From Economic Scenarios to Informed Guesses

Defining a long term investment strategy build on one chosen economic scenario is reckless.

As crystal ball gazing is no option, defining strategies on more (multi based) economic scenarios makes more sense, but often ignores the underlying forces that drive those economic developments.

And precisely these elemental forces are the drivers for a dynamic investment strategy.

Informed Guesses
What remains as next best solution, is to define an investment strategy on basis of what is called 'Informed Guesses'.

This implies that a strategy is not just build on professional guessing (statistical & actuarial modeling; Monte Carlo, etc). The key to success in the approach is this word 'Informed'...

As board members of financial institutions can not delegate or outsource their investment strategy, they have no other option than to inform themselves about the economic, social,  psychological, financial and statistical underlying forces and to formulate a dynamic investment strategy based on those basic forces.

 

Global Trends 2030

An excellent example of mapping these future driving forces is a December 2012 report published by the U.S. National Intelligence Council (NIC) called 'Global Trends 2030: Alternative Worlds'.

The NIC report does not seek to predict the future, which would be an impossible mission. Instead, it provides a framework that stimulates thinking about our world's rapid and vast geopolitical changes. Resulting in possible global future directions and implications during the next 15-20 years. 

The report defines 4 mega trends and 4 potential worlds:

Mega Trends 

1. Individual Empowerment and the growth of a global middle class 
2. Diffusion of Power from states to informal networks and coalitions
3. Demographic changes, growing urbanization, migration, and aging
4. Increased demand for food, water, and energy. 

Potential Worlds

1. Stalled Engines
   Most plausible worst-case scenario: Increasing risks of interstate conflict. The Us draws inward and globalization stalls. 
2. Fusion Most plausible best-case outcome. Collaboration of China and the Us, leading to broader global cooperation.
3. Gini-Out-of-theBottle
   Inequalities explode as some countries become big winners and others fail. Inequalities within countries increase social tensions. Without completely disengaging, the Us is no longer the “global policeman.” 
4. Nonstate World World driven by new technologies, nonstate actors take the lead in confronting global challenges

 

Let's take a look at some interesting charts from this report:

I. Asia's dominant growing consumer power...

 

II. U.S.-Asia's  combined World Power...

III. Europe, GDP Dominant in 2030 ?

IV. U.S.GDP, Any way : Going down...

Conclusion

"Global Trends 2030"is an interesting and relevant document for investment planning, that I would recommend to read, to draw your own conclusions.

A more general conclusion - as stated by NIC - could be that we are heading for a transformed world, in which “no country – whether the US, China, or any other large country – will be a hegemonic power.”

No matter what trend or potential world, one thing seems inevitable:
the influential power of the U.S. that's vital for our world's economy will decline.....

Success with defining new investment strategies!

Bye the way.... Actuaries help you out on your investment strategy:

Sources/Links:

- Escher Image from Freakingnews
- Escher: Hand with Reflecting Sphere (1935)
- Zero hedge: The world in 2030
- World in 2030 (original report (2012)

River Deep Mountain High Actuary

As actuaries we execute Risk management by the book. We dive deep into the tails of our risk sea and try to catch every small risk until we reach the value of the Planck constant.

This approach was a proven method to success during the last decades. Our current financial crisis shows us that no asset class is free of risk. This crisis forces us not only to dive deep but also to look at the high mountains of economic risks and emotional winds.....

In other words, to survive the next decades, we have to practice risk management

River Deep, Mountain High

In an excellent presentation Chris Martenson shows us that the constant doubling of debt is about tot collapse and that our economy has to make a turn.

If you got some time left in your busy actuarial life, enjoy the full presentation of Chris and define for yourself which asset classes will be strong enough to survive this mother of all crises. Determine how you're going to embed these conclusions in your actuarial models...

Chris Martenson’s presentation at the Gold & Silver Meeting in Madrid



Here's the PPT presentation of Chris.

Martenson Gold Silver Meeting Madrid 20111



Rethink your Asset Mix
If one thing becomes clear in this presentation, it's that your 'In crisis Asset Mix' will differ substantially from your 'Before Crisis Asset Mix'. By means of economic scenarios and combining financial facts with common sense, you and your board are challenged to find the right asset combination that de-risks your portfolio......

After studying Chris' presentation I'm sure you'll be a qualified 'River Deep, Mountain High Actuary' !


Sources/related Links:
- Homepage Chris Martenson
- Picture Rochat





'Trying'  is hard: Youtube

Credit Crisis Predicted

Lyndon LaRouche, economist, long-range forecaster, risk manager 'avant la lettre' and one of the initiators behind the SDI-project (Strategic Defense Initiative) in the 80s.

With firm quotes like "there has been no economic growth on this planet, since the end of the 1960s. None, if you measure the right magnitudes", he takes stand in the sometimes overoptimistic and misleading world we've created.

Back in 1995, in Germany, he stated "We are at the end of an epoch".

He warned that a global financial bankruptcy and collapse would be under way and introduced in an econometric form his 'famous' "Typical Collapse Function" or "Triple Curve"to illustrate that power statement.

In his daring view, he describes the interplay of the three curves (non mathematical directionalities) that characterize the collapse process:

1. Physical-economic input/output (bottom curve)
   The productivity and functioning of the physical economy, upon which all human existence depends;
2. Monetary aggregates (middle curve)
   The increase in monetary aggregates (approximately represented by money supply measures; injections)
3. Financial aggregates (upper curve)
   Growth—which can become hyperbolic growth—in financial aggregates of all kinds: run-up of debts and other obligations, speculation in currencies, stock markets, futures (derivatives), etc.

As in the case of a "typical collapse function," the interaction of the upper two curves sucks the underlying physical economy dry.

But at a certain critical point (around 2000 in the USA), no matter how much money is injected in the economy, the financial bubbles cannot be kept aloft! The rate of rate of growth of monetary aggregates becomes higher than the rate of rate of growth for financial aggregates. In graphical terms, this is the "inevitable crossover" point of the middle, monetary curve, breaking up through the top financial curve.

Although this looks like intuitive econometric science, LaRouche illustrates this with some striking examples.

In the year 2000 LaRouche stated that compared with a worldwide GDP of about $41 trillion, the total amount of financial aggregate in short-term obligations was over $400 trillion. In other words, at least 10 times the amount of the total annual product of the world as a whole at that time. "

In 2008 he publishes in 'The Time Has Come for a New System':

• We are a credit system, not a monetary system.
• Outstanding obligations: $1.4 quadrillion, derivatives, short-term obligations of speculative nature
• This mess is coming down.
• System will be put into bankruptcy, by governments

And than to realize that there are still leading prominent professionals that like to make us believe that it's just some limited subprime issue. Regretful, it's the other way around. Subprime will just turn out to be the proverbial little stroke that'll fell the great oak.

Read more about LaRouche Writings

Let's hope that LaRouche is a pessimistic man....