Greece is celebrating. Is there a reason?

Cheer loudly and celebrate for three days! Believe it or not, Greece really issued its government bonds for the first time in three years. The fact that Greece, burdened with bankruptcy, has returned back to the financial markets has been giving strength to the European stocks past hours and days.

However, from my point of view, there is not much to celebrate. Issuing of five-year Greek bond in the volume of three billion euros with a yield of 4.625 % is still expensive. The Czech government bonds with more than twice longer 10-year to maturity are carrying a yield under 1 %. But Greece together with the entire Europe is despite that rejoicing that Greek bankruptcy is forgotten.

I don’t want to be a bad prophet but I think that it is not definite. Greece is still relying on foreign help. We could have read a couple of weeks ago that Greece can draw another part of the loan from the third rescue programme in the sum of 8.5 billion EUR. All of that while considering that the Greek government debt is still making fewer than 180 % GDP. On top of that, its size hasn’t been dropping past years but is roughly stagnating.

The European central bank might start limiting the buyout of the government bonds already in autumn. That means that it is going to partly leave the line on buying the debts of individual countries. And that is going to mean that the yields of the government bonds of the European countries are going to go gradually upwards sooner or later. And if the yields in countries such as the Netherlands or France are going to grow then the yields of Greek government bonds can be rising twice as fast.

As a Europe, we are going to worry again...

The economic world is synchronising

It seems that the global economy is going through an interesting twist of events. We have been observing for years how after the crisis in the years 2008 and 2009, the world split apart. Asia barely noticed the crisis, America recovered soon but Europe couldn’t recover for a long time.

Only when it seemed that something is sort of getting better the bankruptcy of Greece hit and then the infection of Cyprus and others.

But now something is starting to change. Apart from some exceptions, Europe is also growing. Suddenly almost the entire world is growing.

That is getting confirmed by numbers that has been published today from Germany where the exports grow significantly faster than it was expected. It seems that the German economy is going to grow this year beyond all estimations. The growth of the German export is so fast that even the MFF is warning about it and suggesting Germany to increase the domestic investments so the German imports would grow and Germany wouldn’t be generating such a high trade surplus.

Everybody is afraid that if Germany has big surplus somebody else has to have a deficit which is creating an imbalance on the planet and potential problems to the future. That’s why many people are betting on the interest rates growing soon in Europe. But people are betting on the same thing in America as well anyway.

The Canadian central bank could start the global winding down of the monetary policy this week already. It is justifiably fearing that the average Canadian is indebted too much because of the all-time low interest rates. The debt of Canadian households has doubled in comparison with the year 2009. To keep the interest rates all-time low is dangerous. It could lead to the households getting overly indebted. But raising the interest rates is also dangerous because many people won’t suddenly have money for payments and it is going to start a recession and a rise of bankruptcies. That’s why the raising of the interest rates needs to be gradual.

That is changing the situation on the financial markets. Bond yields are going up all over the planet. The outlook of the dollar is not as good and clear as it used to be. On top of that, many people expected great things and changes of D. Trump. He hasn’t changed much in the economic area so far which might cause disappointment. That’s why we are expecting stagnation to a slight depreciation of the dollar for the majority of following month. The dollar is going to stay most of the time in the interval from 1.12 to 1.16 USD/EUR.

Banks in troubles

It is generally known that you can see a bottle of wine, that somebody drank a half of, as a bottle that is half empty or half full. It is only about the angle you look at it. The volume of the liquid is still the same. Financial markets are similar.

A news came that could be perceived both as a tragedy of the Italian economy or we can see it optimistically as a rescue of not only Italian but also European economy. The markets decided for that optimistic viewpoint. And that is why the stocks have been growing today. The Frankfurt stock exchange has been adding 0.6 %, the Paris one 1.0 % and the Milan one right away 1.3 %.

Markets have simply been thrilled about the news that the Italian government is going to pay 5.2 billion euros to the Intesa bank and provide a guarantee of another up to 12 billion euros for taking over the Popolare di Vicenza bank and Veneto Banca which bankrupted. The market sees it positively because the bank is going to take over only the good assets only for one euro. In the eyes of the investors, it is like it choses only the cherries from the sundae.

From the point of view of the entire banking sector, it is a good news. Italy has a giant amount of bad loans and now their big part is going to get outside of the banking sector. But everything has its price. The Italian government has been saving another bank not long ago and it poured in it 6.6 bn. euros. So it is cumulated 17.2 bn. That means almost 24 bn. euros in several weeks. By the end of the year – before this rescue – the Italian debt to GDP was 133 %.

So Italy is going to get indebted even more. I think that Italy is going to be a big problem for the Eurozone. Much bigger than Greece because it is a big country. Indebtedness of the South of Europe is not and won’t be solved just like that and the Northern part of Europe is going to pay it one day.

The world votes for the bitcoin

There is a problem in Europe: The ECB should have a bond portfolio in the amount of 2.3 trillion euros by the end of the year. But it is more complicated. The ECB has been saving indebted south-European economies by those bonds-buyouts. It is the biggest creditor of European governments. So the ECB is going to be under a giant political pressure not to raise the interest rates.

Moreover, the south of Europe needs low interest rates for another reason too. Italian banks are having problems with bad loans. While the bad loans had a share only of 3 % in the year 2009 today it is even 13 % (!). Raising of the interest rates might endanger the banks.

On the other hand, keeping the interest rates on the current levels is also wrong. Even though Europe doesn’t have a traditional consumer inflation, the growth of prices has manifested elsewhere. It looks like there is a mortgage bubble in many countries, stocks are incredibly high and digital currencies are growing to all-time highs as well.

While the bitcoin was at 1000 dollars at the beginning of April, it is at 2725 dollars today and it has been almost on 3000 dollars at the beginning of the week. That’s why the chief of Bundesbank warned of the dangers from digital currencies. It is understandable. Everything is heading towards the digital currencies replacing the current currencies one day because the central bankers are failing. So the fish doesn’t want to drain the pond.

Reactions on the bitcoin are coming from the investment banks as well. Morgan Stanley is asking for the bitcoin regulation. I think that the fewer people trust the central banks the higher the bitcoin would go. It is a reaction to the scepticism in society. Gold is doing similarly. It is important that it is growing in the long run. Today it is at 1270 dollars per ounce and it was at 670 dollars ten years ago. The more complicated the world is the more interesting gold is.

The growth of the global economy is false

We can say a good news. OECD has adjusted its expectations concerning the global growth. While in November, it has been expecting that the planet is going to grow by 3.3 % in the year 2017, today it is expecting that it is going to grow by 3.5 % and in the year 2018 even by 3.6 %. If the prognosis gets fulfilled it is going to be the most significant growth since the year 2011. It would be great if OECD was right - but I am cautious.

The world has changed a lot. Patterns which have been working for years are not working anymore. It is extremely difficult to make prognosis today. The yield curve has been working as an effective tool of prediction for years. You could tell a lot about the entire economy from the difference of 2-year and 10-year yield. The bigger was the difference the more were the investors speculating on the recovery of the economy and on the growth of the interest rates of central banks. But today?

For example at the American bonds, this difference has been getting smaller for a couple of months which should hypothetically mean a speculation on a crisis. But that is definitely not expected according to OECD. We all can relativize this and take it down by saying that let’s say the interest rates are significantly influenced by the decisions of central banks and those are behaving unusually so the difference of interest doesn’t have such good predictive ability as it had twenty years ago. But we do have new tools.

For example, bitcoin is right under the all-time high today and moving around 2860 dollars. It was still around 1200 dollars three months ago. Why? Because the investors are preferring alternative investments. Simply said, they think something is stinky in the standard economy. The same goes for gold. That has reached to its seven-month high. When has the gold always been growing in the history? When a crisis was coming up or when the investors were fearing something. So how is OECD going to deal with this?

No matter what side we look at this, investors are suddenly doubting that it is possible to be raising the interest rates quickly. Economic recovery should be automatically connected to the growth of the interest rates… Many are assured of this also because of the development on Spanish banking market. The biggest bank in the country announced that it is going to buy the struggling Banco Popular for symbolic one euro and increase its capital by 7 bn. euros. That is showing nothing more than a weakness of the sector which is still dusty from the last crisis.

All things considered, I still think that the growth of the global economy is false from a big part and it is pulled by artificial demand from the central banks.  Many central banks are already owning a giant share in the industry. For example, the central bank of Japan has ownership of more than 20 % share at many key companies. It is simply rather a growth on the paper then a real one.

Danger of impeachment

Sometimes one has a feeling like the internet is giving them unbelievable opportunities. And sometimes one has a feeling that the internet took democracy from them. We do have unbelievably fast media and never-ending plurality because of the internet. There are so many opinions and news that one can’t distinguish real from fake and important from unimportant. Which is somehow complicating the legibility of world especially in the connection with the fact that not only Russia but the rest of the world is as well ruled by oligarchs who think that they are endlessly smart and unshakable. It is true even in the USA.

A fairly surprising news that has a strong potential to influence the financial markets came from the USA. The American president D. Trump is in a danger of impeachment, meaning the constitutional legal action leading to dismissal from the office for pressing the chief of FBI to not investigate his former security adviser who was accused of cooperation with Russia. On top of that, the pressure on Trump is growing because he told the Russian president significant military secret. However, the Russian president stated to the media today that the American president didn’t tell him anything. By doing that he stood up for the American president but didn’t calm down the situation in any way, on the contrary, he only added the fuel to the fire of speculators that Russia has financed Trump’s campaign and now it’s covering for him.

That started a spiral of hypotheses that are all leading to the democracy being rotten. Logically, that immediately rose worries among speculators that Trump won’t be able to unite the American parliament and enforce what he has been planning before the elections at this disturbing situation. That’s why the stocks are dropping and the dollar is depreciating. Let’s remember how the financial markets were growing in expectations at the beginning of the year that almost omnipotent Trump will fix the world. The excitement and the golden aura have vanished like when you swoosh a magic wand at least in the eyes of the financial speculators. Gold is thanks to that quickly growing. The market is looking for a safe haven just like I have been already mentioning last week. The price has been still under 1220 dollars per ounce on 10th May and now it is at 1248 dollars.

It is a habit of politicians that when the situation gets serious they are trying to divert the attention. That’s why there is a logical chance that Trump could surprisingly send a couple of missiles on North Korea like he did some time ago in Syria. Media would be paying attention to the chance of the nuclear war and not to the impeachment. But today the gold hasn’t even reached its twenty-day average yet. That’s why I think it still has more space for growth.
In the light of all these events, the dollar depreciated against the euro today to the weakest value since D. Trump has been elected into the office. That is a really weak exchange rate. The twenty-day average is stronger by two cents. If Trump won’t do some other misstep and handles the situation this time as well, I think the dollar is going to return to the stronger values. The current exchange rate is not matching the strength of the America. (It would be of course different if the impeachment was really set into the motion which is something I’m not betting on.)

Marketa Sichtarova, Vladimir Pikora

The gold is looking good

The financial markets are once again optimistic. They are STILL (!) living by E. Macron’s victory in the French presidential election. But it was a stress for the multinational corporations. Le Pen could hypothetically cause them significant losses with her fight against globalisation.

Thus, Macron’s victory torpedoed the gold. The price returned where it has been last time in March. The investors are not fearing the political instability anymore but they are rather looking at the interest rates and as it is known the gold is not carrying any interest which should lower its price even more. The current price is 4 dollars under the 100-day average - which is not a bad price for buying. Why?

Unlike others, I am assuming that Macron’s winning doesn’t mean we have all the complications behind us. Korea is going to return like a boomerang. And there is one more thing: There is a new indicator of the risk apart from the gold and that is bitcoin. It has always been growing when somewhere on the planet the governments are getting stricter. One time it was Cyprus, one time India and one time China. Bitcoin reached its new all-time high yesterday.

It reached even to 1750 dollars at one moment. Its exchange rate was 778 dollars a year ago and less than a month 1150 dollars. So the investors seeking the risk are seeing risk even now after Macron’s victory. To buy bitcoin now in this phase of the sinusoid is in my opinion too late but the time doesn’t have to be bad for gold...

Macron is making the speculators happy

The European stock exchanges are growing to the twenty-month high. They are being helped by the recent television duel of candidates for the French presidency.

The duel – at least as many are claiming – “won” E. Macron. The conviction that Macron is going to win the election is reflecting also in the bond market where there is actually the lowest difference of yields of French and German bonds in a plenty of months. That’s why the dollar erased its previous profits.

It is clearly showing that what is going to influence the financial markets in following days is going to be the French election. It’s counting on Macron’s victory. If it comes true it won’t influence the market much. But the bigger commotion would set in if the polls were wrong just like they were about BREXIT and Le Pen would win. Then sharp depreciation of the euro would come (appreciation of the dollar) by several percent, fall of the European stocks and also of the French bonds.

Le Pen is NOT right-wing

If the mood on the financial markets today can be described by one word then it is a word “relief“. Relief bigger than what Šichtařová is experiencing when her plane finally touches the runway. The reason is simple: Emmanuel Macron is getting into the second round of the French presidential election.

What of course happened one time was that Šichtařová in the fear from the fact that there is a two-hour long flight ahead of her, completely intentionally and in control, consummated half of litre of scotch bottom up style, got on the plane, fell asleep, woke up and found out that the plane is on the land so she experienced a flow of relief – just so she would find out right away that unplanned layover happened because of the strong counter-wind and she has to go through all of that again. In other words: we still have the second round ahead of us and until that is going to be behind us all judgments are somewhat premature. Despite that, all the polls are hinting that the final victory of Macron over Le Pen is almost certain. And that should secure the financial markets definitive boost.

Besides, the markets got boost already after this first round: Somewhat peculiar it is especially because the markets are usually not reacting as well to the victory of the left-wing candidate. And – let’s admit it – even though Macron is being labelled as centre-left, he is significantly closer to the left than to the centre. Why is that?

The reason is that the labels got a little bit tangled in the case of French election and labelling Le Pen as right-wing is almost ridiculously unthinkable. Le Pen is significantly anti-immigration and anti-integration but not right-wing. Judge it yourself: Raising salary of government employees by 200 euros, lowering the retirement age to 60 years, raising the pension, administrative regulation and lowering the prices of gas and electricity by 5 percent, lowering excise taxes even by 20 % but raising the progression and percentage of the income tax, taxation of luxurious goods, raising the property tax, progression of business taxation… that is literally a clear ultra-left program.

The joy of the financial markets over Macron can’t be understood as much as the valuing of the candidate but rather as their joy that Le Pen is being faced by somebody who has a high chance of winning against her but at the same time he is not a communist and in any case obviously extreme either. And if the second round ends up like everybody is thinking that it is going to end up, the joy on the financial market is going to be even bigger .

Big disappointment for many diehard fans of D. Trump

When I’m looking at the key stock indexes such as DJ Industrial or S&P 500 I always see the same picture: Since Donald Trump’s election as a new American president in November, the stocks skyrocketed upwards. E.g. DJ Industrial climbed from 18 000 points to 21 000 points. Now we have been observing for several weeks that the stocks are shuffling on their feet like they would want a new impulse or a confirmation that the hopes pinned on D. Trump are going to get fulfilled. Except a big disappointment might come here.

Initially, it seemed that D. Trump will be a different president than many of his predecessors. That he won’t be that engaged in the world, he will have his army for a deterrent rather for an attack because he knows how expensive it is to be a policeman of the world. At the same time, he is going to lower the taxes and raise the investments so the America would grow faster. At the beginning of March, America started doubting that Trump is able to enforce significantly lower taxes and higher investments but it was still thinking that his foreign politics is going to be different. That he is going to be friendly with Russia and won’t be engaging in the world. So the development in Syria was a big disappointment for many diehard fans of D. Trump.

Suddenly, it seems that just like his predecessors he is going to initiate his office by a new war also. At the same time, it seems that the alleged connection of Trump and Putin somewhat “mysteriously” vanished. Maybe there’s not going to be any war but it won’t be far from it. American military vessels are already heading towards North Korea. Maybe they are only going to drop anchor there. And maybe they won’t because South Korea agreed with China that North Korea can’t be continuing with its missile testing. The tension reached such levels that Japan joined the game and tried to calm down both sides which is signalizing that it is logically fearing the nuclear missiles that it could become a target of.

The stocks irrationally overdid it in past months because of Trump. The bubble might burst . Bombarding or shooting Korea would be very bad for the stocks.

V.Pikora & M. Sichtarova

The Exchange rate roulette is going to start next week

Well – Czech national bank didn’t disappoint, it defended the reputation of its level of stubbornness competing with my pet bulldog. Even though there is probably no economist today in the Czech Republic who wouldn’t be from CNB and at the same time didn’t sign up for the statement that the interventions against the exchange rate of Czech crown are outdated and useless and should be ended as soon as possible, CNB after the negotiations of its bank board ended, once again stated that – by their vocabulary – “the exchange rate commitment of weak crown and setting of the interest rates on the current level are remaining”. In other words, CNB keeps fighting against the market pressure on the appreciation of the crown and is not letting the exchange rate go under 27 crowns for euro.

It means that the key moment for the Czech economy which is being looked forward in the financial waters with really giant suspense and by which almost three and half year period ends when the Czech economy simulated by basically fixed exchange rate as if the adoption of euro is being pushed to time in another six weeks so after another “big” meeting of the bank board?
Not by far. We are repeating again that the interventions belong among precautions which are not being announced in advance for strategic reasons. The bank board could freely agree today that it is going to agree on it soon. And if CNB committed keeping the exchange rate until the end of the first quarter then it agreed to keep it until midnight of today. And then there’s going to be the weekend. And then the fun can freely begin. Or it doesn’t have to. Literally, the everyday roulette is going to get started since Monday’s morning. Then every day can bring the moment that is being talked about even by old ladies cooking lunches in a school cafeteria. (Without overreacting. 8 the least-likely people asked me about the exchange rate yesterday, people that I was surprised only by hearing the word “exchange rate” coming from their mouths.)

Despite that, we have at our disposal certain key which is clearing up this roulette a little bit. Governor Jiří Rusnok stated on the press conference at the end of the meeting of the bank board: “Starting next month it is possible to leave the exchange rate commitment on any of the meeting of the bank board. We are going to announce the decision immediately so within ten of minutes.” Aha, so the end of the interventions should happen after one of the other meetings of the bank board takes place. Although, they do have “big” meetings once in six months (that is rather falling at the beginning of May) but “small” meetings are happening every Thursday. And next to that bank board can arrange called meeting anytime. Therefore Thursdays are the first in the line of suspects for the jump of the exchange rate.

And then we have one more certainty. Rusnok was talking about “announcing immediately” after the decision. Aha. So the decision is going to be announced. Not that CNB would be playing a dead bug and let the financial market to notice it on its own. That is for the analysts more fun but for the speculators, small savers and companies heart attack inducing and for CNB the more complicated variant. It is guaranteeing that the jump of the exchange rate is going to be bigger than it would have been if CNB took the more diplomatic route instead. Well, that way the gentlemen from the bank board are making this more adrenaline inducing for both them and us.

D-day for the exchange rate of the crown is coming up

We are going to have 31st March exactly one week from today. So the last day of the first quarter. Not very interesting information. It starts getting better when we add another information to it: All members of the bank board of Czech national bank (CNB) are planning to take part in regular meeting of the bank board which is going to be held on Thursday 30th March. And it is known that CNB officially guaranteed to keep holding the exchange rate of the crown in so-called intervention regime for an entire first quarter, meaning it won’t allow it to appreciate under 27 crowns for euro. Not more not less. There are no guarantees for the second quarter which is starting next Saturday.
Surely the individual members of the bank board were heard to say during many occasions how ideal it would be to end with the interventions that time or the other time; altogether all those from CNB who were talking about the exchange rate mentioned the “ideal” later date sometimes during the middle of the year or even later. But each of those statements can be presented as a personal opinion of some member of the bank board if it comes to it. And the truth is that each of the central bankers who were talking about the timing of the interventions knows very well that words are spoken but the action is being decided behind the closed door of the meeting of the entire bank board. Each of them was saying what they were saying mostly to discourage the speculators from giant speculating on the appreciation of the crown. Because the more are the speculators speculating today the more money it costs CNB. Each speculator that got driven off counts because with each speculator who got discouraged is the entire intervention fun getting a bit cheaper. And the best way how to discourage the speculators is to convince them that the speculations are pointless – or that the interventions are going to last for a long time, alternatively that after their ending the crown can get (!) even weaker, not stronger.
The thing is that it is obviously nonsense. If there was a single reason for the crown to really depreciate after the end of the interventions how one of the central bankers was trying to convince us with his poker face, of course, such tendencies would be manifesting already. The Reality is that once the interventions end respectively once the financial market takes a notice they ended significant turbulences of the exchange rate are going to happen on both sides. Only then consequently, the exchange rate is going to stabilize in couple of days and long-term gradual appreciating trend against the euro is going to take place. By the way, if I was a central banker I wouldn’t be announcing the end of the interventions in advance but backward. I would simply end with the interventions one day and let the exchange rate to its fate. And then let’s say a day later I would confirm it officially. This leaving of speculators in doubt about the details would work as another way of how to restrict the speculations against the crown a bit and therefore make this entire thing from CNB’s point of view “cheaper”. So all things considered: we are probably going to have one week of relative peace on the forex market but then we are going to have to be alerted and have eyes of a hawk every day. Then the D-day can come completely whenever.

Can Trump offer more than rumor?

It is good to look at the financial markets from bigger outlook from time to time. When you are observing only individual days you can’t see the wood for the trees. And right now the look from above is appropriate. A look on the stocks is showing that we have seen something since D. Trump has been elected what we wouldn’t believe in a year ago.

Donald Trump has managed to catapult the global stocks upwards without doing anything at all to achieve that. It was enough to say and promise that he is going to lower the taxes and increase the investments. Index S&P 500 in reaction to this vague promise skyrocketed high since Trump has been elected to the office by 13 % until 1st of March. Here it reached its peak and since then it has been slightly dropping. It was similar with German index DAX: It was growing until 16th March. Until then it added 16 %.

What is juicy about it is that since D. Trump’s election to the office up until now we haven’t found out how Trump is planning to fulfil his promises. Instead of talking about how the taxes are going to drop it is being talked about Obamacare or about how Trump’s connection to Russia is going to be investigated. Basically, it is being talked about everything else but about what is important for the financial markets. And it seems that the financial markets got fed up of it.
Trust has vanished basically from one day to another just like when a flock of starlings scatters after a gunshot. On Tuesday the stocks experienced the biggest drop in the USA since the election of Trump and now we are observing resonance of this drop in Europe too.

I think that the stocks are definitely overheated and it’s long-term. But that doesn’t mean that long-term drop of the stock markets started with this. D. Trump can still manage to save everything if he introduces a specific and trustworthy plan. Or he can freely continue staying mysterious like a haunted castle in the Carpathian Mountains if he accompanies it with sufficient hyper-assertiveness and persuasiveness. But so far we have only been hearing from him something in the style of the good old but pretty insufficiently persuasive motto “Everybody is stealing!” And that probably won’t be enough for speculators anymore...

Marketa Sichtarova & Vladimir Pikora

Isn’t there somewhere in the thinking of speculators some logical mistake…?

It truly is a phenomenon this mister Trump. One would say that when the financial markets were good one week or even longer still distressed from the (possible) raising of the interest rates of the American central bank the Fed that was coming up, possibly even from the key Dutch elections that were getting closer he is going to, today, after the meeting of the Fed and after the elections, be paying enough attention to all of it. But no. Eight out of ten last global news of the financially focused news agency Reuters has “Trump” in their title. I don’t remember that it would ever – whenever – as far as is the memory of the current generation trading on the financial markets reaching be one man considered to be that crucial in influencing of the economy of the world. (To consider somebody crucial and be that person who can actually influence something are two completely different things.)

So despite the fact that the investing community is acting today like the recent events have already been forgotten, they are still important to us. Foremost the stocks took the raising of the interest rates by the Fed as a confirmation that the American economy is doing well to which they reacted by jumping to new all-time maximums. Let’s note: Whenever when some significant bank of the world (the Fed, ECB, BoE and others) announces that it is going to keep loosening the monetary politics stocks take it as a great thing because the flow of cheap money will continue and so they grow. And whenever when it is announced that the monetary politics will be getting stricter the stocks take it as a great thing because that must be a sign of growing economy. Isn’t there somewhere in the thinking of speculators some logical mistake…?

The question trembling in between the lines is if the speculators are not perhaps overreacting once again. Actually, we have already answered that question. Considering that the stocks are currently reacting in the same way to entirely contradictory signals it doesn’t seem to be completely rational. Moreover, the Fed was heard to say that even though it is raising the interest rates now and therefore fulfilling the expectations imposed upon it, it is not intending to overdo it with another raising of the interest rates to the future and that the pace of raising is going to be only “gradual”. It is hard to say what we can imagine by that, it can freely mean that only one more raising is going to happen this year at most. So is there even a real point in dealing with the fact that some country even if it’s the world’s biggest economy is going to raise the interest rates during the year by half of percentage point in total? The financial world – based on the scale of the reaction – is obviously thinking that yes even though from our point of view it is like spitting into the Atlantic.

Inflation is getting wings, beware of the exchange rate of the crown!

The inflation rate in the Czech Republic is soaring: When we recount the inflation by the harmonized index of the prices of the European twenty-eight we will get that the Czech inflation is reaching 2.6 % while the inflation in the Eurozone is making only 2.0 %. In other words, it is hard to find an argument why should CNB continue the interventions.

The initial argument for the interventions was fear of the deflation. That surely won’t happen. We need to realize that the interventions are insanely expensive. CNB increased the forex reserves because of them since the beginning of the year by one-quarter and they cost more than 1.5 trillion crowns in total. Every day of the interventions costs on top of that CNB 10 bn. CZK in average this year. There is no reason to be waiting for the end of the interventions until summer.

Moreover, the inflation pressures are starting to show up all over the world. The German Bundesbank together with IFO institute already warned today against the monetary politics of ECB that is too loose. They are probably going to raise its interest rates in the USA next week because of the inflation. CNB was also expecting significantly lower inflation.

CNB is claiming that the domestic production expenses will continue to significantly grow especially because of the influence of growing wages. Together with the renewed growth of the prices of industrial producers in Eurozone, it is going to lead to another raising of the core inflation. That is all true. I can sign under that. But then an interesting part comes that is worth underlining: CNB is claiming in today’s report that it is going to appeal against the inflation since the middle of this year by the prognosis of presumed appreciation of the exchange rate of the crown after leaving the exchange rate commitment. What is it? Appreciation? CNB has been surely claiming until now (in contrary to everybody else) that there is no reason for the appreciation of the exchange rate after the interventions end…

It is completely inconsistent with the claim that CNB has been feeding us for months that the end of the interventions doesn’t have to mean an appreciation of the crown. In other words, CNB is counting with crown’s appreciation deep down but it is trying to convince the market on the outside that crown won’t appreciate. My opinion is that it will appreciate long-term (more than a year). That is also the opinion published in Financial Times where speculators claim that they think that the crown is going to return long-term to the appreciation trajectory that it was on before the CNB started intervening. I think that this argument is completely logical when we realize that we had a surplus of foreign trade last year. The crown is simply significantly undervalued today.

But of course, that doesn’t mean that the crown is going to be stronger than it is today week after the interventions are ended. I bet on the fickleness of the exchange rate that nobody has seen in the Czech Republic ever before. So much money was bet on the appreciation of the crown by speculators that once they start withdrawing they will easily move the crown by tens of hellers in a couple of minutes. The exchange rate can jump up and down a couple of times a day and always significantly.

Vladimir Pikora, Marketa Sichtarova

The debt of the planet is skyrocketing high

I have a neighbour. On a first sight, you would say that he is a very rich person because he buys a new car with a five-litre engine every year. But because it is the neighbour, I know that he hasn’t got finished his entrance staircase for years in the house where he lives and he is getting to the house by stepping on stocked wooden box pallets. So he is obviously not rich. The car is bought on the debt and that is regularly rotated. And that is the picture of the wealthy part of our planet in small, which is also not actually rich either.

The debt of the planet is skyrocketing high. Rating agency S&P published and analysis today according to which the debt of all the governments of the world is going to reach 44 trillion dollars in total this year. That is a debt added together for many years. As a curiosity, it is mentioning eternal bonds from the Napoleonic wars where the coupon remains valid. But the majority of debts has been created in recent years.

The governments are going to issue bonds for 6.8 trillion dollars this year only. That doesn’t sound good at all. Do you think that it can continue forever? Is it possible to have a debt of the planet in the year 2030 in the sum of 90 trillion dollars? It is! But only under the condition that there is going to be somebody still willing to lend. And that depends on our trust in the system and in politicians. Until there is trust it is going to run like a well-oiled engine. But when there is no trust everything is going to collapse like a house of cards. And the trust is very a fickle and perishable thing. It can vanish fast and unexpectedly and vice versa...

Marketa Sichtarova & Vladimir Pikora

Instructions on how from a developed country to become a developing country

One is using the pitcher until it gets broken.

 

I have been announcing for a long time that we need to try hard to get rid of the label of a cheap assemble factory. That we need to start competing by the quality and not by the price. But we have been significantly held up on this road by Czech national bank which is artificially keeping the weak crown since the November 2013. And so the Czech goods continues to be successful abroad mostly because it is cheap.

 

But on the other hand, because of the cheap crown, we are not able to adequately financially value the professionals who are having no problem moving around the European market. The overall growth of wages in the Czech economy (despite the improvement in past quarters) is suffocated. And they noticed that abroad in the end too. And so the bank JPMorgan decided to eliminate the Czech Republic out of the list of developed countries. Now it is going to be set in the group of emerging markets.

The American bank agreed to this step because the volume of income per capita has been staying under the level set for the developed countries for past three years. To be properly developed market the fiercer yields of assets should be matching that as well. But the profits of the main index of Prague’s stock market PX has been staying around the zero past few years. Moreover, also the yields of Czech government bonds are significantly lower than what the developed countries of Asia or South America has to offer.

 

So we are going to be a developing market that won’t thrill the investors with a yield above the standard. That’s why we should start working on getting a better reputation as soon as possible. And specifically the reputation of the market to which people are going to invest because of the safety, sufficient quality and human capital. JPMorgan has very loudly hinted that the interventions of CNB are with using the pregnancy terminology “over-carried”. (Despite that the crown keeps writing a story of stagnation at the 27-crown level.)

Thank you, the Czech national bank...

The wolf of the White House

Do you ever also ask yourself how it is possible that the financial markets are so stupid? In the big amount of investors, the rationality should prevail and the market should move rationally and therefore predictably. It is not like that. If you have seen the movie "The Wolf of Wall Street" you know why: Too many times in too many places on the earth people who know nothing about the economy are selling stocks to people who know even less about trading and they are really buying them. The main hero of the movie was able to sell anything which he documented by the fact that he would convince you to buy your own pencil from him. He was logically targeting the uneducated clients when trading. Maybe you are telling yourself that it is “only” a silly movie, beautiful women, sex, drugs and expensive cars. Or maybe you are telling yourself that it is past because the robots are trading now and neither their algorithms nor the stock market is what it used to be. But that is not true.

I am often getting convinced about that first hand: An unknown person from the street was calling me last week saying that he is coming from a trader with securities and that he as an amazing business for me. I am supposed to buy stocks of Tesla. I will supposedly make 20 % in two months. He was surprised I’m not interested. And since the man wasn’t anticipating that he managed to call analytic company he kept adding more and more details and nonsensical arguments that were impossible to listen to. There was no reason to talk to him about stocks because he was selling them just like he would be selling office supplies or doughnuts. It was useless to ask what I would do if the CNB ended the interventions and the exchange rate of the crown against the dollar would jump by 15 % in a month already. That man probably never even heard of CNB.

And specifically, those people are tilting the financial markets away from rationality. And there is many of them. So to claim that financial markets are behaving rationally is only a myth.
They won’t be buying stocks when they are long-term all-time high! Except that is exactly what are people doing today. Stocks are once again higher today. Frankfurt’s stock market is higher by 1.1 % and Paris’ one by 1.4 %. Index of German stocks was on 9000 points a year ago and now it is almost on 11 800. That is almost double the amount in comparison where the stocks were five years ago. Tesla has been growing since the beginning of the year and that is working in the advantage of seller except at the same time it is almost on 5-year maximum. To make 20 % in two months is really extremely big risk and really high chance that it won’t work out. When something is really up it is rather the argument for selling not buying.

So why are the markets growing today? Because the American president D. Trump said that he will make the biggest tax reform in the USA since the times of R. Raegan. People are expecting great things like lower taxes and therefore better conditions for businesses because people will be hypothetically buying more and the profits and dividends will be higher. But does it have to work like that? It doesn’t! It depends on how the taxes will change – and nobody knows that. Greece is the example of this. You lower the taxes under the liminal level and you can end up with bankruptcy... So analogically to this example: Buying stocks today because of Trump is an argument like one Greeks would use.

Vladimir Pikora, Marketa Sichtarova

Stupid american politics

When I’m looking at current economy it is reminding me a joke about how is a group of old Teutons standing in full armour and one of them lays down on the floor, ear down on the ground and is listening. Then he says: “I can hear swearing, a tribe of Czechs is coming!” Friends, when I’m reading news from other parts of the world I have a feeling that the always complaining tribe of Czechs is significantly invasive vermin since everybody is swearing and complaining now. When again there’s objectively not such good a reason for that.

From the point of view of macroeconomist is the unemployment rate the most important indicator for me and that is almost everywhere all-time low. People are doing unprecedentedly well from the point of view of the unemployment rate. For example, the Czech unemployment rate was published yesterday and it is showing the best results since the year 2008. German unemployment rate is again the lowest since the year 1990 and the American unemployment rate goes even further. Number of Americans applying for unemployment benefits for a first time surprisingly dropped last week to the level slightly above 43-year minimum. And it is not just a swing because the 4-week average is the lowest since the year 1973. The unemployment rate is the lowest in nine years. From the historic point of view, nobody can complain about the lack of jobs. And like it wasn’t enough whatever medium is complaining about a poor performance of the economy. I am afraid that what comes next can only be a big disappointment. New American politics asking for bigger production in the USA and for bigger employment of the Americans, because the foreign companies are apparently taking their jobs by leaving abroad is stupid.

Today’s data from Germany showed record breaking surplus of trade balance for the year 2016. Normally they would be excited from it in the Germany but today they are afraid that it is only supporting the American president D. Trump with his statement that euro is too weak and the Germans are exploiting Americans and south of Europe through it. So there is still a threat of high duties for the import to the USA hanging in the air. So we are unnecessarily making a new problem a new bogeyman which is not being supported by the real numbers. Americans will want to produce more on their land and they won’t have anybody to employ. But with that, the globalization is slowly starting to falter.

Why is Le Pen labelled as right-wing?!

I don’t enjoy saying this but there’s nothing else to do: The presidential elections in France might bring many surprises.

French politics is at the time under the pressure of scandals and M. Le Pen has the clearest position. She is not facing any scandals at the time but she published her detailed plan what is she supposedly going to do once she becomes president – and the financiers are somewhat getting chills from it.

Actually, I don’t even know why is Le Pen labelled as right-wing in the media when she wants to raise the social benefits and lower the retirement age. Le Pen is definitely not right-wing. She is rather surprising and different: Besides leaving the Eurozone and EU she wants to also leave NATO. And at the same time, she wants to pursue – according to her own words – “intelligent” protectionism. By the word intelligent she probably means that she will outsmart hundreds of years of economy and make up some protectionism which is going to be prosperous for the country despite all rules of economy. (Which will hardly happen.) So the financial market is pretty scared of her victory. And it is not even a fear of leaving the EU but rather a fear from said mysterious “intelligent” protectionism.

But let’s look at that closer: Transformation of bonds denominated in euros to bonds denominated in new francs would supposedly bring a French bankruptcy according to many. I don’t think that. Those are rather similar fairy tales to those that BREXIT will bring a catastrophe which is not showing in any way so far.

Nevertheless, nobody has an experience with anything similar so the fear is understandable. The difference in yields of French and German bonds has climbed up because of that to four-year maximum today. So that is confirming that many are truly scared of the French bonds and that it’s not only gossips. French bonds are being seriously sold. But even other south European bonds are being sold as well. For example, the difference of yields between German and Italian bonds is the highest in 2.5 years. That is a lot and it is pointing at disintegration fears.

At the same time, the American (truthful) statement about how Germany is profiting of euro is coming back to the game: Italian economy is in real GDP per capita by 0.4 % lower today than in the year 1998 and on the contrary, Germany is by 26.1 % higher. Or the euro surely didn’t help Italy. Even Greece is doing better than that as far as change of GDP per capita is concerned. And this unfortunate trend of opening scissors will continue because the latest data from Germany are excellent – German industrial orders published today are the highest in 2.5 years. While the domestic German demand is growing by 6.7 % the foreign one by 3.9 %. Rest of Europe is basically slowing down Germany and that’s why it has to focus more and more on China and the USA.

Will Trump Destroy Euro?

Last week, Trump attacked Germany via his advisor for monetary matters P. Navarro.

P. Navarro claimed the euro is undervalued and that Germany is exploiting USA and rest of the EU thanks to that. Let’s remind us that American diplomat stated on Tuesday that he is expecting depreciation of euro and possible disintegration of EU – and the USA is saying today that euro is too weak and that Germany is abusing its position in EU. Understandably the speculators are a little bit confused by that. (And so we would add to it lets remind us that it is exactly Germany which as the only one in the Eurozone is pushing on ECB to stop pumping the money into the economy and depreciating euro by that.)

While according to the USA the exchange rate is in favour of Germany it is destroying south of Europe. “German” euro is undervalued by 17 % while “French one” is overvalued by 5 %. So the France is losing while the Germany is gaining. The Americans are documenting it on fact that Germany has the lowest unemployment rate since the year 1990. So the USA is basically stirring a tension inside the Eurozone. And the worst is that they are right: Weak euro is truly demonstrably helping Germany and hurting the south – although it is the Germany standing against the politics of ECB but it is supported by the south! (Is it sufficiently complicated now?)

Could the USA be playing the American card even against the EU at the end? They are “only” saying today that the Mexicans are taking jobs from the Americans so they need to build a wall on the borders. Could we perhaps expect to hear that even Germans are taking jobs from the Americans? Besides, Germany is exporting to the USA more than to France. And that understandably can be explained by for example the fact that the exchange rate is supporting German export. Trump has been stating already before the elections that countries which have artificially undervalued currencies will be hit by the new duty in the sum of undervalued currency. So by this logic could purely hypothetically and improbably (because of Germany) the Eurozone reach new duty of 17 % and the Czech Republic because of the politics of CNB of 10 %...

And so it would be extra-super complicated we need to add that nobody (except the market itself) can determine the amount of undervaluation, various models give various answers so we can basically make up any duty and nobody can disprove its amount. Either way, it is definitely something which won’t help the global growth – not even in central Europe – at all.