into a good recovery of global markets. Did you notice that the Russian RTS Index is showing the second lowest loss year-to-date, whereas the Swedish OMX-Index is the worst performing comparative index…

https://www.investopedia.com/articles/optioninvestor/09/implied-volatility-contrary-indicator.asp

Bond Prices. A sharp rise in interest rates this year has been a massive impact on fixed income, with losses feeling even more acute when coupled with a volatile stock-market. Investors are not used to seeing dramatic losses in their bond portfolios, particularly when equity markets are also declining sharply.

History shows where we are coming from, and many of us do remember how to live with higher rates, respectively that there is a price for money, especially in combination with its supply.

Avocados. Tesla, Bitcoin and avocados have all risen in tandem in recent weeks as trading activity spikes among millennials. https://bitcoinist.com/bitcoin-price-avocado-trump-tariffs/

So, in hindsight, avocados would have been a good investment since Summer 2021…, in the long term we ongoingly suggest equity, with solid balance sheets, stabile dividend payouts and understandable business models. For crypto we do not have the understanding, so we leave this to other professionals.

As always, we appreciate being challenged with your view and comments on our reflections and would like to wish you a good summertime including a strong recovery of markets, since valuations of solid names have become even more attractive.

Best regards

Your JIMAG Team

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Input 13.05.2022

Good Day

“SELL in May and go away… remember to return in SEPTEMBER” is a well-known saying in finance. It is based on stocks› historical underperformance during the six-month period from May to October. This may refer to trading, but not long-term investing. Our assessment of the markets is that the present correction is an investment opportunity. Inflation has failed to materialize over the past week and the question is whether the destructive war in Ukraine can be blamed for everything. China’s zero Covid policy will also come to an end and GDP growth will recover. Supply chains are already feeling the stress of the Shanghai lockdown and ships are piling up in the world’s largest container port waiting to unload their cargo.

With reference to the war, it is interesting to follow the exchange rate of the Russian currency RUB; its value is stronger than before. But it is also interesting to see how Germany, for instance, has locked itself into long-term gas supply contracts with Gazprom – “take or pay” until 2036. So, in case Germany does not use the gas, Russia can sell it “twice”.

Russia’s seaborne crude exports continue to flow while European Union nations wrangle over sanctions to block purchases and make it harder for the country to ship its barrels elsewhere. Shipments of the nation’s crude were little changed, even as the volume sent to Asia from Russia’s western ports tumbled. Self-sanctioning of Russian crude by European companies has diverted flows to Asia, while having little impact on the overall level of crude shipments.

The CPI (consumer price index) in the US shows that the impact of energy and food makes a difference of about 2%. So, instead of linking everything to interest rates, why not reducing state duty on gas, as seen for instance in Italy, where cars can be fueled at a discount compared to, say, Germany https://de.globalpetrolprices.com/gasoline_prices/Europe/, as these lower prices would consequently affect transportation costs for food and other goods.

It is hoped that a new awareness will boost local production, which will bring the following benefits:

  • Shorter distances = less CO2 emissions
  • Benefits for local economy
  • Crossborder-free communication with manufacturers
  • Enhanced sustainable working conditions – buzzword ESG
  • Fast delivery – just in time

For further information, please feel free to contact us.

Best wishes

Your JIMAG Team

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Input 15.02.2022

«Nothing is more difficult, and therefore more precious, than to be able to decide

Napoleon Bonaparte

Good day,

Ukraine holds a special place in the Russian thinking. Since 2014, and increasingly in 2021, the Russian elite has used historical and cultural reasoning to argue that Ukraine belongs to Russia’s sphere of influence. In 1994, the United Kingdom, the U.S. and Russia solemnly promised to respect Ukraine’s sovereignty and borders in exchange for giving up nuclear weapons. Why is this memorandum not being mentioned as a prelude to de-escalation of the Ukraine crisis?

https://en.wikipedia.org/wiki/Budapest_Memorandum_on_Security_Assurances.

Tensions in the Ukraine-Russia crisis have been simmering for more than two months,  and diplomatic efforts to resolve the issue show little sign of progress. Russia has deployed more than 100,000 troops on its border with Ukraine, sparking Western warnings of an imminent invasion. Moscow, which has repeatedly denied its invasion plans, says it is responding to aggression by NATO allies and dismisses those warnings as “hysteria”. It is difficult to assess what is taking place, since Russian troops may have already entered Ukraine without incident.

Not only Ukraine but also Taiwan, both being small powers grappling with a persistent, and recently growing, threat posed by greater powers, in the first case Russia, in the second China, who both believe these states are rightful parts of their territory or at least sphere of influence in the case of Ukraine. This takes place in a context of heightened global tensions and great power rivalry. The U.S. is a part of both conflicts, although it has not extended the same security guarantees to Ukraine as to Taiwan. As a relatively small state bordering Russia, Norway is interested in maintaining the rule of law and the current international order. In this regard, it is in Norway’s interest to support NATO and EU initiatives vis-à-vis Russia. However, Norway also has a longstanding tradition of successful bilateral cooperation with Russia and maintains dialogue where possible. This is essential at a time of heightened tensions and especially when perceptions of reality continue to diverge. A key problem in this escalating situation is that neither side can offer many, if any, concessions – neither Ukraine, nor NATO, nor Russia. In this case, Norway has little room for manoeuvre and or influence as far as to de-escalate Russia and Ukraine tensions.

Market corrections occur quite frequently and can be described as a regular component part of investing. When the stock market keeps rising steadily for an extended period, there comes a point when the talking heads on television start forecasting a correction. What’s a correction? Nothing more than a moderate decline in the value of a market index or the price of an individual asset. A correction is generally agreed to be a 10% to 20% drop in value from a recent peak. Corrections can happen in the stock market, in a commodity index, or even in the shares of your favourite tech company. “Say the words market correction and many investors immediately think of a crash or a bear market, with the panic-inducing idea that they’ll be living on Ramen noodles through retirement,” says Joseph Hogue, chartered financial analyst (CFA) and a former Wall Street investment analyst. “In reality, stock market corrections happen relatively frequently, and they aren’t nearly as bad as you might think.”

Figure 1: Stock market corrections are fairly common. Pullbacks of 10% or more occurred in 14 of the past 22 years. (annual Performance of Global Equities in green and largest drawdown in red).

The coming weeks and months will show if the recent market volatility has already reached its highs or whether the turbulence might continue. In any case we must remember that market pullbacks are not uncommon and occur in every year. These corrections are considered healthy because they realign valuations, albeit at the time they happen they do not feel healthy at all. Markets are volatile, although volatility has been below average for some time now. Successful investors follow a long-term strategic asset allocation plan, and adherence to that plan is a prerequisite for achieving financial goals set.

For additional information please do not hesitate to contact us.

Best wishes

Your JIMAG Team

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Input 16.12.2021

Zurich, December 2021

As an eventful 2021 draws to a close, we look back on a year full of hope.

It began with an inglorious end to a presidency in America. However, the country with unlimited possibilities gives hope for a more conciliatory leadership that seeks responsible, far-sighted policies in cooperation with the global community. For the first time in America, the vice president, who is the first female, the first black and the first South Asian woman in that role, took office – albeit for a short time.

There is also justified hope with regard to fighting the pandemic and regaining the normality that we have long taken for granted. We succeeded in developing effective vaccines and making them available to a large number of people during the course of the year. New variants of the virus continue to cause uncertainty. However, thanks to enormous research efforts and new technological possibilities, we can now hope with confidence for an end to the pandemic.

Hopes for a rapid recovery of the economy have also been fulfilled. But it has also shown us how fragile our globalisation is. The blockade of the Suez Canal by a single cargo ship led to worldwide delivery delays and bottlenecks that still reverberated months later. At a lecture by Prof. Beatrice Weder di Mauro – she was a member of the German Council of Economic Experts from 2004 to 2012- we were able to learn that this expert’s assessment continues to promise good global growth; digitalisation also plays an important role here. In a very short time, changes have occurred that were thought to be almost impossible. Travel has been replaced by video meetings on «Zoom» or «Microsoft Teams», «home office» or «distant learning» have become the norm. Nevertheless, this will never be able to replace personal contact, and we do look forward to hopefully many encounters in the near future.

The hopes for an easing of the geopolitical situation were only partially fulfilled. The change of strategy by the great powers in Afghanistan led to new misery, the problems in the Middle East remain unsolved and Taiwan and the minorities in China can hardly be discussed internationally.

The hope for a common climate policy with binding international agreements has also not been fulfilled so far. The switch to electric cars can only make a contribution, with new problems related to power shortages, dangers from the continued operation of nuclear power plants, risks in the manufacture and recycling of batteries and the lack of charging concepts.

In an environment characterised by hope, we at JIMAG have consistently implemented our strategies for efficient capital management. The newly developed simulation platform was made available to investors and interested parties. Risk and return characteristics can thus be presented transparently and optimizations can be discussed efficiently.

We wish you a Merry Christmas and a happy and fulfilling New Year.

Warm regards

Bjoern Jacot and the JIMAG team

Input 22.09.2021

“Life is divided into three terms – that which was, which is, and which will be. Let us learn from the past to profit by the present, and from the present, to live better in the future.” William Wordsworth

While Chinese regulators have urged Evergrande to resolve its debt situation, the government has so far stayed silent on whether it will provide financial support.

In 2016, founder and chairman Xu Jiayin was the eighth-richest person in China, worth $4.9 billion. In 2017, Evergrande stocks, share price, profits and revenue surged almost three to four times in value, propelling Xu Jiayin to be one of the wealthiest people in Asia. As of June 2019, his net worth was reported as US$30.4 billion, making him the third-richest person in China. Personally, I am always surprised to which extend big players access debt to expand their business, make headlines in all media only to shake up global markets through spectacular defaults. The world’s most indebted developer must pay bond interest totaling $669 million in note coupons due through the end of this year. The next major bond principal payment hits in March, the first test of $7.4 billion of securities due in 2022.

Market reactions on September 20th 2021 were “interesting”, especially since the stock price in https://en.wikipedia.org/wiki/Evergrande_Group did suffer for a while, and the price level is back to levels from 2010. Wikipedia gives us some background of the company, and to some point it tells us a success-story. But then President Xi Jinping and the Communist Party’s Central Committee have laid out a plan (a 5000 word statement) for a ‘new era’ in which the party has better control over private businesses in China.

Alibaba Group Holding Ltd. pledged 100 billion yuan ($15.5 billion) over five years toward Xi Jinping’s “common prosperity” vision, becoming the latest tech giant to bankroll China’s broad aim to share the wealth. This is quite a turnaround. Previously, private business was not considered very earnest for party membership or influence, but it has gradually entered the heart of the regime…

https://www.mondaq.com/china/land-law-agriculture/89998/ownership-of-land-in-china. Evergrande is one of the largest property developers in China. But land is either subject to government ownership or collective ownership. In principle, municipal land is subject to government ownership and land outside cities is subject to collective ownership. However, one can obtain the right to use the land. Allocated land can be used only for a specific purpose and cannot be assigned. Though the default of a property developer and the consequences might not be directly comparable to historic events in the real estate business as we know them.

A new dimension, we referred to the Reddit community in our «Input 01-02-2021», is the impact of social media influencers, being on Facebook, YouTube, Twitter or Instagram, has taken an important turn. The recent financial phenomenon has completely revolutionized the way the industry now works. With some TikTok influencers now making up to $500,000 and surpassing their banker counterparts, it is clear that the nature of Wall Street is changing.

As an example Elon Musk, the founder of Tesla and SpaceX, has engaged in cryptocurrency and stock market trading while commenting in his Tweets. According to CNBC, a February 4 tweet from the tech billionaire caused the value of Dogecoin, a cryptocurrency inspired by a meme of a Shiba Inu dog, to surge more than 50%. In 2018, the Securities and Exchange Commission (SEC) charged Musk with market manipulation after tweeting that he was considering taking Tesla private; this tweet resulted in a 6% increase in Tesla’s stock.

Most of the influencers have no Wall Street experience, nevertheless their followers react on their comments. Reaching younger and new clients has always been a hurdle for finance firms, but with the new introduction to Wall Street influencers, this is no longer a problem.

We at Jacot Investment Management have our roots in investment management. Yes, we follow the latest market developments and even some tweets and from time to time some influencers. But we would never ever base our decisions on short term market gyrations Investment decisions should always been made according to a process combining relevant information, technology, and long-term experience. We pursue a consistent methodology for our clients to achieve their investment objectives irrespective of the latest market noises and report our results transparently Allocations-Tool.

As always we appreciate your reflections on our thoughts, and are looking forward to discuss different views

Best wishes for good health

Bjoern and the entire JIMAG Team

Input 17.05.2021

“The thing that doesn’t fit is the thing that’s the most interesting: the part that doesn’t go according to what you expected” Richard P. Feynman, American Physicist

Good day,

Global equities realized a positive performance since the start o f 2021 and reached new all-time highs. The positive momentum was supported by good company news as earnings expectations were largely exceeded. So far almost 9 out of 10 companies have reported a positive earnings surprise and three out of four have reported a positive revenue surprise. This marks the highest percentage of S&P 500 companies reporting a positive surprise since tracking began in 2008. The earnings growth rate for the S&P 500 reached almost 50% and marks the highest year-over-year growth rate for more than 10 years. Despite this impressive numbers the valuation of the equity market in the US reached 21.6 times forward earnings. This ratio is above the 5-year average (17.9) and above the 10-year average (16.0).

Global bonds on the other hand realized a negative performance so far with yields and interest rates increasing substantially. The development was driven by inflation expectations that continued to rise and, in the USA, reached levels last seen in 2013. Raw material prices indicate further price pressure, as for example copper is quoted above 10,000 for the first time since 2011, crude oil rose again to 70 and grain prices have doubled compared to the previous year. Inflation was also the big buzzword of the reporting season. In their reports, companies made various statements on the subject due to logistics restrictions, rising input costs and general price increases.

Economic data confirmed the ongoing recovery. The US economy grew by over 6% in the first quarter thanks to high consumer spending. This dynamic could even intensify in the current quarter. The expansionary monetary policy has been confirmed until further substantial progress has been made to improve economic development, which refers primarily to the employment situation.

So far, financial market investors have shown little concern about a potential rise in inflation. On the one hand, the expectation dominates that the upward pressure on prices will be temporary. On the other hand, it is assumed that the companies will be able to pass on the price increases due to the strong demand based on the confidence that the economy will recover significantly as a result of further reopening measures.

For weeks, tensions have been building between Israelis and Palestinians in Jerusalem, with a confluence of recent events and longer-term trends leading to the latest violence. Israeli restrictions around holy sites during Ramadan; increasingly intense protests and violence on both the Israeli and Palestinian sides, with each side blaming the other for initiating; and a court decision, now under higher court review, to remove Palestinian families from an East Jerusalem neighborhood preceded this latest round of conflict — the most violent since the 2014 Gaza war. As has been the case many times before, the Israeli-Palestinian conflict will not settle into a frozen one, able to be cast aside by the international community. Rather, without active measures to address flashpoints and convince publics that peace with the other is possible, events could spiral out of control.

The recent attack on the Colonial Pipeline, a critical part of U.S. petroleum infrastructure, which hit critical national energy infrastructure may represent a new level of ransomware, but there is one aspect to the vulnerability exposed in U.S. defenses that is a reminder of what experts already knew: the federal government and private enterprise have struggled for decades to build a deeper relationship on cybersecurity to stay ahead of accelerating, and more advanced threats. hack raises a different set of issues, including government and industry debate over whether to pay the ransom demanded by hackers. As one of the consequences there will be global focus on strengthening cybersecurity through all the sectors.

Please challenge us with your view on the situation, since our way to reflect does only cover a part of a complexe theme.

Best wishes for good health

Bjoern

Input 01.02.2021

“I am always ready to learn although I do not always like being taught.”– Winston Churchill

Good afternoon

Since March 2020 all we are all  being challenged with new social patterns and digital behaviours – continuation of the 4th industrial revolution 4.0 – and limited travelling and personal meetings. Home office, distance learning, videocalls, e-commerce, initiated by the tech world of Silicon Valley , have taken  over and elements such as limited private invitations, outdoor activities – revival of the picnic  – as vital balancing elements have become the “new normal”.

https://finviz.com/ is a site  started  by Nik, my 16-year-old son, who created a smashing performance in 2020, being  part of the Reddit community WallStreetBets . I asked Nik what happened to NOKIA and BETHBATHBEYOND and through him I found the explanation:

In January 2021, New York markets had just fired up, and the investing world was tuning in for Thursday’s episode of the continuing drama: Legions of Robinhood Markets investors versus hedge-fund Goliaths. But within minutes, a shock wave invisible to the outside world rattled the mechanics of Wall Street — sending Robinhood rushing for more than $1 billion of additional cash. The stock market’s central clearing hub had demanded large sums of collateral from brokerages including Robinhood that for weeks had facilitated spectacular jumps in shares such as GameStop Corp.

The Silicon Valley venture with the wildly popular no-fee trading app came to a crossroads. It reined in the risk to itself by banning certain trades and unwinding client bets – igniting an outcry from customers and even U.S. political leaders. By that night, word was emerging that Robinhood had raised more than $1 billion from existing investors and drawn hundreds of millions more from bank credit lines to weather the storm.

When the history of this month’s stock mania is written, it may be a story of how retail traders set out from Reddit message boards to challenge Wall Street’s status quo — and ended up battering their beloved brokerage too. For weeks, Robinhood, with a mission “to democratize finance for all,” has been their trading platform of choice as they inflicted billions of dollars of losses on hedge funds by sending stocks that those firms had shorted into the stratosphere — a sort-of populist crusade into the staid world of finance.

Those juniors, Nik included, are  probably also too young to remember that a couple of years ago, in another troubled time  (the GFC, Global Financial Crisis), we,the “old guard”, also went through our GME episode…back then it was called Volkswagen. Let’s go back in time. The year is 2008, the world is falling apart and demand for cars plummets … autos are filing for bankruptcy left and right, but VW, despite its debt load and lack of business prospects, manages to survive  a few  quarters and post better-than-expected earnings making its stock the best outperformer of the sector but also the best short candidate. Flagship Hedge Funds (HF) start smelling blood and initiate short position in a name supposedly poised for bankruptcy. In reality, PORSCHE, at the time a frequent but unrelated business partner, had decided to seek more voting rights and control of the VW board and embarked on a buying program a couple of years back. VW continued to inch up through 2006 and 2007, going from about €30 in 2005 to over €150 by 2007, seemingly absent any outside reason ….and as the stock continued to grind “inexplicably” in the midst of the GFC, shorts intensified to balloon to 12% of outstanding shares (yes, I know it sounds ridiculous now). The trigger came on a Sunday night of October 2008 (it’s always on a Sunday night!) when Porsche disclosed owning 43% of VW and 32% via calls. Minor detail was that the German government also owned another 20% leaving the true available float to basically close to 0. When they woke up on Monday (don’t know if they slept though having had the entire Sunday to mull over their position), shortsellers caught off guard by this new supply/demand imbalance had no choice but to cover. VW rocketed to €900 in a matter of days, becoming the world largest market cap almost overnight (300b at the time, it also sound ridiculous now) with veteran HFs losing some $30b in the process. At a time when autos were at the brink of extinction, Porsche had effectively made more money trading stocks than selling cars. We are not talking about a forgotten video-games mall name that a crowd of retail day-traders decided to magically bring back to life. VW was THE jewel of the German crown, a 17% percent weight in the DAX (the equivalent of AAPL, MSFT, AMZN and FB combined in today’s SPX). Ask any market participant what he was doing the day of the VW infinity-squeeze … he will tell you without blinking. And then? Once the last short got covered, , the stock retreated back to its 2008-fundamental reality, lost 90% of its value ….and never really recovered. Today where TESLA’s market cap did exceed the peer as contrast – TESLA trades at 1200times earnings & zero dividends, VOLKSWAGEN at 12times and 2.7% dividend yield.

During my studies I was tought: «When interest rates are low, individuals and businesses tend to demand more loans. Each bank loan increases the money supply in a fractional reserve banking system. According to the quantity theory of money, a growing money supply increases inflation. Thus,low interest rates end to result in more inflation».

A new theory of interest rates, the Neo-Fisherian theory, predicts a low inflation rate due to a central bank’s low interest rate. After several years of near-zero interest rate policies and low and even negative inflation rates in the Eurozone and in the US, this theory gained momentum in academic circles. Indeed, central banks have had difficulty meeting  their inflation targets. In 2021, central banks will maintain   their ultra-loose monetary policies, even as  the global economy is expected to accelerate away from last year’s coronavirus-inflicted recession. In Bloomberg’s quarterly review of monetary policy, which  covers 90% of the global  economy, no major Western central bank is expected to hike interest rates this year. Only the ECB increased its emergency bond-buying program to 1.85 trillion euros ($2.3 trillion) in December and extended it through March 2022. The 500 billioneuro boost won broad backing in the Governing Council only because President Christine Lagarde conceded that not all of that amount necessarily needed to be spent.

Best wishes for a good, new and healthy week

Bjoern

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Input 22.12.2020

“To be without some of the things you want is an indispensable part of happiness.”

Bertrand Russell

Not only our wellbeing…

According to a recent study by the London School of Economics it has been reported that wellbeing is the determining factor for happiness. The study, «The Origins of Happiness», concluded that most human misery is not due to economic factors but to failed relationships and physical and mental illness. Along these lines of reasoning, we must realise that the current pandemic not only threatens our wellbeing and our economy but also endangers our happiness.

…distractions and historic events…

As if the pandemic would not have been sufficiently threatening, we had to cope with more challenges this year.

Apart from some distractions, the elections in America could be perceived as historic but not because of the president but because of his vice-president being the first female, first black and first South Asian in this role. Her first statement will certainly be remembered: «but while I may be the first woman in this office, I will not be the last because every little girl watching tonight sees that this is a country of possibilities».

Significant events also happened in the financial markets. Losses in tremendous amounts accumulated in only a few days in the first quarter. We saw oil prices that settled in negative territory meaning that the buyer of physical oil had been paid to accept the delivery.

and memorable achievements…

Undoubtedly, we also saw memorable achievements in medicine. We have well-founded hope that a vaccine protecting people from the transmission of the virus might be available in due time. That would bring into view a potential end to the pandemic that battered economies and upended daily life worldwide

…we at JIMAG proceeded with our strategies and successfully launched two new investment modules.

In this special and historic environment, we at JIMAG proceeded with our strategies to efficiently manage investments and preserve capital in difficult times. After thoroughly analysing our assumptions and a lengthy research period, we successfully launched two new investment modules in the second half of the year. We are confident that these modules help our clients to navigate in these specials times as they provide a solution to realise equity like returns but with substantially reduced levels of risk or serve as an alternative for the cash management.

We wish you a peaceful Christmas season and a happy and above all healthy New Year.

Warm regards

Bjoern Jacot

Input 10.09.2020

“Correction does much, but encouragement does more” Johann Wolfgang von Goethe”

Good afternoon

Even before the coronavirus pandemic, many supply chains were under pressure due to the proliferation of e-commerce, increasing shipping and consumer expectations in terms of availability as well as constant geopolitical battles, such as, for example, Brexit and the US-China trade war. Then came the pandemic, which created a doomsday scenario for supply chains driven by travel restrictions, stay-at-home orders, massive fluctuations in demand and uncertain prospects. Although the projections are still uncertain, we expect three main trends to emerge that will lead to a faster shift to online from offline: more flexible supply chains, greater diversification and contingency planning. In addition, we believe that senior executives in many companies attach greater importance to this area. In our view, this will accelerate investments in several key supply chain technology areas. These include fulfillment technologies, supply chain planning, warehouse automation, supply chain and logistics visibility and last mile technologies. Although not typically considered as supply chain technologies, e-commerce platforms should also see a significant benefit – and many already have.

The US and China showed signs of de-escalation of the trade tensions as both sides reaffirmed their commitment to the trade agreement signed earlier this year (source: Bloomberg.com). In the latest announcement, the US discussed the steps taken by China to comply with the terms of the agreement, which were depicted to be improving despite not being on pace with the year-end goals. This improved understanding led to a constructive view on US and Chinese stock markets, moving equity indices, such as the S&P 500 Index SPX, up to reach new all-time highs. Chinese stock prices went up as well, with a recent period of stagnation but showing short-term signs of ticking higher again.

The Chinese equity space is no stranger to the trends in 2020, after all, it was one of the first areas internationally to rebound from their COVID-induced economic downturns. There are a variety of names within the Chinese technology sector that have shown improvement, as evidenced by the strength of funds oriented toward that area. One of the most valuable companies in China, Alibaba Group Holding ADR BABA, has advanced in recent weeks which speaks for a broader improvement of the Chinese technology and internet industry.

The measures taken against the corona virus were accompanied by increased volatilities and downside risks within the markets. To manage these risks, we combine our in-house expertise with best-in-class technologies, including the Nowcast technology of OpenMetrics (an ETH Spin-Off), which strictly relies on regularly and frequently measuring the current state of the markets and reacting according to those measurements. This in contrast to predictive models, which work on well-defined and stationary states only. Real life systems, such as the weather, might show such states, but in most cases not for more than a couple of days, even though the physical principles for the weather are solid and well-defined. In financial markets, such states which could be exploited by predicting future states, do not seem to exist outside of the high frequency domain.

The Nowcast approach is not based on such assumptions but can deal with erratic systems by always adapting to the current state. Therefore, we are achieving similar risk profiles as passive hedging strategies while realizing more of the upside.

This approach is becoming increasingly popular in the pension fund industry and forms the basis of our modular framework, which offers customized solutions for different risk profiles. A new module, based on OpenMetrics’ Nowcast technology, will go live in the coming weeks.

Extremely low or even negative yields erode the risk-free foundation of earnings. As a result, investors will be more exposed to fluctuations in market prices. Fixed income instruments might no longer efficiently fulfill their diversification function. If this environment persists, new approaches will be required to generate income while preserving capital. To achieve consistent returns, strategies based on alternative sources of income could be considered.

As with the Nowcast approach, the objective of such strategies must be to achieve consistent returns, as only stable returns allow accurate long-term forecasts of investment results. Using a systematic, non-predictive technique based on volatility premiums, a defensive investment strategy was provided to our clients to complement their multi-asset portfolios:

Please challenge us with your ideas and comments.

Best wishes

Bjoern