The document discusses the author Bill Ehrman's core beliefs about the current economic and financial environment. Some of his key beliefs include: monetary policy remains accommodative globally; economies have bottomed out and will improve slowly; inflation and interest rates will remain low; and strong companies with good management and strategies will thrive. The author argues these beliefs suggest the financial markets should do well, despite increased fears, as long as active managers can adapt to shifts in the environment. Corporations need to invest for the future to increase competitiveness while controlling costs, and individuals need to develop new skills for changing job markets.

1. COMMENT&ANALYSIS
THE
LONG
VIEW
18 -24 J U N 201 514 HFMWEEK .COM
BILL EHRMAN
Core beliefs and some reasons to be cheerful
A
successful investor must have core beliefs
and needs to monitor events, which may
challenge or support those views. My core
beliefs today are:
• Monetary policy is relaxed virtually everywhere
in the world
• Monetary ease has been offset to a large degree
by increased regulation and higher capital ratios
• The supply of funds continues to exceed the
demand for funds, which is beneficial for finan-
cial assets
• Global economies have bottomed and will
improve slowly
• Globalisation is a fact of life, influencing com-
merce and the financial markets
• TheUSdollarwillremainthecurrencyofchoice
• Inflation and interest rates will remain subdued
but the yield curve will steepen as fears of defla-
tion abate as growth improves
• Commodity prices will remain contained as
long as supply exceeds demand but the lows
have been reached for this cycle
• Energyproductionwillcontinuetoincreaseout-
side of the Middle East, further weakening the
Organisation of Petroleum Exporting Countries
• The economic cycle will be extended as there
will be few excesses, therefore creating lower
highs and higher lows due to the lack of imbal-
ances
• M&Aactivitywillremainstrong,astheeconom-
ics are overwhelmingly boosted by low interest
rates, high cash balances and large synergies
• Managements are acting as their own activists
andmakingstrategicchangestoimprovegrowth,
margins, returns and competitive advantage
• Corporate profits will surprise on the upside,
benefiting from growth and tight cost controls
• Corporationswillcontinuetogeneratefreecash,
as capital spending will remain equal to or lower
than depreciation
• Speculation exists in real estate, art and private
equity
• Governments, like corporations, need to focus
more on the long term and implement policies
that will enhance global competitiveness while
improving the general standard of living
• Infrastructure spending will grow globally
• Investinthestrongestcompanieswithexcellent,
open-minded managements with sound strate-
gic plans to thrive in a global economy, with
growing earnings, free cash flow and dividend
yields over 2.5%
• Be agnostic as to where the company is
domiciled
• The bond bull market is over
• Don’t fear Fed policy, which will remain accom-
modativeevenafterthefirstincreaseinthefunds
rate
• India, China and Japan are building strong foun-
dations for future growth
• Greece exiting the euro will not lead to conta-
gion elsewhere and the euro will rise
• Control risk by maintaining excess liquidity at
all times.
I have argued that there is “nothing to fear
but fear itself”, as good news should be good for
the financial markets. We are living in a different
world than eight years ago and most forecasters
and econometric models cannot factor into their
equationsashiftinpsychologytoamoreconserva-
tive bias.
Governmentsaremanagingtheirbudgetstighter
asdeficitspendingispassébutthereremainsaneed
for regulatory and tax changes to promote growth.
Corporations must be willing to invest for the
future to increase their global competitiveness
while controlling labour costs and capital spending
to improve profitability and cash flow.
Individuals, who are saving more and spending
less, need to realise that different skills are needed
in today’s job market.
This is the new norm that will impact investing.
Therewillbeclearwinnersandlosers.Moneyman-
agers have had a difficult time keeping up with the
averagesoverthelastfiveyears.Underperformance,
not fees, is the reason that Calpers and other pen-
sion funds are firing managers. However, they
should consider reducing their actuarial assump-
tion to reflect lower baseline inflation.
I believe that active managers like hedge funds,
rather than passive managers like low-fee index
funds will outperform the averages as shifts occur
in capital allocation between asset classes.
Sponsors that added to hedge funds after the
2008 crash have underperformed and are now sell-
ing hedge funds when it is the time for active man-
agement. Figure it out.
BILL EHRMAN, managing partner at Paix et Prospérité Funds
A
nyone assessing the clearing
landscape recently will be aware
of some distinct contradictions
created by inconsistent global
legislation.
Compare the consequences of Basel
III, which seeks to reduce systemic
risk in the global financial system, with
Emir and Dodd-Frank Title VII, which
togethermandatethecentralclearingof
OTC derivatives.
Banks consider Basel III’s leverage
ratio a “major headwind” to imple-
menting the clearing mandate, given
that notional and potential future
derivatives exposure is included in the
calculation with little account for the
risk-reducing impact of the segregated
initial margin posted on clients’ behalf.
The capital requirements are “entire-
ly out of proportion” with the systemic
risks posed by clearing members, said
Suzanne Sprague, managing director,
credit risk, banking & solutions for
CME Clearing.
Sprague, alongside several COOs,
says the current iteration of the rules
will lead to fewer entities providing
clearing services, creating greater coun-
terparty credit risk in turn.
Basel’s treatment of cash reflects
another paradox: while banks welcome
non-cash instruments, which sit off-
balance sheet for collateral and treas-
ury purposes, one top-tier prime OTC
clearing head says cash is still optimal in
a liquidation event.
“The capital rules actually compel
clearing members to take incremental
counterparty risk, since cash is typically
the collateral of choice in a liquidation
scenario.”
The need for cash alternatives has
other implications, with COOs predict-
ing a lowering of yields on T-Bills and
Money Market Funds.
Providers, such as BlackRock, are
encouraging the use of ETFs as col-
lateral, a move that will only gain
widespread traction when fragmented
European reporting obligations are har-
monised to provide a comprehensive
picture of liquidity, one ETF source
tells HFMWeek. ■
THE
SHORT
VIEW
JASMIN LEITNER
j.leitner@hfmweek.com
CORPORATIONS MUST BE
WILLING TO INVEST FOR THE
FUTURE TO INCREASE THEIR
GLOBAL COMPETITIVENESS
”
014-015_HFM382_comment.indd 14 16/06/2015 16:43