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Mar 2

Jun
2016

Is the Fed behind the curve?

This month I have moved my attention to Washington. I am concerned that the Federal Reserve Bank is far too inactive, potentially leading to much more significant inflation down the road. I should stress that our European readers shouldn’t worry too much, as the situation is fundamentally different on this side of the Atlantic, but rising U.S. inflation will obviously have at least some effect on European interest rates.

Mar 2

May
2016

Abnormalities in the New Normal

Certain investment dynamics are behaving very differently post the 2008 Global Financial Crisis. Understanding these changes are important as they can provide opportunities for investors. In this month’s Absolute Return Letter, we will look at the impact of some of these ‘abnormalities’ and how investors can profit from them.

Mar 2

Apr
2016

A different 
take on Brexit

With 2½ months to go before the Brexit referendum it is anybody’s guess what the outcome will be. In this month’s Absolute Return Letter we take the rare opportunity to comment on a political event. Regardless of where you reside, the result is likely to be important for you. Like most things in life, the choices are not black and white.

Mar
2016

If only we
could blame China

We challenge the widespread belief that the steep fall in commodity prices is all about the economic slowdown in China, and we arrive at the conclusion that the combination of high, and rising, debt levels amongst corporates in emerging markets, and a strong U.S. dollar – particularly when measured on a trade weighted basis – is a more likely cause.

Archive

2016

June – Is the Fed behind the curve? This month I have moved my attention to Washington. I am concerned that the Federal Reserve Bank is far too inactive, potentially leading to much more significant inflation down the road. I should stress that our European readers shouldn’t worry too much, as the situation is fundamentally different on this side of the Atlantic, but rising U.S. inflation will obviously have at least some effect on European interest rates.

May – Abnormalities in the New Normal Certain investment dynamics are behaving very differently post the 2008 Global Financial Crisis. Understanding these changes are important as they can provide opportunities for investors. In this month’s Absolute Return Letter, we will look at the impact of some of these ‘abnormalities’ and how investors can profit from them.

April – A different take on Brexit With 2½ months to go before the Brexit referendum it is anybody’s guess what the outcome will be. In this month’s Absolute Return Letter we take the rare opportunity to comment on a political event. Regardless of where you reside, the result is likely to be important for you. Like most things in life, the choices are not black and white. Enjoy the read.

March – If only we could blame China We challenge the widespread belief that the steep fall in commodity prices is all about the economic slowdown in China, and we arrive at the conclusion that the combination of high, and rising, debt levels amongst corporates in emerging markets, and a strong U.S. dollar – particularly when measured on a trade weighted basis – is a more likely cause.

February – A Frail New World We argue why the long-term outlook for GDP growth and for returns on risk assets is uninspiring. We are often ‘accused’ of allowing the negative long-term demographic outlook to colour our view on risk assets in general, but we argue why the demographic outlook is only one of (at least) four factors, which will hold back GDP growth as well as returns on risk assets in the years to come. 

January – The Biggest Stories of 2016? Which stories are most likely to clear the front pages of the financial newspapers in 2016? In this month’s Absolute Return Letter we take a closer look at that and arrive at the conclusion that three favourites stand out. We discuss all three, and we look at the implications for financial markets, should any of them unfold. Enjoy the read and happy New Year.

2015

December – The Next Driver of Productivity This month’s Absolute Return Letter picks up from last month’s discussion. Amongst other issues, we look at the lessons learned from the financial crisis; we project what impact poor demographics are likely to have on GDP growth around the world and, last but not least, we take a closer look at what the next major driver of productivity growth is likely to be.

November – Should FIFAA Be Red-Carded? We take a closer look at portfolio construction in an environment which is shaping up to be very difficult. We start with a review of FIFAA – Harvard Management Company’s new approach to portfolio construction, and we compare it to our own. We won’t discuss specific investment – not because we are short of ideas, but because present rules and regulations prohibit us from discussing unregulated investment schemes in the public domain. Should you wish to learn more, please contact us.

October  – The Real Burden of Low Interest Rates Almost the entire world is concerned about the high levels of debt, should interest rates begin to rise again, but we are not. Don’t get us wrong; a meaningful increase in debt service burdens could do substantial damage to a global economy so loaded with debt. We just don’t think it is going to happen. Economic growth and inflation are likely to stay comparatively low for many years to come, and so are interest rates. But that raises another question: What damage can very low interest rates for an extended period of time actually be expected to do?

August/September – Doodles from an eventful summer This month’s Absolute Return Letter is a little different. It was a very eventful summer with many incidents impacting financial markets, and we have compiled all these topics into one letter. China is not surprisingly a core subject. If the Chinese economy is slowing (and it is), we don’t think China is in for a hard landing. If anyone is in for a hard landing near term – and this may surprise you – we think the U.S. and the euro zone are far more likely candidates.

July – A return to fundamentals? June was a very eventful month, in particular in Europe. Greece went from bad to worse, and the Greek people have now been asked to vote on their own destiny. However, Greece is not the only subject in this Absolute Return Letter. Financial markets have in many ways behaved oddly since the near meltdown in 2008. We look at whether we are finally beginning to see some sort of normalisation – as in a return to the conditions we had prior to 2008 – and what that would mean in practice.

June – Are bond investors crying wolf? There has been quite a dramatic increase in interest rates in most markets and in Germany in particular. We are looking into whether this is the beginning of something much bigger. For those of you with too little time on your hands here is the conclusion: This is NOT the beginning of something much bigger. Economic growth will stay low for many years to come,  and central banks have no intentions of suddenly flooding the bond market with sell orders.

May – How to dress for a rainy day In recent months we have been through many different macro scenarios and have concluded that interest rates will stay low for a long time to come, and equity returns will be anaemic. In this month’s letter we tackle the art of portfolio construction in a low return environment; in other words, where are the right – and wrong – places to be? Admittedly, regulatory requirements limit our ability to be overly specific, but there should still be enough of interest.

April – The'Perfect Storm' A highly unusual set of circumstances have underpinned the equity bull market of the last 35 years as multiple factors coincided to create the perfect breeding ground for exceptional equity performance. Unfortunately we should prepare for more modest returns ahead as it is exceedingly unlikely that those circumstances will be repeated in our lifetime.

March – Tigers in Africa This month we discuss unrealistic expectations which is something we are all guilty of from time to time. And, if we don’t do our homework properly, we may be expecting things to unfold in a way that just isn’t going to happen. We look at why it is unrealistic to expect equity returns to be in the double digit range over the next several years, why central banks are not printing money like many believe they are, and a few other things.

February – The End Game Many investors have been on tenterhooks ever since 2008 believing that we have never fully solved the issues which created the financial crisis. Via QE central banks have managed to ‘lower the temperature’, however the patient is still sick. In this month’s Absolute Return Letter we take a closer look at a number of ‘end games’ and conclude that the most likely outcome is simply a continuation of the slow growth which we are currently experiencing.

January – Pie in the Sky? January each year brings with it a host of forecasts, many of which are 'pie in the sky' – silly predictions on equity markets, interest rates and currency movements. We are not in that game. Instead we focus on structural trends when analysing the future. In this letter we argue why these are more relevant for investors.

2014

December – A Brave New World Over the next decade, the investment world is likely to be quite different from anything we have seen over the last 30 years or so. Interest rates will stay low for much longer than nearly anyone is currently predicting, the dividend investor will return to glory, passive equity management will win substantial market share from active managers, fees will fall much further than they already have, and some investment strategies which are only alternative by name, will struggle to survive in their current form.

November – Snail Trail Vortex The world is undergoing a radical shift towards lower economic growth at the moment. Some of the dynamics driving down growth are structural in nature (e.g. demographics), and even the most dramatic monetary or fiscal policy will not change that. We are in for a period of lower, but still positive, global economic growth whether we like it or not. It is almost unthinkable, at least the way we see the world, that this number will begin to increase any time soon and portfolios must be constructed accordingly.

October – Six Months of Nothing The Absolute Return Letter is back – regrettably to a more unsettled world than we experienced in March when we last wrote. So far Europe has been slow to react to policy initiatives, and it is no longer unthinkable than the Eurozone will experience a re-run of the Japanese nightmare – deflation. Deflation is particularly problematic when combined with high debts. In that regard Italy stands out with particularly high national (but not private) debt. Political problems have also escalated over the past seven months. Russia has been aggressive and so have extremists in certain Muslim countries. We examine the implications for financial markets in this letter.

March – A century of Policy Mistakes A century ago Argentina ranked as one of the wealthiest countries in world. Today it is a shadow of its former self. A long string of policy errors explain the long slide from riches to rags. Europe, like Argentina 100 years ago, is facing enormous challenges - as well as potential pitfalls - and the management of those challenges will define the welfare path for many years to come. Unfortunately, the early signs are not good. Our political leaders, afraid to face public condemnation, have so far chosen to ignore them

February – Challenging the Consensus Investors are overwhelmingly bearish on bonds going into 2014. In this month’s Absolute Return Letter we challenge that view and look at various reasons why the bond market may surprise most people and deliver a positive return this year. In no particular order, those reasons are: The emerging market crisis escalates further, The Eurozone crisis re-ignites; The disinflationary trend intensifies and potentially turns into deflation; The economic recovery currently underway proves unsustainable; Flow of funds provides more support for bonds than anticipated.

2013

December – Squeaky Bum Time QE has led to asset price inflation. That much we established in the November Absolute Return Letter. In this month’s letter we go one step further and look at whether we are now in bubble territory. Considering the strong bull-run we have experienced in 2012-13 it is perhaps surprising to learn that, in a historical context, it is not an outsized rally, nor are equity markets - with the possible exception of the United States - particularly expensive.

November – Euthanasia of the economy? QE has had two noticeable and positive effects. It has saved the world from a financial meltdown not once, but twice, and it has had an overwhelmingly positive impact on asset prices, so in that respect QE has been a success. However, there are growing signs that QE may be beginning to impair economic growth and it may even cause dis-inflation, precisely the opposite of what was widely expected. For these reasons we believe it is time to call it quits and begin to tackle the root problem – a banking industry still suffocating from bad loans.

October – Heads or tails? The number of people on planet earth will grow from around 7 billion today to over 8 billion by 2030. At the same time, the old-age dependency ratio in many countries around the world will reach critical levels, creating significant headwinds for economic growth and financial markets across the old world. Meanwhile, almost 3 billion people from all over the world will join the middle classes between now and 2030, a shift which may provide a counterbalance. The outcome is far from clear, however, and that is the topic of this month’s Absolute Return Letter.

September – A case of broken BRICS? EM currencies, stocks and bonds have struggled since the Fed signalled its intent to change course in late May. This has seemingly triggered an exodus of speculative capital from emerging markets but, as is always the case, there is more to the story than that. EM countries (ex. China) no longer run a current account surplus with the rest of the world, and this hurts global liquidity. It is not yet a re-run of the 1997-98 Asian crisis, but it has the potential to become one with all sorts of consequences for bond yields in developed markets, currency wars, etc.

July – Much Ado about Nothing The growing presence of political incompetence is beginning to annoy the world’s central bankers. BIS has sharpened its knives, but it cannot have it both ways. Simultaneous de-leveraging in the public and the private sectors would lead to a serious economic set-back. Meanwhile, nobody can afford for interest rates to rise, but can central banks actually control the yield at the long end of the curve?

June – The Wisdom of Crowds Are markets efficient? This is a debate that has been on-going for decades. In one corner you have the proponents of the Efficient Markets Hypothesis. In the other corner you have the supporters of behavioural finance. Out of this long lasting stand-off a new paradigm is emerging called the Adaptive Markets Hypothesis which aims to reconcile the two.

May – In the long run we are all in trouble Investors appear preoccupied with central bank policy. We argue that investors are quite right in keeping their eye on the ball but, to us, it looks as if they are focusing on the wrong ball. The real worries for the long term are demographics and negative real interest rates and the effect these factors may have on equity returns.

April – The Need for Wholesale Change The seeds of the next crisis have probably already been sown as a consequence of the lax monetary policy currently being pursued. Frustrated with the lack of direction from political leaders, most recently witnessed in the handling of the crisis in Cyprus which was a complete farce, central bankers from around the world are likely to demand change, but politicians will have to be pushed into a corner before they will respond to any such pressure. Hence nothing decisive will happen before the next major crisis erupts.

March – Expect the Unexpected With real interest rates being negative in many countries we expect low returns on both equities and bonds going forward. Many investors have responded to that by allocating more and more of their assets to passive strategies such as ETFs. We believe it is the wrong approach for this type of environment.

February – Currency War or Something Altogether Different? We cannot recall ever having encountered as much bearish sentiment when it comes to the outlook for bond prices as we see at the moment. In this month's Absolute Return Letter we question whether the pessimism is justified or if there is something else at play.

2011

December – The Facts They Don’t Want You to Know Our industry needs a good old fashioned kick up its backside.

November – Ignore Egan-Jones at Your Peril We take a closer look at Italy's refinancing needs and suggest corporate bonds as an alternative to government bonds.

October – Point of Maximum Pessimism? The current level of pessimism is quite overwhelming, in particular in Europe where the eurozone crisis has taken its toll on investor confidence.

September – If Carlsberg Did Mortgages We focus on one particular idea which will greatly benefit economic growth at no cost to the tax payer – reform the mortgage finance system across the world, using the model developed by the Danes over the past 200 years.

August – Why U.S. of AA Matters We have never published the Absolute Return Letter in August before; however, the unprecedented events of recent days and weeks have forced our hand.

July – What Happens Next? Only a political/fiscal union can now save the euro in its current form, but there seems to be zero appetite for that at this stage.

June – Five Misconceptions Squashed We take a look at five of the most widely accepted investment doctrines today, and we challenge each and every of them.

May – The Case for Human Ingenuity We take a closer look at oil and reach what many of our readers will probabaly find a surprising conclusion: We believe that we are approaching the end of the oil era and that oil prices will undergo a substantial correction over the next several years.

April – Confessions of an Investor We advocate a different approach to investment and risk management.

March – From Dublin to Tripoli We take a closer look at two remarkable events unfolded during the month of February (i.e. the uprising in the Middle East and North Africa and the Irish elections) and what the implications may be for financial markets.

February – Find the Hat We celebrate the Chinese New Year – the year of the rabbit - by taking a closer look at what is now the second largest economy in the world.

2010

December – The Dirty Dozen We seek to identify the risks and uncertainties which may shape the investment landscape of 2011.

November – Four Rather Sick Patients US monetary policy is likely to push emerging market currencies to new highs, but the euro and the pound should also strengthen further against the dollar, at least in the longer run. Only the yen appears to be in a bigger pickle than the US dollar.

Not The Absolute Return Letter – A New Equity Fund with a Different Approach Our policy is not to market our products and services in that letter. However, today we take the unusual step of writing to all our subscribers to inform them of our new equity offering which we believe is truly unique.

October – Insolvency Too On 1st January 2013, a new directive regulating insurance companies which conduct business within the EU will come into effect. It is called Solvency II and unless you work in the insurance or the pension industry the chances are that you will never have heard of it before.

September – Beggar thy Neighbour We differentiate between the predicament of the US versus Europe and conclude that investors have become too bearish on US growth prospects and too optimistic on European.

July – The Art of Outperformance We focus on a couple of ideas for equity investors who have grown frustrated trying to beat the market – which is very difficult indeed.

June – The European Disease The eurozone is facing its biggest crisis so far. Many countries are flirting dangerously with a toxic combination of high debts and low growth and are at risk of falling into the dreaded ‘debt trap’.

May – The Commodities Con Financial demand is growing much more quickly than industrial demand, suggesting that many commodities are no longer real assets but financial assets.

April - When the Facts Change We look at the implications of being in a structural bear market and we make five specific recommendations: (1) Beware of echo bubbles; (2) Do not benchmark; (3) Include uncorrelated asset classes in your portfolio; (4) Do not use leverage; (5): Prepare for bond yields to surprise everyone by falling further.

March – The Retirement Lottery Most of us have about 20 years to secure our retirement – from our mid 40s to our mid 60s.

February – If PIIGS Could Fly An increase of more than 50% in global equity prices can be very seductive, and nine months of virtually uninterrupted gains have led many to believe that the problems of 2008-09 are now largely behind us.

2009

December – Mental Midgets and Moral Pygmies The role of the consumer and the fact that he has taken on more and more debt.

November – Time to Cut Taxes? The focus this month is on government and why our leaders need to think outside the box to solve the crisis we are in.

October – A Country for Old Men and a Bit of Samba This month’s Absolute Return Letter is about demographics and is the second in our series about major trends defining the future of the world we live in.

September – The Hamster on the Wheel We outline the most important factors investors should consider and over the next few months will examine each one by one.

July – Make Sure You Get This One Right The most important investment decision you will have to make this year and possibly for years to come is whether to structure your portfolio for deflation or inflation.

June – Green Shoots or Smoking Weed? Our conviction remains high that the global economy will stage a recovery later this year but, unfortunately, we remain equally convinced that it will prove temporary and that we will face more gloom and doom soon afterwards.

May – The $33,000,000,000,000 Question Credit markets are gradually thawing whilst equity markets are on steroids.

April – The News Which Never Made the Front Pages Markets have been distracted recently as the focus has been on issues such as executive pay packages at AIG and the preparations for the G20 summit. This has created a unique situation where events, which would normally make the front pages, have not received the attention they deserve.

March – Europe On the Ropes Europe’s banks are far more leveraged than American banks which would be acceptable if the assets were of high quality; however, many of them have loaded their balance sheets with junk dressed up as AAA. In many Eastern European countries, the economy is now in freefall and the local banking system is at risk of collapsing.

February – Do BRICs (and Germans) Eat PIGS? We argue that several of the member states are in much bigger trouble than they are prepared to admit and that something will have to give.

2008

December – Do Dead Cats Bounce? We argue that, despite a somewhat more benign environment over the past couple of weeks, markets are by no means ‘back to normal’ (whatever that means these days), and it is this ‘normalisation’ which needs to take place before we can finally declare victory over the bear market. We look at the conditions which must fall into place for a more sustainable equity rally to unfold.

November – When the Chickens Come Home to Roost We look at two issues which worry us - the banking sector's exposure to emerging market countries and the large redemptions facing the hedge fund industry.

October – The Helicopters are Coming We argue that, over the next year or so, the world's major central banks have a great opportunity to ease monetary policy.

September – Observations on a Crisis We look at property as an asset class which is still considerably overvalued, even after the correction of recent months. The key question is how much damage has been inflicted on the real economy.

July – Shadow Banking, Private Credit or…? Even the deepest of crises will throw up opportunities, and we believe that the current crisis, with all the problems facing the world's banking industry, has created just one such opportunity.

June – The Untold Story We take a hard look at the arguments underpinning the bull story on oil prices in order to assess if Masters has a point or not.

May – Food for Thought The consequences of the rapid rise in energy and agricultural commodity prices are far reaching and perhaps not as well understood as they should be.

April – The Moral Balance Sheet We look at how years of abnormally high returns have "corrupted" investors and reveal why we believe the years ahead of us will offer very different, and certainly less extravagant, returns. At the very end we also bring a new investment idea to the table.

March – A Great Buying Opportunity? Once every few years events conspire to create opportunities which are out of the ordinary and which have the potential to generate extraordinarily attractive returns.

February – For Richer, Not Poorer We have identified a number of investment themes which will define the investment year ahead.

2007

December – The Future Looks Bright(er) We look at why November was an ugly month for investors and find that the risk-reduction exercise currently being undertaken by banks across the world has played a big role.

November – It Ain’t Over till the Fat Lady Sings Why is it that global equity markets have performed so resiliently on back of the severe credit problems we have been faced with in recent months? Can equity markets continue to ignore the credit problems? Is the credit crisis behind us now or is it likely to get worse before it gets better? Are $96 oil prices justified?

October – Wagging the Fat Tail We explore the operations of our central banks in recent weeks as well as the fundamental problems in using standard value-at-risk models to assess market exposure.

September – Another Black Swan? So profound has the summer crisis been that it has left deep scars in the investment landscape and the repercussions will be felt for a long time to come. Topics covered include the implications for the private equity industry, pension funds, gold, property, hedge funds and much more.

July – The beginning of the End? We take a closer look at investors' perception of risk and how that is manifesting itself in asset prices.

June – Cooking the Books We will take a closer look at inflation and why it may be premature to celebrate.

May – The New Religion We confront the issue of global warming, or climate change as we prefer to call it.

April – The Emperor’s New Clothes A number of high profile investment banks entered the market with new 'innovative' products on the premise of being able to replicate hedge fund returns. We are highly sceptical of these products which we consider simply as marketing gimmicks. We examine the arguments and explain our rationale.

March – The Volatility Puzzle We focus on volatility.

February – The Price of Globalisation We argue that the two biggest concerns should be inflation and protectionism - however not for the reasons you already know about.

2006

December – Trash the Cash – The Dollar Club November has seen unprecedented activity levels in the buyout market and in the first article we take a closer look at the reasons behind this. In our second article we look at what it really means when countries such as China tie their currency to the US dollar.

November – Priced for Perfection – Show Me the Hedge (Again) There are recessions and there are soft landings. And once in a blue moon, you may even come across a perfect landing. So perfect, in fact, that it justifies the exuberant behaviour arguably displayed by most asset classes today. This month we do our best to try to explain this. The only problem is, we don’t believe in Nirvana. In the second essay we follow up from a previous story as more evidence supports our long-held view that many hedge funds do not offer the qualities they claim to deliver.

October – The Chart Room – Absolute Returns Revisited In our first essay we take a quick look at the U.S. current account deficit which may be about to improve, if history offers any guidance. In our second essay we offer some thoughts on hedge fund investing.

September – A High Price to Pay The U.S. Federal Reserve Bank has stated unequivocally that the current state of affairs is not likely to be long-lasting. They expect the headline rate of inflation to come back down again over the course of the next year or so. The main thrust of this letter is a discussion of why the Fed could be terribly wrong in their analysis.

July – So Much Nonsense – Show Me the Hedge The performance of stocks and commodities is likely to de-couple sooner or later and the key to performance will once again be to correctly assess where we are in the economic cycle. This is the focus of our first essay. In our second essay, we take a closer look at a recent UBS study which confirmed our long-held view that certain types of hedge funds have been designed more for the benefit of the manager than investors.

June – The Bulls, the Bears and the Pigs – Size Matters We take a look at the recent rise in volatility and the factors behind this turn of events. In the second article we look at some of the reasons why younger hedge funds tend to do much better than their more established peers.

May – Something Has to Give We take a closer look at commodity prices and in particular at the recent run in gold.

April – Bangladesh Here We Come – An Update on Global Liquidity For the first time since we launched the Absolute Return Multi-Strategy Fund, and indeed the first time since our model portfolio was established a little more than 3 years ago, we are downgrading the long-term outlook for global interest rates and reducing our exposure to long-dated bonds. In our second article this month we take another look at the global liquidity situation.

March – The (Not So Apparent) Risks of Asia – The Forecasting Powers of the Yield Curve In our first article this month, we discuss the worrying signs of inflation creeping in across parts of Asia. In the second article we take a closer look at the shape of the yield curve and we reach two conclusions.

February – Challenging the Consensus – In Search of Hedge Fund Returns We discuss the importance of not following the herd, and we look at some of the biggest consensus trades of 2006. In the second article we take a closer look at the lacklustre returns hedge funds have offered in recent years, and we offer some suggestions as to how this problem may be overcome.

2005

December – Investment Outlook 2006 – Time to Buy Yen Assets? Over the next few pages we shall provide you with a brief summary of how we view the investment outlook for next year. In our second article this month, we take a closer look at the Yen which has been struggling in recent months.

November – Inflation and Interest Rates – The Concept of Value Inflation has been dominating the headlines over the past few weeks. In our second essay we review the concept of value investing.

October – The Liquidity Driven Dollar – A Bubble in Private Equity? – Freakonomics The global liquidity indicators that we follow continue to deteriorate. This suggests a continuation of the recent uptrend for the U.S. dollar. In our second essay this month we take a closer look at the private equity sector. Lastly, we review one of the best books we have read for a long, long time. “Freakonomics” takes a closer look at things in life that most human beings accept at face value.

September – Peak Oil – Deteriorating Global Liquidity Peak Oil has played only a modest role in taking oil prices from $30 to $70 per barrel. This suggests that the bull market in oil prices is far from over, although an economic slowdown could temporarily provide some relief. In the second article we take a closer look at one of our favourite leading indicators, namely the global liquidity indicator.

July – Does Europe Have a Future? – Be Careful What You Wish For Since the EU referenda in France and the Netherlands about five weeks ago, the future of Europe has been panned by most observers. Some have even questioned whether the euro will survive. In our second article this month, we look at the twin deficits of the U.S. and why the issues are less straightforward than often portrayed.

June – Inflation and the Battle of Interest Rates – An Afterthought on Commodities We dedicate most of the space to one of the greatest challenges of recent times - figuring out whether the bond market is in for a rude awakening or if yields can continue to fall. Towards the end, we make a few comments related to our article from last month, discussing the short- and long-term outlook for commodity prices.

May – The Chart Room – Absolute Return Investing We will be sharing with you three charts that all tell an interesting story. In the second part of this letter, we discuss the concept of absolute return investing and some related subjects and make our case why you should run your portfolio according to this investment philosophy for the foreseeable future.

April – The Lessons from Phoenix – Is Germany Kaputt? In our first article this month, we discuss some of the more important issues that investors should consider when selecting managers for their assets. In our second article this month we put the spotlight on Germany. The German economy continues to underperform most other nations, and we argue that there is no easy solution available to German policymakers.

March – The Great Rebalancing Act – What Exactly Is It that You Guys Do (Part Two) The world is out of balance. Economic growth is far from evenly distributed as demonstrated by the large U.S. current account deficit, which has created repeated calls for a lower dollar. In our second article, we revisit the area of portfolio theory and we focus specifically on the concept of correlation and how you may use it to your benefit.

February – The Property Market Revisited We will revisit the outlook for house prices around the world, exactly one year after we did an essay on the U.K. property market (you can find our February 2004 newsletter on www.arpinvestments.com).

2004

December – 2005 Investment Outlook – What Exactly Is It that You Guys Do? Over the next few pages, we shall, as we usually do around this time of year, provide you with a brief summary of how we view next year’s outlook for various asset classes. In our second feature article, we try to respond to a frequently asked question: “What is it exactly that you guys do?” We hope you will find it insightful.

November – Has Oil Gone Off the Boil? – Hedge Funds – Should You or Shouldn’t You? Recently, we have come across some very interesting research on oil prices which we would like to share with you. If "our" thesis is right, oil prices could actually drop a little bit further in the short term, which should provide a welcome boost to equity prices. In our second feature article, we take a closer look at the hedge fund sector.

October – It’s Not the Economy, Stupid! – Dispelling the Hedge Fund Myths – The War on Terror We focus on the U.S. elections which are scheduled for the 2nd November. We usually don’t comment on politics, but given the profound effect this particular election is likely to have on all of us, we decided to dedicate this month’s letter to the subject of politics. In our second article, we bring the results of an interesting new survey on hedge funds. We finish with an essay on terrorism, from a game theoretical point of view. We argue why the War on Terror is a very different war to the ones we have fought in the past and we discuss how best to prepare for it.

September – What Is the Bond Market Telling Us? – Risk-Adjusted Returns In the first article, we take a closer look at the mixed signals we are getting from the bond market at the moment. The second article is dedicated to a theme that we often get questions one, namely the meaning of the term risk-adjusted returns. We touch on a lot of related terms, such as standard deviation, Sharpe ratio, etc.

July – How Far to Go? – Twin Peaks Revisited We take a closer look at how high interest rates are likely to go. We also take a closer look at the similarities – and dissimilarities – between the stock markets of the U.S. and Japan.

June – Four Reasons to be Cautious – Dennis Gartman’s Rules of Trading We revisit an old theme – the outlook for equity markets – and we argue why there is more trouble ahead.

May – Not Quite as it Seems – The Burden on Our Children What a difference a month makes. On 1st April, with 10-year U.S. Treasuries yielding 3.88%, compared with € and £ bonds of similar maturities trading at 3.97% and 4.77% respectively, the investment community was not the least bit concerned about inflation. Then, in the U.S., the CPI numbers for March were released, showing that consumer prices had gained considerable momentum with an overall increase of 0.5%. Shortly thereafter, Greenspan presented the Fed’s view of the economic outlook to the Joint Economic Committee of the Congress. When he uttered the now famous words: “…the worrisome trend of disinflation […] has come to an end”, the bond market threw up. In our second article we continue to explore the topic of demographical changes, we will take a look at the magnitude of these changes in the United States, Japan, and Western Europe.

April – The Case for Higher Oil Prices, Part Two – The Bull versus the Bear Last month, we wrote extensively on the long-term outlook for oil prices. We suggested that, over the next several years, oil prices are likely to rise significantly from current levels. In fact, we predicted that oil prices could reach $100 per barrel within 10 years. In our first article, we will look at the implications of such a rise in oil prices.

March – The Case for Higher Oil Prices – The Deficit that Matters This month’s newsletter has been dedicated to the outlook for oil prices.

February – Not the Bubbles We Would Normally Prefer – UK Property Prices – A Bubble About to Burst? – A Note on Structured Products There is preciously little we can say about 2004 that we feel absolutely convinced about. The only thing we know with almost complete certainty is that 2004 will, just like any other year, deliver a few unpleasant surprises.

2003

December – Get Long and Get Loud It is a wonderful expression. It represents the oldest trick in the book. First you load yourself with the very best investment idea that you can find. Then you tell everyone (who cares to listen) that this is indeed the best idea you have ever come across. It happens over and over again and since we are all human beings, we often fall for it. Take China. We are struggling to find any bears on China (other than ABN-Amro Bank, Marc Faber and perhaps one or two others if we really push ourselves). Why are we so concerned about China? Isn’t it the land of opportunity? Isn’t it the country that keeps the world from slumping back into recession? Perhaps, but there are signs on the horizon that the good days are coming to at least a temporary end.

November – The Ageing Disease Two important concepts played a key role in the bull market of the 1990s. Both represent fundamental flaws in logic. Both are demonstrably untrue. First, many investors believed that ear-nings could grow faster than the macro-economy. In fact, earnings must grow slower than GDP because the growth of existing enterprises contributes only part of GDP growth; the role of entrepreneurial capitalism, the creation of new enter-prises, is a key driver of GDP growth, and it does not contribute to the growth in earnings and dividends of existing enterprises. During the 20th century, growth in stock prices and dividends was 2 percent less than underlying macroeconomic growth. Second, many investors believed that stock buybacks would permit earnings to grow faster than GDP. The important metric is not the volume of buybacks, however, but net buybacks less new share issuance, whether in existing enterprises or through IPOs. We demonstrate, using two methodologies, that during the 20th century, new share issuance in many nations almost always exceeded stock buybacks by an average of 2 percent or more a year.

October – The Dollar – Debacle or Opportunity? Two highly distinguished financial newspapers. Same weekend. Same subject. Two very different conclusions. No wonder some investors find it difficult to decide what to do next.