THE. July, Why the Korean economy looks poised to hit the wall in late 2017 while Australia is set to resist the global weakness.

Transcription

1 THE MAVERICK July, 217 Why the Korean economy looks poised to hit the wall in late 217 while Australia is set to resist the global weakness. P a g e 1

2 Highlights Korea Korean money supply growth has peaked and is now in a sharp downtrend Our successful multi-country MENGER model points to a slowing Korean economy from 3Q, 217 with yearly industrial production growth likely to head towards zero or lower The KOSPI is currently very overbought technically and our MENGER model predicts considerable downside in 2H, 217 and again sharply in 218 Our business cycle asset allocation model goes extremely defensive with a 7%/3% bonds/stock mix Our equities sector model focuses only on two highly defensive sectors: Consumer Staples and Healthcare Australia Incredibly, the Aussie economy looks set to buck the global weakening trend, due largely to different money supply dynamics The stock market should range trade while our MENGER model is forecasting further weakness in the AUD against the USD Asset allocation becomes more expansive with allocations to: o Oil & Gas 15% o Basic Materials 15% o Telecom 17.5% o Consumer Staples 17.5% o Healthcare 17.5% o Financials 17.5% AUD is also forecast to weaken considerably against the Korean won P a g e 2

3 AAS Economics () specializes in producing forecasts for the global macro community using advanced monetary and econometric analysis. We use our unique framework to generate specific, trackable predictions for over 5 world markets and variables. From these forecasts we construct model portfolios which can form the basis of investible products. We also build customized predictive models for clients with particular interests. We welcome enquiries and enjoy discussing our novel approach to economies and markets. Pick up an explanatory paper outlining our methodology here. us at info@aasecon.com. P a g e 3

4 Korea the environment gets tougher from here Korean money supply growth is in sharp decline after peaking at over 29% p.a. in late 215 In our framework this spells slowdown, and after a short term improvement in the middle of 217 our successful MENGER model predicts Korean industrial production growth to head towards zero, or even into negative territory, in late 217 or early 218 This is consistent with our global economic slowdown scenario detailed in last month s The Macro Maverick The KOSPI Index is forecast to drop 15-25% over the next 18 months Our equally successful business cycle asset allocation models shift from the current Stage 4 (defensive) to Stage 1 (extremely defensive) in 3Q, 217 This means that the Stage 4 allocations of 5% Bonds 5% equities shifts to Stage 1 which is 7% bonds 3% equities This means that Consumer Staples and Healthcare become our only equity exposures, each with 5% allocations. As with other countries around the world, Korea is now dealing with the consequences of the end of one of the largest expansions in money supply growth in the post-war period. In our view these episodes of expansion and contraction of the money supply always end badly, and Korea should be no exception. There are only two questions regarding the forthcoming Korean slowdown: when and how severe? Fortunately we are able to model these developments using our integrated MENGER (Monetary Econometric National & Global Economic Research) model. This model covers more than 15 economies and examine the interplay between changes in money supply (as we measure it) and various other domestic and international factors so as to forecast what is likely to happen in the Korean economy over the coming 18 months. And it s not looking too good. First, the money supply. P a g e 4

5 Yearly Growth South Korea Money Supply (% p.a.) Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 After peaking at over 29% in September 215, South Korea s money supply growth rate has been declining and is now down to 12.3% p.a. (March 217). What this means is that those businesses that survived or evolved as a result of this rescue of the Korean economy by the Bank of Korea and the commercial banks will be finding life a lot tougher as the liquidity largesse is withdrawn. In May the yearly growth rate of the Bank of Korea s balance sheet stood at 2.1%. In May 216 it stood at -4%. However the long term underlying trend has remained weak since February 215 when it stood at 7.2% P a g e 5

6 Yearly Growth Bank of Korea Balance Sheet (% p.a.) Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Note the trends in other major economies money supply growth rates: monetary growth has peaked and is heading down. US Money Supply Growth 2 US AMS Germany Money Supply Growth 2 GERMAN AMS Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Japan Money Supply Growth China Money Supply Growth JAPAN AMS CHINA AMS Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 P a g e 6

7 In our framework (see the way we view the world, economically, here) the world economy is heading into contractionary headwinds. For Korea this means, at a minimum, a reduced rate of output growth. After rising to 6.7% in February this year the annual growth rate of industrial production has weakened significantly to 1.7% p.a. in April. Our MENGER industrial production model, which for Korea is driven by Korean money supply and foreign activity, indicates that the annual rate may rise to around 3.6% by July but thereafter the underlying momentum may weaken. Korean Yearly Growth Industrial Production (% p.a.) SOUTH KOREA INDUSTRIAL PRODUCTION Indeed, as the chart shows, our outlook is for Korean industrial production growth to head towards zero or even negative by 3Q, 217 or early 218. KOSPI hitting the brakes Korean equities have performed quite strongly so far this year. As at the end of June, the KOSPI index has risen by 21.4% over the year. This compares to last year s gains of only 3.3%. Similarly our KOSPI model which is driven by Korean money supply, foreign equity markets and commodities, suggest that the KOSPI index may come under significant pressure in the months ahead. Declines of 15-2% or more are possible over the coming year. P a g e 7

8 Yearly Change KOSPI v. Yearly Change Korean Liquidity Lagged 15 Months KOSPI Index and SOUTH KOREA KOSPI INDEX 6 4 2,4 2,2 NORMALISED SCALE 2 INDEX 2, 1, KOSPI LIQUIDITY 1,6 Jan 92 Jan 94 Jan 96 Jan 98 Jan Jan 2 Jan 4 Jan 6 Jan 8 Note also the technical position of the KOSPI. The long term Relative Strength Index on monthly data shows a value near 8 which is typical of periods just before a correction. KOSPI Index and Relative Strength Index P a g e 8

9 A significant decline in the KOSPI could well be one of the major trends in equity markets over the coming 12 months. A close below a previous month s low, or a close below a trailing moving average, may constitute an entry trigger. Note that previous experience with regulators suggests that those who wish to short the index too long after it peaks may face bans on short selling. Possible strategies, depending on risk appetite, include: Granting covered calls Shorting KOSPI on downward breaks with close stops Long puts with or without short calls Long put spreads If remaining long Korean stocks, change to a more defensive sector mix as indicated below Korean asset allocation time to think more defensively Our Korea asset allocation model (for an explanation of this model see the Appendix) has been remarkably effective in historical testing. Here are the summary performance* tables. South Korea Asset Allocation Model Proforma Performance* ANALYSIS* Mar-26 to Jun-217 Approach* KOSPI Return CAGR 13.13% 6.32% Max Drawdown -28.3% -48.9% Std Dev 14.4% 17.8% Return/Drawdown Sharpe 3%.7.19 % Positive Years 83.3% 75.% 1 Year Return 1.31% 25.71% 3 Year Return 38.7% 29.% P a g e 9

10 Apr-6 Oct-6 Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Dr. Frank Shostak - Chief Economist/Director Asset Allocation Strategy 5 S.Korea Total Return 5 Model S.Korea Total Return % 6.4% % 35.98% % % % 49.4% % 2.17% % -9.41% % 1.33% % 1.83% % -4.83% % 4.9% % 7.7% % 2.78% Korea is now in Stage 4, a defensive stage in our model and typically one of increasing risks for equities in general. Unfortunately, trends in monetary growth suggest that Korea moves from Stage 4 to Stage 1 (the most defensive of all stages) in 3Q, 217 and remains there for the remainder of the forecast window. The Stage 4 macro allocations for Korea are: Bonds: 5% Stocks: 5% o Utilities 16-2/3% o Consumer Staples 16-2/3% P a g e 1

11 o Healthcare 16-2/3% The Stage 1 (3Q, 217) macro allocations for Korea are: Bonds: 7% Stocks: 3% o Consumer Staples 15% o Healthcare 15% In line with this stage analysis we also produce using the same methodology allocations across equity sectors, whereby we allocate to equity sectors (not bonds) depending on the stage of the cycle. Here we have more historical data and our notional performance numbers are as follows: South Korea Sector Allocation Model Proforma Performance* ANALYSIS* May-1999 to Jun-217 Approach* KOSPI Return CAGR 18.81% 7.3% Max Drawdown -45.6% -6.6% Std Dev 23.8% 25.3% Return/Drawdown Sharpe 3% % Positive Years 77.8% 72.2% 1 Year Return 1.4% 21.82% 3 Year Return 54.% 24.8% P a g e 11

12 Apr-99 Feb- Dec- Oct-1 Aug-2 Jun-3 Apr-4 Feb-5 Dec-5 Oct-6 Aug-7 Jun-8 Apr-9 Feb-1 Dec-1 Oct-11 Aug-12 Jun-13 Apr-14 Feb-15 Dec-15 Oct-16 Dr. Frank Shostak - Chief Economist/Director Sector Rotation Strategy 25 S.Korea Total Return Model * S.Korea Total Return % 17.99% % % % 5.87% % -1.74% % 31.35% % 12.13% % 6.7% % 5.38% % 35.98% % % % 49.4% % 2.17% % -9.41% % 1.33% % 1.83% % -4.83% % 4.9% % 7.7% % 2.78% Once again, Korea is in Stage 4 and will move into Stage 1 (the most defensive stage) in 3Q, 217 according to our model. Thus we have the following allocations for Korean sectors: P a g e 12

13 Now (Stage 4): Utilities 33-1/3% Consumer Staples 33-1/3% Healthcare 33-1/3% 3Q, 217 (Stage 1): Consumer Staples 5% Healthcare: 5% Prospective allocations and more information can be obtained by contacting us via our website or via on Australia can it fight the global slowdown? Incredibly, our MENGER model indicates that the Aussie economy looks set to resist the forces that are driving a slowdown in global growth, due largely to its different money supply dynamics The stock market (ASX 2) should trade in a broad range around 5,5 6, for much of 217 before weakening in 218 The AUD should slowly slide against the USD and more so against the KRW Our business cycle asset allocation model place Australia in Stage 3 expansive in 2H, 217 with allocations as follows: o Oil & Gas 15% o Basic Materials 15% o Telecom 17.5% o Consumer Staples 17.5% o Healthcare 17.5% o Financials 17.5% P a g e 13

14 A significant difference between Australia and most of the advanced economies over recent years has been the trend in its rate of growth of money supply. Note the resilience of Australian money supply growth over recent months compared that of the other economies. Australian Money Supply Growth Rolling 3yr Z- AUSTRALIA Score AMS Z-SCORE 4 3 Australian Real GDP Growth v. Rolling Money AUSTRALIA REAL GDP v AMS Z-SCORE LAG 8 MTHS Supply 3yr Z-Score Lagged 3 2 ROLLING 3YEAR Z-SCORE NORMALISED SCALE R.GDP AMS Z-SCORE Jan 9 Jan 92 Jan 94 Jan 96 Jan 98 Jan Jan 2 Jan 4 Jan 6 Jan 8 Jan 82 Jan 84 Jan 86 Jan 88 Jan 9 Jan 92 Jan 94 Jan 96 Jan 98 Jan Jan 2 Jan 4 Jan 6 Jan 8 US Money Supply Growth German Money Supply Growth Eurozone Money Supply Growth US AMS GERMAN AMS EUROZONE AMS Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 P a g e 14

15 Japan Money Supply Growth China Money Supply Growth Australia Money Supply Growth JAPAN AMS CHINA AMS AUSTRALIA AMS Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9-1 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 After falling to 3.7% in September last year, Australia s money supply growth has strengthened. As at May the annual growth rate stood at 9.6%. This movement is also mirrored in RBA balance sheet growth which stood at -4.4% in September last year but has since risen to 14.6% in June this year. For the first quarter of 217, annual real GDP growth eased to 1.7% from 2.4% in the previous quarter. Using our MENGER model for Australian real GDP, which is driven by real money supply growth and foreign economic activity, we estimate that the annual rate of real GDP growth may strengthen in the short term, rising to around 2.3% by December. Next year may see a gradual softening, with GDP growth easing to around 2.2%. Australian Real GDP Growth & The Australian growth outlook is in stark contrast to that of most of the world s major economies. P a g e 15

16 US Ind. Production US INDUSTRIAL PRODUCTION Growth German Ind. Production Growth Eurozone EUROZONE Ind. Production INDUSTRIAL PRODUCTION Growth GERMAN INDUSTRIAL PRODUCTION YEAR-ON-YEAR Q(%) Japan Ind. JAPAN Production INDUSTRIAL PRODUCTION Growth China Ind. Production Growth Brazil Ind. Production Growth CHINA INDUSTRIAL PRODUCTION BRAZIL INDUSTRIAL PRODUCTION Russia Ind. RUSSIA Production INDUSTRIAL PRODUCTION Growth India Ind. Production Growth UK Ind. Production UK INDUSTRIAL Growth PRODUCTION INDIA INDUSTRIAL PRODUCTION Most other economies face a deteriorating growth environment from late 217, due mostly to the lagged effects of tighter money supply growth. Australia s monetary trends have been a little different, so that the resulting growth outlook is not the same. Australian CPI price inflation rose in Q1 this year to 2.1% from 1.9% in Q4 last year. Our CPI model (which is driven by money supply, foreign inflationary pressures and the AUD) suggests that inflation may soften in the coming months to around 1.8% by December this year. Thereafter it may increase to around 2.1% by December next year (still within the RBA target range of 2-3%). P a g e 16

17 In the context of our forecasts which indicate relatively optimistic economic growth alongside subdued inflation this, along with foreign central banks tightening might provide the platform for the RBA to also begin tightening at some point in the future more to rebuild its stimulatory arsenal than to fight price pressures. Australian Annual CPI Inflation & Aussie stocks - prepare for some volatility with falls in 218 After rising by almost 7% last year the ASX2 has been relatively subdued this year, only rising by 1% over the first six months. In our MENGER model the ASX2 forecast is driven primarily by Australian liquidity, foreign equities and commodity prices. Despite the shift towards commodity-related sectors our near-term outlook for the overall market is that it may weaken, followed by a rally into early-mid 218. Although forecasting error increases with the length of the forecast window, the outlook for the second half of 218 is for significant declines, back to the levels of mid-216. P a g e 17

18 ASX 2 Index ASX2 & Model ASX 2 Index 7, 6, 6, 5,6 5, 5,2 INDEX 4, 4,8 4,4 3, ASX2 MODEL 4, Jan Jan 1 Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Asset allocation still in expansive mode As mentioned in relation to Korea, we use an asset allocation model based on prediction of the business cycle using our measure of money supply. We apply this process to numerous countries and Australia is no exception. So far this year our Australian model has followed a relatively defensive course (Stage 4) in the cycle incorporating a mixture of government bonds and defensive stocks. For the first half of the year our model showed gains of 5% compared with those of the All Ords of only.8%. The forecast stage of the business cycle moves into Stage 3 from August 217 through to at least February 218. Stage 3 is associated with a zero weighting to bonds and a high allocation (3%) to commodities or commodity-related equities sectors Oil & Gas and Basic Materials. For Australia this translates into the following allocations: Bonds % Equities: o Oil & Gas 15% o Basic Materials 15% o Telecom 17.5% o Consumer Staples 17.5% o Healthcare 17.5% o Financials 17.5% Using our high-level asset allocation model (which includes bonds) the notional performance* of this process is shown in the table and chart below. P a g e 18

19 Apr- Jan-1 Oct-1 Jul-2 Apr-3 Jan-4 Oct-4 Jul-5 Apr-6 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Dr. Frank Shostak - Chief Economist/Director Australia Asset Allocation Model Proforma Performance* ANALYSIS* Apr-2 to Jun-217 Approach* All Ords Index 5/5 Stocks/Bonds CAGR 9.78% 3.6% 2.88% Maximum Drawdown % % % Standard Deviation 1.9% 12.9% 6.4% Return/Drawdown Sharpe 3% % Positive Years 88.9% 72.2% 72.2% 1 Year Return 3.97% 8.54%.45% 3 Year Return 17.14% 7.7% 7.7% 5 Asset Allocation Strategy All Ordinaries Index 5/5 Stocks/Bonds 5 P a g e 19

20 YEARLY ANALYSIS* Approach All Ordinaries 5/5 Index/Bonds %.68% 3.19% % 6.51% 1.46% % % -2.65% % 11.11% 3.67% % 22.6% 11.84% % 16.18% 8.17% % 19.87% 6.99% % 13.76% 5.16% 28.17% -43.1% % % 33.43% 8.78% % -.73% 1.28% % % -1.5% % 13.46% 8.56% % 14.76% 2.28% %.66% 7.9% % -.82% -.63% % 7.1% 4.54% %.79% -.11% The process is explained in greater detail in the Appendix. Recent and prospective allocation settings are shown in the table below: P a g e 2

21 ALLOCATIONS (Commodities reflected in Oil & Gas and Basic Materials) June 217 Stage 1 Stocks 3% Consumer Staples 17.5% Health 17.5% Government Bonds 7% 1-yr Gov't Bond Commodity Sectors July 217 Stage 1 Stocks 3% Consumer Staples 17.5% Health 17.5% Government Bonds 7% 1-yr Gov't Bond Commodity Sectors August 217 Stage 3 Stocks 7% Telecom 17.5% Financials 17.5% Consumer Staples 17.5% Health 17.5% Government Bonds 1-yr Gov't Bond Commodity Sectors 3% Oil & Gas 15.% Basic Materials 15.% Sector allocations: less defensive We apply the same business cycle model used for high-level asset allocation to allocations across stock sectors. All that changes is that bond weightings are set to zero. For the first half of this year defensive stocks seem to have fared better than the broader market. As at the end of June our equity sector model* had an allocation towards defensive sectors such as Consumer Staples, Health and Utilities. Year-to-date, as at the end of June, our sector selection model* indicated gains of 13.1% against the All Ords appreciation of just.8%. This has delivered the following notional return profile from 21: P a g e 21

22 Apr- Jan-1 Oct-1 Jul-2 Apr-3 Jan-4 Oct-4 Jul-5 Apr-6 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Dr. Frank Shostak - Chief Economist/Director Australia Sector Model Proforma Performance* ANALYSIS* Apr-2 to Jun-217 Approach* All Ords Index CAGR 1.49% 3.6% Maximum Drawdown % % Standard Deviation 12.8% 12.9% Return/Drawdown.44.7 Sharpe 3%.58.5 % Positive Years 77.8% 72.2% 1 Year Return 13.8% 8.54% 3 Year Return 21.49% 7.1% Sector Rotation Strategy 5 All Ordinaries Index 5 P a g e 22

23 Approach All Ordinaries %.68% % 6.51% % % % 11.11% % 22.6% % 16.18% % 19.87% % 13.76% % -43.1% % 33.43% % -.73% % % % 13.46% % 14.76% %.66% % -.82% % 7.1% %.79% Proforma* sector allocations are as follows: P a g e 23

24 Sector Allocations June 217 Stage 1 Sectors 1% Consumer Staples 5.% Health 5.% Commodity Sectors July 217 Stage 1 Sectors 1% Consumer Staples 5.% Health 5.% Commodity Sectors August 217 Stage 3 Sectors 7% Telecom 17.5% Financials 17.5% Consumer Staples 17.5% Health 17.5% Commodity Sectors 3% Oil & Gas 15.% Basic Materials 15.% Prospective allocations and more information may be obtained by contacting us via the website or (info@aasecon.com). Aussie dollar Australian money supply growth exceeds that of the US So far in 217 the Aussie dollar has strengthened against the USD, rising by 6.5% as at the end of June. However, looking into the second half of 217 the fundamentals seem to be favouring a weakening in the currency against its US counterpart. The money supply growth differential between the US and Australia has been in a visible downtrend for the last 12 months as US monetary conditions have tightened relative to those in Australia. This provides support for the USD against the AUD. P a g e 24

25 Difference in Annual Money Supply Growth: US v. Australia (%) AMS DIFFERENTIAL: USA v AUSTRALIA % Also our MENGER model suggests that commodities may remain relatively subdued for the second half of 217. These factors alone suggest that if this were to eventuate then the Australian dollar may weaken against the USD. AUD/USD CRB INDEX v. CRB v AUD/USD Index CRB CRB Index COMMODITY & Model PRICE INDEX 5 4 NORMALISED SCALE AUD/USD CRB INDEX Jan 8 Jan 82 Jan 84 Jan 86 Jan 88 Jan 9 Jan 92 Jan 94 Jan 96 Jan 98 Jan Jan 2 Jan 4 Jan 6 Jan 8 Our forecast for the AUD/USD is therefore for weakness in the AUD against the USD from around 3Q, 217. P a g e 25

26 AUD/USD & A$/US$ US$ PER A$ Using the same monetary logic in our MENGER model our forecasts indicate the possibility of significant declines in the AUD versus the Korean won. Money Supply (AMS) Differential: Korea v. Australia AMS DIFFERENTIAL: S.KOREA v AUSTRALIA AUD/KRW MENGER Model AUD/KRW 3 1,3 2 1,2 1 1,1 1, -1-2 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 % Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 19 As with all of our reports we appreciate questions, comments and feedback. Please feel free to contact us with any questions you may have. P a g e 26

27 Appendix 1: AAS Economics Asset Allocation Model Description We have developed a successful asset allocation model based around the business cycle. The logic is simple: Different assets and sub-assets (e.g. sectors of the equities market) perform better at different stages of the business cycle and this can be examined historically to map these assets to the cycle If one can predict the cycle and its stages then it is possible to predict which assets may perform better or worse We use changes in money supply to predict the cycle and its stages, using a normalized money supply growth rate curve Based on historical analysis we then allocate capital to those assets which have performed better at the relevant stage of the cycle The framework generates a forward-looking asset allocation based on the economy s forecast position in the cycle i.e. which stage it is entering. We use a 4-stage model and the process can be seen stylistically in the diagram below. P a g e 27

28 AMS Business Cycle Model STAGE 1 STAGE 2 STAGE 3 STAGE 4 Consumer Staples Healthcare Utilities Discretionary IT Industrials Basic Materials Energy Discretionary Telecom Financials Industrials Staples Healthcare Basic Materials Energy Consumer Staples Healthcare Utilities STAGE 1 STAGE 2 STAGE 3 STAGE 4 As each country s economy is slightly different, and the monetary lags vary, each country s asset allocation may vary slightly from the above diagram in one or more of the stages, but the overall methodology remains the same. For each country the historical performance of each asset/sector in each stage of the cycle is measured. This forms the basis of future allocations based on each cycle stage. P a g e 28

29 Appendix 2: Structure of the MENGER Macroeconometric Model Dr. Frank Shostak - Chief Economist/Director P a g e 29

30 Glossary AMS This is the proprietary AAS Economics money supply measure. It has its roots in Austrian economics and Excess Money Growth This is AMS growth minus CPI growth minus industrial production growth. It is designed to be a barometer of surplus money in the system, being the excess of demand (as measured by CPI and industrial production) and supply (as measured by AMS). In our framework excess money growth is a key driver of asset prices. Pool of Funding This is the stock of final goods ready for human consumption. The state of the pool sets the limit for economic growth. Real Savings The amount of consumer goods produced locally less the amount taken by the producers of these goods. The reshuffling process The diversion of real savings from wealth generating activities towards activities that sprang up on the back of loose monetary policy. Productive consumption This is defined as consumption that is preceded by production of wealth i.e. consumption that is backed up by the production of wealth. Non-productive consumption This is consumption that arises as a result of monetary pumping and is not supported by wealth production. This type of consumption weakens the flow of real savings. Unbacked loans (Inflationary Credit) This type of lending that is not backed up by real savings. This type of lending is created through fractional reserve banking i.e. lending out of "thin air". P a g e 3

31 For More Information AAS Economics () specializes in producing forecasts for the global macro community using advanced monetary and econometric analysis. We use our unique framework to generate specific, trackable predictions for over 5 world markets and variables. We also build customized predictive models for clients with particular interests. We welcome enquiries and enjoy discussing our novel approach to economies and markets. Contact us at info@aasecon.com. P a g e 31