Capture the Knowledge Effect in your portfolio

Mid-Quarter Update and Commentary

Knowledge Leaders Strategy

Steven Vannelli, CFA

September 8, 2017
KNOWLEDGE LEADERS STRATEGY

Back to the Future: A US Dollar Bear Market?

Section 1
History does not support the view that the USD is propped up by a monetary tightening cycle. The US Dollars moves are more
fundamentally based on aggregate savings, which have been declining for a couple years. The Presidents falling approval rating
and normalization in the energy markets may be the catalyst for the USD to enter a bear market.

Section 2
While it is hard for investors to comprehend how possibly interest rates can fall while commodities rise and foreign equity markets
outperform, one need only look back to 2002-2007 to see the dynamics. We have been in a USD bull market since 2008, but in
2001-2008 we were in a USD bear market, and things are different depending on which regime we are in.

If the US Dollar has indeed begun a bear market, we would expect to see the late cycle sectors (energy and materials)
meaningfully outperform for the medium term, commodity prices to rise, and at the same time we think US Treasury rates can
work meaningfully lower. We would also expect sectors like technology, health care and consumer discretionary to underperform.
Regionally, the emerging markets and ex-US developed markets should be well situated.

Section 3
On the fixed income side, we think commodity linked currencies should do well. Australian and Canadian bonds performed well in
the 2002-2007 period. The recent turn up in the AUD and CAD may be presaging a turn in the relative performance of the
government bonds of each country (in USD terms).

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KNOWLEDGE LEADERS STRATEGY

Section 1: US Dollar Bear Market

3
 KNOWLEDGE LEADERS STRATEGY

Do monetary tightening cycles support the USD? Historically, not really.

United States Dollar

Nominal Trade-Weighted USD
Shaded Areas Indicate When US Monetary Policy Is Tightening
160
150
140
130

120

110
USD

100

90
87.71

80

70

60
'74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Source: Factset, as of 9/4/17

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 KNOWLEDGE LEADERS STRATEGY

The business cycle drives the US Dollar. When the combined savings of the
business, household and government declines, the US Dollar falls.
United States Dollar
Nominal Trade-Weighted USD
Compared to the Total US Net Savings as a % of Nominal GDP
120 8

110 6
Nominal Trade-Weighted USD

Net Savings as a % GDP

100 4

2.35
90 2
87.71

80 0

70 -2

60 -4
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
Nominal Trade-Weighted Exchange Rate Index, Major Currencies (Left)
Net Savings as a % GDP (Right)
Recession Periods - United States

Source: Factset , as of 9/4/17

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 KNOWLEDGE LEADERS STRATEGY

The other reserve currencies are cheap. The Euro is undervalued by about 6%
using our basic purchasing power parity (PPP) model over the last 20 years.
Eurozone Euro
Relative to US Dollar
Purchasing Power Parity: CPI Differential
1.7 40

1.6
30
1.5
20
1.4
13.22
10
1.3
Rate

PPP
1.2 1.19 0
-6.12
1.1
-10
-13.22
1
-20
0.9
-30
0.8

0.7 -40
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Over/Under Value - % (Right)
Spot Rates USD/EUR, Close Daily - Euro Zone (Left)
Trendline: Average (hidden) with 1st standard deviation

Source: Factset , as of 9/4/17

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 KNOWLEDGE LEADERS STRATEGY

The Japanese Yen is undervalued by about 18% using the same basic PPP
model over the last 20 years.
Japanese Yen
Relative to the US Dollar
Purchasing Power Parity: CPI Differential
0.014 40

0.013 30

0.012
20

0.011 12.69
10

Percent
JPY

0.01
0
0.01
0.009

-10
0.008 -12.69

-18.06
0.007 -20

0.006 -30
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Over/Under Value - % (Right) Trendline: Average (hidden) with 1st standard deviation
Spot Rates USD/JPY (Left)

Source: Factset, as of 9/4/17

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 KNOWLEDGE LEADERS STRATEGY

Normalization in the energy market seems to be pressuring the USD in the

short-term.
United States Dollar
USD Index Compared to Commercial Crude Days of Supply
105 36

34
100
32

30
95
92.81 28

90

Days
26
USD

26.00

24
85

22

80
20

75 18
'13 '14 '15 '16 '17
United States Dollar Index - Price (Left)
Weekly US Crude Oil Excl. SPR Days Of Supply, Number Of Days - United States (Right)

Source: Factset, as of 9/4/17

8
 KNOWLEDGE LEADERS STRATEGY

The US Dollar is sinking on the drop in the Presidents approval rating.

Source: Strategas, as of 9/4/17

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KNOWLEDGE LEADERS STRATEGY

Section 2: Memories of the 2002-2007 bull market

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 KNOWLEDGE LEADERS STRATEGY

In 2002-2007, the US Dollar fell w hile US interest rates fell at the same
time.
US Treasuries
30Y Treasury Yield and USD Index
12/31/2001 - 12/31/2007
6
5.8 120

5.6
110
5.4

5.2
100
5

USD
Yield

4.8
90
4.6
4.50

4.4
80
4.2
76.70

4
'02 '03 '04 '05 '06 '07
US Benchmark Bond - 30 Year - Yield
United States Dollar Index - Price

Source: Factset

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 KNOWLEDGE LEADERS STRATEGY

In the 2002-2007, oil prices rose w hile interest rates fell at the same time.

US Treasuries
30-Year Treasury & Oil
12/31/2001 - 12/31/2007
Correlation: -0.42
6 10
5.8
5.6
5.4
20
5.2
US Treasury

5 30

Oil
4.8
40
4.6 50
4.50
4.4 60
70
4.2 80
94.92
90
100
4 110
'02 '03 '04 '05 '06 '07
US Benchmark Bond - 30 Year - Yield (Left)
Crude Oil, Brent, Global Spot, ICE ($/bbl) - Close (Right)

Source: Factset

12
 KNOWLEDGE LEADERS STRATEGY

During the 2002-2007 period gold prices almost tripled w hile interest fell at
the same time.
US Treasuries
30-Year Treasury & Gold Prices
12/31/2001 - 12/31/2007
6 200
5.8
5.6
5.4 300
5.2
US Treasury

5 400

Gold
4.8
500
4.6
4.50
600
4.4
700
4.2
800
838.00
4 900
'02 '03 '04 '05 '06 '07
US Benchmark Bond - 30 Year - Yield (Left)
Gold (NYM $/ozt) Continuous Contract - Futures Price Close (Right)

Source: Factset

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 KNOWLEDGE LEADERS STRATEGY

For equity investors, the 2002-2007 period was not favorable for the relative
performance of US equities.
KLSU DM AMERICAS INDEX
Price Relative to KLSU DM Index
Compared to USD Index
12/31/2001 - 12/31/2007 Correlation: 0.84
130

100 120

110
95
Relative Pirce

USD Index
100
90
90

85
80
82.36
76.70

80
70
'02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left)
United States Dollar Index - Price (Right)

Source: Factset. An investor cannot invest directly in an index.

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 KNOWLEDGE LEADERS STRATEGY

US stocks underperformed in 2002-2007 while oil prices almost quintupled.

KLSU DM AMERICAS INDEX

Price Relative to KLSU DM Index
Compared to Oil
10

100 20

30
95
40
Relative Price

50

Oil
90
60

70
85
80
82.36
90
93.79
80
100
'02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left)
(MOV 5D) Crude Oil Brent Global Spot ICE ($/bbl) - Price (Right)

Source: Factset. As of 12/31/07.

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 KNOWLEDGE LEADERS STRATEGY

US stocks underperformed while gold prices almost tripled.

KLSU DM AMERICAS INDEX

Price Relative to KLSU DM Index
Compared to Gold
12/31/2001 - 12/31/2007 Correlation: -0.94
200

100

300
95
Relative Price

400

Gold
90

500

85 600

82.36 700
800
80 833.75
900
'02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left)
Gold London PM Fixing ($/ozt) - Price (Right)

Source: Factset

16
 KNOWLEDGE LEADERS STRATEGY

Developed Europe and Asia outperformed in the 2002-2007 period.

KLSU DM EMEA INDEX KLSU DM ASIA INDEX

Price Relative to KLSU DM Index Price Relative to KLSU DM Index
Compared to USD Index Compared to USD Index
12/31/2001 - 12/31/2007 Correlation: -0.80 12/31/2001 - 12/31/2007 Correlation: -0.46
135 70 70
131.71 135
130 76.70 76.70
130
125 80 80
125
120
Relative Pirce

Relative Pirce
120

USD Index

USD Index
90 90
115
115
113.18
110 100 100
110

105 105
110 110

100 100
120 120

95 95
130 130
'02 '03 '04 '05 '06 '07 '02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left) (INDEX) Price Relative to KLSU DM Index (Left)
United States Dollar Index - Price (Right) United States Dollar Index - Price (Right)

Source: Factset

17
 KNOWLEDGE LEADERS STRATEGY

DM Europe and Asia outperformed alongside rising oil prices.

KLSU DM EMEA INDEX KLSU DM ASIA INDEX

Price Relative to KLSU DM Index Price Relative to KLSU DM Index
Compared to Oil Compared to Oil
135 100 100
93.79
131.71 135 93.79

130 90 90
130
125 80 80
125
120 70 70
120
Relative Price

Relative Price
115 60 60
115

Oil

Oil
113.18
110 50 50
110
40 40
105 105
30 30
100 100
20 20
95 95
10 10
'02 '03 '04 '05 '06 '07 '02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left) (INDEX) Price Relative to KLSU DM Index (Left)
(MOV 5D) Crude Oil Brent Global Spot ICE ($/bbl) - Price (Right) (MOV 5D) Crude Oil Brent Global Spot ICE ($/bbl) - Price (Right)

Source: Factset. As of 12/31/07.

18
 KNOWLEDGE LEADERS STRATEGY

DM Europe and Asia outperformed alongside rising gold prices.

KLSU DM EMEA INDEX KLSU DM ASIA INDEX

Price Relative to KLSU DM Index Price Relative to KLSU DM Index
Compared to Gold Compared to Gold
12/31/2001 - 12/31/2007 Correlation: 0.96 12/31/2001 - 12/31/2007 Correlation: 0.35
135 900 900
833.75 833.75
131.71 800 135 800
130
700 130 700
125
600 125 600
120
Relative Price

Relative Price
500 120 500
115

Gold

Gold
115
113.18
400 400
110 110

105 105
300 300

100 100

95 95
200 200
'02 '03 '04 '05 '06 '07 '02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left) (INDEX) Price Relative to KLSU DM Index (Left)
Gold London PM Fixing ($/ozt) - Price (Right) Gold London PM Fixing ($/ozt) - Price (Right)

Source: Factset

19
 KNOWLEDGE LEADERS STRATEGY

Across the developed world in 2002-2007, late cyclicals sectors, like

energy and materials, were leadership.

KLSU DM ENERGY INDEX KLSU DM MATERIALS INDEX

Price Relative to KLSU DM Index Price Relative to KLSU DM Index
Compared to USD Index Compared to USD Index
12/31/2001 - 12/31/2007 Correlation: -0.69 12/31/2001 - 12/31/2007 Correlation: -0.75
70 200 70
180 176.85
187.03
170 180
76.70 76.70

160 80 80
160
150
Relative Pirce

Relative Pirce
USD Index

USD Index
140 90 90
140
130
100 100
120 120
110 110
110

120 100 120

100
130 130
'02 '03 '04 '05 '06 '07 '02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left) (INDEX) Price Relative to KLSU DM Index (Left)
United States Dollar Index - Price (Right) United States Dollar Index - Price (Right)

Source: Factset

20
 KNOWLEDGE LEADERS STRATEGY

Technology and health care lagged badly setting these sectors up for
outperformance in the current cycle.

KLSU DM INFORMATION TECHNOLOGY INDEX KLSU DM HEALTH CARE INDEX

Price Relative to KLSU DM Index Price Relative to KLSU DM Index
Compared to USD Index Compared to USD Index
12/31/2001 - 12/31/2007 Correlation: 0.70 12/31/2001 - 12/31/2007 Correlation: 0.84
130 110 130
105
105
100 120 120
95 100
110 110
90 95
Relative Pirce

Relative Pirce
USD Index

USD Index
85 100 100
90
80
85
75 90 90
80
70
67.96
80 80
65 75 76.70
76.70
73.29

60 70
70 70
'02 '03 '04 '05 '06 '07 '02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left) (INDEX) Price Relative to KLSU DM Index (Left)
United States Dollar Index - Price (Right) United States Dollar Index - Price (Right)

Source: Factset

21
 KNOWLEDGE LEADERS STRATEGY

Global consumer related sectors also underperformed in the 2002-2007

period.

KLSU DM CONSUMER DISCRETIONARY INDEX KLSU DM CONSUMER STAPLES INDEX

Price Relative to KLSU DM Index Price Relative to KLSU DM Index
Compared to USD Index Compared to USD Index
12/31/2001 - 12/31/2007 Correlation: 0.69 12/31/2001 - 12/31/2007 Correlation: 0.64
130 130
130
105
120 125 120

100 120
110 110
115
Relative Pirce

Relative Pirce
USD Index

USD Index
95 100 100
110

90 105 104.42 90
90
100
80 80
85 76.70 95 76.70

82.53
90
70 70
'02 '03 '04 '05 '06 '07 '02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left) (INDEX) Price Relative to KLSU DM Index (Left)
United States Dollar Index - Price (Right) United States Dollar Index - Price (Right)

Source: Factset

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 KNOWLEDGE LEADERS STRATEGY

The emerging markets were big winners in the 2002-2007 period,

outperforming our KLSU DM Index by 185%.

KLSU EM INDEX
Price Relative to KLSU DM Index
Compared to USD Index
12/31/2001 - 12/31/2007 Correlation: -0.78
70
300
285.60

76.70
250
80

200
Relative Pirce

USD Index
90

150 100

110

120
100
130
'02 '03 '04 '05 '06 '07
(INDEX) Price Relative to KLSU DM Index (Left)
United States Dollar Index - Price (Right)

Source: Factset

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KNOWLEDGE LEADERS STRATEGY

Section 3: Resource related currencies and bonds look interesting

24
 KNOWLEDGE LEADERS STRATEGY

The Australian Dollar is tightly linked to industrial commodity prices.

Australia Dollar Australia Dollar

Relative to US Dollar Relative to US Dollar
Compared to Copper Compared to Crude Oil
Correlation: 0.85 Correlation: 0.86
1.2 1.2 160
5
140
1.1 1.1
4 120
1 1 100
3.10
3
0.9 0.9 80
2

Copper
0.8 0.8
Rate

Rate
0.80 0.80 60

Oil
47.30
0.7 0.7
40
1
0.9
0.6 0.8 0.6
0.7
0.6
0.5 0.5 0.5 20
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
FX Rate - Spot Mid - US Dollar per Australian Dollar (Left) FX Rate - Spot Mid - US Dollar per Australian Dollar (Left)
Copper, NYMEX Near Term ($/lb) - Close (Right) Crude Oil, WTI /Global Spot, NYMEX - Close (Right)

Source: Factset. As of 9/4/17.

25
 KNOWLEDGE LEADERS STRATEGY

On the fixed income side, Australian bonds did well alongside the falling
USD in 2002-2007 period.

Australia Treasuries
JP Morgan GBI Australia Index (TR USD)
Compared to USD Index
12/31/2001 - 12/31/2007
260 70
240
231.37
220 76.70

200 80
180

160 90
Index

USD
140
100
120
110
100
120

80 130
'02 '03 '04 '05 '06 '07
(INDEX) JP Morgan GBI Australia (Traded) - Index Total Return Level (Left)
United States Dollar Index - Price (Right)

Source: Factset

26
 KNOWLEDGE LEADERS STRATEGY

It is early, but it looks like the performance of Australian bonds relative to

global equities is stabilizing and turning up.

Australia Treasuries
JP Morgan GBI Australia Index (TR USD) Relative to KLSU AC Index (TR USD)
Compared to AUS/USD
110 0.9

100
1
90

80 1.1

AUS/USD
Index

70 1.2
1.25

1.3
60

1.4
54.09

50 1.5
'13 '14 '15 '16 '17
JP Morgan GBI Australia Index (TR USD) Relative to KLSU AC Index (TR USD) (Left)
FX Rate - Spot Mid - Australian Dollar per US Dollar (Right)

Source: Factset. As of 9/4/17.

27
 KNOWLEDGE LEADERS STRATEGY

The Canadian Dollar is also tightly linked to industrial commodity prices.

Canadian Dollar Canadian Dollar

Relative to US Dollar Relative to US Dollar
Compared to Copper Compared to Crude Oil
Correlation: 0.87 Correlation: 0.90
1.2 1.2 160
5
140
1.1 4 1.1 120

3.10 100
1 3 1
80
0.9 2 0.9

Copper
Rate

Rate
60

Oil
0.81
0.81
0.8 0.8 47.30

40
1
0.9
0.7 0.7
0.8
0.7
0.6
0.6 0.5 0.6 20
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
FX Rate - Spot Mid - US Dollar per Canadian Dollar (Left) FX Rate - Spot Mid - US Dollar per Canadian Dollar (Left)
Copper NYMEX Near Term ($/lb) - Price (Right) Crude Oil WTI /Global Spot NYMEX - Price (Right)

Source: Factset. As of 9/4/17.

28
 KNOWLEDGE LEADERS STRATEGY

Canadian government bonds performed almost identically to Australias in

the 2002-2007 period.

Canada Treasuries
JP Morgan GBI Canada Index (TR USD)
Compared to USD Index
12/31/2001 - 12/31/2007
260 70
240 232.12
220 76.70

200 80
180

160 90
Index

USD
140
100
120
110
100
120

80 130
'02 '03 '04 '05 '06 '07
(INDEX) JP Morgan GBI Canada (Traded) - Index Total Return Level (Left)
United States Dollar Index - Price (Right)

Source: Factset

29
 KNOWLEDGE LEADERS STRATEGY

In Canada also, the turn up in the currency may be leading a turn in the
outperformance of Canadian government bonds relative to global equities.
Canada Treasuries
JP Morgan GBI Canada Index (TR USD) Relative to KLSU AC Index (TR USD)
Compared to CAD/USD
110 0.9

100

90 1

80
1.1

CAD/USD
70
Index

1.2
60 1.24

1.3
50.80
50
1.4

40 1.5
'13 '14 '15 '16 '17
JP Morgan GBI Canada Index (TR USD) Relative to KLSU AC Index (TR USD) (Left)
1 / U.S. Dollar per Canadian Dollar - FX Rate - Spot (Right)

Source: Factset. As of 9/4/17.

30
KNOWLEDGE LEADERS STRATEGY

Disclosures

The Knowledge Leaders Selection Universes (KLSU) are the property of Knowledge Leaders Capital, LLC. The publication of the
Index by Knowledge Leaders Capital, LLC is not a recommendation for capital investment and does not contain any assurance or
opinion of Knowledge Leaders Capital, LLC regarding a possible investment in a financial instrument based on this Index. For full
information on the indexes, please visit the document Terms and Conditions available at
www.KnowledgeLeadersCapital.com.

An investor cannot invest directly in an index.

The information contained herein is provided for informational purposes only and should not be regarded as an offer to sell or a
solicitation of an offer to buy the securities or products mentioned. The strategies discussed in the presentation may not be
suitable for all investors. Knowledge Leaders Capital makes no representations that the contents are appropriate for use in all
locations, or that the transactions, securities, products, instruments, or services discussed are available or appropriate for sale
or use in all jurisdictions or countries, or by all investors or counterparties.

31
Capture the Knowledge Effect in your portfolio

For investors interested in the Knowledge Leaders Strategy,

please contact Shawn Paulk, Head of Distribution,
at spaulk@klcapital.com or 704.844.6844.

Knowledge Leaders Capital, LLC | 370 17th Street, Ste. 4930 | Denver, CO 80202