Summary

Dr Frank Shostak began by outlining the Austrian School framework used by AAS Economics. He stressed the importance in the Austrian School of the notion of the pool of real wealth, which is the stock of final consumption goods that remains after the consumption of those goods. This was the source of real savings, of investment, of future productivity and of economic growth. He then outlined the mechanisms by which central banks initially create money out of thin air and how this process is amplified by the credit creation activities of the commercial banks. This process distorts resource allocation and, via the Cantillon effect, leads to some firms and sectors receiving money earlier than others. Newly created money ripples through the economy with time lags, inflating various activities one after the other and creating a cyclical expansion which they identify as a boom. Over time central banks react to inflationary pressures – in goods prices or asset prices – and begin to wind back the money creation process. This deflates the bubble and results in a cyclical downturn. By constructing a novel definition of money supply based on Austrian principles (Adjusted Money Supply or AMS) which encapsulates the effects of fiscal policy it is possible to identify the transmission lags in each economy and then forecast the economic cycle. Frank stressed that the AASE approach is not related to Monetarism, which is the deliberate targeting of money supply or interest rates. He also showed that the post-Covid rate of AMS growth in the US is the highest since the Federal Reserve was created. Derek Sicklen then presented examples of the remarkable accuracy with which AMS growth predicts PMIs and industrial production, instancing the US, Eurozone, China and Japan and touching on the importance of the different time lags in each region. The US has by far the longest transmission lag – currently around 20-24 months, whereas for the other regions the lags are much shorter. This means that the US is not yet being influenced by its Covid monetary explosion but Eurozone, China and Japan are currently feeling their stimulatory effects. For the US the outlook is therefore for subdued growth for much of 2021, accelerating towards year-end and through 2022, while for the other economies there is strong monetary support for the first half of 2021. AASE sees the risk of significant increases in CPI inflation in the US in 2022 if previous relationships between AMS growth and CPI growth hold. Peter Stellios then described how foreknowledge of the economic cycle – using the known lags between AMS growth and economic growth – has allowed the systematic positioning of portfolios to take account of the expected stage of the cycle. AASE break the cycle into four stages and have mapped asset performance across numerous countries in each stage of their respective cycles. This has allowed them to create notional portfolios in over 14 countries, together with multi-country and global macro portfolios, which can be tracked over time as a test of the methodology. Thus far the AASE models have outperformed benchmark over multiple timeframes on average over 75% of the time. The US has just entered the most bearish stage of the cycle and asset allocation through most of 2021 is very defensive, with high allocations to bonds and defensive equities. In the other regions the monetary transmission lags have been much shorter and therefore these economies, now feeling the effects of the most recent monetary stimuli, are in expansive stages of the cycle with pro-cyclical asset allocations for most of the first half of 2021.

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