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Incrementum Chartbook #5 50 Slides for the Gold Bulls Charts and Conclusions of This Year‘s
Incrementum Chartbook #5 50 Slides for the Gold Bulls Charts and Conclusions of This Year‘s
Incrementum Chartbook #5
50 Slides for the Gold Bulls
Charts and Conclusions of This Year‘s Gold Report*
+ Update on Recent Developments
Ronald-Peter Stöferle & Mark J. Valek
September 29, 2016
*The entire report can be downloaded here
Our Conviction
Our Conviction
Our Conviction Due to structural over-indebtedness and the resulting addiction to low/negative real interest rates, we

Due to structural over-indebtedness and the resulting addiction to low/negative real interest rates, we believe that the traditional approach to financial markets and asset management is no longer beneficial for investors.

Therefore, at Incrementum we evaluate all our investments not only from the perspective of the global economy but also in the context of the current state of the global monetary regime. This analysis produces what we consider a truly holistic view of the state of financial markets.

Financial markets have become highly dependent on central bank policies. Grasping the consequences of the interplay between monetary inflation and deflation is crucial for prudent investors.

We believe that the Austrian School of Economics provides us with an appropriate intellectual foundation for our investment assessment and decisions, especially in this demanding financial and economic environment.

Ronald-Peter Stöferle, Mark J. Valek

2

Partners of the In GOLD we TRUST 2016 Report
Partners of the In GOLD we TRUST 2016 Report
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3
Partners of the In GOLD we TRUST 2016 Report 3

3

Partners of the In GOLD we TRUST 2016 Report 3
Gold Price Target for June 2018: USD 2,300
Gold Price Target for June 2018: USD 2,300
Gold Price Target for June 2018: USD 2,300 Gold in USD Since 1999 2,500 2,000 June
Gold in USD Since 1999 2,500 2,000 June 2008: 1,500 Long-term target USD 2,300 1,000
Gold in USD Since 1999
2,500
2,000
June 2008:
1,500
Long-term target
USD 2,300
1,000
June 2015:
Target for June 2018:
500
USD 2,300
0

In 2008 (when gold traded at USD 800) we first called for a long-term price target of USD 2,300

The gold price reached a (nominal) all-time high of USD 1,920 in September 2011

Contrary to our expectations, then a correction started which evolved into a full-blown bear market in 2013

While most other gold analysts became bearish on gold, we continued to stand by our thesis that gold is still in a secular bull market

In June 2015 we set our price target of USD 2,300 for June 2018

Sources: Federal Reserve St. Louis, Incrementum AG

4

Extensive Indebtedness Has Made the System Crave for Growth (and/or Price Inflation) Private and Public
Extensive Indebtedness Has Made the System Crave for
Growth (and/or Price Inflation)
Private and Public Debt as a Ratio of GDP (2000/2008/2015)
2000
51
70
64
2008
71
95
73
2015
98
79
71
2000
72
50
86
Government
2008
72
62
101
Household
2015
105
61
104
2000
126
73
124
Corporate
2008
156
66
106
2015
246
66
102
0
50
100
150
200
250
300
350
400
% of GDP
JP
Euro
US

Structural over-indebtedness all around the globe: Debt levels have increased by about 40% since the financial crisis, a trend that has spilled into emerging markets as well (especially China)

True reform and spending cuts appear illusory and massive tax increases as counterproductive to service this debt more growth (and/or price inflation) has to be generated at any cost

Sources: BIS, Incrementum AG

5

To Stimulate Growth Central Banks Have Gone All - In
To Stimulate Growth Central Banks Have Gone All - In
To Stimulate Growth Central Banks Have Gone All - In Expansion of Central Bank Balance Sheets:
Expansion of Central Bank Balance Sheets: 2007 vs. 2015 140 x BoE 120 x (2015)
Expansion of Central Bank Balance Sheets: 2007 vs. 2015
140
x
BoE
120
x
(2015)
BoJ
Fed
(2015)
(2015)
100
x
80
x
60
x
BoE
(2007)
40
x
BoJ
(2007)
ECB
(2015)
Fed
20
x
(2007)
ECB
SNB
(2007)
SNB
(2007)
(2015)
0 x
0%
20%
40%
60%
80%
100%
Total assets to GDP
Leverage ratio

With monetary experiments, central banks have been engaging into an all-or-nothing gamble, hoping it will eventually bring about the long promised self-supporting and sustainable recovery

The central banks‘ leverage ratios and the sizes of the balance sheets relative to GDP have enormously risen

in the aftermath of the 2008 financial crisis

The Bank of Japan (BoJ) has taken this insanity several steps further than their peers have managed; the ECB has been comparably conservative, but is currently doing its best to catch up

Sources: ECB, BoJ, BoE, SNB, Federal Reserve St. Louis, Incrementum AG

6

However, Can Central Banks Heal the Economy? 3 Worldviews in the Post-Lehman Economy
However, Can Central Banks Heal the Economy?
3 Worldviews in the Post-Lehman Economy

1. Believers in the system

in the Post-Lehman Economy 1. Believers in the system ► The Keynesian economic policy in the

The Keynesian economic policy in the post-Lehman world is in principle correct and necessary

The economy is in a recovery process, financial markets are gradually sounding the “all clear”

New regulations have lowered systematic risk

Low/zero gold allocation in the portfolios

The current mainstream economic worldview

2. The Sceptics

The current mainstream economic worldview 2. The Sceptics ► Doubts about the sustainability of the extreme

Doubts about the sustainability of the extreme economic policy measures that have been taken since 2008

Pragmatic gold holdings: much accumulation after the crisis,

reduction of the position in recent

years

Skeptics could play an important role as marginal buyers in driving the future gold trend

Gradually growing group

7

3. The Critics

gold trend  Gradually growing group 7 3. The Critics ► Conviction that the monetary architecture

Conviction that the monetary architecture is systematically flawed

Theoretical foundation is provided i.e. by the Austrian School

The current economic recovery is neither sustainable nor self- supporting

Portfolios include system hedge and inflation hedge modules, e.g. gold

How to Judge the Current Economic Situation?
How to Judge the Current Economic Situation?
How to Judge the Current Economic Situation? US Economic Expansions After World War II (Duration and
US Economic Expansions After World War II (Duration and Extent) The believers in the system
US Economic Expansions After World War II (Duration and Extent)
The believers in the system say:
1.5
Jan-50
► No large setbacks in economic growth yet in
the US since the 2008 financial crisis
1.5
Jul-54
Jul-58
► Recovery has been shallow, hence it can last
much longer than normal
1.4
Apr-61
Jan-71
1.4
The critics say:
Apr-75
Jul-80
1.3
Jan-83
► The current upswing is borne by a giant
cushion of air in the form of zero interest
rates, QE etc.
1.3
Apr-91
Jan-02
1.2
► These measures have caused asset prices to
rally, which has benefited mainly the wealthy
Jul-09
1.2
► The population at large appears to be
dissatisfied – populist parties are in vogue
1.1
 Of the last 11 economic expansions in
the US, only 3 have lasted longer
1.1
 A recession is within the range of
possibilities
1.0
1
5
9
13
17
21
25
29
33
37
Quarters
of expansionExtent

Sources: Bawerk.net, Incrementum AG

8

What If the critics are right and we reach another crisis/recession?
What If the critics are right and we reach another
crisis/recession?
Federal Funds Rate and Subsequent Crises 25 0 Latin American Debt Crisis & U.S. Banking
Federal Funds Rate and Subsequent Crises
25
0
Latin American Debt Crisis &
U.S. Banking Crisis
0
20
0
0
15
0
S&L Crisis
0
Mexican Peso Crisis
Dot Com Bust
10
Subprime Crisis
0
0
5
0
0
0
0
1975
1980
1985
1990
1995
2000
2005
2010
2015

During the past decades monetary policy has always reacted with expansionary measures in times of recession or crisis

Central bankers now find themselves in a lose-lose situation:

- The long-term consequences of low/negative interest rates are disastrous (e.g. aggravation of the real estate and stock market bubbles, potential bankruptcies of pension funds and insurers)

- Normalizing interest rates would risk a credit collapse and provoke a recession

Sources: RealForecasts.com, Federal Reserve St. Louis, Incrementum AG

9

“If you have the power to print money, you’ll do it . Regardless of any
“If you have the power to print money, you’ll do it . Regardless of any

“If you have the power to print money,

you’ll do it. Regardless of any ideologies or

statements, that you should limit your counterfeit operations to three percent a year as the Friedmanites want to do. Basically you print it. You find reasons for it, you save

banks, you save people, whatever, there are

lot of reasons to print.”

Murray N. Rothbard

10

Central Economic Planning Has Proved Not to Work – Can Monetary Central Planning Be Any
Central Economic Planning Has Proved Not to Work –
Can Monetary Central Planning Be Any Different?

Central Bankers’ Dilemma when Striving for Monetary Normalization

Fed

Threatens

Rate Hike

for Monetary Normalization Fed Threatens Rate Hike Fed Delays Rate Hike Markets Tank Markets Recover ►

Fed Delays

Rate Hike

Fed Threatens Rate Hike Fed Delays Rate Hike Markets Tank Markets Recover ► Low interest rates

Markets

Tank

Threatens Rate Hike Fed Delays Rate Hike Markets Tank Markets Recover ► Low interest rates have
Threatens Rate Hike Fed Delays Rate Hike Markets Tank Markets Recover ► Low interest rates have

Markets

Recover

Hike Fed Delays Rate Hike Markets Tank Markets Recover ► Low interest rates have only created

Low interest rates have only created the illusion of a healing economy this would vanish into thin air as soon as interest rates return to a normal level

Markets have become conditioned to low interest rates if they are withdrawn, asset prices will plunge

Plunging asset prices already helped trigger the last two global recessions

The current asset bubble is even greater

Sources: BofA Merrill Lynch Global Research, Incrementum AG

11

5,000 Years of Data Confirm: Interest Rates Have Never Been Lower Than Today
5,000 Years of Data Confirm: Interest Rates Have Never
Been Lower Than Today
Interest Rates at the Lowest Level Since 5000 Years 25 20 15 10 5 0
Interest Rates at the Lowest Level Since 5000 Years
25
20
15
10
5
0
3000
1
1575
1735
1775
1815
1855
1895
1935
1975
BC
AD
Short-term rates
Long-term rates

Negative interest rates are one of the last hopes to which policymakers cling they are a reality in meanwhile 5 currency areas (government bonds valued at more than USD 8 trillion have negative yields to maturity)

When the centrally planned bubble in bonds finally bursts, it will be abundantly clear how valuable an insurance policy

in the form of gold truly is

Sources: Bank of England, “Growing, Fast and Slow”, Andrew G. Haldane, 2015, Incrementum AG

12

What if Money Supply Expansion Starts Stuttering?
What if Money Supply Expansion Starts Stuttering?
What if Money Supply Expansion Starts Stuttering? Total Credit Market Debt 100 80 60 y =
Total Credit Market Debt 100 80 60 y = 3.6822e 0,0002x R² = 0.9891 40
Total Credit Market Debt
100
80
60
y = 3.6822e 0,0002x
R² = 0.9891
40
20
0
1959
1965
1971
1977
1983
1989
1995
2001
2007
2013
Total Credit Market Debt
Expon. (Total Credit Market Debt)
USD trillion

This chart impressively illustrates the instability of growth induced by credit expansion

Since 1959, “total credit market debt” (which is the broadest debt aggregate in the US) has increased by 9,100%, its annualized growth rate amounts to 8.26% in any decade, outstanding debt has at least doubled

With a lot of unconventional and radical measures central banks are trying to prevent any credit contraction

There is no reverse rear in the monetary system – if money supply and credit don‘t continually rise, the system‘s situation is critical

Sources: Federal Reserve St. Louis, Incrementum AG

13

Gold: The Stable Counterpart to Diluting Currencies
Gold: The Stable Counterpart to Diluting Currencies
Gold: The Stable Counterpart to Diluting Currencies Value of Gold Production vs. Volume of ECB and
Value of Gold Production vs. Volume of ECB and BoJ QE Purchases 2016 1,800 1,600
Value of Gold Production vs. Volume of ECB and BoJ QE Purchases 2016
1,800
1,600
1,529
1,400
1,200
1,000
800
600
400
200
120
0
Gold Mine Production
QE Volume of ECB+BoJ
USD billion

Gold has to be physically mined, its global supply is exceedingly stable holding it provides insurance against monetary interventionism and an endogenously unstable currency system

At a price of USD 1,200 per ounce,* the ECB would have bought 4,698 tons of gold in the first quarter of 2016 (which is more than 6 times the value of globally mined gold)

If the European and Japanese QE programs will be continued as planned, they would be equivalent (assuming prices don’t change) to the value of 39,625 tons of gold in 2016 (~22% of the total stock of gold of 183,000 tons ever mined)

Sources: World Gold Council, ECB, Federal Reserve St. Louis, Incrementum AG

* Moreover, exchanges of EUR/USD = 1.10 and USD/JPY = 115.1 were assumed

14

The Gold Metamorphosis: From an Anchor to a Life Buoy
The Gold Metamorphosis: From an Anchor to a Life Buoy
The Gold Metamorphosis: From an Anchor to a Life Buoy Gold Price vs. US M2 100,000
Gold Price vs. US M2 100,000 10,000 1,000 100 10 1960 1965 1970 1975 1980
Gold Price vs. US M2
100,000
10,000
1,000
100
10
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Gold price in USD
M2 in USD billion

The end of the gold exchange standard changed gold‘s characteristics as an investment asset: Gold suddenly transformed from a risk-free monetary anchor to an asset fluctuating in terms of the US dollar (and thus supposedly a risky one)

Ever since, the gold price has been floating higher over the long term on the back of a continually swelling flood of money

However, the deafening roar of the inflationary tides can create short- to medium-term price risks

Sources: Federal Reserve St. Louis, Incrementum AG

15

Whereas Prices Measured in Gold Remain More or Less on a Constant Level in the
Whereas Prices Measured in Gold Remain More or Less
on a Constant Level in the Long Run…
Ticket Price for Disney World
Gold/Oktoberfest Beer Ratio
vs. Gold/Disney
World Ratio
120
250
100
200
80
150
60
100
40
50
20
Median: 12x
0
0
1971
1977
1983
1989
1995
2001
2007
2013
1950
1960
1970
1980
1990
2000
2010
Ratio
Admission Magic Kingdom (1 Adult)

Gradual erosion of purchasing power since 1971, e.g.:

- Entrance fee for the Disney World Magic Kingdom in Florida: USD 3.50 (1971) vs. USD 110 (today)

- 1 liter (“Maß”) of beer at the Munich Oktoberfest: EUR 0.82 (1950) vs. EUR 10.25 (2015)

However, today‘s prices measured in gold are close to the historical mean/median

Sources: WDW Ticket Increase Guide, HaaseEwert.de, Historisches Archiv Spaten-Löwenbräu, Federal Reserve St. Louis, Incrementum AG

16

…Compared to Currencies, Relative Scarcity Makes Gold Rally in the Long Term Long-term Trend of
…Compared to Currencies, Relative Scarcity Makes Gold
Rally in the Long Term
Long-term Trend of the Gold Price in Various Currencies (Indexed to 100 in 1971)
10,000
USD: 8.1% p.a
CAD: 8.7% p.a
EUR: 8.8% p.a
GBP: 9.4% p.a
100
1971
1976
1981
1986
1991
1996
2001
2006
2011
2016
USD
CAD
EUR
GBP

The price of gold in terms of the US dollar has increased by the factor of 34

In the long term the gold price rises against every paper currency

Sources: Federal Reserve St. Louis, Incrementum AG

17

After 2011 the Gold Price Appears to Have Corrected Too Much
After 2011 the Gold Price Appears to Have Corrected Too
Much
Combined Balance Sheet Totals Fed + ECB + SNB + PBoC + BoJ in USD
Combined Balance Sheet Totals Fed + ECB + SNB + PBoC + BoJ in USD Billion
18
2,200
16
1,800
14
12
1,400
10
1,000
8
6
600
4
2
200
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Balance sheet Fed + ECB + SNB + BoJ + PBoC
Gold
Combined balance sheet (trillion USD)
Gold price in USD

If money supply grows faster than the stock of bullion, the gold price should grow in the long run and vice versa the bear market of the recent years was a divergence from this pattern

At a price of USD 1,200 per ounce, the ECB would have bought 4,698 tons of gold in the first quarter of 2016 (which is more than 6 times the value of globally mined gold)

As hardly any reduction of central banks‘ balance sheets is to be expected, the gold price should rise significantly to catch up

Sources: PBoC, SNB, Federal Reserve St. Louis, Incrementum AG

18

The Normalization Narrative Made Gold Appear Weaker Than it Actually Was
The Normalization Narrative Made Gold Appear Weaker
Than it Actually Was
World Gold Price in an Uptrend Since 2014 2,000 1,800 1,600 1,400 1,200 1,000 2011
World Gold Price in an Uptrend Since 2014
2,000
1,800
1,600
1,400
1,200
1,000
2011
2012
2013
2014
2015
2016
World gold price
Gold in USD

Instead of using USD or EUR terms, the world gold price expresses the gold price in terms of the trade-weighted exchange rate for the US dollar

A growing divergence between the world gold price and the USD gold price can be observed, primarily due to prevailing confidence in the US economy‘s recovery and the associated rate hike fantasies, which boosted the US dollar

Thinking out of the dollar box had seen the bull coming

Sources: Federal Reserve St. Louis, Incrementum AG

19

From a Broader Perspective Gold Appears to Be in a Secular Bull Market
From a Broader Perspective Gold Appears to Be in a
Secular Bull Market
Performance of Gold Since 2001 in Terms of Various Currencies EUR USD GBP AUD CAD
Performance of Gold Since 2001 in Terms of Various Currencies
EUR
USD
GBP
AUD
CAD
CNY
JPY
CHF
INR
Average
2001
8.10%
2.50%
5.40%
11.30%
8.80%
2.50%
17.40%
5.00%
5.80%
7.42%
2002
5.90%
24.70%
12.70%
13.50%
23.70%
24.80%
13.00%
3.90%
24.00%
16.24%
2003
-0.50%
19.60%
7.90%
-10.50%
-2.20%
19.50%
7.90%
7.00%
13.50%
6.91%
2004
-2.10%
5.20%
-2.00%
1.40%
-2.00%
5.20%
0.90%
-3.00%
0.90%
0.50%
2005
35.10%
18.20%
31.80%
25.60%
14.50%
15.20%
35.70%
36.20%
22.80%
26.12%
2006
10.20%
22.80%
7.80%
14.40%
22.80%
18.80%
24.00%
13.90%
20.58%
17.24%
2007
18.80%
31.40%
29.70%
18.10%
11.50%
22.90%
23.40%
22.10%
17.40%
21.70%
2008
11.00%
5.80%
43.70%
33.00%
31.10%
-1.00%
-14.00%
-0.30%
30.50%
15.53%
2009
20.50%
23.90%
12.10%
-3.60%
5.90%
24.00%
27.10%
20.30%
18.40%
16.51%
2010
39.20%
29.80%
36.30%
15.10%
24.30%
25.30%
13.90%
17.40%
25.30%
25.18%
2011
12.70%
10.20%
9.20%
8.80%
11.90%
3.30%
3.90%
10.20%
30.40%
11.18%
2012
6.80%
7.00%
2.20%
5.40%
4.30%
6.20%
20.70%
4.20%
10.30%
7.46%
2013
-31.20%
-23.20%
-28.80%
-18.50%
-23.30%
-30.30%
-12.80%
-30.20%
-19.00%
-24.14%
2014
12.10%
-1.50%
5.00%
7.70%
7.90%
1.20%
12.30%
9.90%
0.80%
6.16%
2015
-0.30%
-10.40%
-5.20%
0.40%
7.50%
-6.20%
-10.1%
-9.90%
-5.90%
-3.75%
2016ytd*
21.62%
25.03%
41.98%
20.55%
19.20%
28.56%
4.69%
21.91%
26.41%
23.33%
Average
10.50%
11.94%
13.11%
8.92%
10.37%
10.00%
10.50%
8.04%
13.89%
10.85%
Gold‘s average annual performance since 2001: 10.71%

Gold has thus outperformed virtually every other major asset class between 2001 and 2016 in

spite of suffering a massive correction

Since the beginning of 2016 gold is back in every currency!

Sources: Goldprice.org, Incrementum AG

* September 21, 2016

20

The Emotional Roller-Coaster is Turning Upward
The Emotional Roller-Coaster is Turning Upward
The Emotional Roller-Coaster is Turning Upward Cycle of Market Emotions Cycle of Investor Sentiment Applied to
Cycle of Market Emotions Cycle of Investor Sentiment Applied to the Gold Price (360-Day Moving
Cycle of Market Emotions
Cycle of Investor Sentiment Applied to
the Gold Price (360-Day Moving Average)
1,800
Euphoria
Anxiety
Thrill
Denial
Anxiety
Euphoria
1,600
Denial
Excitement
Fear
Fear
Optimism
Thrill
Desperation
1,400
Optimism
Panic
Desperation
Capitulation
Excitement
Panic
Relief
Despondency
1,200
Capitulation
Depression
Optimism
Hope
Despondency
1,000
Depression
800
2008
2009
2010
2011
2012
2013
2014
2015
2016
Gold

In the early stages of a bull market the enthusiasm of investors is usually very subdued, scepticism and disinterest tend to predominate; this changes gradually as the cycle progresses, until euphoria and buying panics predominate

near the end of the trend

Comparing this idealized sentiment cycle to the gold price chart (360-day moving average), the point of maximum frustration appears to have been reached last year

Source: Incrementum AG

21

Crucial Question: Is Money Supply Expansion a Suitable Means for Targeting Consumer Price Inflation?
Crucial Question: Is Money Supply Expansion a Suitable
Means for Targeting Consumer Price Inflation?

Problem 1:

Money supply expansion cannot be exactly regulated

Fractional-reserve banking: Central banks issue base money, but the bulk of money supply is created by commercial banks via credit creation

Total money supply is not easy to determine different central banks apply different measures

Austrian Money Supply* (AMS) is an “Austrian” alternative to the money supply calculations by central banks

US Austrian Money Supply (AMS, % Change yoy) 16 14 12 10 8 6 4
US Austrian Money Supply (AMS, % Change yoy)
16
14
12
10
8
6
4
2
0
-2
2000
2002
2004
2006
2008
2010
2012
2014
2016
US AMS
US AMS 2

Problem 2:

Money supply inflation is not directly proportional to CPI rates why not?

Changes in preferences regarding either hoarding or spending money

Methodological problems associated with measuring price inflation, e.g.:

- Composition of a basked of goods

- Quality adjustments of products

- Consumer price inflation vs. asset price inflation

Sources: Applied Austrian School Economics, Incrementum AG

* AMS is calculated by Dr. Frank Shostak from Applied Austrian School Economics

22

The Inflation Story since 2009 Has Been a Story of Asset Price Inflation
The Inflation Story since 2009 Has Been a Story of Asset
Price Inflation
US Monetary Base vs. the Wilshire 5000 Index 4,500 100 90 4,000 80 3,500 70
US Monetary Base vs. the Wilshire 5000 Index
4,500
100
90
4,000
80
3,500
70
3,000
60
2,500
50
2,000
40
1,500
30
1,000
20
500
10
0
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
Adjusted monetary base (USD bn., left scale)
Wilshire 5000 Total Full Market Cap Index (right scale)

A debt-saturated household sector doesn’t express additional demand for credit – all the money injected by the central bank has hence been left sloshing around financial markets instead of reaching the “real” economy

The Fed’s QE programs have primarily led to asset price inflation instead of consumer price inflation

The effect of monetary inflation on the trend in US stock prices is particularly conspicuous: The strong correlation between the Fed’s balance sheet total and the US stock market has been in force for eight years now

Sources: Federal Reserve St. Louis, Incrementum AG

23

A Flipside of Asset Price Inflation: Falling Asset Prices Have Already Triggered the Last Two
A Flipside of Asset Price Inflation: Falling Asset Prices
Have Already Triggered the Last Two Recessions
S&P 500 Index and US Recessions 2,500 ?? 2,000 1,500 1,000 500 0
S&P 500 Index and US Recessions
2,500
??
2,000
1,500
1,000
500
0

Money supply inflation harbors the systemic danger of a subsequent contraction in money supply

Since loose monetary policy has led to the crisis in the first place, its prospects for enduring success are low

Problems have merely been postponed: What turned out to be unprofitable hasn‘t been liquidated, but has been kept on artificial life support

When monetary deflation gets going, it always triggers a chain reaction with highly adverse domino effects:

downgrades, which lead to rising financial costs and ultimate defaults, as well as falling asset prices

Sources: Hedgeye, Yahoo Finance, Federal Reserve St. Louis, Incrementum AG

24

Hence, Asset Prices Appear Highly Dependent on Perpetual Monetary Pumping
Hence, Asset Prices Appear Highly Dependent on
Perpetual Monetary Pumping
Fed Balance Sheet Growth Correlates with Asset Price Inflation 4,800 2,400 2,200 4,300 2,000 3,800
Fed Balance Sheet Growth Correlates with Asset Price Inflation
4,800
2,400
2,200
4,300
2,000
3,800
1,800
3,300
Tapering triggers
sustainable tightening ?
1,600
2,800
Markets in trouble?
Fed to the rescue?
1,400
- Forward guidance?
2,300
FOMC launches
QE3 for higher
wealth effect
- NIRP?
- Helicopter money?
1,200
1,800
Marktet
troubles?
Fed to the rescue
1,000
Marktet
troubles?
Fed to the rescue
1,300
800
800
600
2008
2009
2010
2011
2012
2013
2014
2015
2016
QE 1, 2 & 3
Operation Twist
Fed balance sheet (left scale)
S&P 500 (right scale)
Bn. USD

Unconventional monetary policy has resulted in a further inflation of asset prices and has raised the level from which they inevitably will drop

After the end of QE1 and QE2 the S&P 500 declined and only regained upward momentum once the Fed announced more easing; the end of QE3 was then implemented in a less abrupt manner via “tapering”

But it‘s unlikely that the Fed can return to monetary normalcy without affecting asset prices

Sources: Realinvestmentadvice.com, Federal Reserve St. Louis, Incrementum AG

25

The Stagnation in the Stock Market Rally Since Last Summer Has Already Caused Stress for
The Stagnation in the Stock Market Rally Since Last
Summer Has Already Caused Stress for a Lot of Loans
Loan Delinquencies and Charge-offs (y/y Rate of Change) vs. the Federal Funds Rate 120 10
Loan Delinquencies and Charge-offs (y/y Rate of Change) vs. the Federal Funds Rate
120
10
100
80
Loan delinquencies and charge-offs (left scale)
8
Effective federal funds rate (right scale)
60
40
6
20
4
0
-20
2
-40
-60
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Percent change from year ago
Percent

Steadily rising asset prices and low interest rates have reduced many investors’ risk awareness

There is a palpable danger that a bear market could trigger a chain reaction that leads to a recession

Stagnation in the stock market rally since last summer and dark clouds on the horizon of the US economy the number of loan delinquencies and charge-offs have rapidly risen

Similar patterns could be observed on the eve of previous recessions as well

However, while on previous occasions rising interest rates had a significant effect on growing defaults of borrowers, the current rise takes place in the absence of a real rate hike

Sources: Acting-man.com, Federal Reserve St. Louis, Incrementum AG

26

QE – Which Puts Pressure on Yields and Flattens the Yield Curve – is Fundamentally
QE – Which Puts Pressure on Yields and Flattens the
Yield Curve – is Fundamentally Damaging for Banks
ECB Balance Sheet vs. Bank Stocks 1,000 400 350 1,500 300 2,000 250 200 2,500
ECB Balance Sheet vs. Bank Stocks
1,000
400
350
1,500
300
2,000
250
200
2,500
150
100
3,000
50
0
3,500
2008
2009
2010
2011
2012
2013
2014
2015
2016
EuroStoxx Banks
ECB Balance Sheet (Inverted)
EuroStoxx Banks
ECB Balance Sheet (inverted) EUR Billion

Also negative interest rates, which have been introduced in the euro area in June 2014, have contributed to an even more pronounced flattening of the yield curve

This erodes the income of financial intermediaries further, as the universally popular “maturity transformation” can now only be performed at ever tighter spreads

Sources: ECB, Federal Reserve St. Louis, Incrementum AG

27

The Fed Pioneering Monetary Normalization: What If They Fail?
The Fed Pioneering Monetary Normalization: What If They
Fail?
20 132 122 16 112 12 102 8 92 4 82 72 0 1973 1978
20
132
122
16
112
12
102
8
92
4
82
72
0
1973
1978
1983
1988
1993
1998
2003
2008
2013
2018

Trade-weighted US Dollar Index (Left Scale) and the Effective Federal Funds Rate (%, Right Scale)

If the Fed fails with the normalization of interest rates, the already crumbling narrative of economic recovery could collapse

Meanwhile, there are signs for an economic slowdown (or even a recession) in the US further expansionary measures are hence more likely than that the Fed sticks to the plan of further tightening

After we saw “peak bullishness” on the US dollar and “peak bearishness” on commodities last year, the sentiments that depend crucially on the narrative of a healing US economy have changed

Sources: Federal Reserve St. Louis, Incrementum AG

28

In Light of the Fundamental Economic Situation, a Monetary Normalization Appears Unrealistic
In Light of the Fundamental Economic Situation, a
Monetary Normalization Appears Unrealistic
In Light of the Fundamental Economic Situation, a Monetary Normalization Appears Unrealistic Source: Hedgeye 29

Source: Hedgeye

29

Is Consumer Price Inflation in the Offing?
Is Consumer Price Inflation in the Offing?
Is Consumer Price Inflation in the Offing? US CPI vs. US Dollar Index (Lagged by 5
US CPI vs. US Dollar Index (Lagged by 5 Months, USD Axis Inverted) 6 60
US CPI vs. US Dollar Index (Lagged by 5 Months, USD Axis Inverted)
6
60
5
65
4
70
3
75
2
80
1
85
0
90
-1
95
-2
-3
100
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
CPI (lagged)
DXY (inverted)

CPI (5 months lagged)

Trade-Weighted US Dollar Index (inverted)

The US dollar‘s external value is naturally important for the trend in domestic consumer price inflation in the

US: There is a time lag of approximately 5 months before dollar appreciation or depreciation affects the trend in the

US price inflation rate

Should the US dollar show more weakness, one should expect US price inflation to exhibit a tendency to rise

Sources: Federal Reserve St. Louis, Incrementum AG

30

Since the Beginning of 2016 the Incrementum Inflation Signal Indicates a Full-fledged Inflation Trend Incrementum
Since the Beginning of 2016 the Incrementum Inflation
Signal Indicates a Full-fledged Inflation Trend
Incrementum Inflation Signal
300
1.2
1
250
0.8
200
0.6
0.4
150
0.2
100
0
-0.2
50
-0.4
0
-0.6
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Inflation Signal
Silver
Gold
Commodities
Gold Miners
Inflation Signal (1 to -0.5)

Proprietary signal based on market-derived data as a response to the importance of inflation momentum

Guide for investment allocations in our funds – depending on the signal’s message we shift allocations into or out of inflation-sensitive assets (i.e. mining stocks, commodities and energy stocks)

Shorter reaction than the common inflation statistics

Sources: Yahoo Finance, Incrementum AG

31

But There is a Lot of Asset Price Inflation That Could Now Spill Over to
But There is a Lot of Asset Price Inflation That Could Now
Spill Over to Consumer Price Inflation
S&P/Gold and S&P500/Oil
1,000
10
100
10
1
1
0
0.1
1947
1957
1967
1977
1987
1997
2007
2017
S&P 500 Oil Ratio
S&P Gold Ratio

A commodity price index has been used as a proxy for consumer price inflation (since we are skeptical with respect to the methodology that is commonly used); the S&P 500 has served as a yardstick for asset prices

Key insight by this ratio: There have been alternating long-term cycles during which either consumer price inflation or asset price inflation predominated

Similar to the peaks in 1966 and 2000, another change in trend appears to have occurred at the end of 2015

Sources: Yahoo Finance, Bureau of Labor Statistics (BLS), Bawerk.net, Incrementum AG

32

The New Bull Market in Gold Was Accompanied By an Increase in Price Inflation
The New Bull Market in Gold Was Accompanied By an
Increase in Price Inflation
Gold Price vs. Yield on 10-yr TIPS (Inverted) -2 2,000 -1 1,600 1 1,200 2
Gold Price vs. Yield on 10-yr TIPS (Inverted)
-2
2,000
-1
1,600
1
1,200
2
800
3
4
400
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Percent
US-dollars per troy ounce

10y TIPS

Gold

Strong negative correlation between the yields on inflation-protected bonds and the gold price

The breakout in the gold price was accompanied by an increase in inflation concerns being priced in

The market appears to have correctly anticipated the change in the inflation trend

Sources: Federal Reserve St. Louis, Incrementum AG

33

Will Gold React to a Potential Inflation Boost in the Forthcoming Months?
Will Gold React to a Potential Inflation Boost in the
Forthcoming Months?
US CPI Rates (yoy) vs. Gold 5.0 1,800 4.5 1,700 4.0 1,600 3.5 3.0 1,500
US CPI Rates (yoy) vs. Gold
5.0
1,800
4.5
1,700
4.0
1,600
3.5
3.0
1,500
2.5
1,400
2.0
1,300
1.5
1.0
1,200
0.5
1,100
0.0
Estimates
-0.5
1,000
2011
2012
2013
2014
2015
2016
2017

CPI (All Urban Customers) CPI Estimate (Oil Price = USD 50 c.p.) Gold

CPI Estimate (Oil Price = USD 40 c.p.)

CPI Estimate (Oil Price = USD 60 c.p.)

The oil price is affecting inflation rates due to the “base effect”

Should the oil price remain at USD 40 or rally to USD 50 or USD 60, it will increase in year-on-year terms in the forthcoming months the inflation rate will be boosted

Sources: Federal Reserve St. Louis, Bawerk.net, Incrementum AG

34

Generally, Consumer Price Inflation is Also Perceived as Low Due to Window Dressing
Generally, Consumer Price Inflation is Also Perceived as
Low Due to Window Dressing
16% 12% 8% 4% 0% -4% 1970 1975 1980 1985 1990 1995 2000 2005 2010
16%
12%
8%
4%
0%
-4%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
CPI
ShadowStats

Chart 1: Official CPI Inflation Rate vs. Shadow Stats Inflation Rate (y/y)

Policymakers have an incentive to report low inflation rates (e.g. higher GDP growth can be reported, numerous types of welfare spending as well as the valuation/demand of government bonds depend on current/expected inflation rates)

Shadow Stats calculates the inflation rate according to the methodology employed in the 1980s

Chart 2: CPI and Shadow Stats Inflation Index Since 1980 1,400 1,200 1,000 800 600
Chart 2: CPI and Shadow Stats Inflation Index Since 1980
1,400
1,200
1,000
800
600
400
200
0
1980
1984
1988
1992
1997
2001
2005
2009
2013
CPI-U
ShadowStats

While official price inflation according to the CPI averaged 2.7% p.a., Shadow Stats calculates an average inflation rate of 7.6% p.a. (see chart 1)

According to the Shadow Stats data, the cost of living has risen more than 10-fold since 1980, while the official CPI data indicate only a 138% increase (see chart 2)

Sources: Shadow Stats, BMG Bullion, Federal Reserve St. Louis, Incrementum AG

35

The Trend in the US Dollar is of Decisive Importance for International Inflation Trends
The Trend in the US Dollar is of Decisive Importance for
International Inflation Trends
US CPI vs. US Dollar Index (Lagged by 5 Months, USD Axis Inverted) 60 600
US CPI vs. US Dollar Index (Lagged by 5 Months, USD Axis Inverted)
60
600
550
70
500
80
450
400
90
350
100
300
250
110
US Dollar Index (inverted)
CRB Commodity Index
200
120
150
2002
2005
2008
2011
2014

Systemic instability in recent years: All

industrial commodities and practically all fiat currencies have declined massively against the US dollar; crude oil declined by

more than 50% within a mere seven months

Disinflationary earthquake in the dollar-centric monetary system

Commodities, as an asset class, are an antidote to the US dollar: There is a reciprocity between the price movements, with causality attributable to the US dollar to a greater extent than is generally assumed

While all other currencies used to be firmly tied to gold as well, they are nowadays tied to the US dollar, which is drifting like a buoy in a continually changing swell

In this role the dollar‘s relative value vs. gold, respectively a broad basket of commodities, plays a decisive role for global inflation trends

If the dollar depreciates against gold and commodities, all other commodities implicitly depreciate as well and global price inflation will tend to rise

Sources: Federal Reserve St. Louis, Incrementum AG

36

Gold Is an Antidote to the US Dollar
Gold Is an Antidote to the US Dollar
Gold Is an Antidote to the US Dollar Monthly Change in the Gold Price vs. Monthly
Monthly Change in the Gold Price vs. Monthly Change in the Trade-Weighted US Dollar Index
Monthly Change in the Gold Price vs. Monthly Change in the Trade-Weighted US Dollar Index Since 1973
150
y = -1,6017x + 8,965
R² = 0,1163
100
50
0
R² = 0.1163
-50
-18
-13
-8
-3
2
7
12
17
Monthly change in the US Dollar Index
change in the gold priceMonthly

Negative correlation: Gold tended to do better when the dollar was weakening

Phases during which the dollar’s exchange rate was getting stronger usually dampened gold’s performance (see the

quadrant to the lower right)

The “alpha” of gold: The intersection of the regression line with the y-axis shows that in a dollar-neutral environment, the gold price tended to increase by an average of approximately 9%

Sources: Federal Reserve St. Louis, Incrementum AG

37

Dollar Strength and High (or Increasing) Real Interest Rates Are a Thorn in Gold’s Side
Dollar Strength and High (or Increasing) Real Interest
Rates Are a Thorn in Gold’s Side
Real Interest Rates and the US Dollar: Critical Mix for Gold US 10-yr real bond
Real Interest Rates and the US Dollar: Critical Mix for Gold
US 10-yr real bond
yield (yoy)
12
10
8
6
4
2
0
-10
-5
0
5
10
15
20
25
US dollar yoy change (%)
-2
● Gold price up
-4
○ Gold price down
Bubble size = 12 months gold performance
1973 & 1979 oil crisis
-6

Golden circles stand for a rising gold price, white circles for a declining gold price; the larger the radius of the circles, the larger the price move

Gold posted its largest price gains during the oil crisis of 1973 and 1979, while real interest rates were negative and the dollar‘s performance was subdued

Such a scenario looks like an increasingly realistic possibility nowadays as well

Sources: Société Générale, Federal Reserve St. Louis, Incrementum AG

38

“ Inflation makes it possible for some people to get rich by speculation and windfall

Inflation makes it possible for some people to get rich by speculation and

windfall instead of by hard work. It

rewards gambling and penalizes thrift. It conceals and encourages waste and inefficiency in production. It finally tends to demoralize the whole community. It promotes speculation, gambling, squandering, luxury, envy, resentment, discontent, corruption, crime, and increasing drift toward more intervention which may end in dictatorship.”

Henry Hazlitt

which may end in dictatorship.” Henry Hazlitt Sources: Wikimedia Commons, Hazlitt, Henry: What You Should

Sources: Wikimedia Commons, Hazlitt, Henry: What You Should Know About Inflation, The Ludwig von Mises Institute Auburn, Alabama, 2007, p. 151

39

And the Miners? They Have Had a Heck of a Run so Far in 2016
And the Miners?
They Have Had a Heck of a Run so Far in 2016
Gold Bugs Index (HUI) Since January 2015
280
230
180
130
80
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
Apr 16
Jul 16

The miners had, more even than gold, suffered from the disinflationary environment after 2011

The final low was put in on January 19, 2016; the brief intraday-dip below the level of 100 in mid-January could well turn out to have been one of the greatest bear traps in history

Right thereafter a stunning uptrend began to take shape, in the course of which the gold mining stocks more than

doubled within a few months

Sources: Yahoo Finance, Incrementum AG

40

The Breakout in Mining Stocks Has Marked the End of the Cyclical Bear Market –
The Breakout in Mining Stocks Has Marked the End of the
Cyclical Bear Market – the Boom Has Just Begun!
Bull Markets Compared: Barron’s Gold Mining Index (BGMI) Bull Markets Since 1942 800% 10/1942-02/1946 07/1960-03/1968
Bull Markets Compared: Barron’s Gold Mining Index (BGMI) Bull Markets Since 1942
800%
10/1942-02/1946
07/1960-03/1968
12/1971-08/1974
08/1976-10/1980
11/2000-03/2008
10/2008-04/2011
700%
12/2015-09/2016
600%
500%
We are
400%
here!
300%
200%
100%
1
21
41
61
81
101
121
141
161
181
201
221
241
261
281
301
321
341
361
381
Weeks

Despite the impressive comeback of mining stocks this year, many regard the impulsive move as a “dead cat bounce”

Compared to previous bull markets in the BGMI, the recent uptrend is still relatively small and short in duration

There should be a great deal of upside potential

Sources: Sharelynx, Nowandfutures, Barrons, Incrementum AG

41

How Does the Gold Price Perform in Times of Stress?
How Does the Gold Price Perform in Times of Stress?
How Does the Gold Price Perform in Times of Stress? Comparison of Annual Performance Record, Gold
Comparison of Annual Performance Record, Gold vs. S&P 500 160 140 S&P500 120 Gold 100
Comparison of Annual Performance Record, Gold vs. S&P 500
160
140
S&P500
120
Gold
100
80
60
40
20
0
-20
-40
-60

Negative correlation between gold and the S&P 500

Times of extreme stress in stocks (incl. “tail risk events”) and/or

recessions appear to be sufficient conditions for a rally in the gold price

Reasons:

- Gold is a safe-haven asset

- Investors anticipate monetary and fiscal stimuli as a response to the crisis and buy gold for inflation protection

Sources: Deutsche Bank, Federal Reserve St. Louis, Incrementum AG

42

Gold Performance During US Recessions

 

Gold Start

Gold End

 

Decade

(USD/oz)

(USD/oz)

Change (%)

11/1973 - 03/1975

100

178

78.0%

01/1980 07/1980

512

614

20.0%

07/1981 11/1982

422

436

3.3%

07/1990 03/1991

352

356

1.0%

03/2001 11/2001

266

275

3.5%

12/2007 06/2009

783

930

18.8%

Mean

   

20.8%

Gold and the Permanent Portfolio
Gold and the Permanent Portfolio
Gold and the Permanent Portfolio ► Harry Browne developed in the beginning of the 1970s a

Harry Browne developed in the beginning of the 1970s a concept of a forecast-free, diversified portfolio that generates long- term stable returns with a reduced volatility and without the risk of major losses: the Permanent Portfolio

The Permanent Portfolio is equally invested in 4 asset classes: stocks, bond, cash, gold

Negative correlation among these asset classes under

different economic scenarios reduces the overall

volatility

Regular rebalancing: A component representing a weighting of more than 35% (less than15%) of the portfolio has to be reduced (increased) back to 25%

Immunization against short-term fluctuations

A few months ago Incrementum launched the first European fund that invests according to the principles of the Permanent Portfolio

according to the principles of the Permanent Portfolio “It is not our task to predict the

“It is not our task to predict the future, but rather to be prepared for it.” Perikles

43

Excursus: Antifragility Is Gold Antifragile?
Excursus: Antifragility
Is Gold Antifragile?

In his book Antifragile: Things That Gain From Disorder (2012) Nassim Nicholas Taleb presents a scheme to classify things according to how they react to exogenous shocks:

- Fragile things suffer

- Robust things remain unchanged

- Antifragile things benefit from volatility, randomness,

chaos, uncertainty, instability, unrest, and certain kind of

stresses

The antifragility theory is of course very interesting for investors and particularly for bearish ones – it‘s natural to think of gold in this context, as it‘s a stress/crisis performer

But is gold really an antifragile investment? Or is gold maybe

nothing but a narrative?

investment? Or is gold maybe nothing but a narrative? ► The value of gold rests on

The value of gold rests on its “trust capital”

Its trust capital rests on its physical durability, the stability of its total stock and on the fact that it has been an enduring means of payment and wealth preservation worldwide throughout history

Gold is liquid, also in stress situations

Gold is in a reciprocal relationship with the monetary system

There are also “black swans” for gold

44

“In the middle of a jolly summer party, sensitive people begin to shiver.” 45 Roland

“In the middle of a jolly summer party, sensitive people begin to shiver.”

“In the middle of a jolly summer party, sensitive people begin to shiver.” 45 Roland Baader

45

Roland Baader

In GOLD we TRUST 2016 in 8 Bullet Points (1/2)
In GOLD we TRUST 2016 in 8 Bullet Points (1/2)
In GOLD we TRUST 2016 in 8 Bullet Points (1/2) 1. Growing uncertainty regarding economic and

1. Growing uncertainty regarding economic and political developments is boosting the gold price

2. Brexit: More economic and monetary stimulus programs to counter the disintegration of the EU should be expected

3. The US economy is softening, the planned normalization of the Fed's interest rate policy is about to fail; an economic worldview is crumbling

4. If the dollar weakens further and commodity prices continue to

increase, rising price inflation and stagflation threaten

Source: Wikimedia Commons

46

BREXIT EU
BREXIT
EU
prices continue to increase, rising price inflation and stagflation threaten Source: Wikimedia Commons 46 BREXIT EU
In GOLD we TRUST 2016 in 8 Bullet Points (2/2)
In GOLD we TRUST 2016 in 8 Bullet Points (2/2)
In GOLD we TRUST 2016 in 8 Bullet Points (2/2) 5. Gold investment on the part
In GOLD we TRUST 2016 in 8 Bullet Points (2/2) 5. Gold investment on the part

5. Gold investment on the part of institutional investors is about to experience a renaissance in the uncertain low interest rate

environment

6. The economic environment is not only positive for gold, but also other inflation-sensitive assets, such as silver or mining stocks

7. Gold is back, a new bull market is coming into view

8. Incrementum confirms the long-term price target of USD 2,300 by

2018

is coming into view 8. Incrementum confirms the long-term price target of USD 2,300 by 2018

Source: Wikimedia Commons

47

APPENDIX

48

APPENDIX 48
APPENDIX 48
About Us
About Us

About the “In GOLD we TRUST” report

The annual “In Gold we Trust“ report has been written by Ronald Stoeferle is in its 10th year. For 4 years it has been co-authored by his partner Mark

Valek. It provides a “holistic“ assessment of the gold sector.

The “In Gold we Trust” report is sponsored by the following highly renowned companies: Philoro EDELMETALLE, Endeavour Silver, Global Gold, Tocqueville Asset Management, Allocated Bullion Exchange, Österreichische Gold- und Silber-Schneideanstalt (ÖGUSSA) and Münze Österreich AG.

Silber-Schneideanstalt (ÖGUSSA) and Münze Österreich AG. Ronald-Peter Stöferle, CMT Ronald is a managing partner of

Ronald-Peter Stöferle, CMT

Ronald is a managing partner of Incrementum AG. Together with Mark Valek, he manages a global macro fund which is based on the principles of the Austrian School of Economics, as well as a fund based on Harry Browne’s Permanent Portfolio concept.

Previously, he worked seven years for Erste Group Bank where he began writing extensive reports on gold and oil. His ‘In GOLD we TRUST’ drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times.

Next to his work at Incrementum he is a lecturing member of the Institute of Value based Economics and lecturer at the Academy of the Vienna Stock Exchange.

and lecturer at the Academy of the Vienna Stock Exchange. Mark J. Valek, CAIA Mark is

Mark J. Valek, CAIA

Mark is founding partner and investment manager of Incrementum AG. Together with Ronald Stoeferle he manages a global

macro fund which is based on the principles of the Austrian School of Economics, as well as a fund based on Harry Browne’s Permanent Portfolio concept. In 2014 he co-authored a book on Austrian Investing.

Before co-founding Incrementum, he worked at Raiffeisen Capital Management for more than ten years. There he was fund manager and responsible for inflation protection strategies and alternative investments. During his studies Mark worked in equity trading at Raiffeisen Zentralbank and at Merrill Lynch Private Banking in Vienna and Frankfurt.

Next to his work at Incrementum he is a lecturing member of the Institute of Value based Economics and lecturer at the Academy of the Vienna Stock Exchange.

49

a lecturing member of the Institute of Value based Economics and lecturer at the Academy of