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.

Why the ECB still has a big problem?

The affair around Deutsche Bank has written another chapter. Regulators in the United States and in Britain measured fines to the biggest German bank in the sum of roughly 630 million dollars for laundering dirty money from Russia. But that is definitively not the only fine the bank was facing lately.

 

At the beginning of last year’s January the bank ended the wrangle around the tax evasion payment in the sum of 95 million dollars. And mainly, right before last Christmas, it promised American offices to pay 7.2 bn. dollars for a fault it made before the big financial crisis. While the bank was supposed to pay around double this price to the American offices initially. And so there wouldn’t be enough of those fines Deutsche bank had to also reach to its safe because of the manipulations with the price of silver.

The question stands: Is the German banking number one reformed? According to the immediate reaction of the market yes. The price of its stocks was growing on Tuesday by more than 1 %. It jumped up from the September’s minimum by more than 90 %. But in comparison with the beginning of the year 2014, the stocks of Deutsche bank are still more than 40 % lower. And that shows that stocks of this bank are still pretty fickle goods.

 

Especially the giant exposition of the bank in complicated derivatives is a big unknown to the future since not even the management of the bank is able to judge its final consequences because it will depend on the development of the financial market how will these derivatives end up. Not only Deutsche Bank but for example, even some Italian bank houses will be adding worries to European central bank (ECB) and continue to be a brake for the European economy.

That’s exactly why ECB can’t even think about starting making its monetary politics dramatically stricter. Even though the development of the inflation would soon justify it to do so. According to today’s data, the year on year harmonized inflation grew in the Eurozone to 1.8 %. That is only a tiny bit from ECB’s goal of 2 %. So the risk of deflation vanished from the economy on which is the more expensive oil significantly participating. On top of that, the economy of Eurozone is turning in top gear. GDP of the Eurozone grew according to the preliminary flash estimate quarter-on-quarter by 0.5 % in the final quarter of the year 2016. Quarter-on-quarter growth in the third quarter was improved to 0.4 %. The economy of Eurozone grew at the end of the year 2016 by 1.8 % year-on-year.

Those are decent grounds for the ECB to consider when it will stop with buying of bonds. But it can’t –it probably won’t happen this year. There is actually more reasons for that not only the problematic banks. On top of that, we still have south of Eurozone that is in debt or for example the political uncertainty. And there will be more than enough elections on the old continent this and next year. Add to that the British parliament stormily discussing activating the article 50 of the Lisbon agreement which would practically be the beginning of BREXIT.

 

So yes, ECB will stay with its loose politics and the interest rates in euros won’t grow and euro will stay unattractive interest wise against the dollar.