Newsletter dated February 12, 2016

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Equity markets extended their losses and are close to panic mode.

Crude oil is testing new lows again which means a loss of 28% year-to-date. Leading equity indices are 10-20% down. Treasuries and Bund are up. Investor are heading back to gold which is 15% up. See our chart of the day!

That was the simple part of our bi-weekly newsletter. The big question every investor is asking now is where do we go from here? Let’s check how we got here first. We have a mixed earning season. Investors dump stocks on bad news and even more on bad outlooks. US Fed is still signaling further interest rate hikes for this year which investors do not believe in. European and Japanese central banks announce interest rates cuts which investors do not care a lot about. The worst market concern is that of a recession while monetary actions by central banks prove being ineffective.

So are we heading to a recession? Some early indicators such as industrial orders or commodity prices say yes. Robust economic data from leading economies such as US or German unemployment rates say no. Goldman Sachs says no. JPMorgan as well. If you believe in this or not – they see the probability for a recession within the next 1-2 years between 24 and 38 percent.

The role of central banks is increasingly a point of controversy – particularly in currencies where negative yields force investors to take more risk than they otherwise would. It is for sure that central banks cannot create social wealth. And they do not claim it. Some investors still believe it.

The dilemma right now is that some investors believe in a recession – with or without relief from central banks. And the investors that do not believe in a recession see further interest rate hikes which do depress financial market valuations.

Erwin Lasshofer and his INNOVATIS team expect a high probability for one of the two scenarios to materialize. For both cases markets have already reached a considerable discount. We still expect continued volatility for the rest of the year with moderate profits from here.