The third quarter, like most of 2012 so far, was about pretending to do something, while doing absolutely nothing and central banks putting everything on red in the ‘monetary casino’. We have essentially all become liquidity junkies, and this late in the year even the perma-bears have given up as there is no end in sight for quantitative easing to infinity and the Federal Reserve is now even promising to keep low rates into 2015. The main questions for the balance of 2012 have to be: how long can we keep the social unrest at bay and at what cost? The Groundhog theme for this fourth quarter Outlook is illustrated in how we keep cycling back and forth between denial and protest with a real mandate for change neither given nor taken by anyone.

We need a mandate for change in order to leave this low productivity, high taxation, no lending and no job growth environment behind, and in order to move towards the full potential of the micro-economy - the ultimate breadwinner in times of crises. Just like Bill Murray in Groundhog Day, we too may be able to improve the quality of the same repeating day, but ultimately and unfortunately we remain trapped until the current macro policies are abandoned.

The Quarterly Outlook Q4 2011 focuses on the following areas:

Market Comment

2012 so far has been good for investors (+13% yearto- date) and hope, and extremely bad for reform and employment. The divide between the sectors and people benefitting from the prevailing extend-andpretend policy and the real economy is as large as ever seen in my career. The main questions for the balance of 2012 must be: How long can we keep the social unrest at bay and at what cost?

Equity Outlook

The extreme intervention by global central banks distorts the price signalling effects of the marketplace and increases uncertainty in financial markets but also the real economy. On that basis equity risk premium and credit spreads are worth less value to investors. We foresee subdued economic growth going forward as the financial repression continues and in that environment small niche companies with comparative advantages will do well compared to larger companies.

FX Outlook

The third quarter of this year saw central banks doubling down on the quantitative easing approach to all economic problems great and small and FX generally responded to this renewal of the QE theme as it has done every time since the global financial crisis began, by pushing the USD and JPY lower and pushing risk appetite higher. As one would expect with asset markets being force fed liquidity like some giant foie gras duck and risk appetite storming back higher as the market enjoyed the prospect of endless central bank gravy, implied volatilities for most G-10 currencies continued to collapse, reaching levels not seen since way back in 2007.

Monetary Policy

One certainly could not accuse the Federal Reserve of complacency or inflexibility when at the end of its most recent meeting on September 13 it made some momentous announcements. But the underlying change in the Federal Open Market Committee’s (FOMC) philosophy and reaction functions will come to be seen as the most significant development to emerge that day. One could even say the Fed was very brave being willing to risk its own survival (at least with its current mandate) for the sake of what it saw as right for the economy.


At this point in the crisis, almost all major central banks have moved towards very lax monetary policy. Interest rates are virtually zero and quantitative easing is on the agenda everywhere – despite the lack of results from Japan’s two decades of QE and Ultra- Easy Keynesian stimulus. It makes one wonder what were the measures in Japan utilised to instigate the (in academia) so broadly anticipated Keynesian recovery? Regardless, since 1996 in Japan.


Q4 sees the changing of the Committee guard in China, the once-a-decade event that in the past has not really raised any eyebrows. In the last transition in 2002, Hu Jintao had been groomed by former leader Deng Xiaoping and it was a relatively smooth affair when he took over from Jiang Zemin. This time round, the recent arrest and ouster from the party of Bo Xilai, party chief of the city of Chongqing and potential presidential candidate, together with media frenzy stirred up by reports of the health of front-running candidate Xi Jinping (he was out of the media spotlight for a week) has clouded the outlook and introduced a minor element of uncertainty.

Commodity Outlook

Into the fourth quarter we think the impact of the latest round of quantitative easing will fade and the dollar should find some support which in turn will create some headwinds for the commodity sector as a whole. We continue to favour gold as raised inflation expectations and low official US rates until 2015 will keep the real rate of return on fixed income investment entrenched in negative territory. Energy prices, which had another attempt to the upside in Q3, once again found lack of support from sluggish economic fundamentals and lower to flat prices followed. This scenario of subdued price action is set to continue into Q4 barring any geo-political upheaval.