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Kieger Macro Update
Executive summary
Q1 2016

GDP growth is currently positive and was at around 1.7% y/y in
Q2 as well as Q3 2015. This averaged global growth rate has been
abnormally stable which we interpret as positive. World economic
growth is expected to grow at a rate of around 3.3-3.5% from
2016 to 2017 based on current consensus forecasts. These
forecasts seem quite optimistic. India and China are expected to
grow this year at a rate of 7.4% and 6.5% respectively.

Macro risks: The number of red flags from macroeconomic
indicators is rising in general and in the United States in particular.
The investment environment has changed over the past three
months.

Leading economic indicators (LEI) peaked in late 2013/early 2014
and have been falling ever since. The leading indicator for the
United States has been falling since August 2014.

Purchasing managers’ indices (PMI) are, on average, around 50
which is the border line between improvement and worsening of
the manufacturing sector. The average PMI peaked at around 52 at
the end of 2013 and has been falling very moderately to around 51
in December 2015. This change is abnormally minor, i.e., the
situation suggests stability rather than overall decline.

Consumer sentiment has peaked in February 2015 and has been
falling, generally. Consumer sentiment in some European
economies is high and rising.

Inflation: In many industrialised and indebted economies, inflation
remains low, or negative, and materially below the target of the
monetary authorities. During 2015 the range of average inflation
was from -0.04 in January to 0.31 in December. This means during
2015 consumer price inflation, on average, has risen, albeit only
very modestly.

Monetary policy: The normalisation has begun in the United
States. Even if the Fed has started the tightening cycle, the reign of
cheap money is not over.

Notable: Switzerland is at the brink of recession.
IR&M contact:
Alexander Ineichen CFA, CAIA, FRM
+41 41 511 2497
[email protected]
www.ineichen-rm.com
Kieger contact:
Andre Konstantinow
+41 44 444 1851
[email protected]
www.kieger.com
Provided compliments of:
Important Disclosure: Kieger AG has paid
Ineichen Research & Management (“IR&M”) for
the preparation of this material and is providing
it to you for general informational purposes
only. IR&M is not affiliated with Kieger AG and
has independently prepared this material and
the views and opinions expressed herein.
Kieger Macro Update Q1 2016
January 2016
Content
The macro perspective ........................................................................................ 3
GDP growth: positive and stable ..................................................................... 3
Macro risks: red flags mounting ...................................................................... 5
Leading economic indicators: falling moderately............................................ 8
PMI: around 50 and stable .............................................................................. 9
Consumer sentiment: falling moderately ...................................................... 10
Inflation: very low but rising .......................................................................... 11
Monetary policy: normalisation begins ......................................................... 12
Outlook: consensus mildly positive ............................................................... 13
Exhibit of the quarter: Swiss industrial production ....................................... 14
About IR&M and Kieger AG ............................................................................... 15
Ineichen Research and Management
Page 2
Kieger Macro Update Q1 2016
January 2016
The macro perspective
“Policymakers who dismiss market
moves as reflecting mere speculation
often make a serious mistake.
Markets understood the gravity of
the 2008 crisis well before the
Federal Reserve. They gasped the
unsustainability of fixed exchange
rates in Britain, the UK, Mexico and
Brazil while the authorities were still
in denial, and saw slowdown or
recession well before forecasters in
countless downturns.”
—Lawrence Summers, Financial Times,
11 January 2016
GDP growth: positive and stable
Average real GDP is positive and abnormally stable at around 1.7%. Table 1 shows
real year-on-year GDP (seasonally adjusted) for a range of economies. We have
colour-coded the data to show i. highs (green) and lows (red), ii. the correlation
among economies, and iii. the past and current trend. The arrows show the
direction of the latest move. The average for the world is equally weighted.
Global economic growth is positive
at around 1.7% and this growth rate
is abnormally stable
Table 1: Global real GDP, SAAR (seasonally adjusted annual rate)
Q1 2006 to Q1 2015
Q2 15 Q3 15 Q4 15 r
1.7
1.7
1.7 
Average
2.7
1.1
-3.0
2.1
1.2
-4.5
n.a. 
n.a. 
n.a. 
Americas
USA
Canada
Brazil
2.3
0.9
1.6
1.6
1.1
0.6
3.2
2.1
0.8
1.6
1.7
1.1
0.8
3.4
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.




Europe
UK
Switzerland
Eurozone
Germany
France
Italy
Spain
0.7
7.0
-4.6
7.0
1.9
2.2
2.0
1.6
6.9
-4.1
7.4
2.5
2.7
1.8
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
2.0







Asia and RoW
Japan
China
Russia
India
Australia
South Korea
Singapore

Source: IR&M, Bloomberg.
Ineichen Research and Management
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Kieger Macro Update Q1 2016

An equally weighted average of the economies in Table 1 implies a real,
average annual growth rate of around 1.7% for the global economy in Q2
and Q3 2015 with estimates for Q4 not yet fully available. The colour-coding
reveals that this average is abnormally stable. This means when we average
out the extremes such as for example the BRIC economies, the global
economy is “tucking along nicely” with very low or no inflation.

Brazil and Russia remain in recession. Japan was a couple of days in a technical
recession (generally considered two consecutive quarters where quarter-onquarter growth is negative) but the estimates for Q3 got revised upwards into
positive territory. (Table 1 shows GDP growth in a year-on-year format.)

India has overtaken China as the fastest growing economy in Table 1.
However, India’s statistics ministry in January 2015 radically revised its gross
domestic product calculation methodology. Despite repeated attempts by the
ministry to explain how it changed the method and why, many economists
remain suspicious of the new calculations. The revised GDP is controversial as
the new growth numbers do not fit with other indicators which suggest the
Indian economy is doing reasonably well but not as well as implied by the new
GDP figures.

All quarterly growth rates for the Eurozone in Table 1 were unchanged or
higher in Q3 than when compared to Q2 2015. Spain has abnormally high
growth by European standards and has been accelerating uninterruptedly
since Q4 2012. Spain is an example where structural economic reforms are
actually not just talked about but executed successfully. (The reason the stock
market is underperforming other European bourses is because of Spain’s
corporate links to emerging Latin America.)
Ineichen Research and Management
January 2016
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Kieger Macro Update Q1 2016
January 2016
Macro risks: red flags mounting
Low and falling economic growth is a risk to nearly all asset classes and forms of
wealth. A red flag popped up during Q3 2015 which we discussed in our last
update from October 2015. Although the “red flag” disappeared during the
fourth quarter of 2015, it is back and is visualised in the graph below. Figure 1
shows the “path” of an economic indicator for the world economy (horizontal
axis) vs an indicator for expectations thereof. Some points are marked in dark blue,
including the last three observations. “Red flag zone” refers to H1 08 that should,
if history rhymes, give investors ample time to fasten their seatbelts.
“History does not repeat itself - at
best it sometimes rhymes.”
—Mark Twain (1835-1910), American
author
Figure 1: Global economy and expectations
Source: IR&M, Bloomberg, Sentix. Notes: Based on Sentix Economic Indices Global Aggregate (Current Situation and
Expectations). Full “path” since 2003 is shown.

The latest movement of these two variables point towards the lower left hand
corner of the exhibit, i.e., recession. The latest data point (“01-2016”) is quite
close to the area we marked as “red flag zone”. This was the area in the Great
Recession that would have warned investors ahead of time. History does not
repeat, but only rhyme, as the famous quip goes.

One other aspect is disturbing: We also measure the magnitude of change
related to its own history, i.e., we measure the standard deviation of the latest
move. The latest falls were -1.7 and -3.1 standard deviation from their mean.
Our interpretation of this is that not only is the direction of the change a red
flag; the vehemence of the change too is a warning that not all is well in the
global economy.
Figure 2 is an economic health check for the US economy. We selected different
indicators related to different aspects/parts of the economy including, in the lower
part of the table, earnings estimates and price momentum of the stock market; for
many the ultimate leading economic indicator. Then we chose a red flag criterion
that should function as a warning sign of the next recession.
The months where the criterion is met are marked red. The top line counts the red
flags. The criteria were chosen to pop a red flag prior to the recession. With some
indicators, the red flag is up prior to the Great Recession but not during the
recession, e.g., some indicators measuring consumer sentiment or housing. The
reason for this is that we introduced a peak, i.e., we measure not the absolute fall
Ineichen Research and Management
“Those who do not learn from
history are doomed to repeat its
mistakes.”
—George Santayana (1863-1952),
Spanish-American philosopher
Page 5
Kieger Macro Update Q1 2016
January 2016
of the indicator, but the fall from a certain (high) level. With other indicators the
red flag goes up prior to the calamities of H2 2008 and stays up for a long time
thereafter, e.g., the leading economic indicator (“LEI”) of the Conference Board
(third line under “general economy”) or most indicators on the labour market.
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Figure 2: Health check of US economy (as of 12 January 2015)
Indicator
7
# Red flags
General economy
ISM PMI,Manuf.
ISM PMI,Non-Manuf.
LEI (Conf. Board)
LEI (Conf. Board)
Chicago (CFNAI)
Philly
Consumer
Sent. (Conf. Board)
Sent. (UoMichigan)
Restaurant perform.
Eating out
Labour market
NFP
Jobless claims
Unemployment
Quit rate
Temporary help
Housing
Housing starts
NAHB
Construction, non-res.
Earnings estimates
SPX EPS est.
SPX Finan. EPS est.
Markets
S&P 500
Yield curve
Red flag criteria
<50 for 2 months and falling*
<50 for 2 months and falling*
Falling***
DD>5% and falling**
<-0.7% for two months
<-20 and falling*
>93 (avg.) and falling**
>85 (avg.) and falling**
>100 (avg.) and falling***
Falling***
<0 and falling**
>350k and rising*
>4.5% and rising**
Falling***
Falling***
>1500k and falling**
>60 and falling***
>10% y/y and falling
Falling***
Falling***
50day < 200-day mov. avg.
Inverted (2Y > 10Y yield)
Source: IR&M, Bloomberg. The Restaurant Performance Index is from the National Restaurant Association. “Eating out” is from Bureau of Economic Analysis. Quite rate and
Temporary Help are from Bureau of Labor Statistics. Construction is from US Census Bureau. DD=Drawdown from previous peak; CFNAI=Chicago Fed National Activity Index;
Philly=Philadelphia Fed Business Outlook; NFP=Non-farm payrolls; NAHB=National Association of Home Builders Market Index; SPX=S&P 500 Index. * Based on three-month
moving average. **Based on six-month moving average. *** Based on 12-month moving average.

We do not want to sound alarmist, but the investment environment has been
changing over the past three months. The number of red flags in this exhibit
has risen from three in October to seven in January 2016.
We believe with some degree of confidence that the US economy is in its’ second
half of the current expansion. It can take many years from the onset of the Fed
starting the tightening cycle until the official recession, which is always made
public long after the fact, begins. But still, the onset of an expansion this is not.
Stock markets around the world had an abnormally negative first trading week in
2016. The main reason was investors’ response to capital flight out of China that
manifested itself via a continuous weak Renminbi and continuous or intensified
worries about the state of the Chinese economy and its potential impact on the
world economy. Some fear there is a credit crisis lurking as the degree of
misallocation of capital in China is most likely unprecedented. Saudi Arabia closing
its embassy in Teheran did not help to stimulate investors’ high spirits.
“Beneath all of the financial
turbulence there lurks, in my view, a
credit crisis. I fear the worst now.“
—George Magnus, referring to China,
Bloomberg, 12 January 2016
Many risk gauges have risen as a result of the difficult one and a half weeks of the
new year. One such measure, the VIX that measures implied volatility of index
options of the S&P 500 Index and is probably the most often referred to “fear
gauge,” is shown in Figure 3 below. The large chart shows the VIX by year since
2008. The small inserted table in the graph shows the average level of VIX since
1990 with a colour-coding whereby the most volatile years are red. We have
Ineichen Research and Management
Page 6
Kieger Macro Update Q1 2016
January 2016
highlighted two five-year periods, the period from 2003 to 2007, the onset of the
Great Recession, and from 2011 to 2015.
Figure 3: VIX by year
Source: IR&M, Bloomberg

VIX rose at the beginning of 2016. The rise was not as extreme as the one in
August of last year. However, the current path has a certain resemblance to
2008.

The colour-coding of the two five-year periods in the inserted table show a
certain resemblance too. Whether this pattern recognition has any merit, we
don’t know. It implies that 2016 will be to 2015 what 2008 was to 2007.
Ineichen Research and Management
Page 7
Kieger Macro Update Q1 2016
January 2016
Leading economic indicators: falling moderately
Table 2 shows a selection of leading economic indicators (LEI) for the past ten
years. While these leading indicators are often lagging indicators, they do serve a
purpose as they often trend continuously in one direction. This means these
trending indicators are useful for confirming an existing economic trend, even if
the turning points only become apparent slowly.
Leading economic indicators
peaked in late 2013/early 2014 and
have been falling ever since
Table 2: Selection of leading economic indicators
Dec 2006 to Aug 2015
09-15 10-15 11-15 r
99.9
99.8
99.8  OECD Composite
99.3
99.5
99.2
99.2
99.5
99.3
99.1  United States
99.5
Canada
99.5  Brazil
100.5
99.9
100.7
100.8
101.5
99.5
99.4
100.6
99.9
100.8
100.9
101.5
99.3
99.5
100.6
99.9
100.9
100.9
101.5
99.1
99.6
 Eurozone
Germany

France

Italy
Spain
 United Kingdom
 Switzerland
98.2 98.3 98.4  China
99.9 99.8 99.8  Japan
100.1 100.2 100.4  India
99.9 99.6 99.4  Russia
99.9 99.8 99.7  Australia
101.2 101.3 101.3  South Korea
98.4 98.3 98.3  Indonesia
99.4 99.3 99.1  South Africa
99.4 99.3
n.a.  New Zealand
Source: IR&M, Bloomberg, OECD.

The leading indicator for the whole world, the OECD Composite has peaked at
100.4 in January 2014 and has been falling very moderately ever since. The
colour-coding went from light green to light orange. This means the leading
indicator for the whole World (first row in the table) went from moderately
positive to moderately negative over the past two years. This makes the
change comparable to 2011 but not to 2007. In 2007 the changes were much
more abrupt.

The leading indicator for the United States peaked in August of 2014 and has
been in decline ever since. Our interpretation of this fact, together with the
ISM Purchasing Manager Index (PMI) in manufacturing being below 50 (see
next section), is that the US is further ahead in the business cycle than most
other economies. This, together with the fact that the Fed has started to
tighten, means that the US has passed the mid-point of this current business
cycle.

The arrows in the table mark the direction of the latest changes. From the 20
indicators shown, nine had a positive change while eight had a negative
change. The biggest surprise is Brazil where the leading economic indicator
has been rising from the lows of 99.0 in March 2015. A rising leading
indicator in Brazil is somewhat inconsistent with the negative economic as well
as political news flow coming out of Brazil.

Both indicators in India and Spain have been rising due to, we believe,
successfully implemented economic reforms. The leading indicator in Spain has
now stopped rising.
Ineichen Research and Management
Page 8
Kieger Macro Update Q1 2016
January 2016
PMI: around 50 and stable
Table 3 shows a selection of global Purchasing Manager Indices (PMI) for the
manufacturing sector. The PMIs are diffusion indices and oscillate around 50
between 0 and 100. A reading of above 50 means that more survey participants
observed an improvement, a figure below 50 means that there were more survey
participants who reported a deterioration. A reading of exactly 50 implies neither
positive nor negative change. A colour-coding is applied to show a rising or falling
trend but also to distinguish regions with economic strength from those with
economic weakness.
On average the PMI indices are
around 50 and have been falling
moderately since early 2014
Table 3: PMI
A key feature of the PMI surveys is
that they ask only for factual
information. They are not surveys of
opinions, intentions or expectations
and the data therefore represent the
closest one can get to “hard data”
without asking for actual figures
from companies.
3-year
High Low
Nov
Dec r
54.8 46.0
50.7
50.8 
58.1 48.2
55.6 47.5
52.5 43.8
48.6
48.6
43.8
48.2 
47.5 
45.6 
58.6
57.3
54.0
56.5
52.1
55.6
55.8
52.5
49.7
52.8
52.9
50.6
54.9
53.1
51.9
52.1
53.2
53.2
51.4
55.6
53.0







52.6
48.6
50.1
50.3
52.5
49.1
52.6
48.2
48.7
49.1
51.9
50.7





Jan 2013 to Oct 2015
47.9
47.3
46.7
48.1
43.9
44.5
44.2
56.6 48.5
51.7 47.2
52.0 47.6
54.5 48.5
53.2 36.7
52.6 46.1
Source: IR&M, Bloomberg.
World average
Americas
USA (ISM)
Canada (Markit)
Brazil (Market)
Europe
UK (Markit)
Switzerland (CS)
Eurozone (Markit)
Germany (Markit)
France (Markit)
Italy (Markit)
Spain (Markit)
Asia Pacific
Japan (Markit/JMMA)
China (Caixin)
Russia (Markit)
India (Markit)
Australia (AIG)
South Korea (Markit)

The average PMI in Table 3 was 50.8. This compares to 50.4 in both June and
October of last year. In other words the changes are minor on an average
level.

The most important PMI-related data point is the United States falling below
50 in November. This fall below 50 in combination with the Fed kicking off the
tightening cycle is a clear indication that the US economy is now beyond the
mid-point of the business cycle. The exact date of the start of the next
recession is, of course, still anyone’s guess. The PMI falling below 50 is a very
unreliable guide. The last recession of 2008/2009 started three and a half
years after the first rate hike.

While all shown PMIs in the Americas are below 50, all PMIs in Europe are
above 50. Europe was much slower in recovering from the Great Recession
and now could be at a point in the business cycle where the US was one or
two years ago. Overall, six PMIs are below 50, same as in our update from
three months ago.

Italy has been rising strongly and its’ manufacturing PMI is now the highest in
the table and is also the only indicator at a three-year high. Brazil is just off its
three-year low.
Ineichen Research and Management
Page 9
Kieger Macro Update Q1 2016
January 2016
Consumer sentiment: falling moderately
Table 4 shows a selection of consumer sentiment indicators for the past eight
years. We show all figures in percentile terms. The period high is set to 100 and is
shown green. The period low is set to 1 and is red. The table allows comparing a
trend of a region or country separately (horizontal view) but also allows a
comparison between different economic entities (vertical view).
Consumer sentiment is falling
Table 4: Consumer sentiment
Jan 2008 to Oct 2015
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Nov Dec Jan
r
62.2 57.4 57.4
 World
77
41
2
82
n.a.
1
n.a.
n.a.
n.a.



Americas
USA
Canada
Brazil
85
59
93
94
62
100
98
90
n.a.
93
92
61
99
100
n.a.
n.a.
n.a.
93
n.a.
n.a.
n.a.







Europe
UK
Switzerland
Eurozone
Germany
France
Italy
Spain
64
n.a.
90
38
64
n.a.
n.a.
86
36
43
n.a.
n.a.
n.a.
n.a.
n.a.





Asia and RoW
Japan
China
India
Australia
South Korea
Source: IR&M, Bloomberg.

Average consumer sentiment has peaked in February 2015 and has been
falling only moderately since then. Note that we show consumer sentiment in
percentile terms. This means a reading of 100 indicates that consumer
sentiment is at an eight-year high. Italy and Spain, therefore, have been
improving since the last leg of the Euro crisis and are currently at or very close
to an eight-year high.

When December consumer sentiment is compared to November or October,
then consumer sentiment is falling slightly, partly due to a sharp fall in
consumer sentiment in South Korea.

The US consumer sentiment, arguably the most important, given the size of
the US economy and its consumer base, rose nearly continuously from July
2014 to June 2015. The US consumer was in the 96th percentile (100th=best) in
our update from June 2015, fell to the 65th in September and now is back to
the 82nd percentile. A sharp fall of US consumer sentiment would be a red flag
for nearly everything macro-economic.

The manufacturing PMI falling below 50, as mentioned in the previous section,
is a negative. However, the services PMI (not shown) is still comfortably above
50. Furthermore, consumer sentiment does not suggest that the important US
consumer is in distress. This means the warning signs would be a lot worse if
not just the manufacturing PMI was suggesting caution, but the services PMI
and consumer sentiment too.
Ineichen Research and Management
Page 10
Kieger Macro Update Q1 2016
January 2016
Inflation: very low but rising
In many industrialised and indebted economies, inflation is low, or negative, and
materially below the target of the monetary authorities. Table 5 shows the current
annual consumer price inflation for a selection of economies. The first row shows
an equally weighted average excluding Brazil and Russia.
Table 5: Consumer price inflation
Jan 2008 to Oct 2015
11-15 12-15 r
0.30
0.31  Average ex. Brazil and Russia
0.50
n.a.
United States
1.40
n.a.
Canada
10.48 10.67  Brazil
0.10
-1.40
2.80
0.06
0.20
0.40
0.00
0.70
0.20
-0.30
0.64
-0.20
-0.74
n.a.
-1.30
2.30
n.a.
0.20
0.30
n.a.
0.70
0.10
0.00
n.a.
n.a.
n.a.
United Kingdom
 Switzerland
 Norway
Sweden
Eurozone

Germany
France
Netherlands

Italy

Spain
Portugal
Ireland
Greece
0.30
n.a.
Japan
1.50 1.60  China
15.00 12.90  Russia
1.00 1.30  South Korea
-0.80
n.a.
Singapore
Source: IR&M, Bloomberg.

Many economies have inflation rates that are still way below their announced
target rate or target range. The environment of “wanted consumer price
inflation” has not changed. In some cases the inflation rate is negative. This
means all the monetary expansion has not resulted in consumer price inflation
but in asset price inflation, inflating nearly everything from equities to bonds
and from real estate to farm land.

Consumer price inflation, as measured in the table above, has been low and
stable for quite some time. All the various quantitative easing (QE) efforts and
expansion of central banks’ balance sheets have not resulted in a material rise
in consumer price inflation.

During 2015 the range of average inflation, as in the table above, was
from -0.04 in January to 0.31 in December. This means during 2015 consumer
price inflation, on average, has risen, albeit only very modestly.
Ineichen Research and Management
“If we are convinced that our
medium term inflation target is at
risk, we will take the necessary
actions.”
—Mario Draghi, Reuters,
1 November 2015
Page 11
Kieger Macro Update Q1 2016
January 2016
Monetary policy: normalisation begins
The monetary policy event during the last quarter of 2015 was the Federal Reserve
moving from monetary easing to monetary tightening by increasing the overnight
rate from 0-0.25% to 0.25-0.5%. One reason for the rate hike was that core
inflation had reached the “very-much-wished-for” 2% mark. Never, we believe,
was a rate hike as transparently flagged in advance as this time. Ms. Yellen in a
speech in Rhode Island on 22nd May:
The market’s probability for a
further rate hike in March 2016 was
around 40% in early January 2016
If the economy continues to improve as I expect, I think it will be appropriate
at some point this year to take the initial step to raise the federal funds rate
target and begin the process of normalizing monetary policy. To support
taking this step, however, I will need to see continued improvement in labor
market conditions, and I will need to be reasonably confident that inflation will
move back to 2 percent over the medium term.
The Fed is often criticised for being too late to start the tightening cycle. This time
around was no exception. The Taylor Rule, an econometric model that implies
where the Fed fund rate ought to be, would have justified a rate hike as early as in
2012 or 2013. However, the Fed looks at different measures. The previous Fed
administration used non-farm payrolls, among other variables, as a rough guide as
to when to start the tightening cycle. The rate hike of 2004 took place when nonfarm payrolls exceeded 200,000 for three consecutive months. This criterion was
met multiple times in the period from 2012 to 2015. The latest three observations
to December 2015 were too above the 200,000 threshold. The current rate hike,
therefore, is reasonably consistent with the previous administration’s rate hike of
2004.
2015 rate hike consistent with 2004
rate hike
Figure 4: Central bank assets
Source: IR&M, Bloomberg.
Even if the Fed has started the tightening cycle, the reign of cheap money is not
over. One proxy for this reign is the total assets of the three largest central banks
in the industrialised world, as shown in Figure 4. The Fed’s balance sheet has not
been expanding since the end of 2014. However, “the baton of monetary easing”
has been passed to the Bank of Japan and the ECB. The expansion of “money,”
here broadly defined, continues.
Ineichen Research and Management
Reign of cheap money remains
Page 12
Kieger Macro Update Q1 2016
January 2016
Outlook: consensus mildly positive
World economic growth is expected to grow at an annual rate of around 3.1% in
2016 and 2017. Table 6 shows an economic outlook for a selection of countries
for the years 2015-2017 including a measure as to how these consensus forecasts
were revised over the last two quarters of 2015. We applied a colour-coding to
both forecasts and revisions to highlight the extreme values.
World economic growth is expected
to grow at around 3%
Table 6: GDP forecasts and revisions
2014
World
Americas
United States
Canada
Brazil
Europe
United Kingdom
Switzerland
Eurozone
Germany
France
Italy
Spain
Asia Pacific
Japan
China
India
Russia
Australia
South Korea
Real GDP (y/y, %)
Consensus forecasts
2015
2016
2017
Change GDP forecast
since 1. Jul 2015
2016
2017
2.43
3.00
3.30
3.50
-0.20
0.10
2.40
2.40
0.05
2.50
1.20
-3.55
2.50
1.80
-2.50
2.40
2.10
1.00
-0.30
-0.40
-3.40
-0.30
2.60
1.90
0.90
1.60
0.40
-0.40
1.30
2.40
0.90
1.50
1.50
1.10
0.70
3.10
2.30
1.20
1.70
1.80
1.40
1.30
2.65
2.20
1.65
1.70
1.65
1.45
1.20
2.20
-0.10
-0.10
-0.15
-0.10
0.20
0.15
-0.05
0.10
0.20
0.20
7.40
6.90
0.50
2.70
3.40
0.60
6.90
7.35
-3.80
2.30
2.60
1.10
6.50
7.40
-0.50
2.60
2.90
0.65
6.30
7.70
1.30
3.00
3.05
-0.30
-0.20
-0.15
-1.00
-0.20
-0.60
-0.10
-0.10
0.10
0.15
-1.00
-0.05
-0.15
-0.20
-0.20
-0.40
Source: IR&M, Bloomberg. Based on consensus forecasts.

Overall, this table has not changed much over the past three months. The
consensus estimates for the whole world have risen slightly. GDP forecasts are
generally low but positive. The stability of the forecasts in itself is positive too.
World GDP consensus forecasts for 2016 to 2017 are currently 3.30% and
3.50% respectively. This seems quite optimistic, given that from the
economies in the table above; only China and India have GDP forecasts that
are higher than that estimate. The equally weighted average from the 2016
and 2017 forecasts from the economies above imply a growth rate of 2.1%
and 2.5% respectively.

The most severe revisions of GDP forecasts over the past one and two quarters
where in economies that are related to commodities, especially to energy. In
Brazil all forecasts were revised downwards. Brazil, apart from being in an
economic recession, is also currently going through a political, corruptionrelated crisis and is not expected to get out of recession this year. Whether the
summer Olympics will change anything on this dire outlook is doubtful.

Russia is the second commodity-based economy that is in a recession that is
going through a political crisis of sorts, and where GDP forecasts have been
falling. Russia too is not expected to get out of recession this year.
Ineichen Research and Management
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Kieger Macro Update Q1 2016
January 2016
Exhibit of the quarter: Swiss industrial production
Figure 5 shows annual change of industrial production in Switzerland since 1960
and year-on-year real GDP growth since 1966.
Figure 5: Industrial production in Switzerland
Source: IR&M, Bloomberg. Industrial production: IMF (1960-2004), Federal Statistics Office of Switzerland (2005-date). GDP: IMF (1966-1980), State Secretariat for Economic
Affairs (1981-date). Exhibit is based on quarterly data. Recessions (two consecutive negative quarters of y/y GDP) are marked.

The trajectory of industrial production in Switzerland has been negative over
the past couple of years. The actual, annual, quarterly-published figure
was -0.6% in Q1 2015, -2.1% in Q2 and -2.7% in Q3 of 2015. Often, but not
always, do falling industrial production and a recession in Switzerland
coincide.
Falling and year-on-year negative industrial production is not a guarantor for a
recession, here loosely defined as negative GDP growth. Switzerland is largely a
service economy and other factors matter too. However, two and three
consecutive falls pointed towards 5 from 6 recessions; it failed to anticipate the
1991 recession.
The latest fall, a -0.3 standard deviation (sd) event that followed a -0.9 sd fall that
followed a 1.5 sd fall in Q1 2015, was the third fall of industrial production in a
row. There were six false alarms since 1966 based on two consecutive falls.
However, there were no false alarms based on three consecutive falls. Industrial
production fell for three quarters or more only on six occasions: 1975, 1983, 1993,
2002, 2009, and now. Our interpretation of these historical facts is that the
probability of Switzerland falling into a recession within a year is high.
Ineichen Research and Management
Switzerland at the brink of
recession
Page 14
Kieger Macro Update Q1 2016
January 2016
About IR&M and Kieger AG
IR&M
Ineichen Research and Management (“IR&M”) is a research boutique focusing on
investment themes related to risk management, absolute returns and thematic
investing. IR&M was founded by Alexander Ineichen in October 2009, has an
institutional investors’ orientation, and is domiciled near Zug, Switzerland.
Kieger AG
Kieger is an independent wealth and asset manager. Kieger offers bespoke
investment solutions for clients with a long term investment horizon. The team has
been managing and implementing multi-asset solutions for institutional investors
for almost 15 years and the firm seeks to build long-term partnerships. Kieger’s
Headquarter is based in Zurich with a branch office in Lugano and its subsidiary in
Luxembourg (CSSF regulated) manages a broadly diversified portfolio of
investment funds for its investors.
Kieger develops and manages investment solutions that encompass all major
traditional and alternative asset classes including a dedicated Health Care Fund
management business.
Copyright © 2016 by Ineichen Research and Management AG, Switzerland
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