tag:blogger.com,1999:blog-32672508979103806232024-03-24T21:52:21.309+00:00Cubism EconomicsRShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.comBlogger57125tag:blogger.com,1999:blog-3267250897910380623.post-79936843254583655012023-01-10T16:41:00.003+00:002023-01-10T16:45:15.293+00:00Outrageous predictions for 2023<p class="MsoNormal"><span style="font-family: arial;">Welcome to 2023 - and Happy New Year everyone!</span></p><p class="MsoNormal"><span style="font-family: arial;">Keeping up with a well-established tradition, and with the usual
few days' delay, here are my outrageous predictions for the year ahead:</span></p><p class="MsoNormal"><span style="font-family: arial;">1. Before you ask: no, the Ukraine war will not end in 2023. Putin
will be too busy playing ice hockey to notice that being an international
pariah state is no good long-term strategy for Russia. And three warm meals and
a well-heated home in winter is all that is needed to keep the vast majority of
Russians supporting the war - being self-sufficient in food and energy does
wonders to win political support in a mostly poor country. Sorry to disappoint the
well-travelled among you, but Moscow and St. Petersburg are not Russia.</span></p><p class="MsoNormal"><span style="font-family: arial;">2. Another year, same story: Germans will not freeze and the
German industry will not have to shut down in winter. With alone the two new
LNG terminals already in operation as I write, 20% savings in natural gas
consumption across the board will be enough to get comfortably through the 2023
winter months. The German industry - via efficiency measures and switching to
other fuels - can easily save more than the required 20% (with the exception of
the glass and ceramics industry), as shown in 2022. Turning down the thermostat
by 3 degrees Celsius is all that is needed for households to save 20% in their
nat gas consumption. Given that the average room temperature in German houses
pre-Ukraine war was 20-22 degrees Celsius during winter time, living with 17-20
degrees is hardly an unbearable sacrifice to make in order to defeat Putin.
Fleece jackets will become the most fashionable piece of clothing in Germany.
Again.</span></p><p class="MsoNormal"><span style="font-family: arial;">3. Following the successful first steps in the “Energiewende”
(i.e. in terminating the dependence on Putin’s gas), Robert Habeck will be Germany’s most
popular politician by the end of the year. Again. The same can’t be said about
Macron in France following his reform of the retirement age & public pension
system. C’est la vie, Monsieur le Président.</span></p><p class="MsoNormal"><span style="font-family: arial;">4. History repeats itself not. With the experience gained in 2022,
there will be no panic reaction neither in the European nat gas (Dutch TTF) nor
the global LNG market ahead of the winter 2023/24. So, no: nat gas peak prices
2022 will not be seen again in 2023. Scaremongers will have to find a new field
of activity.</span></p><p class="MsoNormal"><span style="font-family: arial;">5. It will look like a space invasion. Feel like a space invasion.
But relax, it will not be one. With covid restrictions fully lifted by the end
of 1Q2023, Chinese will start to travel again around the world. And especially
to the west. Chinese revenge traveling will be pure joy - for duty-free shops
at airports and luxury brand shops in the west's major cities. Who said that
globalisation was over?</span></p><p class="MsoNormal"><span style="font-family: arial;">6. Elon Musk still holds around 11% of Tesla's shares worth around
USD 39bn. To finance its acquisition of Twitter, Elon needs to raise additional
USD 13bn in cash (for a total of Eur 21bn equity financing). This means cutting
down its Tesla stake. The more Tesla's share price falls, the more shares does
he have to sell, which in turn will force the share price further down. The
market knows it. Hedge funds know it. They will keep short-selling the stock. In
the end, Elon will hold less than 5% of the company. Swapping the world's
leading EV firm for 140 characters - legend!</span></p><p class="MsoNormal"><span style="font-family: arial;">7. In the UK, political stability will finally be back. Charles
III (ex-prince Charles for the uninitiated in British royal affairs) will still
be King at the end of the year.</span></p><p class="MsoNormal"><span style="font-family: arial;">8. The annual inflation in USA and the EU will come down quickly
in the first three months of the year - basis effects are a beautiful thing.
The expectation of a US soft landing triggers a rally in equity and credit
markets. In the second half of the year, however, US inflation becomes sticky.
"Higher (interest rates) for longer" becomes the new investor mantra
and equity markets give up all their gains for the year. The rapidly increasing
probability of an US recession does the rest: equity markets crash. The S&P
500 finishes the year 20% below its December 2022 closing level. Financial
markets are never boring, are they?</span></p><p class="MsoNormal"><span style="font-family: arial;">9. Here we go again: at some point in 2023 markets will start to
price in an Italexit and break-up of the Euro. I could now start arguing that
Italians are strongly pro-EU and Euro and that the shambolic state of British
politics post-Brexit only reinforced this sentiment. As a reminder: the
"Italexit for Italy" party, who has Nigel Farage as strategy advisor,
captured less than 2% of the vote in September's Italian general elections (get
over it, Nigel). I could further argue that the country's economic fundamentals
are much better than general perception has it: a country running current
account surpluses for at least 9 out of the last 10 years (2022 numbers have
not yet been published) is surely not a weak Euro member. I could add that the
ECB is a superpower able to keep Italian credit spreads under control, at any
time. And that Nigel Farage doesn't speak Italian. Then again, drawing on the
experience from his Brazilian exile during World War II Stefan Zweig would put
it better: "Italy is the future European crisis. <span lang="PT">And always will be." ("O Brasil é o pais do futuro. E sempre o
será.").</span></span></p><p class="MsoNormal"><span style="font-family: arial;">10. The western European extreme right is more loud than powerful.
Spain will prove it once more: the Vox party will not pass the 15% popular vote
threshold in the country’s general elections.</span></p><p class="MsoNormal"><span style="font-family: arial;">11. Led by German coach Roger Schmidt, Benfica will be the big
surprise of the current edition of the Champions League. It will reach the
final - and win it. Happiness galore in the streets of Lisboa! For the European
Union's north-south combination of talent, knowledge, and skills, not even the
sky is the limit.</span></p><p class="MsoNormal">
</p><p class="MsoNormal"><span style="font-family: arial;">12. The next edition of my outrageous predictions will reach you
in January 2024. After a phenomenal 2023. Enjoy - life is good!</span><o:p></o:p></p>RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com1tag:blogger.com,1999:blog-3267250897910380623.post-87411016607341862532022-11-20T22:14:00.002+00:002022-11-20T22:16:59.379+00:00World Cup 2022 - it's happening. All you need to know<p><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222; font-family: arial;">Dear All,</span></p><span style="font-family: arial;"><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">We had Trump. Four British prime ministers. The end of Merkel's golden era and the beginning of colourful cool Germany (note: for conservative Germans cool means that heating prices are not what they used to be). A pandemic. An ongoing war at EU's doorsteps. The rise and fall of crypto - several times. The goodbye of the all-time world's number 1 magician: Roger Federer. Four years is a long time. It's time for another football world cup. </span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">For those who don't want to know what is going to happen in Qatar between 20 November and 18 December, stop reading now. For all the others, here is all you need to know:</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">1. Qatar. How could it be any different? The Qataris will try to bribe every rival team during the group stage with cheap natural gas deliveries for the next 10 years. Ecuador and Senegal couldn't care less. Netherlands' gas storage capacities are fully filled up. Qatar will find out that nat gas can't buy you love. Nor football success. The hard way - its journey will end where it started: at the group stage.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span style="background-color: white;"><span face="Arial, Helvetica, sans-serif" style="color: #222222;"><span style="caret-color: rgb(34, 34, 34);">2. Italy. What a team full of elegance, attacking beauty and above all unshakeable self-confidence! So much so that it seriously thought to be able to win the world cup without qualifying for the competition. Mi dispiace - it's not the way it works.</span></span></span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">3. Germany. A new generation. Colourful and cool - like the new post-Merkel Germany in the making. Kimmich will finally play in midfield and be one of the tournament's highlights. Die Mannschaft will do much better than the German public expects. And worse than the rest of the world fears.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">4. Mexico. Exports to the USA account for 24% of the country's GDP. It makes Mexico what most Mexicans never wanted to be: USA's 51st Federal State. And places the country miles away from what Mexicans always dreamed to be: worse economically and better in football than Argentina. Arriba Mexico! And above all: keep dreaming.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">5. Iran. It's not easy to be an Ayatollah these days. First, massive international pressure following the uncovering of Iranian military drones being used by Russia in Ukraine. Then, political upheaval at home. Girl power bringing the regime to the brink of collapse. And now this: having to play England and the USA - the USA! - in the group stage of the world cup. But worry not - Iranian players will be received as heroes on their return home. The double defeat against England and USA will trigger a collective nervous breakdown of the already very fragile Ayatollahs and - yes! - regime change. Football, clever girls and democracy - what is there not to like?</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">6. England. For the first time in living memory the English players will arrive in top shape at a major international tournament. Full of energy, youthfulness and ambition (let's forget team manager Southgate for a minute) England will be a welcome addition to the top favourites shortlist. Fans all over England will be more enthusiastic than ever in their hopes, celebrations and pub drinking. After the group stage, the country's newspapers will be dominated by headlines about the perfect connection between fans and players: "drink team at home supports dream team in Qatar". In the end, tradition will prevail: the drink team will massively outperform the dream team. Cheers!</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">7. USA. Having won World War III in the match against Iran, the US players will go back to what they do best: play baseball. This football world cup is all about diversity.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">8. Canada. Just a gentle reminder to the Canadian team: only the goalkeeper can use his hands. And only in his own box. Ok? Whatever.....</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">9. Netherlands. Cruyff's home country. Cruyff! Cruyff! Cruyff! The most influential and revolutionary personality in the history of the game, first as a player and then as a coach. The best football mentor I never had. Netherlands attacking football will be the usual delight for the spectator. Cruyff style football without Cruyff. Cruyff never won the world cup for his country. What goes around comes around. Now his country will not win the world cup for him. </span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">10. Belgium. It has been the secret favourite of all major tournaments for at least the past 6 years. Not this time. Without the external pressure of the public and media, the players will feel more relaxed than ever and play like never before. Plus ça change, plus c'est la même chose. Belgian chocolate pralines anyone?</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">11. Spain. What a team! How much talent! A true delight to see them play! Sergio Ramos, Piqué, Puyol, Xabi Alonso, Busquets, Xavi, Iniesta, Villa, Torres. History books are great. And past performance is not indicative of future results.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">12. France. La Grande Nation. The world champions. The perfect combination of outstanding technical skills, speed and physical strength. Four years ago, the country's football strategy led by President Macron was clear: "Liberté! Egalité! Mbappé!" It's clear this time as well: "Liberté! Egalité! Croissant & Café!". What can you say? The French always have the right priorities.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">13. Argentina. Messi! The best football player I have ever seen. The footballer without weaknesses capable of making the impossible possible on a consistent basis. Watching Leo Messi and Roger Federer play will remain as two of the greatest privileges in anyone's life. Human beauty supreme. Federer finished his career without being the Grand Slam titles record holder. Messi will finish his without winning the world cup. Super heroes are not what they used to be.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">14. Portugal. The most talented team of the tournament: Diogo Costa, Cancelo, Rúben Dias, Nuno Mendes. Bruno Fernandes, Bernardo Silva. Otávio, João Félix, Rafael Leão. Technically outstanding. Highly creative. Tactically sophisticated. Unlimited ambition. The perfect average age. Portugal also has the legendary Cristiano Ronaldo in the squad. And Fernando Santos as a coach. It could have been glorious.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">15. Brazil. Jogo bonito. The world cup winner speaks Portuguese.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">Enjoy!</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">Best wishes,</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">Rui</span></span>RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-33994028390077006762022-01-23T22:33:00.005+00:002023-01-10T16:43:31.981+00:00Outrageous predictions for 2022<p><span style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222; font-family: arial;">Dear All,</span></p><span style="font-family: arial;"><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">Happy New Year!</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">I’m spending too much time in the Metaverse - some call it Financial Markets - these days and almost missed that 2022 had already started.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">But worry not. I did not forget that you need my guidance to walk confidently through 2022. So here they are - my outrageous predictions for 2022:</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">1. By the end of 2022 everyone will be asking: "remind me, what was that covid thing again"?</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">2. Companies are building inventory so aggressively that we will end up with an excess supply of durable goods in the 2H2022. Meaning: wait until September to buy that new coffee machine. Fridge. Bike. Car. Or start your flat refurbishment. It will be (much) cheaper then. Durable goods deflation is a beautiful thing.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">3. With US inflation proving to be more persistent than initially expected, the Fed will have to decide between fighting inflation aggressively or protect asset prices. Protect the poor or the rich. In full compliance with its mandate, it chooses the former. And it panics, tightening monetary policy much more aggressively than expected (and necessary). Stock markets collapse: peak-to-trough the S&P 500 loses 30%. The Nasdaq 40%. Tesla 60%. Meme stocks anyone?</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">4. It will be the year of the great re-opening. And revenge travelling will take off decisively. Book your holidays for the next 2 years. Now! (PS Travel & Leisure stocks will be some of the very few with a positive performance for the year. Just saying).</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">5. Boris will still be British PM in December, proving that Brits have a brilliant sense of humour. The world’s best. What is there not to like about a good party anyway? </span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">6. Putin invades Ukraine. Better now than after it becomes a NATO member, his rationale goes. The Nordstream 2 gas pipeline is discontinued. US and Middle East (more expensive) LNG replace Russian gas in the EU. The green energy revolution will pick up speed - and yes, nuclear energy will be part of the new green.</span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">7. In the US, the democrats will lose the mid-term elections. Sorry Joe! </span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">8. By the end of the year, Trump will be by far the most popular politician in the US. Encouraged by his rising popularity, he sets course for world domination: he announces a Deutsche Bank debt financed takeover bid for Twitter. </span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span style="background-color: white;"><span face="Arial, Helvetica, sans-serif" style="color: #222222;"><span style="caret-color: rgb(34, 34, 34);">9. In December, the football World Cup will take place in Qatar. For the first time in living memory, English players will not arrive at a major international tournament in much worse physical shape, after a long Premier League season, than their rivals. Given England’s strong squad, they are serious contenders to win the title. Christmas will see record alcohol sales in England. “Drink teams“ will be formed all over the nation to forget the “dream team’s” failure to win the World Cup. Consolation prize: Germany won't win either. Can’t wait for that roaring party at number 10!</span></span></span><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><br style="caret-color: rgb(34, 34, 34); color: #222222;" /><span face="Arial, Helvetica, sans-serif" style="background-color: white; caret-color: rgb(34, 34, 34); color: #222222;">10. At the end of December you will be eagerly awaiting my outrageous predictions for 2023. I’ll send them out in January. The Metaverse is very addictive indeed.</span></span><div class="yj6qo" style="caret-color: rgb(34, 34, 34); color: #222222;"></div><div class="adL" style="caret-color: rgb(34, 34, 34); color: #222222;"><span style="font-family: arial;"><br /><br /></span><br /></div>RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-48637607492740199052021-01-01T21:49:00.014+00:002022-01-23T22:14:02.041+00:00Outrageous Predictions for 2021<p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"><span style="color: #222222;">2020 was a year of turmoil, disruption and transformation - as predicted in January 2020.</span><o:p></o:p></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"><span style="color: #222222;"><br /></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"><span style="color: #222222;">I failed to correctly anticipate the source of the massive shocks we were about to witness. It was the ultra-tiny Corona virus (aka c19) - instead of Trump (re-election), Boris (Hard Brexit) and Cummings (digitalisation and numeracy of Whitehall) - that triggered 2020 life-changing events. You can't get all the details right, can you?</span><span style="color: #500050;"><br /><br /></span><span style="color: #222222;"><o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #500050;"><span style="font-family: helvetica;">Main takeaway from the year 2020: size doesn’t matter. Just your talent and potential to transform the world.<br /><br /><o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #500050;"><span style="font-family: helvetica;">Equipped with the wisdom gained and lessons learned over the past 12 months, here are my outrageous predictions for 2021:<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #500050;"><span style="font-family: helvetica;"><br /></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">1. The year 2021 will prove to be as intellectually stimulating, disruptive and transformative as 2020 was. But c19 won't be the main agent of change.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"><br /></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"><span style="color: #222222;">2. The new c19 UK strain will spread all over Europe and force longer and more severe lockdowns during the 1Q2021 than expected. Vaccination will however prove effective and by August all travel restrictions in the European Union will have been lifted. Do you remember the utopian dream of empty sandy beaches in Southern Europe in the summer? Prepare for dystopia in the summer of 2021.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"><br /></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">3. In mid-March financial markets had 7 questions:<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">a) Is c19 highly deadly or just highly contagious?<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">b) Will lockdowns flatten the curve (quickly)?<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">c) Will home office actually work?</span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222; font-family: helvetica;">d) Will governments and central banks intervene decisively?</span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222; font-family: helvetica;">e) Will the temporary nationalisation of business life avoid a massive wave of defaults?</span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">f) Once the economies start to open up will we have a quick, V-shaped recovery?<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">g) Will we have an effective vaccine in less than 2-3 years? <o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">All questions were answered at the most extreme positive end of the initial range of expectations.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">With the new c19 UK strain on the rise, and normality taking longer to return than expected, governments and central banks will have to build longer bridges. And they will do whatever it takes to build them.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">Markets won't be shocked by c19 anymore. Don’t expect more than a 10%-15% stock market correction even if the newsflow becomes supremely negative (e.g. full lockdowns across Europe till end-March, home office is here to stay, vaccine not fully effective against new c19 UK strain)<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">4. Bitcoin won't be banned by US and EU authorities. In October the Economist will run a cover story titled " Bitcoin - the digital gold?". Timing is everything.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">5. CDU and Greens will form a coalition government following the German general elections in September 2021.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">I will vote. Jens Spahn will be Chancellor. Green Annalena Baerbock will be Deputy Chancellor. <o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">A gay head of government. Girl power continuing to be represented at the very top of German political decision-making. Alliance between conservatives and greens at the summit of German politics.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">Modernity, diversity and tolerance. Youthful spirit. Brilliant Germany.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">6. One of the first measures of the new German government coalition will be to pass legislation making equal time sharing of government paid parental leave for the two parents mandatory.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">It’s a tiny measure at first glance. It will do more to break up the still very much patriarchal German job market (especially at the top management level) than 100 (boardroom) quotas for women.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">Size doesn’t matter.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="font-family: helvetica;"> </span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">7. Massive street protests across Scotland will force the UK government to give in. Scotland will hold an independence referendum in 2022. Nigel Farage founds a new political party: "Scots-don't-get-back-control". What a time to be alive!<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">8. Joe Biden will engage in negotiations with Xi Jinping to improve US-China relations. No much progress here. By the end of the year Hong-Kong will be fully under Mainland China control. Chinese democracy was a pipe dream.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">9. Portugal's new flying football generation will display pure technical beauty at the Euro 2021. Football fans all over the world will fall in love with Cancelo, Rúben Dias, Rafael Guerreiro, Bruno Fernandes, Bernardo Silva, João Félix. Portugal will end the competition as it started it: the European Champion 2016.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"> </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"><br /></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">10. A meteorite will hit New York in May and wipe out all my predictions - especially the ones related to financial markets. Er.....context man! Stop thinking 2020. In 2021 normality returns and impossible things simply won't happen. Relax people! </span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"><br /></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;"><br /></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #222222;"><span style="font-family: helvetica;">11. At the end of December 2021 you will be eagerly awaiting my "Outrageous Predictions for 2022". They will arrive in January 2022. Portuguese punctuality never disappoints.<o:p></o:p></span></span></p><p class="MsoNormal" style="margin: 0cm 0cm 0.0001pt; text-align: justify;"><span style="color: #500050;"><span style="font-family: helvetica;"> </span></span></p>RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com2tag:blogger.com,1999:blog-3267250897910380623.post-68490367428916644432020-01-12T16:48:00.001+00:002020-01-12T21:13:55.031+00:00Outrageous Predictions for 2020Dear All,<br />
<br />
here we are again: new year. Same people. Better world and life. And my outrageous predictions for the year just started:<br />
<br />
1. Trump will be re-elected US President. God bless America.<br />
<br />
2. The killing of General Soleimani triggered a burning desire by Iran's ruling elite to seek revanche against the US. It also exposed Iran's deep vulnerability to US military's tech supremacy, starting with the personal physical safety of its leaders. The latter effect will tame the former - there won't be any major Iran-led attacks to US interests in the West.<br />
<br />
3. Boris Johnson. No one in living memory enjoyed being British PM so much like Boris. He will also prove to be an unexpected bold strategic thinker. Here a snapshot of his thinking: it doesn't make sense for the UK as a non-EU member to be regulatory fully aligned with the EU and in order to have full access to the single market be a contributor to the EU budget. It would mean that the UK would be in exactly the same position as non-EU member as it is currently as an EU-member. With one major difference: it would have to fully comply with EU regulations without any saying in its design. Moving from a rule (co-)maker to a rule taker isn't very smart. Neither very British.<br />
<br />
Consistent with his thinking, Boris will seek maximum regulatory divergence from the EU (ultra-flexible labour laws, weak social protection, ultra-low corporate taxes to foreign direct investment projects) to offset the impact of EU's WTO tariffs on British exports (on average 2.8%; for car imports 10%; for dairy products rising to around 35%). And thus try to transform London into the Singapur on the Thames.<br />
<br />
Result: there will be a Hard Brexit on 31 December 2020. God save the Queen.<br />
<br />
4. Dominic Cummings is a crazy man. Then again, he will revolutionise UK government's decision-making process by starting to rely on big data instead of big ideas. On evidence instead of perceptions. Whitehall will start to be populated by boys and girls who actually have strong numeracy. Instead of only literacy and social skills.<br />
<br />
It will be a beautiful combination: literacy, numeracy and social skills - what is there not to like?<br />
<br />
5. The Greens will be solidly leading the polls in Germany by the end of 2020. Fridays for the future anyone?<br />
<br />
6. Spain. For the first time following democratic elections in the post-Franco era, Spain has a coalition government. Podemos, the supposedly left-wing radical party, is PSOE's (the Spanish social democratic party) coalition partner.<br />
<br />
Spanish traditional right wingers expect the worse: an irresponsible government leading to the collapse of the Spanish economy. And then of the entire country. Spanish traditional left wingers expect nothing less than the worse: the military rolling out the tanks and crushing the left-wing government. Spain moving back to the dark side. A new military dictatorship is unavoidable.<br />
<br />
Quality institutions and being part of the EU - which acts as a top quality institutional anchor - makes life sometimes apparently too predictable and boring. Exciting narratives all too appealing. It's all very much understandable.<br />
<br />
However, I would suggest the Spanish media to build a narrative comprising Pedro Sanchez meeting Boris Johnson on a spaceship travelling to Mars designed by Elon Musk. There they would meet with Donald Trump, play golf with Angela Merkel and be lectured on Voltaire's great contributions to mankind by Emmanuel Macron. The probability of it occurring is the same as the currently propagated narratives by traditional Spanish left and right wing media.<br />
<br />
But the latter narrative would be more fun to follow.<br />
<br />
On a slightly different note, worry not - the Spanish paella is as good as ever.<br />
<br />
7. 2019 was a happy year for investors across (almost) all asset classes. Based purely on valuations 2020 should be a very difficult year across (almost) all asset classes. But valuations are just one part of the equation. The other is liquidity. On the latter, the FED made the largest liquidity injection on record in September 2019 (to shore up the US repo market when it suddenly froze up). And the Chinese Central Bank started liquidity injections again in the 4Q2019.<br />
<br />
Cutting a long story short: it will a good year to make money by being long equities and high yield bonds. For all the wrong reasons.<br />
<br />
PS Anyone willing to assess the probability of a Hyman Minsky Moment vs. Samuel Beckett's Waiting for Godot in 2021, please give me a ring. I'm happy to discuss.<br />
<br />
8. Euro 2020. The European Football Championship will for the first time take place in several European countries. Portugal was European Champion in 2016. It will finish the Euro 2020 as European Champion 2016.<br />
<br />
In June 2020 I will issue my (not so) outrageous predictions for the Euro 2020.<br />
<br />
Seriously!<br />
<br />
<br />RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-85958641617140324102019-01-08T22:14:00.001+00:002019-01-08T22:14:52.483+00:00Outrageous predictions for 2019<!--[if gte mso 9]><xml>
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<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">Happy
New Year everyone!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">Life
is good. Especially if you live in interesting times. And 2019 will be very
interesting indeed. Here my outrageous predictions for the next 12 months:</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">1.
The FED's quantitative tightening (QT) will intensify the global USD shortage.
Bank shares will keep falling led by the ones with the largest USD short
positions, i.e. the Europeans (Deutsche, BBVA,...)......until the FED announces
the end of QT.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">2.
Donald Trump will keep up the pressure on FED's Chairman Jerome Powell for a
more lax monetary policy. To send a clear signal of FED's independence to the
markets, Jay Powell will keep QT in place for longer than the US economy
fundamentals would justify and even increase interest rates by 25 bps one or
two more times. The US yield curve inverts. The US enters a recession.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">Donald
Trump's 2020 re-election becomes a low probability event. The US institutional
framework of checks and balances does work in mysterious ways.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">Chairman
Powell, high five!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">3.
Theresa May's Brexit deal is voted down in parliament. For weeks there is no
majority in parliament for what Brexit-related path to follow. Newsnight (BBC
2, from Monday to Friday at 10:30pm UK time) becomes the world's greatest
comedy show for quite a few weeks. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">Eventually,
the UK parliament calls a second referendum and the EU agrees to extend the
29th of March Brexit deadline by 1 year. The referendum is held in September.
Remain wins by a surprising large margin (55% vs. 45%).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">The
GBP goes through the roof. London's real estate prices start to go wild again.
Brexiteers are angry. Boris resumes playing cricket with other Etonians in
North London.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">4.
In May, populists parties across Europe secure less than 15% of the overall
European Parliament's seats. Even if they formed a single parliamentary group,
it would be smaller than that of the two leading parties.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">The
EU is perceived as having saved another set point by the British press.
Brexiteers are angry. Boris is still playing cricket.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">5.
China launches a major stimulus programme. The Chinese aggregate debt levels
keep rising and surpass 260% of GDP, 5% short of Italy's total debt to GDP
ratio. This combined with Xi Jinping's aggressive anti-corruption campaign and
the communist party's rising interference in China's large private companies,
makes Chinese entrepreneurs increasingly nervous and looking for ways to
transfer some of their wealth abroad.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">China
has strict capital controls in place. The capital account is closed. However,
no capital controls system is 100% watertight. With the yuan denominated
financial assets / foreign reserves ratio currently at 12x, a 4.2% leakage of
financial assets abroad will cut Chinese foreign reserves in half. And force a
devaluation of the currency.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">The
capital flight happens. The yuan devalues 15% vs. de USD (to USD/CNY of 8.0).
Trump is not happy. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">6.
An EU-wide recession is currently fully priced in by European stock markets. An
US recession is currently priced in with a 50% probability by both European and
US stock markets. In the European high-yield market, high single to mid-teen
yields are available on names of strategic industrial companies benefiting from
implicit core-EU government support.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">2019
will be a good year to deploy capital. You just have to be patient. Contrarian.
And long-term greedy.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">7.
Portugal will remain the European football champion in 2019. I'm 100% certain
about this one. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">The
next European Cup will only take place in 2020.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;">May
2019 be a FUNtastic year!</span><span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;"> </span><span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;"> </span><br />
<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt;"></span>
</div>
RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-71293252337209680712018-06-15T12:01:00.001+01:002018-06-15T12:01:13.589+01:00The beautiful game: world cup 2018 forecast (with perfect foresight)<!--[if gte mso 9]><xml>
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<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">Today, for something completely different. The World Cup 2018. Spoiler: you will see the future.</span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">-----------------------------------------------------</span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;"> </span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">I
can feel your sense of anticipation. The excitement. And relate to the
sleepless nights in search of answers to the supreme existential question: is
there any meaning to life beyond seeing your team winning the football world
cup?</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">Well,
life is good. And today is your lucky day - here are all the existential
answers you have been looking for (you're welcome):</span></div>
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<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">1.
Italy won't win the world cup. They have bigger plans for the summer: leave the
Euro without anyone noticing.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">2.
Holland won't win either. They decided some months ago not to participate in
this year's tournament. Despite not having any plans at all for the summer at
the time. Now they are considering going to Italy on holiday and organise daily
football matches with the locals. There is hope for the Euro's survival.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">3.
The US will contribute as much to raise football's quality standards as
President Trump to make a rules-based world great again. It will be beautiful!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">4.
Putin is a man of vision. Why participate in a G7 +1 summit when you can host
the world cup? Russia's football team will play with the same flair, diversity
and success that characterises the Russian economy.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">5.
England won't win. Nothing new but at least England has an excuse this summer:
there is no time for distractions - the nation has to focus all its energy in
turning the Boris-Rees Mogg Brexit master plan into a major success by
mid-July. 2018. No one really knows what the master plan looks like, starting
with Boris and Rees-Mogg, but there is no reason to panic as the deadline is
still a distant five weeks away. Well informed sources in Westminster say that
Brexiteers have never been more confident about delivering a successful Brexit
and destroy the Euro along the way. After Boris has been spotted ordering a
Pizza Margherita in Islington yesterday, rumours are rampant that he plans to
invade Italy to kick the Dutch out of the country.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">6.
Belgium is the secret favourite. So secret that no one will miss them when they
head home after the quarter-finals. The Belgium chocolate pralines remain world
class though. Then again, that's not a secret.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">7.
Portugal will start the world cup as European Champion. And finish the world
cup as European champion. If anyone wants to bet against it, please call me.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">8.
Spain will play Portugal in its first match. It's an early final. What would be
the point to have the same match in the final again? Right....</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">9.
France has a fantastic team. It's true that Napoleon suffered an history
changing defeat in Russia (calm down Boris and Jacob, we know: Waterloo was
epic) and that it still weighs heavily on the Grand Nation's collective memory.
However, France has now an Über-President who can turn the nation around:
young, dynamic, competent, eloquent, an ex-investment banker, a broad thinker
with attention to detail. From my generation. Just like me in fact. Ok, France
won't win.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">10.
Germany. It was in Stalingrad in 1943 that the new cool Germany was born (sure
Boris and Jacob, we know: Churchill was magnificent). Who said that a
devastating defeat can't mark the dawn of a much brighter and happier era?
Cheer up Neuer, Kroos, Özil & Co: Germany's football will become even
better following your performance in Russia.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">11.
Argentina has Messi. Messi! Messi! Messi! The clinical magician. Cruyff on the
bench and Messi on the pitch have been a generation's football heroes. The ones
who radically reinvented the game and in the process took us to places no one
ever thought could possibly exist. It's a pity that Messi has Argentina.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 10.0pt;">12.
Brazil has nothing in common with Russia, except being an emerging market.
Brazil is Southern hemisphere; Russia is Northern hemisphere. Brazil is hot;
Russia is cold. Brazil is a chaotic, lively democracy; Russia is an
organised, sombre authoritarian state. Russia meddles in other countries
elections; Brazil can hardly keep track of what is happening in its own
elections. Brazil has Neymar, Coutinho, William; Russia doesn’t. Opposites
attract. Brazil is the top favourite.</span></div>
<div class="MsoNormal">
<br /></div>
RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-2866678863518102532018-04-10T23:10:00.000+01:002018-04-10T23:22:53.694+01:00What's up with Portugal?<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
Matthew Klein, from FT's creative department (FT Alphaville), did a very good analysis about Portugal's economic journey post-Euro adoption in 1999. Here the link to Matthew's article: <a href="https://ftalphaville.ft.com/2018/04/04/2199417/whats-up-with-portugal/" target="_blank">FT Alphaville looks at Portugal</a></div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
And a few remarks:</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
1. The increase in Portugal's household debt in the post-Euro period was to finance consumption. Not real estate acquisitions (mortgages). There was no real estate boom in Portugal over the period. The increase in household debt combined with the increase in government debt (part of it directed to infrastructure spending / construction) led to the massive increase in foreign debt pre-Eurozone crisis.</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
2. The phenomenal improvement in Portugal's current account balance since 2011 is a combination of three factors</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
a) luck: tourism picked up to a large extend due to competing destinations' troubles (North Africa, Turkey,...)</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
b) sheer need: PT's export companies had to expand into new geographies as demand from Spain & Co collapsed</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
c) FDI: reforms made PT more attractive. Some foreign companies established operations in the country (e.g. Rocket Internet); already present ones expanded their existing operations (e.g. Siemens, Bosch, Peugeot, BNPP...)</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
3. Reforms (read tax incentives) implemented post-2009 attracted many EU-citizens as permanent residents. Golden Visas attracted non-EU residents (Chinese, Brazilian, Angolan. And more recently Turks). These individuals are the main force behind the boom in the Lisbon / Porto real estate markets. The ECB has little to do with it.</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
Tourism boom and VIPs as permanent residents (Madonna, Michael Fassbender, Cantona, Monica Belucci, Philippe Starck....) doing high profile marketing of the country - for free - led to an international (re)discovery of Portugal. And have created a positive feedback loop for tourism and investment.</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
The main gap in the whole story: a much more aggressive FDI attraction strategy (a la Ireland) is needed. FDI is the only way for Portugal to massively broaden its export base, increase productivity and raise living standards sustainably over a reasonably short timeframe (10 years).</div>
<div style="color: #505050; font-family: Arial; font-size: 13.333333015441895px; margin-bottom: 1em;">
An Eurozone private sector transfer union based on a FDI core-periphery bridge is what the EU(rozone) authorities should focus on. It would be a win-win situation for core and periphery. And therefore a no-brainer:<br />
<a class="m_-1685507852400400939link" data-saferedirecturl="https://www.google.com/url?hl=en-GB&q=https://email.livefyre.com/wf/click?upn%3DsoTU6FNECwh4FHYrhQQSCvNGIj7Z2Iqhh2v-2Bw-2B3eXNWkPEY9eM8Lated0mrZ1IPk8xsW8eYfIhC7F8ooxGX-2BUPg4s-2Bw6bRIZXwV90P-2FCqz0zXYyuP32bIRjVBKJqCjLQ_3wIbEq46PfT7J-2BH11Z9FxWR8ko-2FDtsSWRZSiShJL155dLTps0-2FIPUZcvAkSAWWRbd6IWquuYQif-2F2KJZdA4QnCsQyFR47CwCXd3hVn-2BGtDTuIg8zVLeqViqPrn3UM3-2FLxylsAjcJRwe6lEzdm9C53B1bWEBKXYL6JAVwyNbbfpX7N70WZLNOh-2B2G4FbumhvBbE2fGdkYOD0uvvUBcK-2FhEw-3D-3D&source=gmail&ust=1523483235853000&usg=AFQjCNFDXBrgQZPI2ASmLL8Gm-R_UlAneQ" href="https://email.livefyre.com/wf/click?upn=soTU6FNECwh4FHYrhQQSCvNGIj7Z2Iqhh2v-2Bw-2B3eXNWkPEY9eM8Lated0mrZ1IPk8xsW8eYfIhC7F8ooxGX-2BUPg4s-2Bw6bRIZXwV90P-2FCqz0zXYyuP32bIRjVBKJqCjLQ_3wIbEq46PfT7J-2BH11Z9FxWR8ko-2FDtsSWRZSiShJL155dLTps0-2FIPUZcvAkSAWWRbd6IWquuYQif-2F2KJZdA4QnCsQyFR47CwCXd3hVn-2BGtDTuIg8zVLeqViqPrn3UM3-2FLxylsAjcJRwe6lEzdm9C53B1bWEBKXYL6JAVwyNbbfpX7N70WZLNOh-2B2G4FbumhvBbE2fGdkYOD0uvvUBcK-2FhEw-3D-3D" style="color: #2c87dd; text-decoration: none;" target="_blank">http://cubismeconomics.<wbr></wbr>blogspot.de/2017/05/<wbr></wbr>macronomics-missing-piece-<wbr></wbr>private_16.html</a></div>
RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-11403043266901886082017-09-21T08:41:00.002+01:002017-09-21T08:42:55.344+01:00Tesla vs. BMW – all you need is imagination<!--[if gte mso 9]><xml>
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<![endif]--><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: #222222; font-size: 10pt;">Equity investors seem to regard Tesla as the
future leader of the global affordable luxury car segment. The company’s
current market capitalisation already roughly matches that of BMW - nothing
that a giant dose of imagination and creativity can’t possibly justify.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">We are in September 2027. The
electric car revolution made Tesla the world’s leading affordable luxury carmaker
– the new BMW. Tesla’s 2027 car sales are expected to reach USD 120 billion
(matching BMW Group’s sales in 2017).</span></span></div>
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<br /></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">Tesla has a similar net profit
margin (7.4%) and is trading at a similar PE multiple (7.4x) as BMW was 10
years ago. Its market capitalisation just hit USD 68 billion. It was USD 61
billion in September 2017. As no dividends were paid out over the past 10
years, Tesla shareholders earned a 1.2% annualised return in 2017-2027. They
are disappointed.</span></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">When buying Tesla shares in
September 2017, they had a vision: Tesla would become the new BMW in 10 years
time. Accordingly, they expected to make a 10% annualised return on their
investment. They would have made it – if they had bought Tesla shares 56% below
the then prevailing market price.</span></span></div>
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<br /></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">That’s not a very realistic vision
of Tesla’s future, some enthusiastic Tesla investors may now argue. BMW’s
current PE multiple is depressed. In 2027, a very successful Tesla will trade
at higher multiples. </span></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">Ok. Let’s think about an alternative
future. In September 2027 the new BMW – aka Tesla – will trade at 10x earnings
2028 (post dotcom bubble BMW only traded, on average, higher in phases of
depressed earnings during recessions). This would translate into a 2017-2027
annualised return of 4.3% - assuming that no further equity or quasi-equity
financing will be needed over the coming years. Factor in a 10% capital
increase (i.e. USD 6bn - Tesla’s cash burn rate in 1H2017 was USD 2.4billion,
USD 3 billion of cash is left on the balance sheet) and the resulting dilution
would lead to an annualised return of 3.3%.</span></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">But, hold on, Tesla is not only
cars! What about the energy generation and storage business? Sure - currently
it accounts for 10% of Tesla’s sales. Therefore, even if it was able to mirror
the growth and profitability of the car business in the Tesla-is-the-new-BMW
scenario over the next 10 years, it would hardly move investors’ return-on-investment needle.</span></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">Imagination and optimism are good
things. They cannot change the big picture: even if Tesla turns out to be the
new BMW, with a successful energy and storage business attached, it is doomed
to be a poor investment. </span></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 10pt;">It’s what usually happens when a
stock is priced for perfection.</span></span></div>
RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-68132474625866392962017-06-14T11:14:00.002+01:002017-06-14T11:30:12.737+01:00Modigliani-Miller, Warren Buffett, gravity and US equity valuationsGiven the high levels of debt, the world's main central banks can't afford to rise interest rates dramatically over the coming 10 years. Thus, 10-year government bond yields in the US, EU and Japan will reach maximum 2%. If we add a 2% equity risk premium - historically rather low but justified by the low equity market volatility that is supposedly here to stay - we end up with equities being fairly priced at an earnings yield of 4%. A P/E of 25x.<br />
<br />
This is the standard explanation many give to justify that equity markets, starting with the US, are currently far from overvalued. Then again, what do we know about the relationship between debt levels and the cost of equity (i.e. the equity risk premium)?<br />
<br />
We know, from the Modigliani-Miller theorem, that a firm's capital structure has no impact on its valuation. Contrary to what many argue, the increase in a company's level of (low cost) debt vs. (high cost) equity - an increase in leverage - doesn't lead to a meaningful reduction in the average cost of capital. The reason is straightforward: an increase in leverage by increasing the company's insolvency risk leads to an increase in the company's cost of equity (the equity risk premium goes up). The increase in the cost of equity in turn fully offsets the lower cost of debt, resulting in an unchanged average cost of capital. As changes in the capital structure don't have any impact in a company's operating free cash-flow generation potential, it follows that a change in a firm's capital structure doesn't have any impact on its fair value. There is only one minor caveat: given that interest payments are tax deductible, an increase in leverage leads to a minor change in the average cost of capital via the debt tax shield (e.g. if (i) 50% of the firm's capital structure is made up of debt, (ii) the corporate tax rate is 25% and (iii) the average cost of debt is 4%, the average cost of capital is.......0.5% lower vs. a capital structure with zero debt and 100% equity. Only 0.5% lower!). But even then there is a limit to the benefits of leverage: at some point (dependent on the cyclicality of the underlying business) further increases in leverage lead to an increase in the risk of insolvency and cost of equity that starts to offset the tax shield advantage. Keeping adding debt once that point is reached starts to increase the average cost of capital instead of slightly reducing it.<br />
<br />
By the way, that the capital structure has no meaningful impact on a firm's average cost of capital and valuation is one of the few things on which Warren Buffett, Charlie Munger and financial academics agree on. So we better take it seriously.<br />
<br />
With this is mind, where does the world economic system stands now? This is how the world's debt levels have evolved since the year 2000 (courtesy of MGI - McKinsey Global Institute):<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJeMWczORPTPUah3xFEuMDIdduMvWw9UXz9JI9VA8VUxElgnFiWuRurVXceASlLopb6Q__zWLuawjoa8ZG1lSxzl8Xdk2N5wXidcTrerK-BcMToqKwUdfB9pcXXBnSkJBI1wZI4sjYfbnD/s1600/MGI-World+Debt+pic.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="540" data-original-width="720" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJeMWczORPTPUah3xFEuMDIdduMvWw9UXz9JI9VA8VUxElgnFiWuRurVXceASlLopb6Q__zWLuawjoa8ZG1lSxzl8Xdk2N5wXidcTrerK-BcMToqKwUdfB9pcXXBnSkJBI1wZI4sjYfbnD/s640/MGI-World+Debt+pic.jpg" width="640" /></a></div>
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The world economy is today more leveraged than it was in 2007. This must surely mean that the aggregate risk of insolvency is today greater than it was back then. And knowing what happened in 2008, it is reasonable to conclude that the resulting increase in the cost of equity more than offset any tax shield advantage from the additional debt the system accumulated in the meantime. So, the risk-adjusted average cost of capital should be higher today than it was in 2007.</div>
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What does this mean to valuations in the world's leading equity market, the US? Assuming, very optimistically, that (i) today's average cost of capital is only 10%, (ii) the US economy will grow at 5% nominally per annum in perpetuity (2.5% real growth + 2.5% inflation) and (iii) companies' average dividend pay-out is 75%, US equities would be fairly valued at a P/E of 15x (with a pay-out of 65% the fair value P/E would be 13x).</div>
<br />
The S&P 500 is currently trading at a cyclical-adjusted P/E of 29.9x, trailing P/E of 24.1x and 1-year forward looking P/E of 19.0x. If this is fairly valued, what is overvalued?<br />
<br />
And remember: gravity does exist. In financial markets too. It's just that it is not Newton's gravitational principles that rule financial markets - it's Wile E. Coyote's: markets can deviate from fair value for a long time, but eventually the power of gravity takes over.<br />
<br />
<br />RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-77555782242431092312017-05-16T12:41:00.005+01:002017-05-16T12:44:35.860+01:00Macron(omics) missing piece - a private sector-based Eurozone transfer union: the core-periphery FDI bridge<div class="MsoNormal">
<span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">The
Eurozone suffers from a structural economic problem. An imbalance: a
centre traditionally running current account surpluses, a periphery
traditionally running current account deficits. Admittedly, the peripheral
countries' current accounts are now balanced but as unemployment keeps falling
it is difficult to see how this won't translate into a rise in imports and
current account deficits resurfacing again. The classic response to address
such imbalances is via the creation of an EU transfer union. In theory, it
would make sense.</span><span style="color: black; font-family: "arial"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">But
theory is not always very practical: it is almost impossible to gain political
support at the EZ's national level to transfer taxpayers money from
the centre to the periphery. However, doing nothing is not an option
either. And this begs the question: what to do? The answer: create
a centre-periphery FDI bridge. The idea's rational being reasonably
straightforward:</span><span style="color: black; font-family: "arial"; font-size: 10.0pt;"><o:p></o:p></span></div>
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<b><span style="color: black; font-family: "arial"; font-size: 10.0pt;">Problem:</span></b><span style="color: black; font-family: "arial"; font-size: 10.0pt;"> Peripheral countries (Spain, Portugal, Greece) have
traditionally (i.e. since WWII) run current account deficits - the resulting accumulation
of foreign debt leading sooner or later to an inevitable “sudden
stop”, financial and economic crisis. Just like in 2009/2010. <o:p></o:p></span></div>
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<b><span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">Solution:</span></b><span style="color: #222222; font-family: "arial"; font-size: 10.0pt;"> These countries need to broaden substantially their
export base and implement an export-driven growth strategy. The way to do it in
an effective and reasonably timely manner (5-10 years) is by attracting massive
amounts of foreign direct investment (FDI): that the Siemens, L'Oréals, Googles
of the world set up production/service units in the countries (or expand the
already existing ones) to serve (mostly) clients abroad. For it to happen
structural reforms at the national level are needed – no doubt. But it will not
be enough. The European Union has to create a mechanism that incentivises the
flow of private capital (simply said “Germany’s excess savings”) from the
centre to the periphery to finance the FDI projects. This should comprise:<o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">-
tax incentives, e.g. FDI projects not paying corporate tax for the first 10
years;<o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">-
a pan-EZ legal & institutional framework, e.g. FDI courts at EU level
investors could resort to in case of legal issues arising with their projects.
Thus overcoming the potential lack of trust in the national legal frameworks
& judicial systems.<o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">In
short: create special economic zones in the EU periphery offering investors a
highly attractive and reliable fiscal, legal and financial return framework<o:p></o:p></span></div>
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<b><span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">Result:</span></b><span style="color: #222222; font-family: "arial"; font-size: 10.0pt;"> A win-win situation - the periphery expands its
export base and generates strong export-based sustainable growth; the centre can
invest its surplus in economically sustainable projects at an
attractive rate of return (instead of investing in
US-subprime or Spanish overvalued, excessively supplied, real
estate assets as in the pre-2008 period). <o:p></o:p></span></div>
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<span style="color: #222222; font-family: "arial"; font-size: 10.0pt;">Cutting a long story short, the centre-periphery FDI bridge is an incentive mechanisms at
the EZ level to channel private sector monies from the surplus centre
to the deficit periphery, to finance FDI projects in the latter. It is both
politically more feasible and economically more efficient / sustainable than
creating a classic transfer union.<o:p></o:p></span></div>
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<span style="color: black; font-family: "arial"; font-size: 10.0pt;">Combined with
(i) a limited common EZ budget (managed by an EZ finance minister) to finance investment projects across the EZ,
(ii) evolving the ESM into a fully-fledged European Monetary Fund for crisis
resolution situations, (iii) full implementation of bank bail-in
mechanisms and completion of EZ's banking union, the FDI core-periphery bridge
would complete Eurozone's required institutional framework and make it a
sustainable and prosperous economic construct. The Euro would
definitely become a success story.<o:p></o:p></span></div>
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<span style="color: black; font-family: "arial"; font-size: 10.0pt;">Emmanuel,
are you reading? Thanks to you, we - the Erasmus generation - are
in charge now. Let's make Europe great. Again.<o:p></o:p></span></div>
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RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-49370435153791726722017-02-20T13:21:00.002+00:002017-02-20T21:39:13.683+00:00Hard-core Brexiteers' investor sentiment: Germany is stupid enough to let the Euro collapse...<!--[if gte mso 9]><xml>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Germany's current
account surplus is estimated to have reached 8.6% of GDP in 2016 (Source: Ifo Institut).</span></span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">The Deutsche Mark (DM) was Germany’s
currency from 1948 to 1999. How often did Germany in the DM period have a
current account surplus of 8.6% of GDP? Zero. How often a current account surplus
of 5% of GDP? Zero. The highest current account surplus ever recorded during the DM
period was approx. 4% in two years in the 1980s. During the rest of the time, Germany’s
current account surplus always peaked in the range of 2%-2.5% of GDP. This includes the
years of Germany’s economic miracle in the 1950s and 1960. Check it out for yourself:</span></span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"> </span></span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-size: small;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgO-jUnr448ywFBbLV4Smf9-9s6Vmwt3lqnr6rirmV1F_wIuCdq8PglNdM-j8DDqM886wdG-Wgidf7fedAV1vYdX_OpShEF0qwzEZehmOGrXhuquVVDUZTlHqMR7zc9A2a9N0LD_FR54EgN/s1600/German+current+account_1970-2015.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgO-jUnr448ywFBbLV4Smf9-9s6Vmwt3lqnr6rirmV1F_wIuCdq8PglNdM-j8DDqM886wdG-Wgidf7fedAV1vYdX_OpShEF0qwzEZehmOGrXhuquVVDUZTlHqMR7zc9A2a9N0LD_FR54EgN/s640/German+current+account_1970-2015.jpg" width="640" /></a></span></div>
<span style="font-size: small;"><br /></span>
<br />
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Source: Bloomberg</span></span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><u><b>[Please note</b></u>: chart only depicts Germany's current account balance data from 1970 to 2015. Full data </span></span><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">from 1950 to 2015 </span></span>for Germany's trade balance can be found under <a href="https://www.destatis.de/DE/ZahlenFakten/Indikatoren/LangeReihen/Aussenhandel/lrahl01.html" target="_blank">German Trade Balance 1950-2015</a> and for Germany's GDP under <a href="https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/VGR/Inlandsprodukt/Tabellen/Volkseinkommen1925_pdf.pdf?__blob=publicationFile" target="_blank">German GDP 1950-2015</a></span></span><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"> - data source for both links: German <i>Statistisches Bundesamt</i>. To calculate the German current account balance please take into account that 1%-2% of GDP have to be subtracted from the trade balance. Reason: Germany's current transfers are negative (EU net transfers accounting for approx. 0.6% of German GDP + monies transferred by migrants living in Germany to their countries of origin more than offsetting Germany's positive income balance)]</span></span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"> </span></span><span style="font-size: small;">
</span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Is today’s German 8.6%-of-GDP current account surplus sustainable? No. During the DM period it would
have been swiftly eliminated before it even came into existence via an
appreciation of the DM (<span style="font-family: "arial" , "helvetica" , sans-serif;">r-e<span style="font-family: "arial" , "helvetica" , sans-serif;">-m-e<span style="font-family: "arial" , "helvetica" , sans-serif;">-m-b-e-r:</span></span></span> with the exception of two years in the 1980s, the German current account surplus never surpassed the 2%-2.5% mark during the over 50 years long DM-period). With the Euro, this market-based adjustment mechanism
ceased to exit. What to do? There are two options:</span></span></div>
<div class="ListParagraphCxSpLetzter" style="text-align: justify; text-indent: -18pt;">
<span style="font-size: small;"><br /></span></div>
<ol>
<li><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Break
up the Euro and return to national currencies in today’s Eurozone</span></span><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;"> <br /> </span></span></li>
<li><span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Put
in place a transfer mechanisms from Eurozone’s surplus to deficit countries via
the public and/or private sector</span></span></li>
</ol>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">What are advantages
and disadvantages of option 1 for Germany?</span></span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">The only advantage of
Option 1 I can see is the lack of need for economic co-ordination among
Eurozone member states, which can often be painful. A veritable
pain-in-the-neck. I can see, however, many disadvantages both cyclical and
structural. </span></span></div>
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<span style="font-size: small;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">Let’s start with the
cyclical: Germany would undergo a recession - then again, who cares? Many young well
educated citizens from EZ’s periphery would head back home - one of the best
performing asset classes in Germany over the past 5-6 years has been real
estate. A fall in real estate prices would be unavoidable. There is no asset
class where the average investor is as leveraged as real estate. What would
that mean for the German financial system? Bail-ins or bail-outs - do we start
to care now?</span></span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">On the structural
side: how many decades would the resentment and lack of trust between Germany
and France last following France’s crash-out of the Euro? Could the EU survive
a break-up of the Euro? If not, what would the end of the EU's single market mean for the German economy? With 80 million inhabitants and a Eur 3.1tn GDP,
Germany is Europe’s heavyweight. It accounts for roughly 1% of the world’s population
and 4.5% of the global GDP - how much weight would stand-alone Germany have in
the world (the US accounts for 24% of global GDP, China 15%, the EU 23%, the EU ex-UK 19.5%)? How much influence would stand-alone Germany have in forming and shaping international treaties and world trade agreements? Could NATO be a credible
tightly knit military alliance with no underlying mutual trust among its core
European members?</span></span></div>
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<span style="font-size: small;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">By choosing option
(2) Germany would agree to transfer a large part of its current account
surpluses to the Eurozone periphery. In return it would continue to have the
full benefits of the existence of the Euro and a stable, sustainable and
prosperous European Union. Given that Germany’s giant current account surpluses
wouldn’t exist without the Euro, Germany would give up something it wouldn’t
have anyway in return for having something extremely valuable and tangible.
This is the closest you will ever get to a free lunch: get great value in
return for giving up de facto nothing.</span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: small;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">We can discuss if in
the end Germany will push for an Eurozone-wide public sector based transfer
mechanism between surplus and deficit countries (Eurobonds and an Eurozone finance ministry). Or a private
sector based one, i.e., create incentives at the Eurozone level to incentivise
massive amounts of foreign direct investment (FDI) in the periphery financed
with German private sector surpluses – the periphery widens its export base and
German investors obtain attractive returns for their savings (my favourite
option). Or if Germany simply starts to spend more via a mix of public
investments with a positive impact on the economy’s supply side (infrastructure,
education…) and larger pay rises, which would increase German imports. Or if
Germany will push for a combination of all these (the most likely option).</span></span></div>
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<span style="font-size: small;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">But saying that
Germany, in the end, will let the Euro break up is saying that the country’s
top-decision makers are economic and political illiterate. And absolutely
stupid. Or that they are not intelligent enough to convey the message of the
Euro’s and European Union’s importance and extremely high benefits for the
country to German voters. Meaning: they are really stupid. Or that the vast
majority of the German public wouldn’t understand the message. Meaning: the
Germans overall are really stupid. Or that the German political system would not
comply with article 23 of the country’s constitution. Meaning: German top
decision-makers are not only stupid – they cannot even read. And on top of it,
Germany’s political and judicial institutions are a fraud.</span></span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;"><span style="font-family: "arial" , "helvetica" , sans-serif;">No, no, boys and
girls. No, no, hard-core Brexiteers. I know that it is unpopular to say it these days, and I’m sorry to
disappoint you, but the Euro will not collapse. In Germany’s wisdom and quality
institutional framework you should trust. Even if you don't like it. </span></span></div>
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<span style="font-size: small;"><br /></span></div>
RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-49481786566302512512016-12-07T23:19:00.001+00:002017-02-22T16:25:10.802+00:00Monte dei Paschi di Siena - parliamo deutschiano?Matteo Renzi was defeated in Sunday's Italian constitutional referendum and quickly resigned as Italian prime-minister. The Italian banking sector, led by Monte dei Paschi di Sienna (MPS), became more than ever front and center of investors' and press' speculations.<br />
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One day, MPS will collapse, trigger a new Eurozone banking & financial crisis and the break-up of the Euro. The next day, it will be bailed-out by the Italian government and its shares (and bonds) are a screaming buy. This is all an excellent reflection of markets' and financial press' "action bias": be busy all the time even if it achieves nothing.</div>
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What about looking at the numbers and regulatory framework first and express opinions later, guys? Not very popular in the post-fact world in which we are now living? Let's be unpopular then:</div>
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1. According to the EU's Bank Recovery and Resolution Directive (BRRD), that entered fully into force in January 2016, national governments cannot recapitalise a bank before a bail-in of an amount equal to at least 8% of the bank's total liabilities including bank's own funds (capital) has taken place. Meaning: we're basically talking about 8% of total assets. In the case of MPS, that means a bail-in of an amount of approx. EUR 12.8bn;</div>
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2. MPS' total equity is approx. EUR 9bn; junior bonds face value amounts to approx. EUR 5bn, of which approx. EUR 3bn is held by retail investors. Bailing-in retail investors is politically untenable. The challenge then is to treat all junior bondholders equally while avoiding bailing in retail investors. And the elegant solution would be to define a bail-in free face value amount of EUR 100k per bondholder - everyone would be treated equally while MPS 40k retail junior bondholders were de-facto excluded from the bail-in. This would leave EUR 2bn of junior bonds to be bailed in. Not enough. MPS needs at least EUR 5bn of additional equity. On top of it, bailing in all shareholders and junior bondholders only amounts to EUR 11bn, almost EUR 2bn short of what is needed for a state participation in the recap efforts. What to do?</div>
<div>
<br /></div>
<div>
3. The straightforward answer would be to bail in senior bondholders as well. But it's probably not a good idea many will argue: MPS senior bonds are currently trading at close to 100% of face value. Senior bondholders are not expecting to bear any losses in the MPS recap process. If a bail-in of senior bondholders did occur scared investors would drop senior bonds of other Italian (and non-italian) banks, leading to massive contagion and a collapse of the Italian financial sector. Whatever one thinks of this line of argument, the good news is that a bail-in of senior bondholders is not a pre-condition for the Italian government to participate in the recapitalisation of MPS. The reason is <a href="https://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-rulebook/-/interactive-single-rulebook/toc/2602" target="_blank">article 32 (4.d) of the BRRD</a>.</div>
<div>
<br /></div>
<div>
According to this article "extraordinary public financial support" is allowed "in order to remedy a serious disturbance in the economy of a member state and preserve financial stability". It is the so-called precautionary recapitalisation and considered a case of state aid. In case of state aid a bail-in is still required before the Italian government can participate in MPS' recap. But the degree of burden sharing is lower: only shareholders and junior bondholders are required to participate in it (<a href="http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013XC0730(01)&from=EN" target="_blank">see points 15, 40 and 41 of European Commission's Banking Communication from August 2013</a>).</div>
<div>
<br /></div>
<div>
Will the Italian government invoke BRRD's article 32 (4.d)? You bet it will.</div>
<div>
<br /></div>
<div>
What are the implications? On the one hand, MPS will survive. An Italian fully fledged banking crisis will be avoided. The Euro will not break up. On the other hand, MPS shareholders will be wiped out.</div>
<div>
<br /></div>
<div>
Investors buying MPS banking shares expecting a giant Christmas present from the EU/Italian authorities should think again. And MPS senior bonds currently trading at close to par, and yielding 3% to 5%, are not a prime example of an investment with a spectacularly positive asymmetric risk-return profile.</div>
<div>
<br /></div>
<div>
To reach all these conclusions you only need to understand what makes the EU great: a combination of German rule-based institutions with embedded Italian flexibility. Learn deutschiano and you will be just fine.</div>
RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-28564176942976721092016-10-31T21:50:00.004+00:002016-10-31T21:57:29.592+00:00Hillary, Donald and Investment ManagementBased on current betting odds and Nate Silver's fivethirtyeight polls analysis (<a href="http://fivethirtyeight.com/features/election-update-comey-or-not-trump-continues-to-narrow-gap-with-clinton/" target="_blank">link here</a>), the probability of Trump winning the US Presidential election is only around 25%. With such favourable odds, the easy conclusion would be: let's go long on US (and global) equities and secure the 1-week 3-5% celebration rally that will tend to follow Hillary Clinton's victory.<br />
<div>
<br /></div>
<div>
But it would be too easy. And bad decision making.</div>
<div>
<br /></div>
<div>
Investing is not really about the probability of success vs. failure. It is not even about expected values and expected returns. It is all about assessing the consequences of failure. Binary outcomes and risk-return asymmetry.</div>
<div>
<br /></div>
<div>
In this case, we have a binary outcome: 0 - Hillary Clinton wins; 1 - Donald Trump wins. If Hillary wins the US equity market's upside is arguably 3-5% over a 1-week period; if Donald wins the downside is possibly 10-15% over the same period. Do you really want to be exposed to a binary outcome were you can win 3-5% if things go your way at the risk of losing 10-15% if they go against you? This is an highly unfavourable asymmetrical risk-return profile. The negative consequences of failure way outweighing the positive consequences of success. Thus, the sensible answer can only be no.</div>
<div>
<br /></div>
<div>
The more academic types among us could always argue that if the potential upside is 5% and the downside is 10% (after all you can exit before the losses reach 15%), with the currently implied 75% probability of Hillary winning the election, the expected 1-week return of building a long exposure to US equities the day before the results are announced is 1.25%. All nice and dandy. However, we should never forget that a 75% ex-ante probability of success can easily become a 100% ex-post probability of failure; a 1.25% ex-ante expected return become a 10% ex-post loss. And that in the age of "the rage against the establishment", the polls' - and implied probabilities - accuracy is not what it used to be.</div>
<div>
<br /></div>
<div>
Wouldn't actually a short position in US equities have a much more attractive risk-return profile ahead of the election than a long one? Yes, it would. Then again, if Trump wins there is enough time to make money with equities. </div>
<div>
<br /></div>
<div>
Don't be too greedy. Think binary. Think negative asymmetrical risk-return profile. And stay away from the US (and global) equity markets ahead of the US election day.</div>
<div>
<br /></div>
RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-60856566187634889762016-09-12T10:11:00.002+01:002016-09-12T10:30:20.569+01:00Richard Koo, please mind the gap: the Eurozone is not Japan<!--[if gte mso 9]><xml>
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</xml><![endif]--><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">Richard Koo is well known for his balance sheet recession analytical
framework (here a link for one of his most recent and detailed presentations:<a href="https://www.youtube.com/watch?v=8YTyJzmiHGk" target="_blank"> Richard Koo at May 2016's Acatis
Conference in Frankfurt</a>).</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"><br />
His analysis points to the fact that once a debt fuelled asset bubble bursts,
leaving the private sector in a highly indebted and over-leveraged position
(with many individuals and corporates in negative equity territory), monetary
policy becomes ineffective. Following the implementation of a highly
expansionary monetary policy, private households and corporates will take
advantage of very low interest rates to repay down their debt burden faster.
Not to consume more. Not even to maintain their consumption at pre-asset
bubble burst's level<span style="font-family: "times" , "times new roman" , serif;">s</span>. The private sector unavoidably retrenches.</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"><br />
In such an environment, the only way to avoid an economic depression is to
combine an expansionary monetary policy with an expansionary fiscal policy: the
government has to step in, run large deficits and increase public spending.
This is what the Japanese government has been doing following the burst of the
country's real estate and stock market bubbles in 1989. Once the private sector
has completed its deleveraging process, and monetary policy becomes effective
again, the government can then revert to a normal fiscal policy and the central
bank normalise monetary policy.</span></span>
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"><br /> </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">So far, so good. Richard Koo's analysis is insightful and his recommended
expansionary fiscal policy sensible. For Japan.</span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">But does it really make sense to apply the expansionary fiscal policy
strategy to the Eurozone over the coming years as he proposes? At first sight,
it does. After all, the Eurozone, on aggregate, suffers from the "Japanese
disease": an over-leveraged, over-extended private sector in parts of the
periphery that needs to de-leverage; national governments that need to step in
and spend more to offset the private sector's retrenchment. However, once you
look at things into more detail the picture changes. And you realise that
Richard Koo's Eurozone analysis overlooks a few things. Namely:</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"> </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">1. And this is fundamentally true for any balance sheet recession scenario (Japan included)
- if you have a private sector balance sheet whose left side is suddenly
smaller than the liabilities on the right side (as a result of the burst of a
debt fuelled asset bubble), you have two ways to correct the problem of
negative equity. One is by inflating the left side via an ultra-expansionary
monetary policy while slowly reducing the liabilities on the right side - this
is part of Richard Koo's proposed strategy. But contrary to what Richard Koo
argues it is not the only feasible strategy available. There is another option:
to radically and swiftly shrink the liabilities on the right side via debt
restructuring and haircuts. This will lead to massive impairments in the
banking sector and arguably the financial sector cannot be let implode. But
that doesn't imply bail-outs and debt transfers from private investors to the
taxpayer. All what is needed are bail-ins. Bank shareholders and debt-holders,
who freely decided to invest in bank shares and bonds, bear the pain as would
investors in any other private firm in a similar situation. There will be
massive turmoil in financial markets while this process is ongoing but once it
is finished financial markets' will recover quickly. And with private debt
restructured and a swift de-leveraging process having occurred, monetary policy
will be effective again. No need for ZIRP, no need for QE. No potentially
dangerous financial, economic and political distortions as a result of an
ultra-expansionary, unconventional and highly experimental monetary policy. Ok,
I know, the Eurozone has descended way into unconventional monetary policy
territory by now. But just making the point that there are alternatives to the
path followed by ECB & Co. <span style="font-family: "times" , "times new roman" , serif;">A</span>nd endorsed by Richard Koo.</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"> </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">2. Japan
is a fiscal union with a current account surplus. The latter means that it is
not dependent from external financing - Japan's private sector savings are
directly or indirectly (via pension funds or private bank purchases) financing
the country's large public deficits. The Eurozone is a multi-sovereign state
entity. Not a fiscal union. The EU's peripheral countries, which according to
Richard Koo should implement an expansionary fiscal policy, have just about
reached a balanced current account after many decades running current account
deficits. An expansionary fiscal policy would unavoidably generate current
account deficits again. Meaning: widening fiscal deficits in the periphery
would have to be financed by international investors. How many would be ready
to do it? And for how long? With fiscal and current account deficits ballooning
again, a sovereign credit rating downgrade to non-investment grade and a
sudden-stop in international financing would likely occur sooner rather than
later. An expansionary fiscal policy strategy in the periphery is not really a
sustainable option;</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"> </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">3. The Eurozone is structurally an economic unbalanced entity, with the core
running historically current account surpluses and large parts of the periphery
current account deficits. The adjustment process that the peripheral countries
pursued over the past seven years to balance their current accounts was an
uneven one: only 1/3 of the current account adjustment is explained by an
increase in the countries' exports; 2/3 is due to a fall in imports - the
reflection of economies operating way under full capacity and with high levels
of unemployment. Having large parts of the periphery mired in a state of
semi-economic depression is not a sustainable option either - the Eurozone
would fall apart. So, what to do? The peripheral countries (think Spain, Portugal,
Greece)
need to return to high economic growth. But it has to be an export-led growth.
Not one led by increased public spending. On the other hand, the Eurozone's
core countries are awash in savings and in need of attractive investment
opportunities to deploy them (think German pension funds). This makes it easy
to create a win-win situation for both sides.</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"> </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">How? Simple: the peripheral countries need to attract massive amounts of
foreign direct investment (FDI) to significantly expand their export base,
create jobs and generate sustainable growth; these FDI projects </span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">in
turn </span></span>can be financed by the surplus countries's savings - international companies
can issue Euro denominated bonds to finance their investment projects in the
Eurozone periphery, which can be bought by the savers from the Eurozone's core
(yes, the German pension funds). Surely a more compelling investment
opportunity than US subprime real estate and overvalued Spanish real estate in
the past or Eurozone government bonds today.</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"> </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">What needs to be done for a FDI-led growth strategy to pan out in the
Eurozone periphery? To attract massive amounts of FDI (i) the peripheral
countries have to continue to implement structural reforms to become an
attractive location for international firms; (ii) the European Union needs to
support them by creating incentive mechanisms for international firms to locate
some of their operations in the countries (e.g. by classifying these countries
as "special EU investment zones", which would offer, among others,
exceptional tax advantages to investors for a 10-year period); (iii) on top of
it, the European Union needs to finance a yield top-up on Euro bonds issued by
international firms to finance their investment projects in the periphery. Thus
creating an appealing investment proposition to channel the savings from the
core to the periphery via financing of FDI projects.</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"> </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">After seven years of an economic structural adjustment process in the
periphery carried out with varying degrees of conviction across the different
countries, it is time for the European Union to start thinking about incentive
mechanisms to support massive amounts of FDI to flow to the Eurozone periphery
financed by the core's high savings. Thus creating a win-win situation for both
sides. This has to be the EU authorities' top economic priority. Not an
expansionary fiscal policy in the region. Remember: short-term fixes cannot,
and will not, solve long lasting structural problems. Only buy time to fix
them. </span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;"><br />
Boys and girls, dear Eurozone leaders: it's fixing time.</span></span><br />
<span style="font-size: small;"><span style="font-family: "times" , "times new roman" , serif;">
</span></span><br />
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<![endif]-->RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-34535319116282327132016-06-06T01:27:00.002+01:002016-06-06T01:27:54.166+01:00The German economic trinity is easy to agree with<div class="MsoNormal" style="text-align: justify;">
“It’s impossible to agree with a German economist. They
don’t get it.” How often did we hear this kind of statement over the past five
years?<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Implied is that Germans are so much detail obsessed that
they miss the big picture. To be fair, Germans are indeed obsessed with detail.
They are the engineering nation, aren’t they?<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Then again, they are also a nation of philosophers, who
almost by definition are big picture thinkers. And when it comes to economics, philosophers
are indeed what German are. Big picture thinkers in search of sound economic
principles (not surprisingly, in Germany econometrics is normally not a
mandatory subject in an economics degree programme and the overall level of
mandatory math courses is quite shallow).<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The German economic model itself is the result of a big
picture approach to problem solving. It goes like this: reality is far too
complex and unpredictable to be mathematically modelled with great detail. So,
let’s focus on what we know and put in place some principles that if followed
will guarantee the achievement of sustainable economic prosperity. The result
is the German economic principles trinity.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;">Principle one:</b> a
fully independent central bank whose only mandate is price stability<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Why? Because…..<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
….the only way to increase a country’s economic living
standards sustainably over time is by increasing productivity. The way to
increase productivity is by continuously investing in education, training on
the job, innovation and technology (increase a country’s human and physical
capital). How can we force companies to continuously re-invest part of their
profits in training, innovation, technology instead of paying out bigger
dividends to shareholders? By putting them continuously under competitive
pressure. How do we do that? By having a stable currency. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
If we devalue whenever there is a loss of competitiveness
relative to foreign competitors, local companies won’t make a great effort in
investing in training, innovation and technology. Why should they? When in
trouble, they know that a currency devaluation will bail them out and restore
their competitiveness. However, if a regular currency devaluation is not an
option – and on top of it currency devaluations do happen regularly in
countries where some of their competitors are based – they know that the only chance
they have to remain competitive is by continuously investing in their human
capital and technology.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
How can we make sure, that politicians do not resort to
regular currency devaluations? Simple: by ringfencing monetary policy from
their interference (politicians are not allowed to access the “printing press”).
This is achieved by creating a fully independent central bank, whose only
mandate is to keep price stability and thus a stable currency. In addition,
such a fully independent central bank will over time make the “promise” of a
stable currency credible by committing to it. This credibility will lead to
lower interest rates (with no risk of recurrent devaluations, international
investors will ask for an ever lower interest rate risk premium to lend money
to local issuers – government and corporates). Lower interest rates will reduce
the cost of financing for the local government and companies. Making in turn
massive investments in human and physical capital more feasible. Thus,
companies have the pressure to continuously invest in human capital &
technology and the financial means to do so.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
In short, principle number one intents to set in motion a
virtuous sequence of events: fully independent central bank whose only mandate
is to keep price stability ---> stable currency---> put companies under
permanent high competitive pressure----> forcing them to permanent high investment
in human capital, innovation and technology ---> increase in productivity
----> sustainable increase in citizens’ living standards<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;">Principle two:</b> a balanced
current account (or a current account surplus)<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
How do we know if the country is staying internationally
competitive? By monitoring the current account balance. If the current account
is balanced or in surplus nothing needs to be done. Everything is under
control. If the current account swings consistently into deficit, something is
not working. Structural reforms are needed to improve the countries
competitiveness (think about Schroeder’s Agenda 2010)<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;">Principle three:</b>
solid & solvent public accounts at all time<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
No matter how well the economy is run, there will always be
recessions, unexpected disruptive events, negative external shocks that
adversely impact the economy. In such situations, decisive government intervention
is needed to stabilise it. In order for the government to be able to act
forcefully, and run large public deficits in times of economic crisis, it has
to have available fiscal space at inception of a crisis. It has to be solvent
and public debt low when the crisis hits. Putting it differently, to run large
deficits when the going gets tough, the government has to run a reasonably
balanced budget in good times.<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Finally, principles two and three combined also mean that the
economic authorities don’t have to worry much about private debt levels. If the
current account is at least balanced and the government is running a small deficit
(in good times) it follows that the private sector (families and corporates) is
running a surplus. So, either it is not accumulating debt or the debt is backed
by assets denominated in the same currency as the debt - which makes dealing
with situation of overleverage, and its impact on the financial system, much
easier.<o:p></o:p></div>
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If you look at the Eurozone crisis from the perspective of
the German economic trinity principle, you quickly understand why Germans
insist so much on structural reforms in the peripheral countries. Since the
second world war, Spain, Portugal and Greece have run current account deficits
the vast majority of the time – making them dependent on external financing. Such
external imbalances will eventually trigger a “sudden stop” in international
financing and a financial crisis. They way out of this structural weakness is
to expand the countries’ export base. This in turn can only be realistically
achieved by attracting massive amounts of foreign direct investment. How to do
it? By doing structural reforms that make the countries’ attractive to foreign direct
investors (the Siemens, the Sanofis, the Googles, the deutsche Mittelstand
& Co of the world).<o:p></o:p></div>
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<br /></div>
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So the question is: should we waste our energy and intellect
in building ever more complex and elegant mathematical models instead of focusing
on what we know about economics and keep things simple? The German answer is “Nein”.
That’s surely not something so difficult to agree with, is it?<o:p></o:p></div>
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RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-23830332976803172692016-04-24T23:06:00.001+01:002016-11-17T13:22:19.660+00:00Value Investing in a nutshellAs an entrenched value investor, I'm often asked to explain quickly and in simple terms what value investing is all about. And I'm always afraid of failing spectacularly in the task.<br />
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<br /></div>
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The difficulty doesn't lie however in the investing philosophy's extraordinary complexity. The opposite is the case: the value investing's principles are truly so simple and powerful that I'm always afraid to introduce complexity where there is none.</div>
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So, what is value investing? It is investing in companies that comply with the combination of 3 plus 5 principles:</div>
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Three qualitative principles:</div>
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1. Simple, understandable business models</div>
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2. Businesses with an intrinsic durable competitive advantage ("moat")</div>
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3. Talented management team, with high ethical standards, whose interests are aligned with those of the shareholders</div>
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Five quantitative principles:</div>
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a. Follow the cash: sustainably cash-flow generative businesses</div>
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b. Businesses whose return on capital employed is sustainably above the cost of capital (reflects the existence of a moat). For the overwhelming majority of investors this would be enough as an indicator of the existence of a moat. But it is not. If a business benefits from a moat, you should expect it not only to successfully defend its market share but actually to increase it over time. Meaning: you should expect to see a (10-year) track-record of continuos sales and (cash) earnings growth. If you are facing a business whose return on capital is above its cost of capital but whose sales and (cash) earnings are on a downward trend, it may rather signal a declining business. Whith no moat. And where a return on capital still above the cost of capital is a legacy feature that will tend to disappear over time (think Nokia or Blackberry two years after their sales started to decline)</div>
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c. Bridge to the future: sound capital structure (low debt levels) and liquidity position</div>
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d. No accounting shenanigans (reflects management team with high ethical standards)</div>
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e. Margin of safety: the company is trading at a discount of at least 30% to its conservatively estimated fair value</div>
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You may find my explanation too long and wordy. In that case, worry not:<br />
<br />
<a href="https://www.youtube.com/watch?v=3XlBrohrIUc" target="_blank">Charlie Munger is alive, well, and kicking. In YouTube.</a></div>
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<a href="https://www.youtube.com/watch?v=ZqSFZSq3keI" target="_blank">And so is Bill Gates talking about Warren Buffett</a>.</div>
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After listening to Charlie Munger you will understand why Leonardo da Vinci once said that "simplicity is the ultimate sophistication".</div>
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RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-46514515642063761692016-03-21T11:10:00.002+00:002016-03-22T00:00:40.309+00:00Helicopter money: great minds think alike. And they don't change<div style="color: #222222; font-family: arial, sans-serif; font-size: 13px;">
Would the FED and the ECB allow financial markets, and especially equity markets, to suffer a massive fall? Or would they, if deemed necessary to avoid such an outcome, extend QE and start to buy equities at some point? Could they resort to helicopter money and e.g. deposit, on a non-refundable basis, ten thousand euros / US dollars on each Eurozone / US citizen's bank account (possibly conditional to the money being used to pay down debt)?</div>
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<div style="color: #222222; font-family: arial, sans-serif; font-size: 13px;">
Normally, to gain a deep understanding of reality - how the economic system works and things are likely to play out - you have to quantify it. Occasionally, however, you can gain the required understanding by analysing the top decision-makers' intellectual framework, background and the incentives guiding them. Let's do the latter to answer the questions above.</div>
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Who were/are the main top decision-makers in the post-2008 financial crisis world? Where do they come from? What's their intellectual background? The main decision-makers were/are: Ben Bernanke, Mario Draghi, Mervyn King, Olivier Blanchard, Larry Summers. The "PR department & fan club" cheering publicly their actions was/is led by Paul Krugman, Joe Stiglitz, Jeffrey Sachs.</div>
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All of them did their PhD studies in the same city and University in the 1970s. With the exception of Joe Stiglitz and Mervyn King. Stiglitz is a bit older than the others and finished his PhD at the end of the 1960s. In the same city and University. So, not an exception after all. Mervyn King studied in Cambridge, UK. And came later to the city and University for a 2-year tenure as visiting professor. During his time there he shared an office with the then assistant professor.....Ben Bernanke - so, not an exception after all either. Mario Draghi, by the way, was the first Italian to obtain a PhD from the University in question.</div>
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The University's economics faculty had 4 intellectual giants: Samuelson & Solow, who shared one office, and Dornbusch & Stanley Fischer, who shared another office. Samuelson is Larry Summers uncle. </div>
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The University is the MIT (note: Larry Summers, who did is BA at MIT, and Jeffrey Sachs were PhD students at Harvard. But the MIT had an open door policy allowing Harvard PhD student to attend lectures. Summers and Sachs did just that. And Dornbusch's lectures with many of the students-turned-policy-makers-<wbr></wbr>and-or-international-VIPs are legendary)</div>
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Cutting a long story short, if you know what the 1970s MIT's view of the world - and how to deal with financial crisis - is, you will understand the boys-turned-central bankers approach to the financial crisis to date and what they are likely to do in the future. This begs the question: what was 1970s MIT's analytical approach to problem solving and resulting view of the world? Answer: MIT's analytical style was based on developing simple and concrete mathematical models directed at answering important and relevant questions. I fully identify with this style - you don't analyse and try to find solutions for a complex reality by building models that are even more complex than the reality you are trying to analyse. You keep the models simple by identifying what are the key variables impacting the dynamics of the problem at stake and modelling accordingly (even because if you have a model with 20 variables most of them will be correlated and therefore redundant). </div>
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However, once you get into this simple-model-analytical-framework mindset you risk being captured by it and think that for every economic problem there is a simple and straightforward solution at hand to solve it. As policy maker you will then tend to become too interventionist in areas you shouldn't and don't let the system correct its excesses. This is what happened in the post-2008 financial crisis world. Instead of focusing on the right side of the balance sheets and incentivising painful debt restructuring measures, balance sheet repair and debt-to-equity swaps in an over-leveraged economic system (starting with the banking sector), policy makers focused on the left side of the balance sheets and in reflating asset prices. Misallocation of resources is the result and we all will have to bear the consequences of it at some point down the road.</div>
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Are policy makers likely to change their crisis resolution approach, start to focus on the balance sheets' right side and on supply side / structural reforms (which arguably include public investment in human capital and infrastructure)? Very unlikely. People don't change - especially when it comes to their over many decades developed intellectual framework. The top decision-makers would have to be replaced for a radical change in economic and central bank policy to take place.</div>
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One could now argues that a major replacement already took place: Ben Bernanke is not the FED's Chairmain anymore. But that's irrelevant. Janet Yellen is intellectually very close to Ben Bernanke. And the current number 2 at the Fed, appointed de facto by Yellen, is....Stanley Fischer. Yellen, by the way, is married to George Akerlof - Nobel Prize winner and PhD from.....the MIT.</div>
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Do I need to say more?</div>
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RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-65656801009169690312016-03-02T16:29:00.001+00:002016-03-03T12:40:49.176+00:00Cubism Economics: 3-year blogging highlightsCubism Economics was born in March 2013.<br />
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The purpose was threefold:<br />
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1. Create a legacy for my children (and control instrument for my wife. And friends): how did papa think as he was a grown-up Londoner teenager? Did he change? I intend to remain a grown-up teenager for many, many years. But this way they can control my evolution more easily by looking at how my writing style changes over time. And warn me, before it's too late, if I start failing in my intentions and becoming a spectacularly boring grown-up<br />
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2. Monitor how my thinking evolves over time. And answer the question: how often am I wrong and why? So that I can learn from my mistakes and improve my analytical skills and decision-making process<br />
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3. Engage in a regular broad framing exercise: look at the big picture, quantify it, and put forward my ideas in a punchy, crispy, provocative manner. With the aim to obtain the broadest possible feedback and diversity of opinions from the outside world. Not to confirm my initial views but to challenge and falsify them. Thus improving my understanding of the world, the quality of my decisions and helping me to avoid making mistakes in the first place. Yes, Karl Popper is my hero. And any professional investor's most cherished philosopher<br />
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So here we are. Three years later. More than time to say to the outside world: many, many thanks for following and challenging me. And be assured that although some good posts were published over the last 36 months, the best ones are still to come. Promise!<br />
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Below is a selection of the most popular "masterpieces" published so far. Enjoy!<br />
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- <a href="http://cubismeconomics.blogspot.com/2014/12/greece-what-now.html" target="_blank">Greece's debt position and fundamentals are much better than you think</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2013/04/eurozone-debt-restructuring-is-name-of_14.html" target="_blank">An Eurozone periphery debt restructuring is unavoidable (eventually via successive maturity extensions and lowering of interest rates)</a><br />
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- Attracting massive amounts of FDI is the ultimate goal of structural reforms in the periphery. And the solution for Eurozone's economic imbalances<br />
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<a href="http://cubismeconomics.blogspot.com/2013/05/sprechen-sie-deutsch-martin-wolf-does.html" target="_blank">Link 1</a><br />
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and<br />
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<a href="http://cubismeconomics.blogspot.com/2013/05/fdi-is-it-really-that-difficult.html" target="_blank">Link 2</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2013/06/the-cyclical-view-of-structural-reforms.html" target="_blank">Paul Krugman has an obsession with short-term thinking. And for him it's always zee Germans fault even when they are the ones undergoing a crisis. Oh dear...</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2013/11/what-are-you-smoking-macro-economists.html" target="_blank">...which could be partially explained by academic macro-economists love for flows. And lack of understanding of balance sheets</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2014/05/european-union-2-in-1-nobel-prize.html" target="_blank">The European Union doesn't deserve one Nobel Prize. It deserves two</a><br />
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- <a href="http://cubismeconomics.blogspot.de/2014/08/europe-and-china-economics-is-not-zero.html" target="_blank">Europe and China. Economics is not a dismal zero-sum game. Seriously!</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2014/11/climate-change-its-not-about-believing.html" target="_blank">Climate Change is not above believing. It's about risk management</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2015/01/qe-equities-will-follow-super-mario.html" target="_blank">Mario Draghi is a resourceful man. Accept his Christmas 2014 present and stop complaining</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2015/06/grexit-and-risks-of-financial-contagion.html" target="_blank">Yanis Varoufakis strategy was flawed from inception because he didn't run the numbers</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2015/07/greece-response-to-martin-wolf.html" target="_blank">The Troika has been much more supportive of Greece than people think. Starting with Martim Wolf</a><br />
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- <a href="http://cubismeconomics.blogspot.com/2015/08/china-remake-of-2008s-global-financial.html" target="_blank">China won't be a remake of 2008's western financial crisis. At least not in the next three years</a><br />
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- <a href="http://cubismeconomics.blogspot.de/2016/01/equities-2016-us-profit-recession-is.html" target="_blank">Equities: a 2016 US profit recession is mostly priced in</a><br />
<br />RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-33895570682554955252016-01-28T00:46:00.004+00:002016-02-03T15:18:39.035+00:00Equities: a 2016 US (profit) recession is mostly priced in. It's happy days for value investors<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">The S&P500 ended 2015 with a 1% loss. And the largest performance dispersion since 1999 when the Internet bubble was about to peak: the top 10 performing S&P500 stocks (led by FANGs - Facebook, Amazon, Netflix, Google) gained around 23%, the other 490 index constituents lost, on average, 3.5%.</span><br />
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">From its July 2015 peak to its (so far) 20th of January bottom, the S&P500 lost nearly 13%. If you exclude last year's 10 top performers, the loss amounts to 26%.</span></span></span><br />
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="font-family: "times" , "times new roman" , serif;"><br /></span>
</span><span style="font-family: inherit;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">Since WWII, the S&P500 tends to fall, from peak to trough, by 1x-1.5x the underlying constituents percentage profit fall during a recession. This means that excluding the last year's 10 top performers, the S&P500 (let's call it the "S&P490") is currently pricing in a 17% to 26% profit recession for 2016 (note: a similar conclusion would be reached if we used the Russell 2000 index).</span></span></span><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><br /></span></span></span></span></span><br />
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</span><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">How does this compare to previous recessions? The following chart provides the answer:</span></span></span><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOjibOqIDIpMsUdlpfDN0gRiigg1Lmp1uljEI8Ybj3opv5Iew3r6SmZRSMuaZrvcWU6KsxJQMo5VxZeC5GHb0heD5h3-Y4WsoBk_KYJIaMb54wAvpwfTmKZhR2fPi3U_gjmhhvTEo1qurA/s1600/Pr%25C3%25A4sentation1.jpg" imageanchor="1" style="font-family: times, 'times new roman', serif; margin-left: 1em; margin-right: 1em; text-align: center;"><span style="font-family: "times" , "times new roman" , serif;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOjibOqIDIpMsUdlpfDN0gRiigg1Lmp1uljEI8Ybj3opv5Iew3r6SmZRSMuaZrvcWU6KsxJQMo5VxZeC5GHb0heD5h3-Y4WsoBk_KYJIaMb54wAvpwfTmKZhR2fPi3U_gjmhhvTEo1qurA/s640/Pr%25C3%25A4sentation1.jpg" width="640" /></span></a></span><br />
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">With the exception of 2009's financial crisis there has been no case since WWII where US corporate profits declined by more than 25% during a recession. And in the vast majority of cases the decline was limited to less than 20%. So, even if a US recession were to take place in 2016 it is highly unlikely that the "S&P490" would fall by more than 5%-10% from its current level.</span></div>
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<span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">Similar conclusion can be reached by looking at Shiller's cyclical-adjusted PE (CAPE) for the S&P500:</span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXchXyW0MiIV7DXL8NfHblPJT4TagCAOBjKM65ObmA0yIcyQVFiqIpxAXJ02oGRdcXDyJxtPtEEjS_p-kX4YxTGMO3r1ekBaRWVNiHSVXwJ9J384Bp-OYUcMju9QmeBovQMQpfwR0FmowB/s1600/S%2526P+500+CAPE.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "times" , "times new roman" , serif;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXchXyW0MiIV7DXL8NfHblPJT4TagCAOBjKM65ObmA0yIcyQVFiqIpxAXJ02oGRdcXDyJxtPtEEjS_p-kX4YxTGMO3r1ekBaRWVNiHSVXwJ9J384Bp-OYUcMju9QmeBovQMQpfwR0FmowB/s640/S%2526P+500+CAPE.jpg" width="640" /></span></a></div>
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="font-family: "times" , "times new roman" , serif;">It's current level is 24. </span><span style="font-family: "times" , "times new roman" , serif;">The "S&P490" CAPE however is only 18 and a 10% correction would put it comfortably below the post-WWII average CAPE of 18.6.</span></span><br />
<span style="font-family: Verdana, sans-serif;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><br /></span></span>
</span><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="font-family: "times" , "times new roman" , serif;">Cutting a long story short: the</span><span style="font-family: "times" , "times new roman" , serif;"> </span><span style="font-family: "times" , "times new roman" , serif;">10 top performers in 2015 are distorting the valuation picture of the S&P500. Following the heavy correction since the July 2015 peak, finding US stock bargains is not an almost impossible task anymore (and the same applies to European equity markets). Quite the contrary. For value investors happy days lie ahead.</span></span></span></span></span></span><br />
<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="font-family: inherit;"><span style="font-family: inherit;"><span style="font-family: inherit;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: "verdana" , sans-serif;"><br /></span></span></span></span></span></span></span></span></span></span></span></span>
<span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: inherit;"><br /></span></span></span></span><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="font-family: inherit;">PS A China economic collapse and / or major devaluation of the renminbi would change my optimistic view for US and European equities. However, my view on China didn't change. A severe crisis may happen. But not in the next 2-3 years. Here is why. Again (no</span>te: the capital account seems to be more open / leaky than I thought but nothing that good old capital controls can't solve, if necessary): <a href="http://cubismeconomics.blogspot.de/2015/08/china-remake-of-2008s-global-financial.html" target="_blank">China: a remake of 2008's financial crisis?</a></span></span></span></span><span style="font-family: "times" , "times new roman" , serif;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></span></span></span><br />
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<span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-family: "times" , "times new roman" , serif;"><br /></span></span>RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-7259212380584192582015-12-02T13:46:00.001+00:002016-01-17T00:21:14.238+00:00Spain: Uber-Iglesias and with Ciudadanos PodemosWe are less than three weeks away from the Spanish general election, which will take place on the 20th of December.<br />
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Polls abound. Candidates for Prime-Minister make proposals on a daily basis. Analysts debate passionately the possible election outcomes and government coalitions. And in the process the most important tends to be overlooked: the big transformation of Spanish politics already happened.<br />
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The driving force behind it has one name: Pablo Iglesias, the formidable leader of Podemos (a left-wing party. Note: "Podemos" means "We can"). In less than 24 months, almost single handedly, he disrupted the entire Spanish political establishment. As a result of what at some point looked liked an unstoppable rise in popularity, Pablo Iglesias / Podemos achieved the impossible trinity:<br />
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1. they forced the renewal of the leadership teams of Spain's main political parties. With the exception of Partido Popular (which is in government) the leaders of all main political parties are now 35 to 45 years of age. And the same applies to the vast majority of the top decision makers in their teams.<br />
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These individuals rose to power 15 years ahead of "their time". In Spain, the 35-45 year old generation is much more international, better educated and prepared than the preceding ones. It is also the first since the 1930s civil war able to have a reasonable fact-based discussion about politics, society and economics, leaving the "fachas" vs. "rojos" childish, cartoon-like arguments on the sidelines. Coming to power 15 years earlier than expected is a blessing for Spain's political, economic and social development.<br />
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2. they (and new parties that erupted on the wake of Pablo Iglesias' "anti-establishment revolution") won the support of many discontent voters in Catalonia who would have otherwise voted for pro-independence parties. This gives the new Spanish government to come out of the December election a 2-3 year window of opportunity to reform the country's constitution and accommodate Catalonia in a politically reformed Spain. Catalonia's secession, which looked unstoppable 2 years ago, can now be avoided. Avoiding the related political and economic turmoil is good news. Taking into account that one of Spain's main strengths is the dynamic resulting from the healthy rivalry between its main regions (and this doesn't apply only to football's Barça-Madrid) keeping Catalonia as part of a politically reformed Spain is very good news. For everyone involved.<br />
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3. they generated a new wave of interest and enthusiasm for politics among Spaniards, especially the young, and gave ordinary citizens new hope for a better future. Dreams, even when potentially unrealistic at inception, are essential to create a dynamic of positive change. And interest, hope and enthusiasm is all what is needed for new, innovative social and political movements to be born. Projects able to offer effective solutions for the problems Spain is facing.<br />
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Podemos only shortcoming is its economic illiteracy. It is a major shortcoming.<br />
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However, the disruption of the Spanish political establishment, and the new wave of political enthusiasm, triggered by Pablo Iglesias / Podemos created the space for new political movements to flourish. According to all polls, one of them became in the meantime a top 4 political party: Ciudadanos, the centrist party led by Catalan born Albert Rivera. It has an excellent economic and institutional reform programme (https://www.ciudadanos-cs.org/programa-electoral). More importantly, it is almost certain that it will be part of a future Spanish government coalition as no party will have an absolute majority. And if only half of its proposals are implemented by the new government Spain will be a benchmark for quality institutions and economic policy in 5 years time.<br />
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Whatever the outcome of the 20th of December election, one thing is clear: a country that is able to create political leaders of Pablo Iglesias' spectacular dimension and political movements capable of designing economic and reform programmes of the quality of that of Ciudadanos has a very bright future ahead. And should be proud of its very lively civil society.<br />
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<br />RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com1tag:blogger.com,1999:blog-3267250897910380623.post-56649057686199739022015-09-28T17:05:00.001+01:002015-09-28T17:05:38.605+01:00Independent Catalonia: the Spanish flag and Barça's greatnessPlebiscitary regional elections were held yesterday, 27th of September, in Catalonia. The coalition "Junts pel Sí" won (note: "Junts pel Si" comprises parties across the whole political spectrum solely united by their desire of Catalonian independence). And combined with the left-wing CUP party, also pro-independence (and anti-system), they have a majority of seats in the regional parliament. However, the combined votes of the pro-independence parties fell short of a majority of popular votes (48%). Where does this leave us? In a grey zone. What will happen next is not clear. Except that negotiations between the Spanish government and the new Catalan regional government will have to take place at some point to accommodate Catalonia's growing discontentment with the current status quo. Possibly something along the lines of a new-Spanish-constitution-creating-a-federal-state-followed-by-a-referendum-in-Catalonia-to-decide-on-be-part-of-a-federal-Spain-vs.-independence?<br />
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Whatever the next steps in the Catalan saga will be, it is time to ask the question: why do so many in Catalonia want to be part of an independent country? There are basically three reasons:<br />
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1. The "independence dividend". The pro-independence movement calculates that Catalonia pays EUR 16bn (c. 8% of Catalonian's GDP) more in taxes to the central government than it receives in benefits. We could discuss at length the appropriateness of the methodology used for the calculation (e.g. monetary flows vs. tax contribution-benefit method). However, we don't need to go that far to see what is at stake (for those who want to go into detail: <a href="https://math.temple.edu/~gimenez/NAD/Las%20trampas%20de%20la%20balanza%20fiscal%20de%20Catalu%C3%B1a.pdf" target="_blank">CAT fiscal transfers</a>).<br />
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The pro-independence movement assumes in its calculations that the Spanish government would have to continue to pay the pensions of Catalans, who paid their national insurance contributions into the Spanish social security system over the years, following independence. While 100% of the Catalan citizens' national insurance contributions post-independence would flow to the new Catalan government. The argument is that there is a "pension contract" between each individual taxpayer and the Spanish government that the latter has to honour. It is an apparently sound and compelling argument. And then it is not. It is disingenuous and wrong.<br />
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Spain's pension system (like basically all others in Europe) operates on a pay-as-you-go basis. Not on a funded basis. This means that pensions paid to current pensioners are financed from contributions paid by current workers. <u>It is an inter-generational contract supervised by the state</u>. The older generations pay healthcare and education for the younger ones while they are growing up, and once the latter enter the workforce they start paying the pensions of the former who retire.<br />
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In such a system, if the pensioners move to a new country after retirement (Germans, Swedes who decide to move to Spain after retirement or Spaniards who worked in Germany or Sweden and after retirement decide to move to Spain) the inter-generational contract remains intact. The pensioners will have reached an age where they will not make any additional (roughly speaking) contributions into the social security system anyway. No matter where they decide to spend their lives. And the younger generations remain in the country that pays the pensions. Working, paying their social contributions and keeping the pay-as-you-go system running.<br />
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Things change if a significant part of the entire population, young and old, working age citizens and pensioners, decide that the region where they live should become and independent country. In that case both the younger and older generations "move" to a new country. The younger generations of the "new" country will have to pay the pensions of the "new" country. Even because the shrunken number of young people in the "old" country, from which the "new" split off, will not be able to pay the pensions of both "old' and "new" country pensioners (the inter-generational contract would effectively be broken). So, t<u>he inter-generational contract remains in place but supervised by the newly created independent state and binding young and old generations of the "new" country</u>. <br />
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Once you take this into account, the numbers change dramatically. Pensions paid in Catalonia amount to Eur 19bn per year. With the "new" independent Catalonia state having to pay for them the "independence dividend" turns into an annual "independence burden" of Eur 3bn.<br />
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The "independence dividend" is not the reason to become independent.<br />
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2. The construction of a new model state - the Sweden of Southern Europe<br />
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Spain has weak political end economic institutions. The judiciary is not fully independent. Neither is the press. Corruption abounds. Being part of Spain holds Catalonia, a more dynamic and entrepreneurial society, back. So the pro-independence argument goes.<br />
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Right.<br />
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Have there been notably less (proportionally to population size) corruption cases in Catalonia than in the rest of Spain in the last 10 years? 20 years? Is the Catalonian press less captured by corporate and political interests limiting its freedom of reporting and opinion? Are smaller countries, by design, less corrupt than larger ones? Is the former long-serving (23 years) president of the regional government (Jordi Puyol) not under investigation for money laundry and corruption? Has any president of the Spanish government (current or former) been under investigation for similar crimes? Do the political parties that comprise the coalition "Junts pel Sí" and the CUP party share a common political and economic agenda for the post-independence period?<br />
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The answers to all these questions are the opposite of what would be consistent with the "construction of Southern Europe's Sweden" pro-independence argument.<br />
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This leaves us with one last and powerful pro-independence argument:<br />
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3. Emotions, national identity<br />
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A large part of Catalans may feel that they are significantly different from the rest of Spaniards in the way they think, behave, approach life. That having their own language is a sign of a well defined and separate identity. These are all very respectable reasons to want to be independent. But then it should be made clear, and people be fully aware of it, that these are the reasons to want to be independent. Not something else.<br />
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This should also help to clarify what an independent Catalonia would likely to be politically, economically and socially in 20 years time (after a more or less long, more or less painful transition period). Looking at Spain's and Catalonia's history, at Spain's and Catalonia's path of development over the past 40 years of democracy and 30 years of EU membership, the conclusion seems reasonably straightforward: an independent Catalonia would tend to be more or less the same thing as a Catalonia part of Spain.<br />
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A prosperous country, just as the rest of Spain. More prosperous than today, just as the rest of Spain. With a 25%-30% higher GDP per capita than that of the rest of Spain, just as today. With stronger political and economic institutions, just as the rest of Spain. With a more independent judicial system, just as the rest of Spain. With a more independent press, just as the rest of Spain. Part of the Eurozone, just as the rest of Spain. With an ageing "native" population, higher retirement age and more immigrants, just as the rest of Spain. With a more innovative economy, just as the rest of Spain. A place with a high quality of live, just as the rest of Spain.<br />
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And with two important differences: there would be no Spanish flags hanging on official buildings. And FC Barcelona would have become an irrelevant club in European and world football.<br />
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Catalans should ask themselves the question which of the two differences does the more good to their emotions and sense of national identity. By answering it, they will know if they want to have an independent Catalonia. Or not.RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-2435811558676445142015-09-10T17:00:00.001+01:002015-09-14T00:11:12.382+01:00Greece's 3rd bail-out: make or break?Greece's third bail-out programme was given green light in August. All went according to plan. So far.<br />
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The relevant question now is: after the failures of the previous two, what are the risks of failure facing this one? There are four main risks:<br />
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1. The banking sector's comprehensive restructuring and recapitalisation doesn't take place<br />
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Greek banks need to write-off bad debts and be recapitalised to provide financing to the private sector. Without it no sustainable private sector driven economic recovery can start.<br />
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The third bail-out package includes Eur 25bn to recap the Greek banking sector. This accounts for around 6.5% of the Greek's banking system total assets. It should be more than enough to recapitalise the Greek banks properly.<br />
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Existing shareholders in some banks (all but National Bank of Greece?) will most likely be wiped out - sorry guys, the EU's Bank Recovery and Resolution Directive (BRRD) will only enter fully into force in January 2016 but given Banco Espirito Santo's bail-in precedent in August 2014, January 2016 is too close for the EU authorities to let shareholders off the hook. Bondholders (both junior and senior) will be (partially) bailed-in. But all will be ok.<br />
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The Greek banking sector not being comprehensively dealt with and recapitalised is not a risk.<br />
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2. Primary surpluses demanded by the Quartet (European Commission, ECB, ESM and IMF) are detrimental for growth<br />
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Too aggressive fiscal targets imposed on Greece by the Quartet could be too restrictive for public spending. Social unrest would pick up new momentum. Implementing the structural reforms agreed as part of the third bail-out package become an impossible task. The programme would fail. Again.<br />
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These are the final primary surplus targets agreed between Greece and the Quartet: -0.25% of GDP for 2015 (a primary deficit) vs. 1% (surplus) that was agreed earlier in the summer; 0.5% in 2016 vs. 2% agreed earlier in the summer; 1.75% in 2017 vs. 3% earlier; 3.5% in 2018 vs.....3.5% earlier.<br />
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And there will be surely some willingness to accommodate a deviation from the agreed 2015 primary surplus target to take into account any unexpected adverse effects on GDP growth following the bank closures and imposition of capital controls in July. As long as the Greek government implements the agreed structural reforms for 2015.<br />
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There is hardly anything too aggressive and demanding here. So, no significant risks on this topic either.<br />
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3. Public debt restructuring will not take place<br />
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A silent and significant debt restructuring has been taken place since 2011 as I showed in detail some time ago (http://cubismeconomics.blogspot.co.uk/2014/12/greece-what-now.html). And more is to come via maturity extensions and lowering of interest rates as long as the new Greek government implements the agreed reforms. And as soon as the first review of the third bail-out programme is favourably concluded.<br />
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With an average maturity of 31 years the loans of the new bail-out programme are a clear signal of where the debt restructuring journey is going.<br />
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Absence of further debt restructuring is clearly not a risk.<br />
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4. Lack of political will to implement agreed reforms<br />
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Mr. Tsipras went as close to the edge of the Euro cliff as one could possibly go. Seeing the Grexit abyss he stepped back and agreed to a new comprehensive third bail-out package. If we wins the upcoming general elections (20 September), and forms a majority government, not implementing something that he agreed to is surely not a realistic scenario to contemplate. Even if of one argued that he only agreed reluctantly to some of the measures in the MoU, the electoral victory would give him the mandate to implement them.<br />
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What if the opposition (ND led government) wins the election? Not much changes. With the pro-Grexit parties likely to end up with only 15% to 20% of the votes, any Greek government will have a clear mandate to do whatever it takes to stay in the Euro. And after the dramatic quasi-Grexit events in July, that plain and simply means implementing the agreed reforms.<br />
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Greece being Greece, not all agreed reforms will be implemented. However, even if the implementation ratio is 50% (instead of the rather 10% in the past) that would be good enough.<br />
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Arguably Syriza winning now would be a superior outcome for mid to long-term policy continuity purposes. If after 3-4 years in government Syriza lost the general election in 2018-2019, a new ND-led government (potentially in coalition with Potami) would tend to continue along the roughly same economic path as defined by the third bail-out programme. No dramatic reversal of economic policies would take place allowing Greece to reap the full benefits of the difficult reforms implemented in the meantime. The same cannot be said with the same degree of confidence if Syriza loses this election and wins the next one. There is always the possibility that at that point in time even a more moderate Syriza tries to reinvent the wheel, once more, and reverses some of the reforms implemented in the meantime.<br />
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Then again, will it make any substantial difference for reform implementation over the next 18-24 months who wins the 20 of September election? Not really. The Quartet's first review on the progress of reform implementation will take place in November. Greece will pass. Further debt relief will then be conceded by the EU. And the ECB will be able to extend its QE programme to the purchase of Greek government bonds. With bond spreads narrowing, capital controls slowly being lifting, foreign investors returning to the country and the economy starting to recover, Greece could well be 2016's economic suprise of the year. And with a cyclical-adjusted PE of under 5x, Greece's equity market could do much better than most expect over the next 18 months.<br />
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No one ever said that Greece is a boring country. And rightly so: over the coming 18 months it is likely to continue to be a box full of surprises. This time good ones.<br />
<br />RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com2tag:blogger.com,1999:blog-3267250897910380623.post-41877538142242797862015-08-25T01:46:00.000+01:002015-08-25T01:50:55.435+01:00China: a remake of 2008's global financial crisis?I appreciate the arguments that there are pockets of excessive debt in the Chinese economy (local governments, real estate). And that a mis-allocation of capital (both private and public investments generating returns below the cost of capital) has been taken place in some sectors of the economy (public infrastructure, heavy industries).<br />
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However, I cannot see how all that can lead to a major economic and financial crisis in the country until the mis-allocation of capital translates into sustainable current account deficits. And makes China dependent on external financing.<br />
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My opinion on China's imminent economic implosion remains the same as in March 2014. Please read:<br />
<a href="http://cubismeconomics.blogspot.com/2014/03/china-dont-be-fooled-by-availability.html" target="_blank">Don't be fooled by the availability bias</a><br />
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<br />RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0tag:blogger.com,1999:blog-3267250897910380623.post-60822414104065233352015-07-13T22:11:00.000+01:002015-07-14T01:05:22.630+01:00A-Greek-ment: the day after<div style="line-height: 18px; padding: 0px;">
<span style="line-height: 18px;"><span style="font-family: Arial, Helvetica, sans-serif;">The medicine Greece has to take now is very unpleasant and aggressive. The way it is being administered by the Eurozone - even if they had objectively speaking all the reasons to do so - shockingly humiliating.</span></span></div>
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<span style="line-height: 18px;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">But let's not forget that it was Syriza who put Greece in its hopeless negotiation position. Greece was the fastest growing Eurozone economy in 2H2014. It was running a primary surplus. A current account surplus. The economy was turning the corner. And debt relief via maturity extensions & lowering of interest rates (plus refinancing of ECB held bonds and IMF loans) after June 2015 was implicitly on the table. </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">But Tsipras & Varoufakis were not on top of the numbers. Otherwise, they wouldn't have put debt relief at the top of their Eurozone agenda after all the debt relief that had already taken place since 2012 (</span><a href="http://cubismeconomics.blogspot.co.uk/2014/12/greece-what-now.html" rel="nofollow" style="-webkit-font-smoothing: antialiased; color: #2e6e9e; font-family: Arial, Helvetica, sans-serif; text-decoration: none;" target="_blank">http://cubismeconomics.blogspot.co.uk/2014/12/greece-what-now.html</a><span style="font-family: Arial, Helvetica, sans-serif;">). And the one that was implicitly agreed to take place after June 2015. The priority should have been to implement reforms, win the other Eurozone's countries trust, and then ask for additional, substantial, debt relief.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">The key assumption on which Syriza based their entire Eurozone strategy - a Grexit would lead to massive financial contagion and therefore force the Eurozone/Troika to make material concessions - was flawed. And, once again, they were not on top of the numbers. Otherwise, they could have falsified and rejected the assumption by running them (<a href="http://cubismeconomics.blogspot.co.uk/2015/06/grexit-and-risks-of-financial-contagion.html" rel="nofollow" style="-webkit-font-smoothing: antialiased; color: #2e6e9e; text-decoration: none;" target="_blank">http://cubismeconomics.blogspot.co.uk/2015/06/grexit-and-risks-of-financial-contagion.html</a>). Or, more philosophically, by simply asking themselves what was the worst that could happen if their assumptions proved wrong. And if there wasn't an alternative strategy that offered similar upside in case of success but much more limited downside in case of failure. </span><span style="font-family: Arial, Helvetica, sans-serif;">But they didn't. Now we have a sad story to tell.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">However, as sad as the story may be, let's not fool ourselves: the main responsibles for it are Tsipras / Varoufakis / Syriza and their very, very poor strategic decision-making. At the receiving end of the now needed additional austerity will be ordinary Greek citizens - the ones Syriza allegedly wanted so much to help and protect.</span>RShttp://www.blogger.com/profile/16819181920157733677noreply@blogger.com0