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Archive for the ‘Eurozone’ Category

Beyond the stock market correction

The current stock market correction is likely to be over quite soon, the fund manager Neil Woodford suggested yesterday, and I suspect that he is right for now. His view, sensible as always, is that the main reason for the market’s fall is that investors have taken fright at the evidence of slower than hoped for global economic growth, particularly in Japan and Europe, plus a number of other contingent factors. The market correction, the sharpest for over two years, is long overdue, given increasing investor complacency in the face of Federal Reserve and other central bank manipulation of market prices. Read the rest of this entry »

Written by Jonathan Davis

October 17, 2014 at 10:28 AM

Cyprus and beyond: more thoughts

As usual it will take a day or two for the markets to decide which of their initial reactions to the Cyprus bailout – relief that a deal has been struck, or concern at the implications of the terms imposed by the troika – will prove dominant. Some things do seem clear from what we have learnt already:

  • This was the most acrimonious bailout negotiation yet, with little love lost between the Cypriot negotiators and the troika representatives on the other. Talks came close to breakdown on several occasions over the course of the past week. Apparently tipped off in advance that the Russians would not come riding to the rescue, the troika played hardball – and eventually won, although not before the Cypriot President had threatened to resign and/or take Cyprus out of the euro – a desperate course of action which the influential Archbishop of Cyprus, for one, has openly advocated.
  • Although the deal will avoid the outcome of Cyprus leaving the euro for now, that still remains a possibility. The bailout creates a number of important precedents, raising the possibility that bondholders and depositors in troubled banks elsewhere in the Eurozone could be forced to pick up the tab if their bank needs to be rescued in future. The Dutch finance minister who now heads the Eurogroup said as much yesterday, and subsequent attempts to smooth over his remarks – which were remarkably explicit – have been less than convincing.

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Written by Jonathan Davis

March 26, 2013 at 2:01 PM

Cyprus: new fault lines in the Eurozone

What to make of the Cyprus rescue deal announced this morning? Is it necessary? Absolutely: the Cypriot banking system is insolvent, and has been ever since the Greek rescue deal last year, if not before. Is it fair? Probably not. Knowing how weak the Cypriots’ bargaining position was, the troika (EU, ECB and IMF) has played hardball with one of the EU’s smallest member countries, which makes it certain that for every irate mobster or money launderer who loses a chunk of their capital, there will also be many hard luck cases.

The deal administers rough and ready treatment to bank depositors in the country’s two largest banks, while preserving – belatedly, and at the second attempt – the general principle that depositors with less than $100,000 euros are still protected from loss by state guarantee. (Important to note that while the EU has enshrined this principle as a political objective, the guarantees are only as good as the individual state that provides them. Cross-border deposit insurance, under which the EU would collectively guarantee bank deposits in all member states, is necessary if the banking union which the EU is trying to edge towards is ever to become a reality, but it remains so electorally toxic that it won’t be introduced any time soon). Read the rest of this entry »

Written by Jonathan Davis

March 25, 2013 at 4:12 PM

Fools rush in while wise men take their time?

The New Year has started well, with plenty of evidence that professional investors are continuing to rediscover their appetite for risk assets, with the price of equities, corporate bonds and high yield debt all heading higher. The charts for leading equity indices, including the S&P 500 and the FTSE All-Share, have been trending higher ever since Mario Draghi, the head of the European Central Bank, announced last summer his intention to “do whatever it takes” to prevent the eurozone from falling apart. He has every reason to be pleased with the response to his intervention, which to date has been effectively cost-free. Would it were always so easy! European stock markets, having been priced for disaster before, have led the way up as fears of the euro’s fragmentation recede. Volatility, as measured by the VIX, has meanwhile fallen to multi-year low levels. Read the rest of this entry »

The eurozone’s fundamental problem

For those with an interest in the interminable eurozone saga, this syndicated interview with the French president Francois Hollande is well worth reading. It sets out clearly the main current differences in approach between M. Hollande and Mrs Merkel as they set off for the latest European summit, which starts today.  As always the meeting will attempt to paper over the cracks between these two very different ideas of how greater political and fiscal union in Europe should be achieved. There is still a long way to go before a really durable solution that can guarantee the euro’s survival is reached (if indeed that proves to be possible).

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Written by Jonathan Davis

October 18, 2012 at 11:26 AM

The risk of a short circuit in markets

Richard Burns, until recently the senior partner at Baillie Gifford, is now chairman of a range of the firm’s investment trusts, including Mid Wynd International, a special situations fund that holds positions in interesting companies that are too small to make a difference to its flagship funds. This is his most recent take on the investment environment, taken from the trust’s annual report. With the Eurozone crisis continuing to cast a shadow over events, and equity markets not obviously cheap, cautious and pragmatic investors (a type much in evidence in Edinburgh) are mostly marking time for now.

Repeated central bank stimuli have managed to contain, for now, what would otherwise have been a combination of Western debt deflation and deep recession. These interventions buy time, but not an indefinite amount. Policy making in the afflicted parts of the Western world appears to be running up against the laws of diminishing returns. Underlying sovereign balance sheets are deteriorating further meantime. What has happened is akin to stripping insulation from the bare economic wire – governments and central banks are that insulation. As time goes on, and in the absence of a more potent recovery, the risk of short-circuit increases.

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Written by Jonathan Davis

August 30, 2012 at 9:04 AM

Ruffer: the right question to ask

The estimable and splendidly ideosyncratic private client fund manager Jonathan Ruffer, whom I profiled a couple of years ago in The Spectator, has some thoughtful points on the prospects for Europe in his most recent monthly investment review. Here is a short extract, in which he points to the underlying frailty of the European project, about whose future he is not optimistic:

The Treaty of Rome in 1957 was a great moment for the peacemakers, but now its architects are dead, as are pretty much all those who felt the visceral despair in the darkness of the late 1940s. That hope has been replaced with a sort of Communism: power divorced from economics. Just as Russia could not keep control when the figures didn’t add up, nor can Europe. It is only a question of time. So, when does it all end? I think it is a mistake to try and guess. Observers of 1980s Russia fell into two categories: those who thought things would continue as they were forever, and those who could see the pressure, the inconsistencies, and imagined that the crisis would strike a week on Thursday. Nevertheless, it is striking on my return to find how far the status quo has shifted in Europe since March. It’s the same tune, to be sure, but the violins have been replaced by cellos.

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Written by Jonathan Davis

August 20, 2012 at 4:39 PM

An invidious choice

I find it hard to disagree with these comments from Sebastian Lyon, the CEO of Troy Asset Management, writing in the annual report of Personal Assets, the investment trust to which he and his colleagues now act as Investment Adviser, following the death of Ian Rushbrook four years ago.

The secular bear market in UK and US equities is now in its thirteenth year. How much longer must we wait until we can again be fully invested (or even geared!) and reap the double-digit returns we long for? Ask the policy makers! Stocks would be considerably lower were central banks not keeping stock prices artificially high by means of zero interest rates and quantitative easing. Despite these interferences, stock markets have gone sideways during the past year. Savers have not been rewarded for taking risk and hence our cautious strategy has paid off, for now, although we are likely to lag short term rises in the market should further monetary interventions be forthcoming.

Politicians in Europe are confronted with the invidious choice between severe austerity, which is likely to lead to periodic recessions and declining tax revenues, or incautious borrowing in the hope of buying growth. Both approaches will eventually force governments to pay higher rates of interest on debts. The maths do not stack up. No wonder governments are looking to extricate themselves from an intractable problem by leaning on central bankers to pull their inflationary strings. But our greatest concern is that the European challenges that have dogged markets since early 2010 are merely the dress rehearsal for the main event – a US fiscal crisis. While the UK and Europe have at least tried to tame their budget deficits, the United States has pushed ever harder on the fiscal accelerator. Stock markets swooned last August when they got a shock preview of what might happen should the brakes be applied. Following the public disagreement in Washington over increasing the public debt ceiling, the Dow Jones Industrials Index fell 13% in seven trading days. Read the rest of this entry »

Written by Jonathan Davis

August 16, 2012 at 7:56 PM

La commedia e finita?

Don Coxe, the Canadian investment strategist, whose monthly publication Basic Points is required reading for anyone who follows financial markets, has a wonderfully mordant turn of phrase which from time to time he uses to devestating effect in illuminating current issues. This is Don on the Eurozone crisis, as seen from four thousand miles across the pond:

We remain of the view that no new promises, no new money creation, no new bailouts, and no new debts will resolve the basic problem – that only a few eurozone members have soundly functioning, globally competitive economies. That these nations should continue to subsidise their dysfunctional co-believers in Europeanism would be OK if it were not inflicting such damage on so many millions of unemployed young people, let alone the global capital markets and the global economy. During the last two years, the rest of the world has watched with growing impatience as leaders strutted and fretted their hour upon the stage and then, in many cases, were heard no more, becuase their own voters, in an overdue spasm of good sense, rejected them. There is an Orwellian aspect to the emerging nomenclature of the emerging institutions in this process of illusions and disilusions. The latest bailout banking entity is called The European Stability Mechanism, which is eurospeak for a lender that allows deadbeats to get even more hopelessly indebted in the name of stability”.

According to the most recent estimate I have seen, Europe’s leaders have so far “invested” something like three trillion euros, in loans, bailout funds, transfer payments etc, to try and keep the Eurozone going in its current 17-member format – and the results to date have been dismal. Now, with the region slipping into recession, and Spain hovering on the brink of joining Greece, Portugal, Ireland and Cyprus in requiring a sovereign bailout to avoid bankruptcy, they are gearing up to throw even more money at the problem. Don’s view is that “the euroelites should have declared La commedia e finita and rung down the curtain two trillion euros or so ago”. Future historians, I fear, will have little option but to pass a similar verdict.

Written by Jonathan Davis

August 9, 2012 at 9:23 AM

Posted in Don Coxe, Eurozone

The Eurozone revisited

The latest Eurozone summit, the19th or 20th, depending how you count, has so far been well received by the financial markets. As always, however, this is not quite what it appears. The biggest mistake you can make is to impute approval or disapproval of recent developments to instant market reactions. You always need to take into account the context.

In this case the context was that few observers expected anything postiive to emerge from the summit and therefore the limited progress that was made can be classified as some sort of success, if only when compared to those low original expectations. The truth is that nothing much has changed, despite the optimistic noises coming out of various interested European parties.

Mrs Merkel made some apparent concessions at the summit, but they do not amount to much, when examined in the cold light of day. She is confident that she had not conceded much, and while subject to a range of domestic political pressures, there is no sign that Germany is ready to give in on the substantive measures that would be needed to give the Eurozone a chance of survival in its present form.

And that of course is to make the heroic assumption that even if Germany did agree to mutualisation of sovereign debt across Europe, and the fiscal and banking integration that would be needed to make that enforceable, it still might not solve the problems of banking weakness and lack of competitiveness that are the underlying causes of the current crisis. There is no magic wand to put those things right and it will take years for the necessary reforms to be shown to work in Italy, Spain and Greece.

Written by Jonathan Davis

July 5, 2012 at 8:03 PM

Posted in Debt Crisis, Eurozone

Looking beyond Greece

We don’t know whether the Eurozone agreement on Greece will hold – let alone for how long. My guess is not for long. In any case, for investors this long-awaited deal looks like a classic case of buy on the story, sell on the news. Financial markets have run up so strongly in anticipation of such an outcome that equities now look massively overbought, implying that the short-term reaction is more likely to be negative than positive. Longer term it is still impoosible to know for certain how this great drama reaches its endgame.

My view remains, as it has done for some time, that the best outcome now, as Bill Emmott was saying in The Times yesterday, is for a managed default (and probable exit) by Greece at some point in the course of this year, as it becomes apparent that the country cannot meet the demands which have now been placed on it. I suspect that this is the outcome which the Germans have been after for quite a while now, without of course being able to say so in so many words. It is also in the best interests of the Greeks themselves over time.

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Written by Jonathan Davis

February 21, 2012 at 9:45 AM

New Year hopes

My suspicions back in the autumn that a market rally was on the way have, I am happy to say, been borne our by events. Not for the first time, the peak of rhetorical despair – this time about the dire outlook for the world economy should the Eurozone crisis not be resolved – has turned out to be the moment to turn bullish. The rally since the failure of the Cannes summit has been impressive.

The MSCI world index is up by more than 20 per cent since its October low and has risen for seven straight weeks in a row, something that has not happened since the spring of 2009, according to the equity strategists at Societe Generale. Equity markets have made an even stronger start in 2012, with January producing one of its best monthly returns for many years. Contrarian sentiment indicators, such as the venerable Investors Intelligence survey of investment advisors in the United States, once again proved invaluable in identifying a turning point back in the autumn.

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Talking markets: Jim Rogers

Global investor Jim Rogers thinks that the world is heading for an economic depression unless political leaders finally grasp the nettle of the debt burden they have accumulated over the past decade. He is not optimistic about the outcome. Bankrupt countries such as Greece need to default – and soooner rather than later. The longer they leave it, the worse the eventual outcome will be. Hear more of this – and how Jim is seeking to protect his own wealth in these difficult times – in my latest podcast, a 30-minute interview with one of the smartest investors I know. It is available to download from the Independent Investor website now. An edited transcript will be available in the New Year.

Written by Jonathan Davis

January 3, 2012 at 5:56 PM

Mark Mobius on the Eurozone crisis

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How does Mark Mobius see the outlook for investors in the light of the ongoing crisis in the Eurozone? You can find out by listening in to my latest podcast interview, which can now be downloaded from the Independent Investor website (link). Dr Mobius, who next year celebrates 25 years running the Templeton emerging markets funds business, with $40 billion of assets under management, discusses the threats and opportunities which the crisis has created.  This is the first of a series of podcast interviews with leading professional investors and advisers. Other to be interviewed in the series include the global investor Jim Rogers, author and economist John Kay and Guy Monson, the Chief Investment Officer of the Swiss private bank Sarasin.

Written by Jonathan Davis

December 11, 2011 at 6:58 PM

Forecasts be damned

If someone told you that the end of the world was coming tomorrow, and the day passed without incident, would you be inclined to believe the same person the next time they came out with a piece of radical advice? I doubt it.  Yet one of the wonders of markets and economics is how quickly even sensible investors will switch their assumptions about the future without missing a beat.

The latest example of this bizarre phenomenon was evident in the Chancellor’s Autumn Statement. The independent Office for Budget Responsibility, run by Robert Chote, a formidably bright former economist colleague of mine on The Independent, has drastically reduced its forecasts of future economic growth. They are radically different from the forecasts the same body presented just a few months ago. Yet by some magical process they are already being treated as gospel truth. Read the rest of this entry »

Written by Jonathan Davis

December 3, 2011 at 11:30 AM

Good news, bad news for equities

Why have I mentioned more than once the possibility of a strong stock market rally coming soon? There are several factors at work here. The normal end of year experience of markets finishing strongly is one of them. The oversold technical position in many markets, allied to very low trading volumes, negative headlines in the media and deeply bearish sentiment, is another. More fundamental though is the possibility – which I now rate quite high – that Germany will in due course sanction some kind of ECB involvement in the Eurozone crisis that will provide a trigger for all the investors currently sitting nervously on their hands to rush back into the market. It may not yet happen – the politics of the Eurozone remain fragile and complex, and nothing is certain – but if it does the effect in the short term could be very powerful.

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Written by Jonathan Davis

November 24, 2011 at 3:15 PM

The Eurozone crisis: not insoluble

The Eurozone crisis is a political mess that can only be solved by a political solution, which you don’t need a degree in politics to see is not proving easy, given the variety of interested parties involved – 17 eurozone member countries, 10 other EU member states and the governments of every other major economy on the planet also feeling the need to have their say. Much to the chargrin of some Eurozone leaders, voters too have to be consulted.

Given how many warnings there have been of the risk of a depression and financial meltdown if the Eurozone is not saved, the wonder is that financial markets have not been more affected than they have been by the failure so far to arrive at an agreed solution. The equity markets in particular have been surprisingly resilient. How can that be explained?

This is how one sensible wealth management firm, Saunderson House, is addressing the issue in its client comunications. Implicit in this view is that there will be an endgame in which the Eurozone survives, at least for now, without triggering an economic crisis, which must mean Germany eventually sanctioning some action by the European Central Bank once the various peripheral countries with the worst debt problems (Greece, italy, Spain) have their new governments in place. Read the rest of this entry »

Written by Jonathan Davis

November 21, 2011 at 1:45 PM

Views on Europe

Back from a two-day trip to Paris, it is no surprise to find that the markets are still obsessing about Europe. In the absence of elections political change is rarely a straightforward business, as this week’s tortuous attempts to form new governments in Italy and Greece are demonstrating. The markets remain volatile, but as yet nothing has happened to change my view that we are moving towards an endgame that will ultimately prove beneficial, howver messy it becomes in the short term.

What is noticeable is how opinion is at last slowly shifting away from arguing over how the eurozone in its present form can be saved towards the (more sensible) view that the eurozone cannot continue exactly as it is, whether or not it survives the immediate crisis.. See for example an excellent piece by Lord Owen, the former Foreign Secretary, writing in The Guardian on Monday which begins:

A eurozone may survive, but it will not be the present 17 member state eurozone. What will emerge, if it is to survive, will be smaller and more focused around German financial and monetary disciplines

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Written by Jonathan Davis

November 10, 2011 at 3:02 PM

Bye bye, Berlusconi

The word now is that Berlusconi is on his way out in Italy, as I predicted on this blog a week ago. Assuming that happens, as I am sure it will, it means that we have lost two credibility-shorn prime ministers in the troubled countries of the Eurozone in just 24 hours. In this long and tortuous process, nothing is certain, but I can’t help thinking that this is good news for the markets, as indeed in time the failure of the Cannes summit will also turn out to be.

Why? Becuase it means that the Eurozone is finally getting ready to deal with ugly reality, rather than utopian and impractical dreams. The one premise that has only rarely been challenged throughout this whole drawn out charade has been the belief that the Eurozone could not survive unless it continued exactly as it is now, with all its members on board and Greece and others facing permanent but unsustainable austerity.

That was – and is – a pipedream. What we are seeing now is a process by which failed incumbent political leaders are having to face the consequences of their past errors, not least clinging to such a dogmatic and unproven assumption, which has never been put to the popular vote. Having done more than anyone to talk the Eurozone into recession, with his doom-laden warnings about the consequences of a Greek default, M.Sarkozy faces his own rendezvous with the voters next May. Mrs Merkel, now calling the shots in Europe, probably has until the following year to face the electors.

Whether the new Governments in Greece and Italy can do any better than their predecessors remains to be seen, but the markets are driving the Eurozone to a less worse outcome than wasting all its firepower on saving a bankrupt country, uncertain and potentially disruptive though the consequences may be in the short term.

Written by Jonathan Davis

November 7, 2011 at 12:56 PM

Posted in Eurozone, Greece

Those damned voters…

Did I say there was a need to take these markets one step at a time yesterday? Make that one day at a time. The unexpected decision yesterday by the Greek Prime Minister to call for a referendum on the eurozone package clearly introduces a whole new element of uncertainty into the outlook for financial assets. It almost certainly brings forward the date when Greece defaults and leaves the euro (as eventually it must).

It has never been obvious to me that staying in the euro is the best option for the Greek people, and that may well turn out to be what they think too.  They may opt to take the Icelandic route and vote for the devil they don’t know in preference to the one they do, which has little obvious to commend it.  The decision of the Eurozone to go all out for monetary union without waiting to establish the necessary fiscal  and political regime that was needed to make it workable has always been its most serious flaw, but sadly not the only one.

A consistent failure to consult or carry public opinion has been another hallmark of the whole EU project, and one that may now prove very costly to its architects. Markets hate uncertainty, but if the prospect of a referendum in Greece now forces the Eurozone leadership to start planning properly for the consequences of at least a partial breakup of the single currency, instead of trying to do everything to avoid even thinking about such an outcome, it will be no bad thing. Look out next for the departure of Berlusconi.

Written by Jonathan Davis

November 1, 2011 at 10:31 AM