Profiting from Monetary Policy: Investing Through the Business Cycle

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Palgrave Macmillan, Nov 23, 2012 - Business & Economics - 232 pages
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The Financial Crisis has brought the pensions time bomb centre stage due to a decade of low returns increasing unfunded pension liabilities and lowering future retirement incomes. This is because most investors have been unable to avoid the substantial volatility in asset prices and capital destruction that has accompanied the business cycle. Until investors reject the prevailing monetary policy consensus as an investment framework based on price stability and general equilibrium, pension schemes will continue to suffer poor returns due to periodic downturns. Alternative credit-based disequilibrium frameworks exist, originating with the work of Knut Wicksell that was subsequently developed by the joint winners of the 1974 Nobel Prize, Friedrich Hayek and Gunnar Myrdal. Credit-based frameworks can measure the extent of disequilibrium in an economy signaling to investors when to switch from equities to bonds and vice versa, thus preserving capital as the business cycle shifts. Empirical analysis on multiple countries demonstrates that investment strategies that track the business cycle generate equity like returns with bond-like volatility. The provision of business cycle tracking funds will therefore at least go some way to defusing the shortfall in pension provision.

Profiting from Monetary Policy is a highly innovative book that provides new insights on the business cycle and exposes the flaws in current monetary policy. It advocates a new, credit-based framework which can provide investors with the returns they need whilst eliminating the volatility that has plagued the industry in recent years, and will prove to be an invaluable guide for investors in today's post-crisis landscape.

 

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Contents

Introduction
1
1 The Great Moderation and the unravelling of a Great Myth
10
2 From model failures to streams of data
32
3 The problem of credit
51
A dynamic disequilibrium approach
66
5 The neoWicksellian framework
96
6 Testing Wicksellianism
113
7 The creation and destruction of capital
156
8 Where are the customers yachts?
176
9 Postscript Constructing business cycle tracking funds
180
Notes
188
Bibliography
199
Index
208
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About the author (2012)

Thomas Aubrey is the founder of Credit Capital Advisory, a consultancy specialising in the relationship between credit markets and the wider economy. He has substantial experience running credit and economic analytics businesses and has served as the Managing Director of both Fitch Solutions, a provider of credit risk and quantitative analytical solutions and Datastream, which is widely used by investors and professional economists for asset allocation. These experiences have underlined the importance of analysing streams of data rather than over relying on analytical models, particularly given the dynamic and unpredictable nature of credit. Previously he worked as a management consultant turning around failing businesses in Asia, North America and Europe, affording him a unique perspective into the creation and destruction of capital. He holds a first-class degree from the London School of Economics and an MPhil from the University of Cambridge, where he mostly studied the history of political and economic thought before studying mathematical economics at Birkbeck College.