I do not want a second Ukraine in Poland

It seems to me that the situation in Poland is most often described as Black or White. But I have the impression that the real problem is that it is not exactly the nice guys against the bad guys.

It is more about naive euro-optimists against extra-extra-conservatives who show signs of totalitarian lust and run as an elephant in a china shop in some cases. I do not want even to imagine that I have to stand on one side or the other.

Anyway, I do not want our neighbors to end up like Ukraine, so the whole situation worries me quite a lot. I consider it from the long-time point of view and potential consequences for more serious than, let’s say, events in Berlin (no matter how sad).

The regulation will not protect you!

Excessive regulation does not protect people better - it only causes a false feeling of higher security. In restaurants across the EU, allergens must be labeled. My last experience from a restaurant in Benatky: 

- "We need all foods without allergens 1,3,7."

- "OK, no problem." 

I, a moment later: "What's the white thing in the vegetable? Isn't it the feta cheese?" 

- "You have a problem with it?!"

- "Yes, I do. I have ordered food without allergens 1,3,7. The cheese contains milk! Take it away, otherwise you call an ambulance for my kids!"

Conclusion: The regulation will not protect you, everything depends on the intelligence of your waiter and your vigilance.

Why do I not believe the Fed?

So it got confirmed. The American Fed was giving away higher interest rates again after a year. So the main financial puzzle of the year 2016 got solved. And the puzzle was the timing of the raising of the interest rates in the USA. While a year ago, the interest rates in the USA rose during December from the 0 – 0.25 % zone to 0.25 – 0.50 % they are in the zone of 0.50 – 0.75 % now. This wasn’t anything unexpected for the market. It’s almost like when you can tell that you get socks once again under the Christmas tree just by the shape of the wrapping paper.

The rub lies in the unexpectedly generous outlook of the American central bank. The Fed is not counting with raising the interest rates next year by 0.50 but right by 0.75 percentage point. Translated that would mean not two but right away three raising of the interest rates next year. The chief of the Fed J. Yellen hinted yesterday that the future fiscal expansions (or the spending of the government) will need a stricter monetary policy. But there are big question marks hanging in the air.

 

The detailed plans of the new president of the USA D. Trump for the fiscal politics are not known so far. So the changes in the fiscal politics can be hardly included in the outlook model of the American central bank. So far those are only speculations. But if we take on this feeling anyway then the inflation in the USA should rise.

Besides the pace of the inflation in the USA has reached 1.7 % year on year in November according to the today’s news which is one tenth of a percentage point higher than in October. So from the view of the inflation development, the Fed is really getting its hands untied for higher interest rates. Moreover, the American job market is not far from the state of full employment.

So why do I still not believe the new prognosis of the Fed about the triple raising of the interest rates in the year 2017?

Because if we relied on the prognosis of the Fed from past years then the interest rates in the USA should be floating around 3 % for a long time already and not under the level of 1 %. The Fed was promising even the quadruple raising of the interest rates in the USA for this year. In reality, only one snivelling raising of the interest rates happened and it did in last minute.

On top of that, it won’t be only about the development in the USA. The American Fed won’t be able to ignore that the Chinese growth is slowing down. And with the fast raising of the interest rates the developing markets would be collapsing. The capital will be vanishing thanks to the higher interest rates out of the USA exactly from them. And the Fed won’t find the support for the stricter politics in Europe either. And all of that is going to lead the Fed to carefulness which can be a devastation for the dollar.

The American currency will be continuing to appreciate for a while. That will be supported by bets on another growth of the interest rates in the USA coming up in a couple of months. Why couldn’t the dollar appreciate for a while to the parity with euro in the beginning of the next year? But then the dollar will be getting out of breath every time when the Fed decides not to push its rates higher. We could observe this story in the first half of this year after all.

What will be the next year like?

End of the year brings balancing and expectations for the following year. I must admit that the year 2016 was surprising to me in a certain aspect. We were correctly expecting the basic economic direction of the world but we got pretty surprised by the development in the politics. When I was reading a year old text yesterday I saw that I was rightly expecting that for the year 2016 the politics will be crucial and that the giant propagandistic campaign will take place but I didn’t seriously think that BREXIT could go through and that D. Trump could become the president of the USA. Only a few weeks before the voting I understood that the election didn’t have to end up like it was generally expected. When it was precisely the politics that influenced the financial markets the most.

The year 2017 will be again about the politics. We will have to observe it way more than the macroeconomic indicators. BREXIT should take place in March. That is a big unknown. Nobody knows how will it exactly happen and what will it bring. At the same time, elections will take place in the Netherlands. The polls are showing that the strongest party will be the one which wants Netherlands to leave the EU. Elections in France will take place in May and it is almost certain that the politician who wants France to leave the EU will advance further. And then the elections in Germany will come up where the AfD is quickly gaining power and wants to leave the EU also. However implausible the vision of the EU breaking apart may seemed recently now it is not as unreal. Is it little uncertainty and instability? Uncertainty never helps the economy.

Economic uncertainties are next to it marginal. ECB keeps pumping money into the economy because the economy is not doing well. The prices of real estate are overheated almost all over the EU because the interest rates are unnaturally low. That’s why the central banks everywhere pulled a break on the mortgages. Global stocks and bonds are overheated. Last growth was crazy. Trump was an enormous stimulus for the stocks. But what is standing behind him? Is it something physical? Does the world know what is Trump really going to do? That is a fertile soil for future disappointments. Moreover, the interest rates will rise in the USA. The growth of the interest rates is not good for the stocks. The companies will have more expensive capital. So the probability of the stocks falling keeps growing. Next to that the European banks still have problems with the capital and bad loans. Capital is flowing away from Italy and Asia on a large scale…

Big changes are shaping up

While yesterday’s statistics from the industry, construction and the foreign trade in the Czech Republic confirmed that the Czech economy is slowing down today’s news from the job market will warm us on the first sight. Only 2.7 applicant falls on one vacancy now.

The rate of the Czech unemployment didn’t grow even with the autumn started and ending of the seasonal and outdoor jobs. On the contrary in November, the unemployment rate managed to drop from the October’s 5.0 % to 4.9 %. So it is the lowest in 8 years. Well - and that is exactly the catch.

What happened 8 years ago?

It was the end of 2008. Naive dreamers like let’s say Czech government at the time were rejoicing how well are we doing. And in not many weeks the economic situation took an ugly turn and fell into the crisis at the turn of years 2008-2009.

In other words, the job market is showing just the same unhealthy tension which is selling very well to the masses but at the same time unmistakably predicting upcoming change...

More money, more help?

Sometimes I feel like the world has gone crazy. And not only the investor one. So let’s take yesterday. What to say to the small motorcycle not yielding to you when there is a tipsy creature with horns and linen bag over its shoulder and chain sitting on it and offended yelling at you that it won’t take you to the hell on top of that?

The ones with horns according to the available information didn’t take the Italian Prime Minister M. Renzi, who did resign after the unsuccessful referendum about the constitutional changes to the hell either yesterday but the Italian president wants to see him in the chair at least until the Italian budget for the next year is approved.

 

For Renzi that means roughly one more week in the Prime Minister’s chair. That’s why is the stock Europe shining green today. The German index DAX was adding 0.3 % in the morning. I start to feel like the investors are hoping for St. Nicholas’ present from European central bank (ECB). The bank has a meeting this Thursday. Because of the political struggle in Italy, everybody is betting on the ECB to continue giving money away.

On the one hand, that would be a good news for the euro. More help from ECB = hope that the problems of Italian banks won’t start up in entire Eurozone. But on the other hand, continuing with buying bonds will be pushing down the interest activity of euro. And especially in the case when the American Fed is probably only a few days away from raising its interest rates. Euro can temporarily rejoice on Thursday from the continuous support of ECB and that way even from the temporary peace in Eurozone. Either way from the view of another month, I think that euro will hand out part of the profit back to the dollar and depreciate.

The combination of Italian “No” and Austrian Hofer would be hellish.

We are expecting a very interesting weekend. The referendum will happen in Italy, presidential elections will happen in Austria. So as it would be expected the financial market is pretty nervous.

After all, BREXIT gave it a clip round the ear enough and nobody wants to repeat that. Nobody is working with the polls anymore. Everybody rather has the both scenarios. Actually, it is simple. Italian “Yes” would be a good news for the market the stocks would rise. On the other hand, “No” will torpedo the markets. On top of that, it is still not clear what would happen with the third biggest Italian bank Monte dei Paschi.

Capital is preventively leaving the Italy already and the state is being threatened by problems with its financing. I assume that in a case of more dramatic development ECB would start saving the Italy by buying out bonds. I personally bet on “NO”.

Next to the Italian referendum the Austrian elections will be less important from the view of the financial markets (the more it will be observed by media). Either way, if N. Hofer wins the elections the market is still going to see it as a threat that the anti-European parties will win in the year 2017 in Netherlands, France and maybe even in Germany. That’s why the difference between yields of Austrian and German bonds is unusually growing.

It is difficult to judge how it is going to end up in Austria because the debate from Thursday in Austrian television brought even more emotions into the elections. I am following both of the candidates on the social media and they are posting a lot. I would personally rather bet on Hofer which will definitely scare the markets.

The combination of Italian “No” and Austrian Hofer would be hellish. Speculators will be looking for some safe haven. Besides, that has already started. The exchange rate of bitcoin against the dollar has been sharply growing in past three days. While at the end of September it was on 600 dollars now it is already on 770 dollars. Potential Eurosceptic news will be catapulting bitcoin even higher.

OPEC is destructing itself, American producers can celebrate

Today as well are the global financial markets living by the news that the representatives of Organization of the petroleum exporting countries (OPEC) had agreed on lowering the oil production.

The production should be lowered by 1.2 million barrels to 32.5 million barrels per day. It is the first tightening of the oil production by OPEC cartel since the year 2008. Moreover, Russia should also join the agreement as non-member country of the cartel. Russian production should shrink by 300 000 barrels a day.

However I still think that this step won’t make any significant gap in the oil market. First, there is no guarantee the agreement will be really respected. And second, even if it is respected and it makes a significant gap, the American producers of shale oil would willingly fill it up.

 
That’s why I am not afraid of the oil getting significantly more expensive in the long term. But the market sees it differently… And the price of oil Brent was growing to the 6-week maximum above 53 dollars per barrel.