Make Chiangmai Mail | your Homepage | Bookmark

Chiangmai 's First English Language Newspaper

Pattaya Blatt | Pattaya Mail | Pattaya Mail TV


Paul Gambles
Co-founder of MBMG Group


Update May 28, 2016

Finding an insurance strategy in unpredictable times

When asked what the stock market would do, J.P. Morgan – founder of the eponymous investment bank – famously said, “It will fluctuate.”1 He is also widely attributed as commenting “The market will go up and it will go down, but not necessarily in that order.”2
Over a century after his death, those quotes couldn’t be any truer today: for the last few months, I’ve been saying that 2016 looks more unpredictable than any year I can ever remember. That’s why, for the first time in my career, I decided to hold back from an annual forecast and instead make provisions for the worst case scenario.3
What does ‘making provisions’ actually mean? If you ask Royal Bank of Scotland analyst Andrew Roberts, it means sell “everything except high-quality bonds.”4
However, there are better options: for example, having a portfolio with diversified asset allocation.5 This eliminates the temptation to rely too heavily on one type of asset. So if an investor has, say 40% of their portfolio in shares in companies within the same industry, any bad news in that sector could greatly reduce the portfolio’s value.
That sounds logical, but this principle doesn’t just hold for individual shares. When investing at asset class level – be it stock exchange indices, commodities, currencies, bonds etc. – it’s important to ensure your investments are diversified.
Sounds easy, right? Well it may not be. History has shown us how a drop in value of one asset class can adversely affect market confidence and thus influence the value of others. The 2008-2009 global financial crisis is a case in point. One of its many triggers was the over-mortgaging and subsequent bubble-burst in US house prices. If you’d owned shares in the long-time S&P 500 healthcare company Aetna at the time, you would have thought that there was little relation. Yet, Aetna’s price followed the trend of the overall S&P 500 and went south as house prices started to drop (see chart 1).

Chart 1

Of course you could argue that practically every investment, irrespective of sector or geography, is affected by major events, such as the global financial crisis. You may also point out that placing money somewhere which is almost totally risk-free, such as a bank account, will bring scant return.
What every investor needs to do, you could argue, is buy low and sell high. In most years, I would say doing this with individual stocks is more random than rolling a dice. It’s all about the timing, which is something not even the most lauded experts can predict – take the performance of Warren Buffet’s Berkshire Hathaway for example (see chart 2).

Chart 2

So what is really needed in these uncertain times is some form of insurance policy: something which can counteract against the volatility of the markets.
One option is a managed futures fund. That may sound like some form of high-risk hedge fund we read about in the press.6 However, a sensibly-managed fund as part of a portfolio can take advantage of the markets’ ups and downs. By sensible, I mean using true diversification. One fund manager I spoke to recently showed how a fund he uses tracks scores of futures markets, such as stock market indices; commodities like crude oil, gold, soybeans, milk, currencies; and bonds. The markets’ prices are analysed to see how similar their behaviour is to each other – only markets with sufficiently distinct price movements are chosen for the fund. This strategy is to ensure that in most scenarios, there is always one asset bringing in some form of return. As such a fund comprises of futures, it can gain in value whether the price goes up or down – the crucial factor is that there is a defined trend that a fund manager can follow shortly after the trend is underway.

Chart 3

Most trend-following or managed futures rely on some degree of systematic pattern recognition rather than relying on gut feeling or attention to company news, media reports, weather forecasts or any other type of opinion-based prediction – just analytics based on past trends.
With all this in mind, it may be tempting to put your whole portfolio into managed futures with the objective of making a reasonable – if not spectacular – return. However, there are three main flaws to this strategy: you would become totally reliant on the short/long activity of a single strategy; such funds tend to do well when there are clear trends but don’t perform when there is a plateau in prices, as it’s difficult to see where in which movement the next direction will be; and managed futures can largely underperform when stock markets, bonds or other assets are increasing in value (see the 25 year chart below) but perform very positively when such markets fall sharply.

25 year chart

The old saying “stock markets go up in escalators but come down in elevators,” still has some truth to it.
Consequently, managed futures represent a useful insurance policy within a diversified portfolio. It represents an interesting example of how you can balance out a portfolio, so that you’re not totally exposed to whatever bad news the markets may bring. Even though by itself it can be quite a volatile asset class, much of that volatility is inverse in direction to traditional assets like stocks or bonds – therefore blending these can actually reduce volatility while also increasing return.
So we can insure ourselves against J.P. Morgan’s fluctuations. Although they didn’t have managed futures or trend following 150 years ago, even Morgan himself didn’t leave everything to chance. During the American Civil War, he used to cable outcomes of battles – prior to their general knowledge – to the London office of his father’s firm. That actually did enable the firm to buy US war bonds low and sell them high7 although these days he’d almost certainly find himself in trouble for ‘market timing’.
1 Middletown Times Herald (Newspaper) - February 28, 1934,
2 20101-How%20Much%20 Risk%20Is %20in%20Your% 20Portfolio.pdf
3 http://www.mbmg-investment .com/in-the-media/inthemedia/75
4 idem
5 http://www.investopedia .com/articles/02/111502.asp
7 Chernow, Ron (1991), The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance, New York: Grove Press

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

Update May 21, 2016

Six years on, preparation is still the best policy: Part 2

In his 2010 article published by The Gold Report , Ian Gordon shares a very similar view to me on the outlook for China:1
“I think perhaps the Chinese Winter will be the worst of all, and again we have a parallel. China is the U.S. of the ’20s. The U.S. came out of World War I as the world’s largest creditor nation, with a major significant growth in its industrial prowess - all of which China is today. At that time, the U.S. government was paying down debt, and it wasn’t that significant anyway. And now, the Chinese government doesn’t have much debt; either. But in the U.S., corporations and consumers of the ‘Roaring ’20s’ built up huge amounts of debt. You see parallels in the housing market in the ’20s to what we see today in China. A lot of suburbs were developed because people had automobile or railway access to the suburbs. At the same time, we had a major development of skyscrapers in city centres, monstrous buildings carrying monstrous debt.”
I have also previously drawn parallels between the 1920s building boom that spawned the iconic Chrysler and Empire State Buildings with the Chinese construction mania for ghost towns and empty shopping malls. Gordon explains how this can happen:
“China is in that kind of process. What happens when you get so wealthy, you’re exporting so much, particularly to the United States, the Chinese government takes the U.S. dollars and credits the bank with renminbi. The bank has all this money on hand. So a local businessman goes to the bank and says, ‘I want to build a factory and build toys for Toys ‘R’ Us in the United States.’ The banker says, ‘Fine.’ He has all this money; he makes the loan; the borrower goes and builds his factory. Somewhere across town, someone else goes to another bank and does the same, and again and again with different borrowers and lenders. It’s the mal-investment that occurs when you have so much money floating in the system.”
China, above all, prevented the impact of the debt correction that started to occur from 2007 onwards by huge mal-investment in unproductive overcapacity across many sectors, to the extent that the scale on which supply now exceeds demand has rendered entire sectors totally uneconomic; as Gordon explains:
“Eventually, the United States, the biggest importer of Chinese products, cannot continue buying at that level. Despite the pace of growth in China’s economy, it still takes probably at least 50 years, maybe more, to develop a middle class. Those are the people who have the wherewithal to spend. So, it’s going to take China a long, long time; it’s still very much an agrarian economy.
“For these reasons, I think China’s banking system will go the way the U.S. banking system did in the ’30s, and the whole economy will go into a collapse. But out of it, she will rise as did the U.S. as the greatest economic, financial and political power. She will be the world leader.”
Ian Gordon also shares my view about another huge vulnerability during the Kondratieff Winter2 – the European single currency whose inherent instability has been papered over:
“For years I said the Euro was a cobbled political currency that would never survive a Kondratieff Winter. And we’re starting to see that’s likely to happen. Everybody is trying to pick the winner. Right now they’re picking the U.S. dollar. Before they were picking the Euro. Except maybe the renminbi, all the currencies are vulnerable. Definitely the yen is very vulnerable because the ratio of debt to GDP in Japan is so massive already.”
He also echoes my view that gold is a form of insurance against the impacts of Kondratieff Winter on both assets and currencies and my warnings that gold itself does, however, retain some vulnerabilities to the whims of politicians:
“One problem with that is we don’t know how the government will respond to those who own gold. It’s dangerous to put all of your eggs in one basket. You’d be trusting the politicians not to do what Roosevelt did in 1933. After he confiscated gold, Americans kind of got around it by investing in gold companies. They were very profitable, and all the money, all capital ultimately flowed to gold because it was the only thing people trusted. It was going to gold because that’s where people wanted to be.”
But that doesn’t mean that gold miners will see the same outcome this time, which is why I’d see gold mining companies as a different kind of investment to gold itself. Ian Gordon also shares my scepticism about silver as an alternate currency:
“As for silver, it didn’t really work as a monetary instrument in the early 1930s. Although at that time U.S. coinage from the dollar to the dime was minted in silver, so there was certainly hoarding of silver coinage during the last depression. During this depression, silver may well take on a monetary role, since the price of gold might take that metal out of reach of many people. I think only the precious metals work – again because of the stock market debacle that I see occurring. We know that investing in precious metals worked in the ’30s. People were pushing their money into gold stocks because they wanted to be in gold in any shape or form.”
In short, one of the leading market economist students of economic history viewed through the Kondratieff prison shares my views that:
1) Asset prices in general have been massively inflated by the huge debt bubble that has been created.
2) This debt bubble and its associated mal-investment are a drag on real economic activity.
3) The ever widening gap between economic reality and asset prices can only be bridged by ever-greater policy responses.
4) Despite acting in concert in an unconstrained way during the first fiat currency global economic winter, policy-makers will ultimately run out of road.
5) Because of the unprecedented scale and scope of this experiment, history can’t really guide us as to when that will be.
6) But we should suspect that it will be an extremely serious economic and financial event.
7) It could well exhibit its most serious manifestation in China.
8) Gold may well be one of the better ways to insure against this but government responses to gold will dictate how effective it is and the best form in which to hold gold.
9) The Euro won’t survive the next Kondratieff Winter.
These points have really been my mantra for quite some time and I think the real questions here are just how serious the ultimate event might be and what investors can do in the meantime.

2 idem

Update May 14, 2016

Six years on, still little fruit: Part 1

Whatever a young man’s fancies turn to at this time of year, this grumpy old man tends to think of an article published by The Gold Report,1 having interviewed longwave economic forecaster, Ian Gordon, just over 6 years ago, which laid down its position clearly in the opening line:

Never mind that fruit trees are blossoming all over the Northern Hemisphere. A whopper of a winter in the Kondratieff cycle is far from over.

Ian Gordon elaborated the Longwave Principle as follows:

“The basis of the Longwave Principle is the Kondratieff Cycle. Russian economist Nikolai Kondratieff developed his thesis on this in the 1920s. The cycle lasts approximately 50 to 60 years. I call it a lifetime cycle, because we live only one cycle in a meaningful way. For that reason, it is also very difficult for anyone to recognize where we are in the cycle because we haven’t lived in that period before.

“For example, we are now in the depression stage, but no one really refers to it that way. I do believe we are in depression because the real number on U.S. unemployment is somewhere around 17%. That to me is a depression.”

This longwave cycle and its more advanced cousin, the Minskyan cycle of stability, have pervaded my own thought processes for many years. I’d also see the labour participation rate as being more significant than mere official unemployment statistics. The human capacity utilization rate reflects broader capacity underutilization; but with the added complexity that human beings react very differently to property or plants & machinery, if they are underutilized. This is because labour underutilization generally tends to equate with poverty, deteriorating living standards and large scale malnutrition, even in developed economies.2

Ian goes on to explain the Four Seasons Principle:

“I’ve broken the cycle into the four seasons, and others have done the same - with Spring being the birth and rebirth of the economy, Summer being the time when the economy reaches its fruition, Autumn being the feel-good period. Kondratieff called Autumn the plateau period because it’s when the economy levels out and it’s also the season – always – of massive speculation in stocks, bonds and real estate.

“There are indications of each season changing, and you have to know where you are in a cycle to be able to predict where you’re going… We went into Autumn between 1980 and 1982 and similarly between 1920 and 1921. Four events anticipated each of those Autumns. One was a peak in interest rates, second was a peak in prices, third was a bear market in stocks and fourth was a recession.


“And then you go into this massive speculation in stocks, bonds and real estate in the Autumn because once the Federal Reserve takes interest rates quite dramatically down from the peak, money floods into the banks. It’s also the season when you get the biggest build-up in debt. Any debt chart in the United States, for instance, shows that the debt really starts to take off at the beginning of Autumn.

“When the big speculative bull market ends, it indicates that we’re going into Winter. And Winter is when all the huge debt that’s been built into the economy is wrung out, through either payback or – in most cases – bankruptcy. Creditors and debtors alike suffer very, very much during the Winter period. It causes a crisis in the banking system because banks are the biggest creditors. If you look at the last Winter after the 1929 stock market peak, 10,000 U.S. banks failed by 1933. In fact, when Roosevelt became president, he closed all banks for 10 days and sent in examiners. Banks deemed to be okay were allowed to reopen, and basically the doors stayed closed on the rest.

“So, we’re now in the Winter. I’ve argued the real peak in the stock market occurred in 2000; that was certainly the speculative peak on the NASDAQ. At that time, too, consumer confidence peaked. Alan Greenspan decided he didn’t like Winter and to save the American economy from a depression, he cut interest rates from 6% to 1%, and pushed enormous amounts of money back into the banking system to try to refloat the economy. He did that to some extent, but in effect, he really built up the debt level to absolutely unmanageable proportions and particularly in the housing market, which resulted in this huge speculative phase in real estate.

“That housing market bubble burst, and it has a lot further to go on the downside. The stock bear market that began after the NASDAQ peak - and it has never gotten anywhere close to that level since - began for the Dow in October 2007.”

However, Gordon believes that we’re facing a new and more severe Kondratieff Winter paradigm this time:

“This is the first Kondratieff Winter in which the entire world has been subjected to a fiat system. It’s so much easier through the printing process to try to stave off the bad days. As I’ve said, Greenspan made it appear that Winter hadn’t started by printing all this money. And we did have a bear market. The Dow dropped - what? - 35%, and the NASDAQ dropped almost 80% into 2002.”

The synchronized actions of central banks,3 shorn of the policy constraints that prevented the worse missteps of policymakers in the time when currencies were linked to gold, has enabled the Second Great Depression to be deferred but ultimately, most likely worsened.

However the removal of the destructively high levels of debt from the global economic and financial systems seems certain to have only been delayed and not avoided. In that sense, this time is different. Thanks to central bankers, it will almost certainly ultimately be much, much worse. As this is a new experiment, though, we can’t really know how much worse it will be or how long they can defer the Day of Reckoning Up.

Therefore, like myself, Gordon sees the build-up of speculative debt that leads to Kondratieff winter as being an essentially deflationary force:

“I am very much a deflationist. Taking the debt out of the system is in itself a deflation process. You can see it in falling housing prices. As debt comes out of the housing and mortgage markets, it deflates prices. We’re going to see the same in stock prices. Wealth is being reduced considerably, and that is deflationary.

“A lot of people who argue for inflation say that all the money being printed eventually has to go through the banks back into the economy. But it’s like being on a treadmill. You running as fast as the treadmill goes, but you don’t get anywhere. The Federal Reserve is printing copious amounts of money trying to re-start the economy. Unfortunately, the rate of debt being taken out of the system eventually will overwhelm their ability to do that.”

But we don’t know whether ultimately is now imminent or still some time away.

To be continued…



2 David Dooley & JoAnn Prause, The Social Costs of Underemployment, Cambridge University Press (2003)


Update May 7, 2016

The Panama Papers: a Bungle in the Jungle - Part 2

Clockwise: El Valle de Antón, Panama City Old Quarter, Panama City Av. Balboa, Bocas del Toro. Photos: Simon Harrow

Es mantequilla! (It’s butter)
- Panamanian expression meaning something is irrelevant.
In the current charged environment there seems to be a great deal of (perhaps deliberately provoked) confusion about degrees of wrong. The UK Prime Minister seems to have been fully aware of what appears to be fraudulent and criminal tax evasion from which he directly and indirectly benefitted.1 However, the technicalities of that seeming criminality are quite complex. The same applies to his own alleged capital gains avoidance or evasion.2 These are extremely serious matters; but the UK media seem more interested in the existence of the relationship with Mossack Fonseca; the fact that Cameron’s wife, Samantha, works for a company which appears to have used aggressive, although not necessarily improper offshore tax mitigation;3 that Gideon Osborne’s family business has, seemingly not paid any tax during Osborne’s Chancellorship;4 or, to show that this isn’t just a single party issue, the claims that Cameron’s predecessor Tony Blair faces questions over the non-disclosure of assets held within a (apparently legitimate) tax planning trust.5
The press seems to have been side-tracked by the fascinating question of whether it is actually ‘wrong’ or even ‘immoral’ to hold money in another country, where tax rates are lower. On the face of it, it seems reasonable to argue that doing so deprives a government of tax money, with which it could provide better services to its citizens. But then isn’t some of this money is used to drop bombs on citizens of other countries? And why does one government deserve to receive that tax money over another government?
Politicians tend to apply the limits of their own remits to other people’s lives. They seem to think that because someone has a passport from a certain country, they live there, receive income there, owe tax there and thus holding money somewhere else must be secretive and immoral. For those of us who live in a different country to the one in which we were born, however, circumstances are different. Where should we be taxed? Who should determine this?
How governments receive tax money and how they should spend it is a fascinating debate. But it shouldn’t be confused with morality. As American judge Justice Learned Hand put it in 1947:
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.6
Back in the UK, opposition leader Jeremy Corbyn has even called for London to take direct control of British overseas territories which have lower tax rates.7 He probably made this soundbite because half of the companies mentioned in the Panama Papers are incorporated in the British Virgin Islands. However, this idea ignores the fact that the BVI is a legitimate, regulated financial centre, which adheres to OECD initiatives, as well as the Financial Action Task Force (FATF), an inter-governmental body, set up to combat money laundering, terrorist financing and “other related threats to the integrity of the international financial system”.8 The same can be said of other low-tax countries and territories, such as the Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Malta, Mauritius, Monaco, etc. All of these jurisdictions are among the 133 countries and territories which are members of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes; as well as the FATF, with which just Iran, Myanmar and North Korea have been listed as not cooperating sufficiently.
So if these territories cooperate internationally over possible criminal activity and tax transparency; and have regulated banks, offering legitimate accounts; why have so many politicians felt the heat on revelations that they have benefited from such accounts?
To date there have been no legal charges, or even concrete accusations of illegal activity, made against the British and Icelandic Prime Ministers for whatever reasons, or the Spanish minister. In fact the main reason why Mr Cameron is under pressure is the double standard of previous statements, whilst benefitting from his father’s offshore trust rather than the apparent criminality.9 Messrs. Gunnlaugsson and Soria both resigned because it was revealed they had failed to disclose their offshore interests when taking on their roles.10
What is really happening is that politicians – even those who have offshore interests – are using offshore finance as a scapegoat, in order to at least be seen to be hounding ‘immoral’ tax avoiders. As is often the case in politics, there’s a huge dollop of butter.

4 Gideon Osborne’s family business has, seemingly not paid any tax during Osborne’s Chancellorship
6 Commissioner v. Newman, 159 F2d 848 (1947)
10 &

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


HEADLINES [click on headline to view story]

Finding an insurance strategy in unpredictable times

Six years on, preparation is still the best policy: Part 2

Six years on, still little fruit: Part 1

The Panama Papers: a Bungle in the Jungle - Part 2