Schäuble loses confidence in Greek government (especially after the election)

Not only in the Netherlands (an opinion poll in newspaper De Telegraaf showed 92% did not support new bail outs for Greece) but also in Germany the support for helping Greece is dwindling.
Athens burned Sunday because of approving of new austerity by the current government under pressure of core Europe.
But the New Democrats, after the elections probably the biggest party (31% in the polls), told almost immediately after the vote that the results of Sunday had to be renegotiated by the new government after April.
Those elections will not produce a majority for the friends of European forced austerity. The labour party PASOK that has now a majority in parliament will get about 8% of the votes if they are lucky. Some parties already have indicated they don’t want to rule and they will become big because they oppose more austerity measures (and that is what a lot of people want).

The German minister of finance Schäuble no longer wants to kick the can down the road because Greece will turn in an uncontrollable political ruin after the elections. Now asking from the current government to support current measures after the elections is naive because the will have no votes or are persuaded by the force of the dark side to forgo more austerity.
So it will become very difficult for Greece to remain in the Euro zone because they can no longer force more austerity. The patience of Germany and the Greek people is exhausted.
Schäuble thinks the banks are now much better prepared than two years ago and can take the losses of a Greek default. Europe has bought enough time and this was (maybe for the banks) a success, including the help of the ECB the banking system outside Greece can survive well. Day X (of Greek default) has lost a lot of horror Roessler told at German TV.

Roubini and Barrons as contrary indicators

Nomura had the chart above about how well the timing of two very renowned pessimists Roubini and Rosenberg have been in the last years. They were excellent contrary indicators.
Bianco warned with the front cover of Barrons last year where Epstein (the writer of Dow 15,000) did forecast an oil price of $150. Unfortunately the oil price first had to go down to $80.

Fed contaminated by Valentine fever

Via blogs (Justin Wolfers and http://economix.blogs.nytimes.com/2012/02/10/fedvalentines) and twitter a kind of Valentine excitement has aroused: how can you practise the Valentine thought Fed-style.

The FED is for one day not dovish, but turtledovish.
The FED is clearly to try to pick up new admirers with the biggest punch bowl ever, for an extended period. Even while the see activity growing, there has to come much more stimulus.
The dual mandate to please as well as the inflation fearing as the unemployment avoiding a new technique will be implemented: the turtledove strategy to give everything the loved ones want to have (even while they still see exceptional low levels of activity in the coming years, what can be damaging for the Valentine thought).

The last months I thought often that the FED had a secret love affair with inflation and now it seems confirmed (even while it seems to be a sadomasochistic relation).

Examples how the Valentine fever has inspired several Fed banks and others (source blog Deus Ex Macchiato):
@justinwolfers: You’re my long-run target; my nominal anchor.
@SFFedReserve: I’m going to extraordinary measures to increase your stimulus
@AtlantaFed: I long for you as the economy longs for its long-run maximum potential
@PhiladelphiaFed: Her deviations are never standard, her probabilities never mean.
@PhiladelphiaFed: My initial projections never forecast someone like you would be in my next quarter.
@alanbeattie: I’d like to borrow you overnight and then hold you to maturity
@planetmoney: But, soft! What light through yonder discount window breaks? It is the East, and Ben is the sun.
@sffedreserve: My love is elastic, my commitment too big to fail

Summary financial economic news of the past week

There was not much economic news. In the US the initial claims for unemployment were much better than expected, mortgage applications rose, the consumer confidence dipped a bit after the big rises, consumer credit disappointed, the trade deficit was worse than expected (but according to the deteriorating trend). In the VS agreement was reached about help for mortgage holders that are under water (a drop on the plate of $ 700B of mortgages with negative equity at the current house prices.
In Europe the industrial production growth numbers disappointed in Germany and France, but new orders improved in Germany. In Italy the industrial production rose (and JP Morgan revised growth up for 2012 to only -1.7%).
In Japan the numbers were better than expected (leading indicators, trade deficit, consumer confidence, credit growth). But today’s -.06% GDP growth over Q4 disappointed.
In China the inflation rose from 4,1% to 4,5%, more than expected.

Romney lost surprisingly in three states from Santorum and is now saying he will be much more of a conservative in the future, he is born again as a conservative.

The problems for Greece accumulate, but the markets almost don’t care for the time being. It last long before agreements are made and this caused a bit higher ineterst rates in Southern Europe.
The equity markets showed small declines, because of worries about Greece and Chinese inflation. Also all those publications that Israel has to strike Iran this spring didn’t help either.
The underlying trends are still quite good: macro indicators are improving, much less recession fear in the US and the belief is growing that QE3 will arrive even while the economy is improving, as Bernanke told to the senate last week again.
The optimism can get dented because optimism is quite high (even Roubini is a bull) and some brokers are communicating mildly warning sounds about overoptimism for the growth in the US (high gasoline prices, Greece and inflation now central banks print money like never before.

Barrons (Siegel/Epstein): Dow 15,000

Gene Epstein had this week the honour to write the cover story of Barrons. As usual he had something bullish to tell: Enter the bull; Dow 15,000.


For this forecast he leans on Siegel (writer of Stocks for the Long Run). He has, as is so often the case vexed the numbers of the S&P500 since 1871. After cycles of five year with disappointing returns you normally get good returns. That is now the case. Epstein/Siegel see with 2/3 probability the Dow rising above 15,000 in the coming two years and with 50% probability above 17,000.

Siegel thinks that will be possible even when you get almost no profit growth. The big sorrows (the Euro crisis and the American fears for a recession) will gradually diminish. Siegel thinks 10-15% rise of the S&P as too pessimistic, he goes for 20%+.

These forecasts are not at all very optimistic (when the consensus is right at 15,000 the PE will only be 12.8), but lots of people will use the cover of the Barrons and say that you have to go short based on the contrarian cover theory (when something is at the front page of an important journal the trend is at its highest point and will go in the other direction; so now the Barrons is overoptimistic and that has to be punished by the markets).

Dow 15,000 is a quite modest target. We have had bestsellers with Dow 36,000 and 100,000 at the cover. Because since then the Dow has plummeted nowadays everybody is too much of a coward to impress with a Dow at e.g. 25,000 or 50,000 in 2018 even while that is possible. For 25,000 you don’t need much, only about the current profit margins, continuing implementation of innovations and nice growth in the Emerging Markets.

Fun on ice on the canals of Amsterdam: Breitner’s view

Breitner painted in 1895 on the steps of my house the landscape corner Keizersgracht/Reguliersgracht in Amsterdam. It is auctioned in 2007 from the legacy of Anton Philips (son of the founding father of Philips lamps) for € 760.250, a record for a painting of Breitner (it is also more than the value of my house).
As you can see I have a very expensive view at two canals.

From the same spot I have taken a picture of the fun on the ice in front of my door. It was the first time this century you could skate on the canals of Amsterdam. At the Prinsengracht it was way busier, but also in front of my house the koek-and-zopie (= cook and soup, the Dutch thick peas soup (snert)) stand made a little fortune.
So you get a Breughel/ Jan Steen – like tableau vivant in modern times. It is with with several cars, lots of bikes on the bridge and lots of people making pictures with their smartphones (and there were people skating of course). Still the picture is like what you can expect from Anton Pieck in Amsterdam.

Listen to the vegetarians: Indian equities are cheap

Last year you had an explosion of the onion prices in India and that was a real problem for the Indians that are vegetarians and use onions in every dish. This undermined the consumer confidence. For some strange reasons it looks like the price of Indian equities moves around the trend of the onion prices. This equities-to-onions price did signal well the moments when you had to buy and sell Indian equities. At the end of 2011 you got a buy signal. In 2008 equities were a lot more overvalued against onions, so the bear market of 2008 was bigger than the bear market of 2011.
Maybe it is disappointing that Indian equities (even while one of the best markets in the world in the past decade) did not do better than onion prices. Warren Buffett will disagree that it wil be as bad as gold, because you don’t get dividends.
All in all when onions are too cheap to use and people will cry more using onions, you should not be a contrarian investor: be a crier also.
Of course correlation is not causation, the story behind the onions is not very believable for non vegetarians, but still it was quite a nice indicator.

Buffett: bonds dangerous for your financial health, gold overvalued

It is time for the yearly happening of Warren Buffett speaking to the shareholders of Berkshire Hathaway. The Fortune had already a preview with several of Buffets wise words.

Like all investors that talk about investing in the long run he definitely thinks it is not good to invest in bonds (Bianco reacted on that: Buffett forgets that the buyers of bonds are not investors but forced buyers like the FED, the central banks of China and Japan. So bonds are not an investment but still can give good returns). Buffett thinks the yields have become too low because of manipulation of central banks and so you don’t get a fair compensation for inflation and inflation risks. Bonds should be sold with a warning just like cigarettes: it will damage your financial health.

Also gold was bashed by Buffett. All the gold in the world fits in a cube of 68 feet and has a value of about $ 10 trillion. For that money you can buy all the crop land in the US and 16 Exxons and you still will have $ 1 trillion left for doing nice things. That is all producing income what is not the case with gold [comment: the difference can be quite small because gold normally is not taxed and income is].
At the moment the gold mines make now every year $160 billion new gold and that is c. 1.5% new inventory have to be bought by new fearfuls. Take care when they diminish in numbers.
[My comment: that 1,5% is more than the growth of the world population and less than the growth of the middle class in the coming decade(s), so for the time being the demand for gold could be high enough, certainly when the Asian central banks want in earnest a decent percentage of their reserves be invested in gold].
Buffett says that the only buyers are now investors thinking the price will rise further, this means in a Minsky cycle that gold is in the bubble phase. According to Buffettt that can last for some more time, but then the gold price will decline (and a lot).

Buffett advices to buy equities, they are much safer for the long run than gold or bonds at zero % yield. As has been often the case in the past 50+ years Buffett could be right.


The chart of Data Stream shows the total return of an investment in equities (S&P500) versus gold and at the right hand the total return of government bonds (10 year US Treasuries) indexed at 100 in 1980.
You see huge runs up and down. Initially gold was the bad investment, but this century Gold lets equities and bonds bite in the dust. It deserved a prominent place in an investment portfolio. When the central banks continue to print money at a huge scale than the gold price has to go up further especially versus bonds.

Macro surprises positive in the US and Northern Europe, negative in Pacific and Southern Europe

The chart of ASR (Absolute Strategy Research) shows we are probably a bit too pessimistic about the growth in the Eurozone outside the war zone of the PIGS. The IFO in Germany told a completely different story than we hear every day, namely that it is crisis and that will be the case the rest of the year (at least). Also Scandinavia surprises positively (again) and in the UK the current affairs are not more depressing than initially thought. It is to hope that will also apply for France and the Netherlands. In the Netherlands the real estate market is too bad to let consumer confidence improve meaningfully while income growth is dreadful. It is too difficult to compensate this with better exports. In Germany things are rosier: the housing market is clearly recovering, the confidence is still high, the unions will get a nice rise of the wages and the lower euro will help exports. This is not yet visible in better growth of the industrial production and retail sales but you can hope on improvement coming. So it is not that strange that the DAX is doing so well in the last weeks.

In the US it looked like the surprise indices had topped, but unexpectedly they came back at the old tops. The surprises refuse to vanish, we seem to need more patience (a few months?) before economists have drowned their black poison with excessive QE abuse.

In the Pacific the surprises disappoint. That is amazing, because we hear every day that things are going so well and that growth will not be that vulnerable for low growth in the West because they are selling more and more toe ach other in Asia. The growth in china seems to disappoint a bit more than previously thought. We have had the warnings: declining house prices, overspeculation in Wenzhou but especially clearly lower demand from steel and electricity than thought. The growth of China can drop to 7.5%, also because infrastructure spending is slowing and investments in real estate ought to soften also.

Risk appetite can increase a lot further but when Roubini is starting to get optimistic…

Several sentiment indicators signal an overbought equity market, but there are a lot of exceptions. One of the most important is the risk appetite index of Jonathan Wilmot of Credit Suisse (see chart via http://www.businessinsider.com/a-beautiful-chart-showing-3-decades-worth-of-panic-and-euphoria-2012-2#ixzz1lmPiHI7j). Already for decades that produces a reasonable picture how depressive investors are or how much they are in euphoria. At the moment the CS risk appetite index indicates that a big further improvement seems to be in the cards (when you have enough patience).

Since this week even Roubini provokes investors to become bullish for the short run (but after June the doom and gloom will retrun with a vengeance is his warning) many contrairy thinkers have had a heart attack. When even Roubini is bullish who is left to become bullish (and you need to convert bears to get new money in the markets)? Answer: nobody, so you have to sell.

That reminds me at January 1984. The most important Dutch guru in that time was Jacques Post of then ABN (not yet merged by AMRO or destroyed by Fortis). He had made excellent forecasts about the interest rates, that they should go to levels much higher than seen in everybody’s lifetime at the first and second oil crisis. Equities were something from the past and no longer suitable in the time of the coming social ideal state of Labour. He was a super bear and at long last after a huge bull market since August 1982 he became bullish in January 1984. In that time I just had bought my first equity call options. At that moment I had a big profit on those positions and I was persuaded by Post to become even more bullish: he had after all very good arguments that the markets should rise further. Of course the market went down almost immediately, about 15% (the phase DE in the four year cycle). In the end my calls became worthless. I had become a wiser man in investing, but I could also have been a few months of salary richer.

Equity market capitalisation by country

The US occupies a proud, uncontested first place in the table from Bespoke of equity market capitalisations. Because of the strong relative performance in 2011 the weight of the US even has risen. Still, the weight is much lower than at the end of the nineties or before 1980 when the weight was substantially more than 50%. The fall of the weight of the US is nothing compared to Japan after 1990, when it had a weight of c. 40%.
Also the UK had long ago a market cap of more than 40%. Until 1730 also the Netherlands had a high weight, but that is never well calculated (but it must have been the case in the time the VOC was the only quoted company in the world). Now the Netherlands (without Shell) has a nimble weight of only 0.5%.
Eye- catching is also that the weight of China (only B-shares) has diminished in 2011, while there were many IPO’s. Together with Hong Kong China occupies the second place.
Because of the excellent performance in the last decade of materials and energy and RIM Canada has risen a lot and given its market capitalisation it deserves a place in the G7 of developed countries.

Middle East still a powder keg: when will Israel attack!

The cartoon of KAL in The Economist explains how the situation in Syria is getting out of control. Lattakia (a small area at the coast in the northwest where Assad and his vassals come from) is shouting with joy that Russia is so nice for them, they are allowed to suppress the rest of the country, even while Russia is suggesting that a tad less of blood shedding should be better. A civil war seems to have started.

Meanwhile Israel is thinking how they can devastate the three nuclear sites of Iran. That they will start a military operation is almost unavoidable, so reports the Wall Street Journal (article: How should Israel bomb Iran). The defence of Iran is weak, of third world quality and so it must be possible for Israel to do quite some harm in Iran. VA conquest of Iran is way too difficult (even for the US), but a military operation is seen as a real opportunity. That should happen in the spring. Israel should accept that lots of the 200,000 missiles pointed at Israel will be fired and do their (also human) damage. Israel seems to be convinced they will not exist much longer after Iran has the bomb. The US has told Israel not to attack, but is setting the light at orange. The interpretation of Israel is that they have to attack soon before the US sets the light at deep red.

Iran is threatening to close the street of Hormuz, but they know that will cost them dealy in the actions the US will deliver to open the street again, even atom bombs are not completely out of the question. For Iran maybe it is worth the trouble when they can disturb the US elections, but then they have to act only in September/October. This doesn’t look like rational behaviour for Iran, you know you will suffer a lot from the US military toys. However, Woody Brock warns this could be seen as a game of trembling hands. In game theory this normally doesn’t end well: when a party think it will be attacked on false arguments things canneasily go out of hand. This seems to apply well on Iran nowadays.

Gold price growing with balance sheet of FED and ECB

The chart of Strategas shows that there is a reasonable correlation between the endless expanding of the balance sheets of the central banks and the gold price. Overliquidity ought to lead to higher gold prices. The connection between currency reserves in the world and the gold price is even stronger and longer (before 2006 the gold price didn’t move in tandem with the balance sheets of central banks).

Credit risk of government bonds diminishing; Emerging Markets better than France!

The table of Bespoke shows that in 2012 the insurance premium for almost all government bonds except Portugal is in a free fall.
The CDS premiums are still unbelievably high when you put them in historical context. 163 bp for France or 84 for Germany, that is quite a lot (where is the time that 10 bp was already considered as a rich premium?).
The world has changed, Latin America (Brazil, Mexico, Peru, Colombia and especially Chili) are now seen as more creditworthy than the most countries of the Eurozone and the same applies to Indonesia and the Philippines. Emerging Markets that only just have received the investment grade rating or even are considered as not investment grade when they don’t borrow in their own currency have now lower CDS premiums than France or Belgium (that has seen the biggest % fall of CDS premium in 2012).
The rating of the Developing Markets is still way too low compared to the underdeveloping countries in e.g. Europe.
Who should have thought in the Tequila crisis that debts of Mexico in 2012 would be judged safer than those of France?