Author: Stefan Markus Kremeth

Japanese conditions – low inflation is going to stay for some time!

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

Japanese conditions in global government bond markets are more and more likely. But what does it mean for our investors with reference currency Euro or Swiss Francs, if Germany’s 10-year government bond yields 0% or almost 0%, Switzerland’s 10-year government bond even yields -0.75%. What does it mean, if central banks own large portions of their countries’ government bonds (the Bank of Japan owns 49% of Japanese government bonds, the European Central Bank owns 20% of European government bonds and the U.S. Federal Reserve System owns 13% of U.S. government bonds)?

The answer is not so trivial and since we do not have any long-lasting experience in this, we cannot really know where the situation is heading. One thing is certain though, as long as central banks are buying government bonds in the primary (direct at source) or secondary (at exchanges) markets at current or even increased rate, government bond markets will not become free markets (free in an economic sense) but stay manipulated. Manipulated may be a strong word for one or the other of you and I am not judging, but let’s face it if in any market of any product in the world one single buyer buys all the “leftovers” there will never be a fair price defined by offer and demand for that very product. In the case of government bonds one would assume that a country as over-indebted as Japan would have to pay much higher interest rates to sell their government bonds to investors than for example Germany a country running on a much, much lower debt to GDP ratio than Japan, only that this is not the case. The reason for this is central bank intervention.

Personally I believe Japan is indicating a direction in this respect as Japan is somewhat running ahead of us sitting here in Europe. Japan is running on low or ultra-low interest rates for decades already and Japan is in a situation of constantly increasing government debt levels that have reached roughly 250% of GDP. What we can learn from Japan and what we can expect to experience in Europe including Switzerland (at least partially and maybe to some lesser extent) is the following:

  • Debt to GDP ratios will rise.
  • Interest rates will stay low due to central bank interaction.
  • Government spending discipline is not going to increase.
  • Government bond markets stay manipulated by central bank interaction.
  • Government bond markets’ liquidity problem is going to stay due to central bank interaction.
  • Inflation will stay low.
  • Central bank status quo for decades.

This list is by all means not complete. But it shows why I believe there will not be either a quick fix or hyper-inflation anywhere soon.

Therefore, ask yourself if you really want to invest your money following an unlikely scenario? Because maybe it makes sense to invest in cashflow returning strategies and keep some precious metals for the ultimate worst-case scenario, no?

What is your opinion?

As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

A simple calculation

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

If you belong to the people who pay their bills primarily in Swiss Francs and/or Euros you belong to a rather large cohort of a few hundred million people living most probably somewhere on the European continent.

Today, I would like to show you with a simple calculation why I prefer equities over bonds.

If you keep your money as liquid and as safe as possible in a bank savings-account (hopefully with a bank offering some sort of government guarantee or at least a bank not getting involved in investment banking and/or corporate debt) or you have it invested in Swiss and/or German government bonds, you, Ladies and Gentlemen, will most probably receive 0% interest. Maybe you will even have to pay a small interest for depositing your money at the bank or for investing it in government bonds of short maturity and in any case, you will have to pay some small banking fees here and there on a regular basis.

This means, in the case of you wanting to invest your money in a Swiss and/or German government bond for 10 years because of its relatively low volatility, you will have to accept 0% interest or in other words no income whatsoever from such an investment and even worse, you will actually lose small bits and pieces of your money (fees) over the entire 10-year period. This truly means that at the end of a 10-year period you have less money than when you started and in real money terms, which means adjusted to purchasing power, you may have lost 10% – 20% due to inflation over that period.

To me this seems not a very attractive investment.

On the other hand, if you invest your money over 10 years in some solid listed company that pays regular annual dividends of 4.5%, thanks to the effect of compounding you will receive some 50% return over the same period. True, you will most probably have to accept higher volatility, but doesn’t the proposed return deliver an incentive high enough to accept such volatility?

Ladies and Gentlemen, to me it does!

Now, I know this is a very simplified calculation but both examples are real and possible in today’s market environment. Solid company delivering 4.5% dividend yield on one side and 0% 10-year government bond on the other side.

Think about it!

As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

What’s next?

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

I receive a fair number of messages asking about my view on the markets. As my regular readers all know, I still cannot foresee the future although I am trying hard but so far, I was totally unsuccessful.

However, if we take the core messages of my recent weekly mails about long-term investing into considerations and also what Mr. Andy Haeberli, Profond’s CIO, mentioned in last week’s interview, then – at least for me – there is not much room for investments outside the “real asset” bracket.

To make money with easy to understand, straight forward fixed income strategies seems difficult with current low interest rates. Either you accept elevated currency- or counterparty risks or you will not find decent yields on your fixed income investments. When it comes to real assets you may will have to accept higher volatility – as in equities and/or precious metals – but you get higher returns in the long run.

You may know, that we offer a cashflow based mandate for our private clients and while we cannot diversify those portfolio’s entire volatility away, we receive very decent cash returns on invested capital and interestingly enough, at least half of the companies whose equities we hold in those mandates, just announced dividend increases.

Now, Ladies and Gentlemen, what I want to say with this is, that if you are willing and capable of accepting volatility in your portfolio, you may appreciate rather stable cashflows on your invested capital and this should not to be neglected because the effect of compounding interests will help you to increase those cashflows even more (in theory exponentially) over time.

While I don’t know where markets or single investments are heading, I am confident that by following a strict investment process in seeking and harvesting positive cashflows, you may not get rich over night, but you will be able to steadily increase your capital over time.

There is no magic in this and crashes may occur at any moment. However most solid global companies keep paying stable dividends even during stock exchange crashes. This means if you do not have to sell a solid investment during a stock market crash and if you are patient enough to wait until stock markets recover, your loss potential is most probably going to be limited. However, it all comes down to picking the right stocks and this is hard work and involves a lot of research and number crunching.

As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:
smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Interview with Mr. Andreas Haeberli, CIO of Profond

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

As announced two weeks ago I was able to interview Mr. Andreas Haeberli, CIO of Profond Collective Foundation. Please find my questions with Andy’s answers for your convenience:

1) What is Profond’s investment goal?
We want to offer sustainably high benefits to our policy holders. When we invest, we therefore focus primarily on real values, i.e. equities and real estate. These asset classes enable us to generate above-average returns in the long term. With optimal diversification, we take risk parameters and financial stability into account.
2) What is your investment horizon?
Pension fund assets are invested over a very long period of around 60 years (40 years of gainful employment and around 20 years of pension entitlement). As a result, short- and medium-term financial markets fluctuations balance each other out well. Therefore, we are not influenced by short-term movements and short-term events in financial markets. We do not engage in any tactical investments or hedges. However, we generally hedge foreign currency risks for nominal values, real estate and infrastructure investments.
2) Where do you see the biggest challenge for a Swiss based pension fund manager today?
The current low level of interest rates presents major challenges to investors. Bonds are traded with a maturity yield of zero and negative interest must be paid on cash holdings. This leads to ever lower investment returns on investment funds. This low compound interest effect has a noticeable negative effect on fixed income investments in the long run.
3) hat are your favourite investments and why?
Long term, equities yield higher returns than bonds. This is shown, among other things, by a much-quoted study by Pictet. That is why we focus on equities and not on bonds. We also invest an above-average proportion in real estate. They are not directly dependent on stock market fluctuations and diversify our overall portfolio well. We also benefit from regular income (rental income). Thanks to these asset classes, we achieve a cash flow return of around 2.5% on the overall portfolio.
4) Are you working with consultants and if, why and if not, why not?
On a case-by-case basis, we draw on the knowledge of advisors in the selection of asset managers. We also call in pension fund experts for certain tasks. 
5) How are you investing your private money?

Basically, my private investment activity does not differ from my professional one. The only difference is that I invest a small part of my personal wealh on a short-term basis.

Many thanks, Andy, for your time and the insight!

As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Sociocultural issues meet economics

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

Did you follow my advice and spend every morning 30 to 60 seconds thinking about something positive? If so, what was the effect?

Now, last week I gave you an insight into some of my global sociocultural points of view and proposed to publish an interview with a pension fund manager for this week. The interview was conducted but the time schedule was a bit aggressive and I am not quite ready to publish the interview yet. Hopefully by the end of next week I will be and may deliver on my promise.

I have been receiving very thoughtful and interesting feedback to my last weekly mail and thus today, would like to pick the feedback of two of my readers and share Masha’s and Anton’s thoughts with you.

When thinking of current global economic policies, Masha has a picture in her mind. It is the picture of a curved (concave and convex) mirror. The sort of thing you would see in amusement parks. When you stand in front of it, reality gets distorted. I quite like that metaphor and I totally see her point, only that instead of the mirror we have some of today’s media channels and research reports by banks and brokers.

Anton’s feedback was touching on three points.

Firstly on his statement that uninterrupted growth is not possible, something I would easily agree to, second he cited a quote by Hannah Arendt: “Politics is the professional representation of vested interests”, again I can’t really argue against that one and thirdly he mentioned that we cannot borrow our way to prosperity (how I love that one!) but rather that prosperity requires sacrifices – more specifically, to get something of value tomorrow (including a better life overall) we need to give up something today (time, sleep, money, etc.). This last statement is so true and the ones who know me well, will know that I have a serious problem with today’s culture of “instant gratification”. It just doesn’t work. I always use the same metaphor. If a farmer wants vegetables, he needs to prepare the grounds, saw the seeds and only after a while will see the first signs of germinating plants.

Same is obviously true for investments. People who expect return without giving the investment time to develop, shouldn’t really invest, at least that is what I think.

As always, I encourage you to send me your feedback but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards,
Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Who hinders growth, hinders prosperity

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

Long-term investing seen from a slightly different angle that was what my last weekly was all about. I received many questions for pension fund investment pros and am happy that my friend Andy Haeberli, Profond’s CIO, one of Switzerland’s largest collective foundations, agreed to be interviewed by me. I will hopefully be able to do the interview next week and publish it in my next edition of “Stefan’s weekly”.

Today I would like to have a look at what politics can do to help their people to prosper. I am a firm believer of the vision that politicians should primarily act in the public’s interest, however I do get the impression that some of them are primarily acting in their own interest.

First of all I determine that 10 years after the great financial crisis the global economy doesn’t look all that bad. No matter what you hear or see, it is a fact that GDP in most countries is higher and unemployment lower than before the great financial crisis. Total debt on the other side went up massively but so far did not hit economies with high inflation rates as foreseen wrongly by so many (including me).

During and after the great financial crisis, governments and central banks across the globe worked together and made it possible that we didn’t fall into a deep, deep recession followed by hyper-inflation. I believe one of the success factors was the common vision of implementing concentrated and collective action to prevent worse.

What changed in the last roughly two to years? There is this feeling of negativity and that sound of negativity and you know what? I don’t like that sound of negativity! This is the sound of populists to the right and of populists to the left and it can’t be expected to lead to anything positive! Some of those people would like to bring back “the good old days”, why? Because these were the days when children died of influenza or days of no cancer treatment or days of wars in Europe or days of countries without voting rights for women or days of exclusion of minorities, days of apartheid, days of no central heating, etc, this can’t be the goal.

Anyway, I believe that weak politicians take weak decisions and I believe that protectionism represents a risk to global economic prosperity and I believe that we have to settle for cultural and socio-economic adaptation, because not even the most powerful governments and/or central banks can perform well in a socio-economic vacuum and I believe our political leaders and also the general public need to start immediately to detoxify the current public political discourse. This is important because this negativity hinders growth and thus prosperity. It is our responsibility to elect the political leaders that can do the job.

What is your opinion?

Ladies and Gentlemen, please try one thing for yourself and please let me know if it did have an effect on you. Please spend every morning right after getting up 30 to 60 seconds thinking about something positive or about various positive things. As always, I encourage you to send me your feedback but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards,
Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

What would you do?

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

Just imagine you were managing a multi-billion pension fund with thousands of policy holders expecting you to deliver sufficient returns in order to grant to them a pension that will allow them to pay their bills once will be retired.

What would you do? How would you allocate the money that was entrusted to you?

Ladies and Gentlemen, the largest investors on this planet are pension funds. They invest their policy holders’ money either directly or via mandates. Mandates means the pension funds give the policy holder’s money to banks, brokers, asset managers who then manage parts of the pension funds’ portfolios. Both approaches have their pros and cons but this is not part of today’s weekly.

Now, every month there is new money from pension fund policyholders’ (premiums deducted from salaries) arriving at the pension funds. Furthermore many economies still count growing working populations. This means new workers/employees joining pension funds, which again leads to more money to be managed. This money needs to be invested and it needs to yield a positive return over time. Frankly speaking, this is quite a challenge. In an environment of ultra-low or even negative interest rates, macro-economic uncertainty, and political threats, investors prefer to keep their powder dry before investing. However, eventually a pension fund manager needs to invest as cash on accounts may yield negatively, not to mention inflation, as low as it may be, it should still be that any sort of investment return covers at least underlying inflation.

I personally believe it is always interesting to think about where the largest investors, who not only manage unbelievable amounts of money but on top of that and by definition need to follow a very long-term approach, put their money.

I am curious and this is why I am asking you to let me know how you would invest your policy holders’ money, if you were a pension fund manager. I will consolidate your suggestions/ideas and then let’s see what comes out of it. Maybe we can draw conclusions from this for our own investment style.

Now, Ladies and Gentlemen, I encourage you to send me your concise ideas but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Financial Markets are Indifferent

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen
Welcome to 2019!
May this be a year of good health, interesting encounters and plenty of happy moments for you and your loved ones.

In this first weekly of the year, I would like to take up the issue of last year’s sell-off which occurred during the month of December. I was quite impressed and even more intrigued by what happened and the way it happened.

It was striking to see the media reaction to the sell-off, with comments and vocabulary referring to financial markets almost as if financial markets were humans, a bunch of nasty, mean and hostile guys taking away investor’s money. Quite frankly I believe the sell-off became a self-fulfilling prophecy created by media, financial experts, so-called financial experts and finally the man in the street.

Fact is, financial markets are neither hostile nor friendly they are just indifferent.

Because markets in general (including financial markets) are nothing more than places to exchange goods for goods and/or goods for money during defined times, that’s all. They were actually designed to make life easier for buyers and sellers and therefore with the comfort of humans in mind.

However, most of the market participants on the other side are real human beings  (only most because there are also algo-trading-programs)and as such they are biased, nervous, short tempered, greedy, anxious, happy, educated, uneducated everything you want. Market participants get influenced by noise, media, brokers and many other factors and create hypes and sell-offs. This, as fortunate or unfortunate it may seem (depending on ones perspective or personal positioning), is normal, it’s just the way we – humans – are. It is always interesting to see how quickly we can change from being confident to being anxious and that is not only true when it comes to investments. It is pure psychology and probably dates back to the time when homo erectus started to rover the grounds.

Why would I make a point of this, because I believe that during sell-offs, like the one we have just experienced in December 2018 but also many other sell-offs many times before, there is a mismatch between the fears of crashing financial markets and the real intrinsic risk of failure of the companies whose shares are actually traded on a given financial market (stock exchange).

If you are able to detect such a mismatch and if you have the courage to go against your own fear and step in to buy equities of companies you assessed in the past and considered worthwhile owning and thus always wanted and still want to own anyway, you may get them at interesting prices, possibly enjoying price appreciation over time. Pension funds are typically buying during and after sell-offs. With their very long-term investment horizon they are predestined to buy and hold and while holding, harvesting dividends.

Ladies and Gentlemen, please keep in mind that I can’t foresee the future and that I only try to apply some common sense and that whatever I am sharing with you in my weekly mails reflects my very own personal opinion and please keep on sharing your thoughts and ideas with me. Please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards.

Yours truly,

 

Stefan M. Kremeth
Wealth Management
Incrementum AG

Passion and Merry Christmas

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

December was for most of us a rather grim month with markets going down significantly. As I wrote in my previous weekly mails, this is all part of investing and we have to be able to bear the pain, else we may rather not invest at all.

Yesterday, the Fed acted according to their mandate and the major message was that the Fed did not seem to be wanting to react whatsoever to the tweets by President Donald Trump. I personally think this is very confidence inspiring as it may be seen as a clear sign of the U.S. central bank’s independence.

Now, Ladies and Gentlemen, this is my last weekly for the year and I would like to thank all of you, my readers. Thank you very much for all the interesting comments and questions.

You know, reading, looking at markets, investing, discussing scenarios, speaking and writing about all of this is my passion and I will continue doing it also in 2019 and I hope you will stay tuned and keep sending me your feedback!

I wish you all a relaxed and funky Christmas and a prosperous and inspiring 2019 !!

Many thanks for everything and kind regards.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Video Interview with Demelza Hays

Posted on by Stefan Markus Kremeth

Dear Ladies and Gentlemen

My colleague, Demelza Hays, has been interviewed by Chris Marcus from Stockpulse https://www.stockpulse.com/. I think the interview was well conducted and answers some of the questions in regard to blockchain or crypto currencies. Please feel free to enjoy the video below.

If you are interested in Incrementum’s blockchain and crypto research, please feel free to register yourself under:

https://cryptoresearch.report/downloads/

to receive your free copy of our quarterly research report.

Please do not hesitate to share your thoughts with me on the interview with Demelza or on whatever seems interesting to you or is bothering you. Please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Kind regards.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG