Week End Blog – Politicians to the Rescue?

· by · in FINANCIAL MARKETS, MACRO. ·

Welcome to the Week End Blog. This week was again all about politics. European politics, to be precise. First, the Greek roller coaster continued for at least another week. In a somewhat opaque move,  Athens, at the last moment, rejected a proposal that would keep Greece in the program for the time being. And thus were hard decisions postponed until next week, although rumors that Europe and Greece are moving closer to a solution got louder in recent days.

While things are certainly different now, having a quick look at the past can’t do no harm. Before Greece was expelled from the financial markets, bond yields reached a staggering 100% and more.

Elsewhere in Europe politicians did get some tangible results, however. In Minsk Ukraine and Russia agreed to a cease-fire starting this weekend. While this is certainly no guarantee that this is the start of a durable solution, it is a positive result. That things remain uncertain was also reflected in the hryvnia, the Ukrainian currency, that depreciated again after the agreement. Since the beginning of last year the currency fell by more than 70%(!)

Perhaps economic factors can persuade Russia to go for a sustainable solution. Lower oil prices, a falling ruble that comes with it, and sanctions will lead to a massive recession. This week the FX and gold reserves of the central bank fell again. At this pace Russia will have no intervention options left for much longer.

The European economy is improving. Euro zone GDP grew 0.3% in the last quarter of 2014, led by Germany, which grew much faster than expected. We may have entered the period of upward revisions due to the euro and oil prices.

We got more negative interest rates and more QE this week. Sweden’s Riksbank was the next to give in. It lowered the short-term interest rate to -0.1% and announced an ‘mini-QE’. To put things in perspective, Sweden’s core CPI equals +0.7% and has risen in the last three months AND expected GDP growth for 2015 is +2.3%. Who said this is not about currency wars?

The move by the Riksbank means that we have moved another step closer to the ‘Swiffication’ of Europe. Whoever thought zero was the lower bound was dead wrong.

Meanwhile the Bank of Japan stroke a different tone. Policy makers were said to view further monetary easing to shore up inflation as a counterproductive step for now. That is quite interesting of course since the QE program by the BoJ could theoretically go on until infinity.

In China monetary easing has only just begun with a rate cut last year and a cut in the required reserve ratio for banks this year. However, as inflation has plummeted to just 0.8%, way below target, real interest rates have actually gone up. Big chance that China will add some more monetary stimulus as well this year.

In fact, there is only one country left that has not joined the global race to zero, or even negative, interest rates. This table provides a nice overview that countries around the world are easing monetary policy, even Russia, expect one. Brazil has to hike rates this year as inflation expectations are getting out of hand

The ultra low interest rates around the world does have a flip side. As the financial crisis in 2008 painfully demonstrated too much debt got into the system. Many economists predicted that we would see years, perhaps even decades, of deleveraging before things would improve. But that did not really happen, now dit it? A very nice report by McKinsey shows that total debt has actually increased since the crisis. A total of USD 57 trillion of debt was added…

In the US, retail sales fell for a second consecutive month in a row. And while YoY things still look pretty ok (growth of +3.3%), some worries have started to creep up. But with wages finally showing signs of life, the US economy will probably be ok.

A couple of entertaining items to round up this Week End Blog. First, remember the Baltic Dry Index? For some time it was believed to have forecasting power concerning GDP growth. I have never been able to find a statistical relationship between the two, but if the Baltic Dry Index possesses any forecasting power, things don’t look that nice. The index has fallen to a multi-year low.

Second, we have Apple. Apple is the first company to close with a market cap above USD 7oo billion. Wow! There now fit two Googles into one Apple, or 8 McDonald’s, or 24 Twitters. Apple is huge, but were already knew that.

But, those who claim that Apple is the biggest company ever, only tell half the truth. Yes, in magnitude that USD 700 billion is the biggest number ever reached by one company. However, when inflation is taken into account Apple has some work to do. It is a Dutch company, the VOC (Verenigde Oost–Indische Compagnie) that is really the biggest company that ever existed!

Finally, I wrote an article this week focusing on some real alternative investment classes like farmland, rare coins and wine. Just to get your mind off  those ‘boring ‘bonds and equities for once 😉

Thank you for reading the Week End Blog. Enjoy your weekend!

 

 

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