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The Approach
1. The Central Banks' Best Kept Secret
Most economists and investors are fixated on interest rate
analysis. In vain. Interest rates are only a secondary tool used by
central banks to control economies. Their main tools are the basis of
our proprietary approach, which was developed using input from central
bankers and has been statistically superior to other models. Under a
strict confidentiality agreement, you can look at economies the same
way as central bankers do.
2. Liquidity is the Key
Put simply, money drives the economy. However, it must
be measured correctly. The monetarist approach was discredited, because
monetarists fell for the central bankers' ruse of selling to the public
as measures of the 'money supply' what actually amounts to mere measures
of the savings supply, namely deposit aggregates such as M1, M2, etc.
Net new economic activity is only possible when net new purchasing power
becomes effective in the economy. Net new purchasing power can only
be created by central banks and the private banking system (the 'credit
creation' process). Measuring this with our proprietary Liquidity Indices,
we explain and forecast GDP growth, exchange rates, capital flows and
asset prices in virtually any country.
3. Top-down
Many mistakes in forecasting are due to a narrow focus
on micro-analysis (encouraged by neo-classical economics). Micro research
is important for stock selection, but with it you cannot catch market
turning points. This is due to the fallacy of composition: The mere
addition of parts does not add up to the whole, because the crucial
interaction between those parts is neglected. To give an example: classical
theory says that exchange rates and capital flows are determined by
the interest rate differential. This is the result of a model of one
'representative' investor, for whom interest rates are given. However,
no empirical evidence could be found for this widely-held theory. The
reason is simple: though true for one investor, for all investors together,
interest rates are not external, but the result of their collective
actions. Our top-down analysis captures exactly this.
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