The Price of Money

By Chelton Wealth, January 17


The price of money

The most important price in the global economy is not the price of a barrel of oil or the price of the latest semiconductors but the price of money. Interest is money's price; it is money's time value. Like other prices, money is determined by supply and demand. If there is more savings, interest rates go down. On the contrary, more investments create more demand for money and, therefore, higher interest rates. At equilibrium interest rates, savings and investments are in balance. In recent decades, the price of money has fallen but has risen again in recent years, with potentially major long-term consequences.


Supply and demand

Now, it seems like the central bank decides where interest rates are. However, the central bank has to take supply and demand into account. The moment interest rates are set too high by the central bank, too much is saved, and not enough is invested, resulting in the economy growing below potential. This can be seen, for example, in lagging consumer demand or rising unemployment. When central bankers set interest rates too low, too much money is invested, mainly in existing assets. This quickly creates bubbles and an overheated economy. Eventually, inflation then also rises. However, that equilibrium interest rate has to be determined by trial and error.


Interest rate drop due to too much saving

In the 1980s, 1990s and the first decade of this century, interest rates fell continuously. This is primarily due to slowing economic growth. This reduced the need to invest. Furthermore, the post-war generation (the baby boomers) was the first to start saving abundantly (sometimes even 1 to 1.5 days a week) for retirement. People sometimes talk about a debt bubble, which originated as a savings bubble. 

Moreover, between 1980 and 2010, platform companies emerged. These companies outsourced capital-intensive activities (such as manufacturing) to low-wage countries. Chinese were forced to save a lot, allowing additional investment in these capital goods. The money earned from these factories was largely saved, first notably by Japan and now mainly by China. As a result, these countries own trillions of US dollars.


Low-interest rate boosts the economy

These lower interest rates allowed house prices to rise, and governments had more money left to spend. This provided an extra economic growth impulse. The downside, however, was that with rising debts, risks also increased. This was reflected in the Great Financial Crisis, which was 'solved' with even more debt. Under the motto 'extend and pretend', the global economy could hold out for another decade or so in the new normal. It took a pandemic and a new war on the European continent to realise that the price of money had to go up after all. That while only some of the excesses of the previous years have been eliminated.


Higher interest rates due to the baby boom and investments

Moreover, the baby boom generation is now retiring, and this is a period of relaxation. At the same time, more money is needed for capital-intensive investments, such as a trillion (30 per cent world GDP) energy transition. Much investment is also needed in expensive infrastructure. Not only in the Western world to replace outdated infrastructure but also, for instance, in a country like India.

As a result, interest rates have to go up. India can bear that higher interest rate on infrastructure investments because it has much higher returns. In the Western world, companies that cannot bear much higher interest costs have grown in recent years. Many of these companies are included in indices, giving them a barbell structure with, on the one hand, very successful, ever-larger companies with ever-higher profit margins and, on the other, companies that can barely afford the still-low interest charges.


Consequences for investors

Higher yields are good news for investors. In recent years, savers were punished with interest rates kept artificially low. But those low-interest rates also led to a rising stock market and higher property prices. Now, investors are demanding higher interest rates, both in savings accounts and in their investments. Only not everyone invests in the same way.  Low-income earners save, middle-income (pensioners) buy bonds, and high-income earners buy equities. The result is growing disparities between rich and poor.

Furthermore, which currency is invested in matters quite a bit. Countries can always pay off their debt, provided they have their currency. The only question, then, is the value of such a currency at the time of repayment. Spreading across currencies will become increasingly important, and among the weakest currencies will be those countries where the monetary craze has been greatest. Unfortunately, that includes some major currencies (besides the dollar, the euro, the pound and the yen). In the long run, more inflation in these countries means weaker than stronger Asian currencies.


Best Year of Election Cycle


By Chelton Wealth, January 11

The third year of the US presidential cycle is usually the best. Along with the fourth year of this cycle (2024), the second half is much better than the first two years. The thinking is that the incumbent president will do everything possible to grow the economy before the election, increasing the chances of victory. This theory can be substantiated with data from presidential cycles over the past 70 years. The effect may have increased somewhat since Clinton’s victory over Bush senior, “It’s the economy, stupid” after all, stated James Carville, strategist with Clinton’s campaign team.



The Fed is not always independent.

The question does arise whether the US president has enough power to influence elections. Of course, it helps if Congress is the same colour as the president. Even more influential on the economy is the central bank. Politicians regularly want to influence monetary policy, but the Federal Reserve values its independence. Only once did the Fed overtly change its policy to ensure a candidate could win. In 1972, Fed chairman Arthur Burns kept interest rates low to ensure that Nixon would be re-elected. In other elections, there seems to be no connection between Fed policy and the election.



Candidates take advantage of monetary policy.

Again, the Fed should pursue its targets, including a 2 per cent inflation rate combined with maximum employment. This time, the central bank’s credibility is also at stake. For a long time, the Fed stuck to the ‘longer low’ policy, calling inflation transitory. In hindsight, much of the inflation was indeed transitory, but the ‘longer low’ policy helped contribute to the banking crisis in early 2023. In some ways, the late intervention resembled Paul Volcker’s policy. That raised policy rates sharply in 1980 to combat high inflation. Candidate Ronald Reagan made good use of this by pointing to the misery index (unemployment and inflation rates) tobeat Jimmy Carter. The most significant election-time rate cut was in 2008 when Barack Obama won the election during the Great Financial Crisis.



Fed’s turn comes at a special time.

The Federal Reserve’s December pivot, in which financial markets were immediately presented with three interest rate cuts by 2024, was prompted by the remarkably rapid fall in inflation. Just about every inflation figure surprised on the downside over the past 12 months. Still, the Fed’s pivot does come at a special time. Usually, the Fed pivots when stock markets fall or unemployment rises sharply. That is not the case now. The stock market is trading close to an all-time high, and unemployment — especially in a historical perspective — is still low.

It could be that the market has not understood Powell correctly and that he is still sticking to his ‘longer high’ policy. It is also possible that the Fed sees something the market does not, which is a relatively rapid slowdown in the US economy. After all, a short-term recession is an excellent reason for the central bank to cut interest rates.



Political influence on the economy is greater than before

Politics will also have a greater influence on monetary policy this time. In 2024, consumers will still be in good shape, and the fiscal government will still be stimulating the economy. Lower oil prices, a still-tight labour market, a weaker dollar, and pro-cyclical monetary policy help that economy. The election circus could prompt the Fed’s turn.

The US economy is running like clockwork; full employment and nominal GDP growth over the last few quarters has been spectacularly high. This is all made possible by exuberant fiscal policy. Until the Great Financial Crisis, monetary and fiscal policies moved in tandem, and there has been an opposite policy since then. While the Federal Reserve is trying to put the brakes on the US economy, fiscal policy is geared towards maximising stimulus and thus frustrates monetary policy. In any case, it is an excellent argument for keeping interest rates high for longer.



Washington fears Trump

For officials in Washington, this election is different from previous elections. Candidate Trump is threatening to come clean in Washington, and he holds the federal government responsible for defeating him in 2020 (in his terms: that the election was stolen). Fed members are also unlikely to be waiting for another four years of Donald Trump, a man known for firing people on the spot.

Curiously, no one asked Powell whether the three interest rate cuts announced might not be premature. Everyone is more likely to assume that the Fed is too late and that more needs to be done to support the economy. Both the Fed and the fiscal government are easing in 2024. Much is being done to keep energy prices low. The three interest rate cuts announced made for a weaker dollar, something that worked out particularly well for Democrats.



Taken together, this is not a recipe for a recession in 2024. If Trump’s tax cuts and deregulation are added on top of that, it already seems that growth expectations for the US economy in the coming years have been underestimated. With low interest rates, we are soon in the Uber-Goldilocks scenario, provided that inflation does not throw a spanner in the works later this decade.


The Japanese Yen in 2024


By Chelton Wealth, December 12


The yen reached its highest point in three months versus the dollar last week after Governor Kazuo Ueda signalled that the Bank of Japan is nearing the end of its ultra-loose monetary policy. On 19 December, the Bank of Japan will make another decision on that policy. The probability of an interest rate hike has risen sharply in a short time when, in fact, the market has been waiting for it for more than a year. The Yield Curve Control (YCC) policy originally intended to support banks by ensuring a steep yield curve has degenerated into a procyclical policy that conflicts with efforts to strengthen the yen. At a time when the Japanese economy is doing badly, YCC is putting an extra brake on the economy due to the need to keep long-term interest rates high. At the moment, things are going well, and inflation is picking up. YCC provides another extra boost by buying up bonds.



Gradual departure of YCC

It did become clear last year that Japan is also opting for a gradual transition in monetary policy under Ueda. Other central banks take much bigger steps at the time of policy reversal. This has sharply increased the contrast with monetary policy in Europe and the United States in recent years, further weakening the yen. The need to stop the YCC policy is also evidenced by the fact that Japanese inflation has reached its highest point in 40 years. If the YCC policy is abolished, interest rates in Japan could rise, although there is still a significant savings surplus. A surplus is also rising sharply due to the repatriation of foreign investment, and a current account surplus is near its highest point ever. However, the gap between US and Japanese interest rates has narrowed rapidly since the 10-year peak at 5 per centin late October.



The market is massively short on the yen

The market is still massively short on the yen. The interest rate differential between Japan and the rest of the world is still being exploited to the full. If the yen also weakens, this could be lucrative in the short term. With the Japanese yen not being this cheap in 50 years, the likelihood of this turning soon increases. Then, the Japanese central bank will start tightening, while other central banks may start easing due to rapidly falling inflation. Then, the yen could quickly gain strength, partly by hedging short positions.



Target reached

Meanwhile, inflation is getting into the minds of more and more Japanese. In this respect, the Bank of Japan has reached its target. Whereas inflation initially rose thanks to rising energy prices and a weak yen, wages are now also rising. At the same time, Japanese living on nominal pensions are starting to squeak. These have benefited for years from an environment where prices remained flat or even fell but are now seeing the cost of living rise. Japanese households hold as much as half (a total of trillion) of their assets in cash and short-term deposits. These must look for a better-yielding asset within Japan (equities?). The government does help them with a package of measures with an equivalent value of 3 per cent of GDP. This additional demand will also create more inflation.




Japan is still an industrial powerhouse, and the yen being so extremely undervalued has long-term implications for competitive relations. The cheap yen allows Japan to compete well with China and South Korea, but it is clear that the German industry is starting to lose market share to Japan (and China). Moreover, it is mainly the weak yen causing inflation in Japan. This is not the first time Japan’s competitors have started complaining about unfair competition and demanding action. This can be prevented by a stronger yen, for instance, through the Bank of Japan’s tightening policy, preferably combined with the looser policies of central banks outside Japan.



A stronger yen

There are several reasons why the yen may gain strength next year. Because everything is so cheap in Japan, interest from foreign investors is also increasing. This should be noticeable next year in the number of tourists visiting the country. Only in May this year did the requirement for face masks expire in large parts of public transport. Furthermore, China is keen to deal with its ‘too’ large dollar position. Given the economic ties between China and Japan, China can exploit the weak yen by swapping US dollar positions for Japanese assets. Good news for Japanese assets. For the Nikkei, it is still just over 20 per cent to its all-time high from 1989.


The US dollar

By Chelton Wealth, December 1


Since interest rates spiked in mid-October, the US dollar has been under pressure. This week, the dollar reached its lowest point in three months as investors are increasingly convinced of a Fed rate cut in mid-2024. The drop was boosted by the fact that even Christopher Waller, one of the hawks at the Fed, signalled that US policy rates are unlikely to rise further. It even signalled that interest rates could come down if inflation rates continue to fall. He is increasingly convinced that the Fed will succeed in getting inflation to 2 per cent. In itself, this is not an extreme statement, as there are increasing sounds and signals that US inflation will even be well below 2 per cent next year. Earlier this month, Powell indicated that the central bank was not thinking of cutting interest rates at that time. Meanwhile, the 10-year rate has also fallen below the level of 20 September, the time when Powell stated that interest rates would stay "high for longer".

Factors affecting the dollar

Now, there are as many as 10 different factors affecting the dollar and the market tends to emphasise one particular factor. The US is expensively based on the real effective exchange rate, while the euro and sterling are more likely to be valued at fair value. Asian currencies, especially the Japanese yen, are heavily undervalued. The Swedish krona is also relatively cheap. For now, the dollar is supported by much higher real interest rates in the United States, especially with inflation falling rapidly. But the fact that the Fed has pivoted in a short time from a 'longer high' policy to announcing this week that the first rate cut is imminent puts pressure on the dollar. Financial markets always look some six months ahead. On the other hand, the Bank of Japan is about to raise interest rates from 0.1 per cent to 0 per cent. If more interest rate hikes in Japan follow, the Japanese yen could recover quickly.

Quantitative tightening and energy

Besides interest rate policy, there is also the policy of quantitative tightening, but this is where Europe and the United States keep each other in balance. Only the Bank of Japan has practically abandoned the YCC policy, the superlative of quantitative easing. For the time being, released loans in Japan will be reinvested by the Bank of Japan. Only when Japan also starts quantitative tightening could this boost the Japanese yen. Energy prices also play an important role in the development of the US dollar. That is where the world did change. The United States is now self-sufficient in energy again, while Europe has to finance its energy needs with US dollars more than ever. Last month, however, oil prices fell sharply, which helped the euro. Apart from a US recession, the downside risk in oil prices seems limited.

Impact of weaker dollar

A weak dollar is a boost for equity markets outside the United States. Furthermore, a weak dollar usually has a positive effect on commodity prices. Emerging markets in particular benefit from a weaker dollar, especially if those countries also outperform the US economy economically. Moreover, many currencies in emerging markets are still cheap. Finally, a weak dollar is good news for US companies with a lot of sales abroad. For instance, the Magnificent Seven benefits above average from a weak dollar, as all companies apart from Amazon derive a large part of their sales from abroad.


Unemployment Rises


By originally labelling inflation as a temporary phenomenon, central bankers were too late in combating it. That was compensated with rapid, sharp interest rate hikes, which the economy will only feel in full next year. Part of that late intervention is that central bankers today do not dare to look ahead, relying instead on two ‘lagging’ indicators: inflation and unemployment. These indicators, by definition, look backward and not forward.



As a result, central bankers would rather be late than early in cutting interest rates. That does make the job easy for those who dare to look ahead. As a result, a year ago, predicting inflation would fall throughout 2023 was relatively easy, and inflation will continue to fall for the next 12 months based on the forecasting indicators. Unemployment remained low for a long time due to the tight labour market, but now there are enough figures to state with conviction that it will continue to rise here, too. With this, arguments no longer favour the ‘longer high’ policy. That policy did ensure that the market hardly dares to consider interest rate cuts next year. That is a prelude to positive surprises next year.



Soft landing thanks to the labour market

Last year, government investment and tax cuts, on the one hand, combined with low unemployment on the other, helped avoid a recession in the US. Consumers comprise two-thirds of the economy and continue to spend as long as there is near-full employment. That has created the economically favourable scenario of a soft landing, which for the stock market has the adverse effect of keeping interest rates high for longer. With that comes higher investment and possible interest rate cuts next year. With that, the chances of a recession are lower, but there is less upward pressure on wages.



Unemployment rising

Unemployment is rising in both Europe and the United States. In Germany, unemployment is at its highest level since June 2021. Germany’s unemployment rate is still relatively low, but last week in France, unemployment rose for the second month. There, unemployment stands at 7.2 per cent, still well above the French government’s 5 per cent target. Across the eurozone, unemployment is rising, albeit from an all-time low. In the United States, the rule of thumb is often used: when unemployment increases by half a per cent, a recession is inevitable. The lowest point in the United States was at a rate of 3.4 per cent, which has since risen to 3.9 per cent. That is low by historical standards, but unemployment is always ahead of a recession.



Higher jobless claims

The United States has different ways of looking at the labour market. One is a monthly jobs report published simultaneously with the unemployment figures. In both cases, they are samples with the necessary statistical noise. Looking at the long-term trend rather than the monthly figure is better. Many economists prefer to look at initial jobless claims. These new applications for unemployment benefits are published weekly. Besides initial jobless claims, there are also continuing jobless claims. Initial claims have risen to the highest since August, and continuing claims are now at the highest level in the past two years. Together with other labour market data, this indicates an evident cooling.



Continued year-end rally

The unemployment figures may contain one-off effects such as the carmakers’ strike or the possible US government debt ceiling shutdown. Still, those factors should have a positive rather than a negative impact on claims for unemployment benefits. With this development, there is even more certainty that the peak in interest rates is behind us and that we should look forward to probably more rate cuts than the market is currently counting on. This is positive for both equities and bonds in 2024, but as so often happens, the stock market is already anticipating this good news via the year-end rally.


US dept ceiling


The moment the US federal government runs a budget deficit, money has to be borrowed, usually in the form of government bonds (Treasuries). Before the year 1917, every new state loan had to be approved by the US Congress. This allowed the elected representatives of the people to keep a grip on spending. Because of World War I, the US government borrowed heavily. Procedurally, the situation was unworkable. Henceforth, the government was allowed to issue as many bonds as needed to finance the government. However, a ceiling was attached to this. That maximum is the debt limit (debt ceiling).



Since 1917, the debt ceiling has been raised some 80 times. Over the past three decades, this has become increasingly difficult. US politics is increasingly polarising. Agreement on a higher debt ceiling cannot be taken for granted. Especially the combination of a Democratic president with a new Republican majority in Congress regularly causes fireworks.


Mid Terms 1994

After the 1994 mid-terms, Democratic President Clinton faced a Republican majority in both the House of Representatives and the Senate. This Republican revolution sought balanced budgets as part of the ‘contract with America’. Clinton needed to bring down spending but blocked this with a veto. Then this fight continued through the debt ceiling. The US government shut down for five days. Speaker of the House Newt Gingrich even threatened a default for the first time in history. According to him, if Clinton did not give in to Republican demands, this would be a risk. The US government then shut down for 21 days.


Mid Terms 2010

After the 2010 mid-terms, Republicans gained a majority in the House of Representatives. Influenced by the Tea Party, Republicans again sought balanced budgets. Ahead of the debt ceiling deadline, the S&P 500 fell 17 per cent and interest rates rose. Standard & Poor downgraded the US credit rating from AAA to AA+ based on this stalemate. Just before the deadline, the Budget Control Act of 2011 was signed into law. Spending went down by 7 billion over 10 years and the debt ceiling went up by .1 trillion. That debt ceiling came into view again with the discussion on the Affordable Care Act (Obamacare) and the government closed again for 16 days. This year, Fitch also downgraded the rating for the US to AA+




Given the increasing polarisation, a higher debt ceiling seems like an unattainable goal, but both parties must realise that the blocking party usually does not sit well with voters. Thanks to the mid-1990s blockade, Clinton subsequently won the election. In 2011, the Republicans may have been proven right about the debt ceiling. They could not benefit from that electorally. The current crisis resembles those of 1995 and 2011. The difference is that the small majority of Republicans in the House do not exactly ensure more stability. For instance, it took 15 rounds of voting to select the last speaker of the house. Yet last week, Republican Mike Johnson from the Trump camp became the new speaker of the house relatively quickly.


Debt ceiling negotiations

Johnson must now ensure a deal on the debt ceiling within three weeks. To do so, however, Johnson must negotiate with the Senate in which Democrats hold the majority. The consensus in Washington is that Johnson is not going to succeed in reaching an agreement with the Democrats within three weeks. The alternative is to extend the negotiations. Only such a move is precisely the reason the last speaker of the house McCarthy had to step down.



Republicans on a winning streak

Another dilemma is that the Republicans have the wind at their backs electorally due to the terrorist attacks in Israel. Not only is Trump now almost certainly the candidate for the Republicans, he is also outpacing them in the polls. Biden has just hit a new low with an approval rating of just 37 per cent. Biden seems to have bet on the wrong horse with the friendly approach to Iran. In this regard, he has to hope for the recent questionable development in public opinion. As long as Israelis are victims, public opinion is fine with that. But as soon as they strike back, that sympathy disappears at lightning speed.
Also part of the debt ceiling is the Biden administration’s 6 billion request for military aid to Ukraine, Taiwan and now Israel. While there is widespread support among both Republicans and Democrats for Israel (the House of Representatives condemned the attacks by 412 votes to 10), some Republicans are starting to squeal about aid to Ukraine. Johnson now wants to split that request into two parts. Trump wants the Democrats to extend the five-year farm bill (which mainly benefits Republican states), which requires support from Democrats.


Impact financial markets

For financial markets, approaching the debt ceiling deadline on 17 November could cause more volatility. An additional problem is that when the government has to shut down, macroeconomic figures are also no longer published. That means the Fed has to sail in the dark at quite a crucial time. Furthermore, this may become the moment that the Democrats will lose the next election and thus markets will have to price in another four years of Trump.


Waiting for the first interest rate cut


Central banks in Europe and the United States are probably ready in terms of raising interest rates. Over the past 18 months, policy rates have been raised at a rapid pace, but the full effect of those rate hikes normally follows with a 12- to 18-month lag. This time, it is taking even a little longer because interest rates have been so low for so long. Both companies and individuals (curiously not the US government) have financed themselves on historically low-interest rates for a relatively long time. While mortgage rates in the US are now above 8 per cent, a large proportion of Americans have been financed on interest rates below 3 per cent.



At the same time, many wages did rise based on underlying inflation. Not surprisingly, citizens had more to spend. Although central banks have probably stopped raising interest rates, quantitative tightening continues. Since early 2022, the Fed’s balance sheet has shrunk by about 10 per cent, from trillion to .1 trillion. The ECB is also shrinking its balance sheet but at a more moderate pace.



Cause soft landing

The soft landing was mainly caused by stimulative fiscalpolicy in the United States. Tax cuts and investment programmes such as the Inflation Reduction Act, the Infrastructure and Jobs Act and the CHIPS and Science Act provided a substantial boost. In Europe, this fiscal stimulus went mainly to Italy, while Germany in particular could use some help. In Europe, inflation is higher, but it can hardly be suppressed by the ECB’s higher interest rates. European inflation is mainly a result of political choices. All the ECB is doing by raising interest rates is further wrecking the economy, making stagflation a real scenario for the eurozone. In such a scenario, it is almost inevitable that there will be another euro crisis. Europe is rated low, but not without reason.



Turnaround sentiment

Compared to mid-July, the mood in the stock market has totally reversed. Whereas the soft landing was still celebrated in the summer, the focus is now mainly on rising interest rates. Those interest rates initially rose because a soft landing was priced in. After all, that does not include a recession, which is why the inverse curve flattened. Furthermore, the Fed probably wants to prevent the market from getting too far ahead of future rate cuts. Powell came up with the longer-high scenario on 20 September, an asymmetric monetary policy where inflation windfalls do not cause lower interest rates, but growth windfalls do cause potentially higher interest rates. Based on the gloomy mood and the relatively benign time of year, it may be time to get a bit more enthusiastic about equities. Still, there are some issues that have not been fully factored into share prices.



For instance, earnings estimates for the coming quarters and next year look a bit firm. Still, corporate earnings do not really disappoint and both good and bad numbers are being punished in the current market. There may not be a recession, but there is a slowdown in growth. Consumer and producer confidence shows this. For now, no monetary and fiscal stimulus can be expected, so it seems to be waiting for interest rates to fall. This could be due to the arrival of a recession or a major financial crash.



Fundability of US sovereign debt

Concerns about US sovereign debt (following the rise in interest rates) are heavily exaggerated. There will never be a default on US sovereign debt, simply because the country can always print dollars to repay the debt. The right question is much more about what the dollar will be worth. Given the strength of the dollar, investors do not worry that much about US debt, it is more for the media. That attention to US sovereign debt will peak again in three weeks’ time when a new agreement on the debt ceiling is due.

There is now a new Speaker of the House, Mike Johnson from the Trump camp. Trump has been doing good business in recent weeks, both within the Republican party and ahead of the election, also helped by the terrorist attacks in Israel.



Chinese debts

There are also those worried about Chinese debt. In itself, this is strange because China, along with Switzerland, Norway, Sweden and South Africa, among others, is one of the few countries in the world with no net public debt, helped by China’s many state-owned enterprises. The problem in China is that the economy needs to be stimulated given its flirtation with deflation and high youth unemployment. The consumer demand slump is understandable as 80 per cent of all savings are tied up in China’s struggling housing market. Still, the Chinese government is reluctant to open the credit tap to avoid Japanese scenarios, although ironically, this actually threatens a Japanese scenario.



Things are not bad in China economically. Third-quarter economic growth of 4.9 per cent was in line with the US economy’s third-quarter growth (much better than expected in both cases), but in the US that was helped by the Barbenheimer phenomenon, rising inventories and government investment. The Chinese are mostly gaining market share, for instance in electric cars and other energy transition products. Given the recent 25 per cent wage increases following the UAW strikes, China may gain even more market share. I was recently allowed to take a ride in a Chinese Nio (with an auto-interchangeable battery) and it showed again that many electric cars are interchangeable throughout due to the wind tunnel effect, and that there is a relatively steep learning curve, especially for Chinese electric cars. A Chinese car in the lower sentiment then quickly wins out on price.



Waiting for positive momentumAlthough the long-term return outlook is improving rather than deteriorating due to recent developments in financial markets, we will still have to wait for more positive impulses, for instance in the form of lower interest rates. Liquidity is a factor that is often underestimated but still has a major impact on financial markets. An interest rate cut could be due to a recession next year, a done deal for the eurozone, but not yet for the US. Or due to a financial crash. The combination of the previous (US) banking crisis (whose cause in the form of higher interest rates has not yet been removed) and the tightened Basel rules is putting additional pressure on the economy. Only investors in private markets (private debt) will wonder, with current high yields, why they would buy equities at all. The global euro equity market is now some 8 per cent below its mid-September 2023 peak and also 8 per cent below its November 2021 peak. If there is a bear market, this is more one in time (for more than 2 years now) than one in price, although that is a different story for many mid- and small-caps.



The impossible trinity


After the dollar rose to 150 yen on 3 October, the same dollar suddenly fell 3 yen on 4 October. This raised suspicions of intervention by the Japanese government. This was not confirmed by finance minister Shunichi Suzuki. Japan did intervene in currency markets regularly in the past, but usually to ensure that a weaker yen would positively boost the Japanese economy. Incidentally, those interventions had little effect. The only result was that they left Japan with extensive foreign exchange reserves by selling yen and buying the dollar in particular.



Impossible trinity

Any interventions in foreign exchange markets conflict with the Japanese central bank’s Yield Curve Control (YCC) policy. The YCC policy ensures a weaker yen, while any interventions aimed at a stronger yen. A combination of fixed exchange rates, free capital flows and an independent monetary policy is impossible. This impossible trinity is also known as the exchange rate regime trilemma. Countries with an open capital market with their own monetary policy will have to accept a free exchange rate. Two out of three is possible, but not all three at once. Last year, Japan did try it, but it was doomed to failure.


Pro-cyclical YCC policy

The solution for the Japanese economy is to stop the YCC policy. Moreover, that policy is procyclical. When the Japanese economy is in trouble, the Japanese central bank takes money off the table and when the economy is strong, the Bank of Japan actually injects extra liquidity. Finally, Japan’s core inflation rate is well above 2 per cent (without the previous VAT hikes that only had a temporary effect).



Only developed country with asteep yield curve

The YCC policy was originally designed to get interest rates right up and thus achieve a steep yield curve. Now it is doing exactly the opposite and ensuring a flatter curve. Moreover, Japan is now the only country in the world with and steep yield curve and together with higher inflation and interest rates, this also explains the outperformance of Japanese banks, whereas in the rest of the world, banks are actually struggling.



End of YCC policy in sight

Japan’s 10-year swap has risen above 1 per cent in recent weeks. That 1 per cent is effectively the ceiling in the current YCC policy. Now the swap rate does exceed the rate on 10-year JGBs, but it is clear that the market wants interest rates in Japan to rise further. The moment the central bank sticks to the YCC policy, the yen may weaken further. It seems a matter of time until this policy is abolished. The weak yen makes Japanese assets extra cheap. The moment the YCC policy is abolished, the yen may also recover. Investors have been chronically underweight Japanese assets for the past three decades. For a long time this was justified, but Japan today has much better corporate governance. Earnings per share are growing relatively strongly. Excess capital is increasingly being paid out in the form of dividends. Despite this, as many as 84 per cent of investors are underweight in Japan.



Ten factors affecting the dollar

By Chelton Wealth, October 03


Asking the question “What do you think of the dollar?” is relatively straightforward. The answer, however, is not. One answer that is always correct is that the dollar is likely to remain the US currency for years to come, but this is probably not the answer to the question. Incidentally, the same answer is much less definite with the euro.

Predicting the dollar is not easy. There are 10 factors that affect the dollar. These can still be identified. The problem lies in the weight to be assigned to those factors. Currency markets are often manically monogamous. Usually, strong emphasis is placed on one specific factor and the others seem to play no role until they do.


Below is an overview of the 10 factors that affect the dollar:


1, Top-down, a strong economy also includes a strong currency. In that respect, it is explicable that the dollar is stronger than the euro, for example. Especially now that the euro has slipped towards a stagflationary scenario in recent months while the US economy seems to be making a perfect landing, this helps the dollar. In the long run, economic growth is more of an argument as to why the dollar will eventually lose out to, say, the renminbi.



2. The dollar is a special currency. It is still the world’s reserve currency. As a reserve currency, the United States is effectively a banker to the rest of the world. This makes it possible and even desirable to constantly run a current accountdeficit. Because of that deficit, the reserve currency looks fundamentally weak but is actually relatively strong. A well-known example in this context is the chart of the dollar smile, a chart where the dollar is strong precisely when there is a crisis (everyone flees the dollar) or at the other extreme when the US economy is doing very well. In both cases, the dollar is rising. Only in between, does the dollar tend to fall because that is when fundamentals come to the surface.



3. Interest rate differentials can have a big impact. If you want to arbitrage currencies, you naturally receive interest in the currency you are long and pay interest in the currency you are short. For instance, the proverbial Ms. Watanabe borrowed for years in yen which she put out in other dollars. Only this kite no longer holds true due to recent developments (inflation) in Japan.



4. Monetary policy. At a time when the Fed is hitting the brakes full on and other central banks are still easing quantitatively, this is good for the dollar. This is not just a matter of interest rate differentials, but mainly of how future monetary policy will deviate from the policy the market is currently reckoning with.



5. Geopolitical relationships. The UnitedStates has used the dollar as a weapon against the Russians. The Russians have no use for dollars because they can no longer pay with them through the financial system (Swift). After all, their accounts are blocked. Other countries that sometimes also have (or may have in the future) a difficult relationship are taking this into account. Rich Arabs and Chinese billionaires are therefore better off not holding dollars. Before you know it, they will be in the same boat as the Russian oligarchs. Furthermore, one should also not underestimate the negative effect of polarisation within US politics in this context. That does not help the dollar.



6. Dollarization. Since the Great Financial Crisis, the Chinese have wanted to get rid of their dependence on the dollar. This was not even so much because of a deteriorating relationship with the US, but mainly because the Chinese economy was too dependent on the dollar and thus US banks. Actually, Asian countries have been trying to reduce their dependence on the dollar since the 1997 Asia crisis. Incidentally, saying goodbye to the reserve currency is not that easy. It is not like Microsoft’s operating system. It is not the best operating system, but because everyone uses it, it is hard to get out of it. Incidentally, in recent times you see rather a de-euroisation, which of course is also linked to European sanctions against the Russians, which has reduced the euro’s appeal for wealthy people outside the eurozone. Gradually, the euro’s share in world trade is declining and the renminbi’s share is rising. However, the dollar remains by far the most important currency.



7. Twin deficits. Countries with constant budgets and current account deficits have weak currencies, only this apparently does not apply to the dollar. The risk, however, is that if the dollar loses its reserve status, things could quickly go the other way too. By running deficits, the rest of the world is actually financing US deficits and the US economy. This is the privilege of the residual currency. The United States is home to 5 per cent of the world’s population, but its share of current account deficits is 60 per cent. Furthermore, 40 per cent of the US budget deficit is structurally financed by foreign countries.



8. Debt. Countries with high debts (to foreign countries) can always repay their debts, provided they have their own currency. The big question, though, is what then is the value of the currency? The mechanism of financial repression and reflation ensures that the nominal economy grows more than the nominal debt, often through more inflation. The US national debt has recently surpassed trillion. The US government may soon have to shut down under the credit ceiling. Furthermore, credit rating agencies S&P and Fitch have downgraded the US from AAA to AA, but in a world where there is a glaring shortage of risk-free paper, US Treasuries continue to fill this role for now.



9. Money flows. Many factors are more fundamental in nature, but ultimately money flows determine currency strength. A good example is the year 2001. Back then, pretty much all the above factors would argue for a weak dollar, but because the renminbi was pegged to the dollar at the time, a lot of money flowed into the dollar-renminbi bloc (thanks to China joining the WTO). This could also happen, for instance, when oil prices are high (oil is still largely traded in dollars). As for that high oil price, Europe has to buy energy in dollars these days (it was mostly in euros until recently) and, of course, Europe has to earn those dollars first.



10. Positioning. Besides money flows and fundamentals, everything can go haywire if there is extreme positioning. If the market bets fully on a weakening dollar, you are more likely to see a stronger dollar in the shorter term. This is because basically all other factors are already factored into the price of the dollar and if everyone is negative, the only possibility is that someone is going to become more positive, causing the dollar to rise.



To estimate the development of the dollar, it is important to know how the market views these 10 factors and estimate in which the own scenario differs from the market scenario. Europeans tend quite often to underestimate the strength of the dollar, but in the somewhat longer term, it seems justifiable to forecast a weaker dollar, especially against Asian currencies. The near-term trigger for this could be a mild recession in the US next year, although, for instance, the US government shutdown due to the credit ceiling and the US presidential election next year will also be a trigger for a weaker dollar.


U.S. Jobs report

By Chelton Wealth, June 5


The U.S. jobs report was much stronger than expected with a whopping 339,000 jobs (195,000 expected and the previous two months were also revised upward by 93,000), but the unemployment rate rose from 3.4 percent to 3.7 percent (the highest level in seven months) while wage growth slowed to 4.3 percent. Hours worked also fell from 34.4 to 34.3, the lowest level since 2011 (not including the April 2020 drop during the corona crisis). Employers are apparently in no hurry to lay people off yet. Profit margins are too good for that and the labour market is tight. Job growth was carried by the service sector.



Given the inflation data for the coming months, this is insufficient for the Fed to raise interest rates in June or July. Now that the Fed has started pausing, it is also not obvious to raise interest rates again so soon. Most likely, the Fed will not cut interest rates until early next year, whether or not forced by the banking crisis before then. Also, this figure is by no means indicative of a recession.



The labour market gets a lot of attention from investors these days because Jay Powell tells anyone who wants to hear that he looks primarily at this figure (and realized inflation). In itself, it is strange that the Fed looks at two "lagging" indicators, and then the market quickly has a head start on monetary policy. Furthermore, it also shows little vision and creativity. It could cause the Fed to either apply the brakes too strongly or, on the contrary, leave interest rates too low for too long.



Furthermore, the Fed has a new definition of Core inflation. In addition to food and energy prices, the Fed is also removing the housing component from the figure. Now it seems that as long as all the inflation components that are falling are removed from the inflation figure, then there will always be some inflation left. The Fed's argument is that in the remaining core component, wage growth plays a much larger role. To put Powell on edge, Ben Bernanke and Oliver Blanchard have just published a paper arguing that wage growth has not played a major role in recent inflation. The Phillips curve has flattened out, according to the gentlemen; that is, there is a weaker link between inflation and employment. Now Bernanke and Blanchard believe that inflation is transitory (temporary) and caused by supply-side shocks. If so, then interest rates would not have needed to be raised so much. Inflation caused by airline tickets, auto insurance and auto repairs is not so easy to combat with higher interest rates. The transmission mechanism of higher interest rates in the past was through the housing market, but even in the U.S. there is a shortage of housing and virtually every homeowner has a mortgage fixed for 30 years below 3 percent.



The jobs report does represent good news for consumer spending, which is what drives the current economy. Job security is high and job growth along with higher wages puts a solid floor under spending. If inflation falls a bit further, there will also come a time when the average American will also improve in real terms. Still, for now, the Fed has enough to do with rising unemployment combined with lower rising wages.


All-time highs in Europe

By Chelton Wealth, May 15


While much of the return this year is being made by U.S. tech companies, several European indices are at or near all-time highs. There are several explanations for this. For one, the banking crisis seems to be primarily an American problem after all (Credit Suisse had major problems even before the banking crisis) and this is then combined with the debt ceiling crisis, another typical American problem. Moreover, European equities are relatively cheap.



The euro has also been able to gain some value against the dollar although the scope for a continuation there seems limited. Then, of course, there is a remarkable drop in gas prices, now some 90 percent below their August peak. Last year everyone still assumed that such high energy prices would inevitably push Europe into recession, but the big surprise this year is that recession is momentarily out of the picture. But there is more. For example, the Italians are using part of the corona grant program to subsidize the preservation of homes, and a subsidy of as much as 110 percent is making construction in Italy busy as well. The Italian right-wing government is a big windfall for the European Union; instead of an Italexit, Italian politicians are ensuring that nothing can jeopardize the large European subsidies. Furthermore, Europe is much more economically dependent on China than the United States and thus Europe — Germany in the lead — is also benefiting from the recovery of the Chinese economy. In fact, many international investors would rather buy French luxury goods manufacturers than Chinese stocks, even though the reason these companies are performing well is mostly a result of Chinese consumer demand.



Furthermore, for Europe, the basis of comparison with last year is relatively favourable. Especially the war in Ukraine and the accompanying rising energy prices chopped into it quite a bit. In this respect, it is not so strange to grow on an annual basis. The European Commission is now counting on 0.8 to 0.9 percent growth this year. Inflation does remain more persistent in Europe than in the United States. This is primarily because governments here have a greater influence on inflation.



Furthermore, actual inflation is not always properly measured either. For example, CBS will adjust its figure because of the large difference between new and existing energy contracts. Also, the various packages to compensate citizens for high inflation rates are not included in the inflation figure. Thus, inflation figures do not give a good picture of the actual development of purchasing power.



Wages are also rising faster here than in the United States, even though the labour market there is tighter. The ECB wants to fight that inflation and in the meantime is being helped by sharply lower energy prices. The ECB is expected to raise interest rates two more times, but will then stop at 3.75 percent. One caveat, however, is developments in the U.S. There the market is counting on an interest rate cut in July. If that actually comes, it is possible that the ECB will pause earlier. A scenario in which the ECB will raise interest rates and at the same time the Fed will cut rates is not so likely.



In the somewhat longer term, the European economy is not in such good shape. The euro system is creating an ever-increasing divergence. The Italians have every reason to leave the euro. The economy has not grown on balance due to the many recessions since the introduction of the euro. The debts did, and they have now reached a level where several years of reflation are required to bring the ratios back somewhat in order.



Furthermore, from now on we are cut off from Russian energy. This also means that the Russians will no longer reinvest the proceeds in the Eurozone. From now on we have to buy energy in hard dollars. We have to earn those dollars first, while energy is still relatively expensive here, as is the labour factor. Furthermore, there is a risk that not only the Russians but also the Arabs and the Chinese will be reluctant to invest in the Eurozone. After all, what happened to the Russians could also happen to the Arabs and the Chinese. If so, the long-term fundamentals of several Asian markets are much better.


The mystery of the Norwegian Krone

By Chelton Wealth, April 18


Ultimately, the strength of a currency depends on the strength of its underlying economy. Norway, as a major energy producer, has a strong economy and therefore a strong currency. Recently, the Norwegian currency has weakened remarkably, especially against the euro, to its lowest level in three years. Now there are many factors that influence the development of currencies and often it is only in retrospect that it is clear which factor was the deciding factor. As an energy producer, the Norwegian currency is somewhat more strongly linked to the dollar and thus to oil price developments, but this is not enough to explain the fall this year. However, a significant portion of the energy revenue is invested through the Norwegian Oil Fund, which after all amounts to swapping the Norwegian kroner for another currency. Sometimes it is as simple as following the flow of money. Of course, the Norwegian Oil Fund is a significant factor, both in the Norwegian economy and the Norwegian krone. Last year there were weeks when the fund became 10,000 euros richer per Norwegian per Week. At the same time, the Norwegian Oil Fund suffered solid losses in the financial markets in 2022. Thus, in addition to its sensitivity to oil price developments, the Norwegian krone is also sensitive to financial market developments.


It is possible that interest rate differentials are also contributing to the decline in the Norwegian krone versus the euro. The ECB seems to be more determined in raising interest rates than the Norges Bank. Just last month, the Norges Bank raised the policy rate by 0.25 percent to 3.0 percent and the expectation is that the policy rate will eventually stay at 3.5 percent. The ECB appears to be moving higher. Given the development of the inflation in Norway, that may not be enough. Inflation rose more than expected last month by 6.5 percent, due in part to rising electricity prices. This while Norway initially had inflation well under control.



The Norwegian krone is the worst performing currency in the G10 this year. The Norwegian economy is shrinking due to developments in construction and energy-related activities. That weak krone may cause more inflation, a reason for Norges Bank to support the currency. Trade-weighted, the Norwegian krone now looks undervalued. Perhaps the weakness of the Norwegian krone can be explained by the currency's limited liquidity. This makes it highly sensitive to the development of financial conditions and these are very tight these days. It is possible that a turn by the Fed and at least the ECB will help get the Norwegian Krone back below 11 Kroner versus the euro. Meanwhile, Norway as a vacation country has thus become about 15 percent cheaper for the rest of Europe in a short period of time.



The weak Norwegian krone may also create an attractive entry point for the Nordic bond market. This is a relatively small market (thus also not as liquid and that gets extra punished in times like these) compared to the U.S. or European bond markets. The effective yield on these bonds is higher than in Western Europe and the United States while that higher yield is not explainable based on the underlying fundamentals. Currently, the initial yield is around 8 percent, a return comparable to that of stocks over the long term. A relatively large proportion of the bonds in this market have floating rates. Furthermore, Nordic markets are well protected against rising energy prices next winter. About half of all Nordic bonds are unrated, even though the underlying companies would usually be classified as investment grade. On top of this solid initial yield then comes the recovery potential of the Norwegian krone. On average, the market is now counting on a 6.5 percent recovery over 12 months.



Excavations across

By Chelton Wealth, March 15


Bankrupt Silicon Valley Bank is unique in many ways.
Other US banks are better diversified.
Ten-year US interest rates are a full per cent below two-year rates.
A shrinking money supply and a falling housing market could push inflation towards 2 per cent relatively quickly.
Last week, the 16th US bank collapsed. On Tuesday, there was still nothing to worry about, but after a real bank run, Silicon Valley Bank is now under direct regulatory scrutiny. Many people will never have heard of Silicon Valley Bank until last week. Yet the fall is causing a lot of turmoil in the stock market. For instance, US bank prices fell 15 per cent last week. Since the Great Financial Crisis, many measures have been taken to limit the risk of contagion to the rest of the financial system in such a case, and that is the most likely scenario this time too. If so, things will end with a hiss. It helps that Silicon Valley Bank is unique in several ways. The bank has grown strongly in recent years thanks to large inflows of deposits from young tech companies. Those young companies are often still running at a loss and need constant cash to pay all the charges. Without that money, they might be in acute trouble. Then they won't even be able to pay salaries for the month. Normally, a bank will lend any funds received to other customers on a spread basis at a variable interest rate, but because of the strong inflows, Silicon Valley Bank chose to invest the proceeds in US government bonds. Those bonds, unlike a bank loan, do not have variable but fixed interest rates. So there was a big mismatch. Against variable deposits, rates were assets with fixed interest rates. No problem as long as interest rates remained low, but after interest rates rose, large paper losses arose. When some of the tech companies opted for the higher yield on money market funds, large losses had to be taken on government bonds. A last-minute organised equity issue was to no avail. Other US banks are better diversified, less dependent on tech companies and also normally do not have such a large mismatch, although more have government bonds on their balance sheets as well. Furthermore, European banks also still have too large positions in government bonds, which helped to make the 2012 euro crisis not so easy to solve. But even in Europe, the ECB knows what to do if history were to repeat itself.


The risk of such financial mishaps is relatively high right now due to tightening central bank policies. In the United States, the money supply is shrinking for the first time in many years. In such a situation, companies and other institutions that have taken on too much financing risk in the past may collapse. Usually, the small ones fall first and, with some delay, the big ones. The moment this translates into systemic risks, it may prompt central banks to change course. Indeed, central banks were created to counter such risks. But countering systemic risks conflicts with fighting inflation. With better-than-expected economic growth in recent months and disappointing inflation data, the plan is still for the ECB to raise interest rates by 0.5 per cent in the coming week after which the Federal Reserve will raise rates by 0.5 per cent the following week. When central banks decide to take a more cautious approach, it is a signal that they are taking the risks stemming from Silicon Valley Bank seriously. 


Central banks' tightening policies have created an inverted yield curve. In a normal situation, short-term rates are lower than long-term rates, but now the situation is reversed. In the United States, the 10-year rate is a full per cent below the two-year rate, a situation not seen since the 1970s. In Europe, the difference is 0.7 per cent. This phenomenon contributed to the collapse of Silicon Valley Bank. The high short-term interest rate caused tech companies to look for better alternatives to the too-low deposit rates at Silicon Valley Bank. However, thanks to the relatively low-interest rates on longer-term government bonds, the bank was unable to move forward. An inverted yield curve is also a signal from the market to the central bank that policy rates have been sufficiently raised. The market assumes that a 10-year loan at 4 per cent can eventually earn at least as much as a two-year rate of 5 per cent. This can only happen at the time of a recession. That is when interest rates fall across the curve, so long-term loans benefit the most.  So it is not obvious to invest in a short-term paper when there is an inverted yield curve.


Underlying, inflation will clearly decline in the second quarter. The economy may be stronger than expected, but the coming months should be compared with the sharp rise in inflation following the Russian invasion of Ukraine a year ago. Combine that with the shrinking money supply and the falling housing market, inflation could move relatively quickly towards the 2 per cent target. That gives central banks more room to pause policy. With the fall of Silicon Valley Bank, that moment is approaching faster. Every disadvantage has an advantage here too. That pause should see whether inflation can indeed remain low. If it does, central banks quickly gain hero status and there is a lot of upside price potential. If inflation does remain stubbornly high, it will take longer for interest rates to be cut in the first place, which could cause further financial crashes in the meantime. It is possible that interest rates will then be raised even further, to the point where there is a definite recession. This is not good news for the economy, but for investors, the start of a recession historically proves to be a good time to get in. Even in private markets, recession years are among the best vintage years. We maintain an overweight position in equities and alternative investments and an underweight position in bonds. However, there will be a bumpy ride due to increased volatility, but that is the price to pay for higher returns over time.


Creative monetary policy

By Chelton Wealth, March 3


Kazuo Ueda came up with a new term in his meeting with the Japanese parliament last week: creative monetary policy. Especially in the case of Japan, this raises eyebrows, as surely it seems that Japan has already gone far enough with monetary policy. More creativity does not seem desirable. The Bank of Japan (BoJ) now owns half of all government bonds and, meanwhile, the BoJ's buybacks exceed the Fed's sales. The BoJ's direction to the market has been a monetary commitment to the price of money (the interest rate) rather than quantity.


'Inflation in Japan rose to 4.2 per cent, the highest level in 41 years.'


Originally, the ceiling on the 10-year interest rate was 0.25 per cent, and the BoJ did not actually have to buy up anything, also because everyone was confident that the central bank would be able to maintain this policy for a long time. But by adjusting this rate to 0.50 per cent late last year, the market speculated on more adjustments. This is also because such a policy (Yield Curve Targeting) is unsustainable in the current market. Inflation in Japan has risen to 4.2 per cent, the highest level in 41 years. Not the time to buy up bonds, but rather tighten the monetary somewhat. This while at the start of the corona crisis, interest rates were still falling sharply and stimulative policies were needed but there was no room for them because the BoJ was committed to price. Such a procyclical policy is unsustainable and Kuroda's short-term departure means the market is now speculating on further moves under Ueda.



For Japan, the abolition of this policy has great significance. For the first time since the mid-1980s, the market will then have more influence over the price of money, and the interest rate. It is as if the country has been in receivership for decades and is now allowed to rejoin the global economy.


'It created a double bubble that burst in the early 1990s.'


In the mid-1980s, Japan was tempted to depreciate the US dollar versus the yen. Because of the strong yen, the BoJ had no choice but to cut interest rates just when Japan was doing well economically. Those unnaturally low-interest rates caused a lot of speculation in real estate markets and equity markets. It created a double bubble that burst in the early 1990s. Because Japan was very slow to clear the bad debts that were a consequence of that bubble, this had to be done the slow way through deflation. Two lost decades followed and only after the Tohoku earthquake and the start of Abenomics was Japan (almost 30 years later) investable again. For more than two decades, the Japanese market (and Japanese real estate) was simply overpriced, but then finally appreciated normally again.



The high debts thus half owned by the BoJ are still a legacy from this period. By the way, it is not as bad as it seems. Japanese companies are, on balance, debt-free and Japanese households have more than trillion (twice GDP, roughly equivalent to government debt) in assets outstanding outside Japan. Low interest rates make Japan unattractive to these investors, so they are putting it out outside Japan. In recent years, they have benefited from the interest rate differential and the continuously falling yen. If Ueda starts raising interest rates further, there is a good chance that this money will return to Japan. That will ensure a stronger yen (and therefore less inflation) and probably and some of the money will flow into the stock market. That is relatively cheap and also no longer as sensitive to the strong yen. Much of the manufacturing is in Thailand and other Southeast Asian countries. Rising interest rates are also good for Japanese banks via the steeper yield curve. This was a sector that could safely be shunned in the past year. Japanese banks were the heavyweights in the MSCI world index around 1990 with valuations as high as 200 times earnings. Thanks to that weight, Japan's weight in the world index was almost 50 per cent. That has since been reduced to around 8 per cent.



The scope for raising interest rates with such high debt seems limited. If Japan has to pay 2 per cent on its debts, the country would have to grow more than 4 per cent to keep debt as a percentage of GDP from rising further. At the same time, this is partly pocket-pocket, since half of the debt is owned by the BoJ, i.e. Japan itself. Furthermore, the BoJ is getting by on foreign exchange because of past attempts to weaken the yen. The Japanese government may be poor, but its citizens are still rich. All these things Ueda needs to factor into his policies. He too sees the problem but will want to guard against creating a new one. In Japan - as in quite a few countries in Asia - the system takes precedence over the individual. In densely populated countries, this was also essential to maintain peace in the past. From the outside, Japan looks like a peaceful country without ever having had a revolution. Underlying, though, there are ranks and classes that can cause unrest. That was different at the time of the Shogunate when there were no less than 2,967 peasant uprisings (ikki) because of high taxes. All those uprisings were suppressed; never did the peasants come to power. As a result, every Japanese who participates in the system (has a job) is respected, and raising taxes is also unpopular in Japan. In creative monetary policy, Ueda is probably mostly a pragmatist. More someone of evolution than revolution.


Bank of Japan continues to surprise

By Chelton Wealth, January 25


With the Bank of Japan (BoJ) surprising the market with an adjustment in monetary policy at the previous meeting in late 2022, the market speculated on the next move. The market was counting on the central bank to throw in the towel on Yield-Curve-Control (YCC). This YCC policy is not working as it has rather pro-cyclical effects. During the onset of the corona pandemic, 10-year interest rates fell, resulting in the central bank selling bonds to get interest rates back up. So that effectively means a tightening policy by the central bank, when an easing policy was in order. With inflation rising in Japan too, the central bank has to buy up bonds. So that is effectively an easing policy while rising inflation would require more of a tightening policy. In other words, YCC policy is unsustainable and the annoying thing is that the market has realised this.

In speculation about the end of YCC policy, 10-year yields rose above 0.5 per cent. This meant that the BoJ was forced to buy up bonds en masse, providing additional stimulus to the economy. For a long time, the central bank did not have to do anything when interest rates were capped at 0.25 per cent. Because of its credibility, the central bank hardly needed to act. Now, the adjustment in policy is actually creating expectations that the policy will eventually end and speculation about that is rife. Still, the BoJ did not dare to take the step, but it will probably take that step in April when current chairman Kuroda leaves after 10 years.

With YCC's extremely stimulative policy (actually a step beyondquantitative easing) combined with rising inflation, it looks like it will soon be abolished. But because inflation has been so low in Japan for so long, the central bank also wants to keep inflation rising for a while. In any case, it seems that wages in Japan are starting to rise. First, the cost of raw materials rose. Those caused a trade deficit. Then the yen fell, causing more import inflation. Normally,inflation in Japan means that companies bear the extra burden first, but at some point that becomes unsustainable and companies do have to raise prices. And then higher wage demands follow. At Fast Retailing (the owner of Uniqlo), wages even increased by 40 per cent. Fortunately, the BoJ can also use YCC to tighten. Simply set the target for 10-year interest rates high enough so that there is a braking policy.

The good news about rising inflation in Japan - the highest point in 41 years - and rising interest rates is that with it, inflation is also getting back into the heads of the average Japanese person. Every Japanese now also gets it daily on the news. Inflation is now mainly driven by higher costs, but the goal is for the demand side to also create higher inflation. For this to happen, policy should not become too tightening in the short term.



By Chelton Wealth, January 23


Markets in 2022 were mainly characterised by central bank tightening their monetary policy, but in 2023 it looks like these hiking cycles may be coming to an end.

Let’s take a look at where the major central banks are, and what that implies for the markets.


Federal Reserve

The Fed was ahead of the pack in hiking rates and initiating QT,and naturally they also seem to be ahead in terms of slowing down and eventually stopping. Chairman Powell, vice chair Brainard and other Fed members have been repeatedly stating that once a peak in rates is reached, it will stay there for a significant period of time. However, the markets still don’t seem to believe that, pricing lower rates in 2024 and driving the yield curve to very inverted levels. This tug-of-war has been going on for weeks and is ongoing, but it feels like the market is very stretched at the moment in terms of expectations from the Fed. US inflation has been dropping at a decent pace, down from over 9% YoY to 6.5% on the last CPI reading.

European Central Bank

The European Central Bank was late in starting to hike rates, and the rate of tightening has been slower than the Fed (peaking at 50bps per meeting). Inflation has rocketed higher since 2022, rising from an average of around 2% to over 10% YoY. The key difference to the US inflation figures is that the Eurozone inflation is dropping at a much slower pace. This is primarily due to the Eurozone’s strong dependence on imported energy; this factor has kept price pressures high and is expected to continue to do so. Chair Christine Lagarde and many other ECB members remain hawkish, projecting more 50bp hikes for as long as inflation stays above target.


Bank of England

Unsurprisingly, it’s a similar story in the UK in terms of inflation. CPI shot higher in 2022, reaching a YoY peak above 11% and still printing over 10%. The BoE has a difficult task in its hands, trying to fight inflation with tighter monetary conditions while the UK economy shows increasing signs of an incoming recession. This has been reflected in some of the MPC members, having two voting for no change in rates, in the last interest rate decision meeting. The Bank of England is arguably one of the most dovish central banks, and this can put downward pressure on UK rates and Sterling.


Bank of Japan

Japan has enjoyed very low inflation for decades, and this has enabled it to run an extremely accommodative monetary policy for a prolonged period. Inflation has finally started to substantially exceed their target, and this has led the market to finally price a BoJ move away from negative rates. There was growing expectation for a change in policy in this week’s rate decision meeting, but that didn’t materialize, much to the JPY bulls’ frustration. The markets are certainly pricing a change in BoJ policy, with the Yen having appreciated over 15% vs. the USD in the past 3 months.

Market Implications

The main driver for markets has arguable been the level of yields, with the 10y US Treasuries in particular. As mentioned above, the curve has remained very inverted in the past months, and this phenomenon almost always precedes a recession. It’s probably fair to say that the market is pricing too much easing too quickly for the Fed, and so a bounce back in yields is possible in the short term. We have bounced from a confluence of supports in the US 10y yield, and a potential rally could have targets in the 3.60s or even challenge the previous highs at 3.90%.

If yields move higher from here, then the logical reaction would be to see the US Dollar strengthen. With support confluence in the low 102s, we could rise towards the next upside targets at around 105 and 108.8.

Equities have been quite resilient in the face of rising yields, but the global economic environment has turned for the worse in the past few months. The S&P500 index has already dropped nearly 20% from the all-time highs, but there is still potential for more downside.

Since 2008, the market has been conditioned to get into buy-the-dip mode as soon as the economy weakens, anticipating supportive central bank action. However, the current environment might finally be marking a change to this behaviour. The combination of higher yields, high inflation and a fall in general company earnings might be the catalyst for another leg lower in risk assets. The S&P500 index – currently at around 3900 points – has important resistance at around 4000, and a potential downside at around 3600.

The main takeaway from all the above is that there is currently an apparent central bank divergence, and this may persist in the near term:

the ECB is hawkish and still behind on the hiking cycle
the Fed is hawkish but near the end of the hiking cycle
the BoE is dovish and near the end of the hiking cycle
the BoJ is still dovish but should embark on a hiking cycle soon


Unemployment and inflation

By Chelton Wealth, January 9


It is strange that the US central bank, in setting monetary policy, uses precise economic figures that look only backward and not forwards. Like inflation, unemployment is by definition at the end of the process. There are plenty of leading indicators that paint a much better picture of the future, but apparently, after the miss on the timeliness of inflation in 2021, the central bank does not dare to look ahead. That's a big difference from the past when central bankers used to raise interest rates as soon as inflation was in the pipeline, even knowing that a rate hike only has its full effect on the economy after 12 to 18 months.

Last Friday, the US jobs report was better than expected in terms of new jobs, with 223,000 instead of 200,000 expected. However, the November figure was revised downwards to 256,000. At the same time, the number of hours worked fell short of expectations and hourly wages (4.6 per cent year-on-year against 5.0 per cent last time) also disappointed. This report is too strong for the Fed to stop. Nevertheless, the Fed is likely to raise interest rates by 0.25 per cent in February. If the upcoming monthly reports are better than expected (in the sense that job growth softens), that could immediately be the last rate hike this year. The market is already counting on a rate cut in the second half of this year, but that looks somewhat ambitious.

One figure that clearly looks ahead is the purchasing managers' data. Last Friday, the purchasing managers' index for the services sector dipped below the equilibrium level of 50 for the first time in 2.5 years, the index went from 56.5 in November to 49.6 in December. Apart from the corona pandemic, this was the weakest index since 2009. Economists were counting on an index level of 55. The new orders component of the services ISM fell from 56.0 to 45.2! The price component also fell from 70 to 67.6.

Next Thursday, US inflation data for December will be released. Expect a month-on-month rise in core inflation of 0.3 per cent, following a 0.2 per cent rise over November. That is markedly lower than December month a year ago, and as a result, inflation will fall markedly from 6.0 per cent to 5.7 per cent. Food prices rose 0.5 per cent in December, but energy prices fell 2.8 per cent. As a result, the overall inflation rate is up 0.07 per cent last month, reducing the year-on-year rate from 7.1 per cent to 6.6 per cent. On the goods side, meanwhile, there is deflation, helped by the fall in used car prices.


Japanese surprise

By Chelton Wealth, December 27


It was inevitable that the Bank of Japan would adjust its monetary policy. At the time of Yield Curve Control (YCC), a central bank commits to price, not quantity. This means that when interest rates fall, as they did at the start of the corona crisis in 2020, the central bank has to sell plenty of bonds to ensure that interest rates rise in capital markets, just at a time when the market could use some extra liquidity. Now that has been several years back. At the moment, the problem is that interest rates are rising because of inflation (at 3.7 per cent at the highest point in 41 years) and as a result of yield curve control, bonds must now be bought up, which means that this is an easing (read stimulus) policy. Exactly the opposite of what is desirable and so, on balance, monetary policy is pro-cyclical instead of counter-cyclical. This contrasts quite a bit with the policies of other central banks, and that makes for a weaker yen. At one point, the yen was so weak that the central bank intervened by buying up the yen. That's when policy did have to be adjusted. You cannot expand the money supply on the one hand (by buying up bonds and putting more yen into circulation) and support the currency by buying up the same yen on the other.


Knowing that this policy was finite, Kuroda decided to adjust it three months before his departure. Instead of 0.25 per cent for the 10-year rate, it will now be truncated to 0.5 per cent. Viewed in this way, it is a tightening measure, but at the same time it does give the Japanese central bank the ability to buy up more bonds, and so then there is an easing of policy. The immediate consequence is that there is no longer a strange kink in the Japanese yield curve. In fact, the BoJ is moving towards the market. Now that the BoJ has adjusted policy for the first time in a long time, more moves can be expected to follow, especially when Kuroda leaves in April.

The Japanese yen is one of the most undervalued currencies in the world. This makes everything in Japan cheap and has allowed Japan to gain market share from rivals such as Taiwan, South Korea and Germany in recent months. Authorities want a stronger yen. However, this does mean an end to Japan's "long low" policy, which was the reason why the yen was so weak. Japanese investors (the proverbial Ms Watanabe) were borrowing in yen and deploying it in higher-yielding currencies. That money is now fleeing back to Japan. What these Japanese investors are selling are bonds in higher-yielding currencies, and this allows interest rates outside Japan to rise. A stronger yen is theoretically not good for Japanese equities, but compared to the past, this effect is small. Because for years the yen has remained relatively strong, many Japanese companies have decided to manufacture elsewhere in Asia (e.g. in Thailand). As a result, they have become relatively insensitive to adjustments in the yen. A steeper yield curve does benefit Japanese financials. Finally, this adjustment helps to depress the dollar.


The turn and the dollar

By Chelton Wealth, December 19


The US dollar was the 2022 currency to beat. In the end, it was only succeeded by the currencies of some Latin American countries, the Mexican Peso and the Russian rouble. As a reserve currency, the US currency is a special one. In troubled times, the currency is strong, but it is also strong when the US economy is performing well. Only in the periods in between, poor fundamentals such as twin deficits surface. Graphically, this is the dollar's 'smile'.

Last year, the US economy performed cyclically better than other regions. Europe mainly suffered from the war in Ukraine and China from the zero-covid policy. The United States, as an oil and arms exporter, is more likely to benefit from the war in Ukraine. At relatively low cost and without a single American life being endangered, the Russian military will take at least a decade to get back to pre-invasion levels. A far greater success than in Afghanistan or Iraq. Moreover, the dollar is still the natural haven of refuge. Normally, then, the Swiss franc and the Japanese yen also benefit from the world's turmoil, but they too were no match for the dollar. On the contrary, the Japanese yen weakened sharply against the dollar. This was due to the stark contrast in monetary policy. The Fed raised policy rates from 0.25 per cent to 4.5 per cent in a year, but Japan is still sticking to Yield Curve Control. For Ms Watanabe in particular, that promise that interest rates will stay low for longer is an invitation to keep borrowing in yen and deploying in higher-yielding currencies.

The moment the US economy softens and the Federal Reserve starts easing policy, the dollar can pivot. This is partly already under way, as the Fed is further along in its tightening cycle. Moreover, the ECB persists in continuing to raise interest rates, almost against its better judgment. Further weakening of the dollar is made possible by waning inflationary pressures in the United States. That moment is approaching. Now the euro is seen as the anti-dollar, but it can be expected that Europe will follow the Fed's policy with a delay. Better alternatives can be found in Asia. Next April, Kuroda, the shaper of the Bank of Japan's ultra-flexible policy, vetoes. That ultra-flexible policy has now become pro-cyclical. The moment interest rates rise, the Bank of Japan is not going to tighten, but to ease by buying up more bonds. The moment interest rates fall, say because of corona, the Bank of Japan does not come up with liquidity, but instead has to sell bonds to keep interest rates from falling too far. That is exactly why this policy will end, probably initiated by Kuroda's successor. Then the yen can also recover. 

However, the Americans did deploy the dollar as a weapon in early 2022. This is not for the first time. Earlier, Iran, Sudan and Venezuela felt the effect of monetary warfare. Cutting these countries off from SWIFT (the international payment system) made it difficult for them to trade internationally, because even if two countries each trade in their own currency, it is still often done against the dollar internationally. Those who can no longer trade in dollars quickly run into a wall economically. One of the sanctions against Russia was such a boycott. Russian individuals and even the Russian central bank could no longer access their assets in euros. The question now being asked by several central banks is why would they still hold balances in dollars, euros, British pounds or even Swiss francs when they may not be able to access them in times of stress. For just as US sanctions now hit Russia, these sanctions could also be invoked against, say, China or several Arab countries. As a result, Russians, Arabs and Chinese alike are seeking refuge elsewhere. No longer London or Paris, but Dubai or Singapore, with Turkey as an intermediate post. This risks eventually eroding the primacy of the dollar. The renminbi is already eager to take over.

In 2023, high beta currencies will benefit from a turn by the Fed. Oil-producing countries such as Australia, Canada and Norway also benefit from higher oil prices. These countries also have highly leveraged households, which could also land them hard if interest rates rise too much in these countries. Countries like Australia and also Sweden combine high debt with an excess of floating-rate mortgages. In Australia, this is not yet causing problems, but in Sweden, house prices are under pressure. As a result, the Swedish krona may also lag in 2023.


Towards a multipolar world

By Chelton Wealth, November 30


The United States took over from the United Kingdom asthe world's most powerful nation in the early 20th century. Not only politically and militarily, but also culturally. In retrospect, the Cold War between Russia and the United States was a long period of stability and oversight. Thanks to mutually assured nuclear annihilation, they held each other in a vice-like grip. It seemed a bipolar world, but the communists were constantly seen as the second world (and the emerging markets as the third world), especially since the end of World War II, the United States has been the most powerful nation.

With Nixon and Kissinger's first visit to China, the relationship between China and the Soviet Union changed. With China's rapprochement with the United States, the Soviet Union was now on its own, which eventually led to the end of the Soviet Union and the fall of the wall. In the following years, the peace dividend was cashed in on the financial markets. There was no serious ideological or political challenger. The interwar period lasted until the September 11, 2001 attacks with unsuccessful wars in Iraq and Afghanistan. During the same period, China's economy grew strongly. Since the arrival of Xi Jinping and Trump's presidency, there has been a clear anti-Chinese policy from the United States. Now, this is sometimes compared to a new cold war, but that is unjustified. The United States and China are much more intertwined economically than the Soviet Union and the United States ever were. There is some talk of Chimerica, where US platform companies have outsourced manufacturing to China.

Since the Great Financial Crisis, China has wanted to be less dependent on the United States and the US dollar. The Chinese were spooked by the impact of a systemic crisis in the United States on the Chinese economy. Several programmes emerged through which China wanted to become less dependent on the United States. Probably the best known is Made in China 2025. Besides more emphasis on self-sufficiency, China also wants to rebalance the economy from a typical Asian export-led growth model to a more self-sufficient consumer-oriented growth model. China aspires to have the largest possible middle class in the world with an olive-shaped income distribution: few rich and few poor, but with a large broad middle class. The Chinese fear the instability and populism created in the rest of the world by the disappearance of that same middle class. On a purchasing power parity basis, the Chinese economy is now 20 per cent larger than the US economy and will eventually be larger in dollar terms than the US economy in the coming years. At almost the same time (2027), the economy of India, will overtake the economies of Japan and Germany, becoming the third largest economy (in purchasing power parity, even the second) in the world. The centre of gravity of the global economy will then definitely be in Asia.


The rapprochement between China and Russia is rapidly strengthening China's dominance. Russia has everything China needs and vice versa. Moreover, trade between China and Russia is no longer in US dollars, but in Chinese renminbi. For other countries, this great power bloc is an increasingly attractive alternative to the United States, as was evident who voted in favour of the UN resolution on Ukraine. In favour was 1.5 billion of the world's population, the remaining 6 billion abstained. Because the Americans (including Europe, Switzerland, Japan etc) have used their own currency as a weapon against the Russians, those currencies are acutely unpopular with the Russians, but now also with the Arabs and the Chinese. This weekend came news that the Qatari are reviewing their investments in London, after London's public transport banned Qatari advertisements. Probably the Qatari do not have these problems in Asia. More and more wealthy Russians, Arabs and Chinese are no longer buying homes in London, Paris or Vancouver. Surely the protection of the rule of law does not seem as strong as they first thought, and Dubai and Singapore are the ideal alternatives. Consider further that the West is saving less and less and consuming more, while parts of the world in which more is saved will focus primarily on Asian financial markets.

The rise of Asian financial markets is reinforced by the fact that in the West, monetary madness has broken out since the Great Financial Crisis. As a result, inflation ended up rising sharply here, while in large parts of Asia inflation is under control or even moderately rising inflation is seen as desirable. Ultimate exhaust is currency development. Just as the British pound lost much of its value due to the dollar's hegemony, the dollar will now lose ground to the renminbi. Moreover, China's central bank is much more like the Bundesbank than the Federal Reserve or even the ECB. In China, no quantitative easing or negative interest rates. In times of inflation, this can make for big differences. See, for example, the 1970s. In the late 1960s, 4 D-Mark went into a dollar; in the early 1980s, it was 1.5 D-Mark. During the same period, interest rates in Germany had fallen from above US rates to below them. It looks like the renminbi will follow this same path in the coming years. The US dollar is currently extremely overvalued. The renminbi is still highly competitive given China's substantial trade surplus. Moreover, the Chinese renminbi bond market is much more stable than the high-volatility bond markets in the West. Thus, this makes the renminbi an ideal haven for investors in the future.

In the short term, the renminbi's performance depends on the strength of the Chinese economy. Corona measures, more specifically the zero-covid policy, and property market developments are putting pressure on China's economic growth. However, the market is counting on too low a growth rate going forward. Instead of around 2.5 per cent, the Chinese economy is more likely to grow at around 5 per cent. However, China's corona rate has now risen to an all-time high and the measures appear increasingly unsustainable. As Chinese leaders do concern themselves with their popularity, the revolts against the zero-covid policy bring its end closer. Meanwhile, the Chinese government has also done a lot of work in the real estate sector to revive it. Over the course of next year, this will ensure that on top of the 5 per cent growth, another catch-up effect will be visible with the result that the renminbi can benefit from that stronger economic growth. Then, like the Americans before, the Chinese too can argue that the renminbi is their currency but our problem.



The peak in inflation

By Chelton Wealth, November 24


The direction of financial markets at the moment is mainly determined by interest rate movements. Whereas rising interest rates first caused price losses, falling interest rates are now causing price gains. Interest rates are falling because inflation is likely to have peaked in the United States. While inflation figures came in higher than expected throughout the year, the latest US inflation figures were less than expected. Several developments mean that inflation figures could also be better than expected in the coming months. For instance, there are clearly fewer problems in supply chains. Container transport prices have fallen sharply. The market for new cars is more balanced, with used car prices falling sharply in the US. Oil prices are also falling due to Chinese lockdowns and the impending recession. Furthermore, the housing market is highly sensitive to rising interest rates, so prices are now starting to fall there too. Following the corona pandemic earlier this year, there was a rapid shift from the products side of the economy to the services side. As a result, inventories in the retail sector rose rapidly, which probably means they are going out the door at a discount. On the services side, the scarcity of staff is driving prices higher, but again, this is a temporary phenomenon. Post-corona, many parties, anniversaries, weddings, holidays, and other outings had to be made up and that effect is gradually starting to ebb away. Moreover, many workers are still stuck in crap jobs, made possible by the cheap money of recent years. Think of online businesses that even at the peak of the pandemic failed to generate positive cash flow. Take 10-minute delivery companies, for example. The moment these companies have to charge the actual cost of delivery, the fun quickly ends. Now that they have to watch costs, many of these staff become available elsewhere. Even bitcoin traders have to look for jobs. Higher prices also mean that more people have to go back to work, people who seemed to have left the job market for good last year.

In Europe, the development of inflation is strongly linked to the development of energy prices. Wholesale gas and electricity prices are falling sharply, but consumers are now being presented with the bill for the earlier panic among politicians to replenish gas stocks as quickly as possible and at any cost. The result is now that gas storage is filled to the brim and many LNG tankers are off European shores, waiting to be unloaded. On the one hand, the fact that high energy prices are delayed being reflected in higher prices for consumers means that the recession in Europe has probably already started and will also be relatively deep. Falling consumer confidence, a weak currency, high inflation, and rising interest rates combine to put a big strain on economic growth. That the ECB nevertheless continues to raise interest rates has more to do with the weak euro than with fighting inflation. After central banks opted for a far too lax policy since the Great Financial Crisis, this now threatens to slip to the other side. Eventually, the ECB will follow the US central bank and the Federal Reserve is likely to pivot in policy due to the better-than-expected inflation trend next year. Quickly coming inflation combined with a turn in monetary policy is obviously good for financial markets.

The peak in inflation is causing a peak in interest rates and therefore probably a peak in the dollar. The dollar has benefited from the US central bank’s energetic raising of interest rates. The Federal Reserve is likely to be the first to pivot in monetary policy, something that could temporarily benefit the euro in the form of the anti-dollar. The loss in the dollar is the gain in the euro. Right now, there is still a lot of confidence in the dollar, which is also reflected in large speculative positions counting on a further rise in the dollar. But when looking at what people can buy for a dollar, the currency is extremely expensive, whereas, for instance, the Japanese yen is extremely cheap in that respect. In the long term, the outlook for Asian currencies is better. Those currencies are relatively cheap against the dollar and deserve a higher valuation based on economic fundamentals.

Increased interest rates have caused long-term forecast yields to rise. It has been a long time since bond yields could be this high. After the Great Financial Crisis, interest rates were cut to zero (or even below) and everyone started looking for yield. That period is now over. Rising interest rates caused share prices to fall, despite the fact that profits continued to rise. The combination of rising profits and falling prices have made equities rapidly cheaper. Anyone who would now start investing based on the initial returns in bonds and the long-term profit outlook in equities will find that return expectations have not been this high in a decade. Since investing is by definition a long-term thing and a 10-year investment horizon is also very common, then based on the development of the forecast returns over the past 10 years, this is the best time to get in. Both equity and bond investment prospects have clearly improved recently. We prefer equities and alternative investments to bonds, but bonds are again an essential part of defensive and balanced portfolios. The balance between risk and return has been restored and all thanks to the peak in inflation.


2023: The year of the yen

By Chelton Wealth, November 21


Ten years ago, a Japanese with 10,000 yen could buy a 2 product in the United States, now a product of only . Conversely, Japan has become cheaper and cheaper for tourists. Ten years ago, you only got 100 yen for a euro, now it’s 145 (100 yen/141 US$). Until recently, tourists could not take advantage of this because the borders remained closed due to corona. Meanwhile, tourists are welcome again. In 2019, 32 million tourists came to Japan spending about 5 trillion yen. Next year, tourists in Japan are likely to spend 6.6 trillion yen. One of the successes of Abenomics is the annually-growing number of foreign tourists. Only corona briefly threw a spanner in the works. Instead of the planned 40 million tourists in 2020, it became 4 million. By 2030, the country is targeting 60 million foreign visitors. Time to shop in Japan.

Japan has long tried to weaken the yen to boost the economy. A weaker yen would also help to push up inflation. Despite the many billions spent on buying up foreign currency, both goals were never achieved, until the year 2022. Now the yen is weakening so fast that the Bank of Japan (BoJ) is even intervening in the currency markets. The weak yen is importing inflation. In October, core inflation hit its highest level in 40 years. In light of all the inflationary violence around the world, this may look shocking, yet core inflation is now just above 3.5 percent year-on-year. It is the seventh month in a row that inflation has been above the BoJ’s 2 percent target.

There are several reasons why inflation is succeeding now. One is the weakening of the yen. The main reason is due to the increased contrast between the policies of other central banks including the Fed and the BoJ’s Yield-Curve-Control (YCC) policy. Japanese women (in Japan, women are about wealth) therefore feel comfortable borrowing in yen. After all, interest rates will stay low for longer, and, as a result, the currency seems to have only one way to go and that is down. Ms. Watanabe borrows in yen and deploys the proceeds in higher-yielding currencies. In times of crisis, some of these speculative positions are normally sold (exactly the reason why the yen is normally a safe haven), but this time monetary policy is actually boosting foreign investments.



The YCC policy was launched in 2013 (at the start of Abenomics) and is also known as Quantitative and Qualitative Monetary Easing. Each year, the BoJ would buy 50 trillion yen, in October 2014 it became 80 trillion yen. In 2016, the BoJ cut interest rates from zero to -0.1 percent, and YCC was launched in September 2016. By doing so, the BoJ committed to the price (the interest rate level, namely 0.25 percent) and therefore had no influence on the quantity to be bought up (basically unlimited, so the 80 trillion yen quantity to be bought up became irrelevant). YCC’s original objective was to get long-term interest rates up, thereby ensuring a steep yield curve. Indeed, negative interest rates were not good for Japanese banks and YCC could stop this. The downside of YCC, however, is that it is pro-cyclical. This became really clear in 2020 at the start of the corona pandemic. The crisis situation pushed down interest rates, forcing the BoJ to stop buying bonds (while outside Japan central banks started buying up en masse). Inflation, also in Japan, is pushing up interest rates, forcing the BoJ to buy more and more bonds. This is while outside Japan central banks are actually selling bond positions.

Japan’s unconventional monetary policy has been made possible by Haruhiko Kuroda, the BoJ governor. His term ends in April 2023. Kuroda came in at a time when the BoJ was doing too little to defuse the crisis for years. The YCC policy is unsustainable in the current inflation dynamics, especially if counterproductive yen support has to be provided by buying up the yen while at the same time procyclical YCC policy puts pressure on the yen. YCC and currency interventions cannot be combined. And if something cannot coexist, it will have to stop. That presents opportunities for the yen, which has now slipped to levels last seen in 1970. Japan is now a developed country, with a currency of an emerging country.

Japan’s unit labor costs are now lower than China’s. In a country where GDP per capita is four times higher than in China, labor costs should not be lower than in China. Monetary policy, therefore, needs a shake-up. According to Kuroda, the policy will not change in the next two to three years, but that statement does not carry much weight, given the governor’s departure in March 2023. By the end of 2023, the Japanese yen could well emerge as the big winner.


Turn in the dollar

By Chelton Wealth, November 14


While the price explosion in the US stock market last week looked spectacular, the fall in the dollar was equally spectacular. Now, there are always many different factors affecting currency developments, but the market tends to focus on just one of them. For the dollar, the main focus lately has been on Fed policy and related Federal Funds Rates. Europe started raising interest rates much later and also has much less room to raise rates given its structural (energy) problems. Japan has indicated that it wants to stick to its monetary policy and partly because of this, the yen is extremely cheap and the dollar is therefore expensive.

Yet it remains to be seen whether this is the only reason why the dollar has become so strong. It could also be because of the lack of liquidity caused by the Federal Reserve's tightening policy. Even in the US government bond market, this is causing liquidity problems. That means more dollars have to be repatriated from time to time. Something similar happened to the Japanese yen in the 1990s. The problems in Japan itself made the yen stronger as a lot of money returned to Japan. More recently, we also saw this ahead of the 2012 euro crisis. Given the weakness in the eurozone, .50 was a remarkable high for the euro. It is possible that this time too, dollar strength is more of a sign of weakness.

One reason to be more cautious with the dollar is that fewer and fewer rich people and countries around the world want to hold their money in dollars (or other western currencies). Rich Russians, among others, held their money in London, Paris, or Zurich with the idea that the rule of law was there for all. In practice, that turned out to be an illusion. These days, a Russian surname is enough to get a block on opening a bank account. Moreover, the Russian central bank's reserves have been seized. A central bank needs its reserves only in times of crisis, so it is particularly galling for Russians that they cannot access them. But what could happen to the Russian central bank could happen to any regime that is not friendly to us for a while. Other countries that do belong to our immediate friends are also starting to spread these risks in this regard. Rich Arabs and wealthy Chinese will be among the first to prefer to hold their money in Dubai or Singapore rather than London or New York. It is safer for a European to invest in Chinese government bonds than it is for a Chinese to invest in German Bunds. So on balance, this means much less demand for dollars and other western currencies over time.

Much of the money now spread across the financial markets is citizens' excess savings for their pensions. As the baby-boom generation retires, they are going to consume an increasing share of the pot. This means that, on balance, there is less left to invest. That while in countries like China, India, Nigeria, and other emerging countries, there will be much more saving and investment. It is only from those countries that it is not obvious that this money will go toward Western financial markets. In fact, for these countries, the renminbi and the rest of Asia are more obvious.

Finally, China is trying to offer an alternative to the dollar with the (digital renminbi). This is a long process but has gained momentum this year. Trade with Russia by countries like India, China, and Indonesia is no longer in dollars, but in local currencies. In early December, Xi will visit Saudi Arabia with the aim of paying more oil in renminbi to sideline the dollar. The G20 also looks like a time to discuss the too-strong dollar or too-weak yen. As cyclical developments cause the dollar to weaken, these structural arguments will gain traction.



US elections

By Chelton Wealth, November 2


On Tuesday, November 8, Americans may go to the polls. 435 new members of the House of Representatives will be elected. Currently, 220 House seats are held by Democrats and 212 by Republicans (there are still 3 vacant seats). Furthermore, 35 new senators may also be elected (out of 100). Of those 35, 21 are in the hands of Republicans and 14 Democratic seats. In the Senate, Vice-President Kamala Harris now has the deciding vote in the 50–50 balance of Democrats and Republicans. The moment the Democrats lose control of the House or Senate then it becomes much more difficult for Biden to get legislation through the House. Furthermore, this election may be seen as a referendum on Biden’s performance. Until recently, Biden was the least popular president ever, but that has improved in recent months. Furthermore, there are elections for a total of 36 governors and several other local positions. Linked to these elections are also referendums in several states, including on abortion legislation.

As always, this election is about the economy. The increased cost of living, higher interest rates and falling house and stock prices forms the basis of voter behaviour, arguing against a Democratic win. Currently, according to polls, 45 per cent of Americans voteDemocratic and also 45 per cent of Americans vote Republican. So it is about the 10 per cent of people who have not yet made up their minds. Furthermore, Republicans are more motivated to vote, so low turnout usually favours Republicans.

In only three of the last 22 mid-term elections did the party that had also delivered the president before that win. That was the case with Roosevelt in 1934, Clinton in 1998, and Bush in 2002. In this respect too, things are not going well for the Democrats.

According to several websites where bets can be made on the outcome, the Republicans are in favour, in both the Senate and the House of Representatives.

There is such a thing as the four-year presidential cycle in the stock market. Monetary and fiscal policies have a major impact on financial markets. Politicians want the economy and stock market to do well and boost the economy ahead of the presidential elections. A bear market usually occurs in the first half of the four-year term, in the second half, the third year shows the best performance. That period starts after the mid-term elections.



‘Dear, oh dear. Anyway …’.

By Chelton Wealth, October 18


Convergence real yields US-UK

Green: Real yields on 30-year inflation loan UK
Gold: Real yields on 30-year inflation loan US

Crispin Blunt is the first Conservative MP to think Prime Minister Liz Truss should leave. According to him, Truss cannot survive the current crisis, he says it is a matter of finding a successor. Meanwhile, another Conservative MP has called Truss a libertarian jihadist, engaged in an ultra-free-market experiment in the British economy. According to new minister Jeremy Hunt (Kwasi Kwarteng's replacement), Truss will remain at the helm, but the moment when he or she is no longer in charge of it is dangerously approaching.


Truss was compared to Margaret Thatcher when he took office. The difference, of course, was that she came up with a substantial Keynesian investment programme (combined with tax cuts and a ceiling on energy prices), but another big difference between Truss and Thatcher is that Thatcher became famous, among other things, for her speech on 10 October 1980. Back then, Thatcher refused to make a 180-degree turn, something that Truss did by adjusting more and more of her reforms under public pressure. It confirmed Margaret Thatcher's nickname (Iron Lady). Thatcher received a five-minute standing ovation in 1980, Truss gets a knife in the back from Conservative MPs.

Even the new British king seems to be dropping Truss. Last week she had her first audience with Charles. As Truss greeted Charles with 'Your Majesty, Charles replied with 'So you've come back again'.Truss then replied with 'It's a great pleasure after which the King replied 'Dear, oh dear. Anyway ...'.

Incidentally, Truss is not the only Briton to turn. Central bank governor Andrew Bailey also has to choose between monetary policy and financial stability. Bailey indicated that the buyback programme launched after Truss' reform plans would not be extended. Had that buyback programme not been in place, several UK pension funds would now be bankrupt. Last Friday, that programme ended. According to Bailey, it is not possible to start QT and raise interest rates on the one hand and buy up UK government bonds on the other. But Bailey also seems to be struggling to stick to this view. Bank of England staff leaked to the Financial Times that the BoE would be willing to extend the deadline, all depending on market conditions. This obviously does not help with a rising systemic crisis. There are now MPs who hold the BoE responsible for the current crisis. If Bailey does go ahead with the buyout on Monday, the BoE's credibility will further decline. Bail's comment is reminiscent of the letter the BoE sent to parliament that Northern Rock should not be bailed out because of the moral hazard problem. A few days later, Northern Rock was bailed out.

Now the dilemma is that under the British Conservatives' rule book, Truss cannot be set aside for the time being. That cannot happen until September 2023 at the earliest. Now, of course, she can resign herself and the Conservatives can also change their regulations. For now, the UK looks more and more like a submerging market with the accompanying volatility in interest rates and the pound.


Your currency, our problem

By Chelton Wealth, October 4


The development of the US dollar is highly relevant to the direction of financial markets. Whether the world likes it or not, the world does depend on the US dollar. The only one that can print additional dollars is the US Federal Reserve. This effectively makes the Fed the world’s central bank. Since March 2021, the growth of dollar liquidity has been declining (i.e. the second derivative), as can also be seen from the development of the M2 money supply in the United States. The peak in M2 coincided with the peak in more speculative assets such as cryptocurrencies, SPACs, IPOs and shares of companies that do not make profits but were highly valued. Now, money supply growth is at a point where in the past there was usually a significant financial crash. Developments in the UK are also related to shrinking dollar liquidity. While it seemed that the impact on sterling and interest rates was a direct result of Trussonomics, it was mainly the limited liquidity in the global financial system that caused the big outcomes.


There are several reasons why liquidity growth in the United States is slowing down. The central bank is raising interest rates and shrinking its balance sheet. Higher oil prices are also reducing dollar liquidity. Nearly 100 million barrels a day are consumed daily, and given the many weeks oil is on the road, this quickly adds up to a large amount. Moreover, inflation is not limited to oil; other dollar-denominated goods are also rising in price and thus require more liquidity. What may also play a role in the dollar’s strengthening is that other countries (read central bankers) are no longer willing to finance the US budget deficit. Using the dollar as a weapon after the Russian invasion of Ukraine, few Russians will buy US treasuries anymore. Since the Arabs and the Chinese could happen to the same thing at any moment, they are also no longer keen on financing the US budget deficit. At the same time, though, the US government is looking for more financiers and so they have to come from the US. The sizeable US national debt does need to be financed. This is not the first time a currency has strengthened precisely when there is actually a crisis. The yen rose sharply between 1990 and 1995 when fundamentally the currency should have come under pressure. The euro also rose sharply in the run-up to the euro crisis. The high dollar does start to pose a problem for US corporate profits. Usually, currencies are hedged by companies some time in advance, so gradually the pain for US businesses is starting to get bigger. For US investors, the pain is also great this year. We have to go back to the 1920s to find a year when the ‘neutral’ portfolio has done even worse. That also creates additional demand for dollars. Now it is liquidity problems in the UK government bond market, the US bond market is many times bigger.

The liquidity squeeze has reached a point where it is causing financial crashes. In the past, the Fed would then respond with additional liquidity, something financial markets clearly benefit from. The difference with the past, however, is that policymakers then faced deflation risks and now the problem is inflation. Eventually, even the Fed will have no choice but to conclude that the current dollar market is too tight and possibly, as, in the UK, there will be new forms of quantitative easing in the US, the well-known twist in monetary policy that the whole market is looking forward to.


Panic among central bankers

By Chelton Wealth, October 3


A central banker who turns from shrinking their balancesheet to unlimited government bond buying in a week is panicking. The moment central bankers panic, the market doesn’t have to. It means that a turn in monetary policy is rapidly approaching. NowBritain, for that is what this is about, is an island, but the cause of the interim intervention is universal and has to do with shrinking liquidity. The moment liquidity declines, the likelihood of financial mishaps increases. We are now in the danger zone. The peak in liquidity was reached in March last year and since then all kinds of risky assets have been falling in value. This will not stop until monetary policy (read interest rates) pivots. For that to happen, inflation has to fall markedly and/or there has to be a major financial crash. For the British, the fall it of the sterling, the sharp rise in interest rates, but especially the problems at UK pension funds prompted the Bank of England to intervene. LDI is already seen as the new subprime and if these risks spill over to the continent, we will be in for a treat. Yet the problems in Britain are insufficient to change the Fed’s mind. In fact, the ECB is already at the same level as the BoE. Both banks are raising interest rates and engaging in quantitative easing at the same time. The BoE for pension funds and the ECB for Italy, in both cases because of excessive use of leverage.

Meanwhile, Prime Minister Truss gets the blame, but that is not justified. Actually, it is the greed of the risk managers who cleverly exploited the aversion to career risk among pension fund managers. Economics is about financial incentives, and with a risk manager who is simultaneously selling a product, it is rather thick on the ground. Truss is as unconventional as Thatcher and, as with Thatcher, the supply-side focus is unlikely to lead to the desired long-term effect. In the short term, though, the measures might benefit Truss. With the cap on energy bills, there will no longer be a family in the UK that worries about energy bills. That is different in continental Europe. Taxes are being cut, albeit mainly for the rich, but the aim is for the final tax revenue to go up. That is quite possible if lower taxes and the abolition of the bonus ceiling prompt bankers to return to London (and pay taxes there). Moreover, Truss is going to make Keynesian investments with borrowed money. At the moment, voters only feel the benefits of that and much less the drawbacks. There is a chance that next year the UK will be seen as the example of the country that managed to break out of stagflation. On the European continent, they want to impose an additional tax on energy companies, a way to push up the price of energy further. Next week they will talk about further measures, but it will not be easy to get all European countries to agree, and half-hearted solutions will not win politicians’ elections. Truss possibly will if her popularity rises next year thanks to recent measures. Then there will be a temptation in other countries to copy Truss’ policies like Thatcher’s and with that, the modern monetary theory will be back in full force.

October is the traditional month for a stock market crash, only such a crash usually follows a previously excellent investment year. That is not the case this time. For many investors, 2022 is the worst investment year ever. For European investors who also did not hedge the dollar, it is not too bad. It is mainly because of the carnage in the bond market. One advantage of the rapid rise in interest rates, however, is that serious alternatives to equities can be found increasingly within bonds as well. With it becoming increasingly clear that inflation has peaked in the United States and looks hard to beat, the likelihood of inflation coming in below market expectations is rapidly increasing. This does not mean that inflation will not remain structurally high over the next decade, but there are wave movements in the interim, if only because of base effects. Those base effects are already improving significantly for the world from next February. That will clearly improve the mood of central bankers. With markets taking a more realistic view of the likelihood of recession (probably still overestimated in the case of the US) and also with fears of stubborn inflation well underway, there is less risk as a result. The biggest risk now is not further rising interest rates, but the impact of inflation and the cooling economy on corporate earnings. Earnings expectations have already come off by around 4 per cent and it is possible that the market is also already counting on further declines in earnings expectations, after all, we are looking ahead to the most predicted recession ever. There will be another benchmark moment soon when the third-quarter results are released.


Truss as the new Thatcher

By Chelton Wealth, September 26


The pound fell last week to its lowest level against the dollar since 1985 and five-year interest rates rose 50 basis points in a single day. The trigger was a £45bn package of tax cuts, the largest in 50 years. With the fall in the pound, Britain's economy isnow smaller than that of former colony India. In reaction to the financial markets, Britain is also starting to look more and more like an emerging market, although more like a submerging market than an emerging market. Kwasi Kwarteng, the new finance minister and new prime minister Liz Truss is betting on tax cuts and deregulation with the aim of boosting growth in the UK economy. To pay for everything, Kwarteng wants to borrow tens of billions more. In this regard, it is unfortunate that the UK's two-year interest rate has risen from 0.4 to 4.0 per cent in a year. Moreover, the plan also frustrates the Bank of England's efforts to get inflation under control.


The package of measures also aims to do something about high energy prices. In the UK, there will now be a cap of £2,500 per household and businesses will also get similar support. The top income tax bracket (from £50,750) goes from 45 per cent to 40 per cent and the lowest rate goes from 20 per cent to 19 per cent. The package goes beyond measures introduced by Nigel Lawson, Kwarteng's counterpart, under Prime Minister Margaret Thatcher. For instance, the stamp duty land tax on houses will be abolished or reduced, benefiting first-time homebuyers up to 625,000 pounds. Taxes on dividends are also reduced.

Furthermore, the ceiling on bonuses in the City will disappear. This had been truncated at twice salary under pressure from the European Union and is now being released. According to Kwarteng, it is crucial that jobs in the financial sector return to London and that bankers pay taxes in London and not in Paris, Frankfurt or New York. Incidentally, in recent years, fixed salaries in London have risen sharply due to the bonus cap. Many bankers reacted approvingly to the announced measures. Overall UK tax revenue is likely to increase sharply as a result of this measure. Tax on entrepreneurs will remain at 19 per cent, the lowest level in the G20.


Kwarteng is fully committed to the City of London as a growth engine for the UK economy. On top of tax measures, there will be 38 special economic zones with specific tax cuts and far-reaching liberalisation. Meanwhile, Liz Truss appears to be fulfilling her radical promises during her Conservative campaign. Because of Truss, there will be more diplomatic conflicts with Europe, the UK is belligerent towards China, Scottish nationalism will get a boost and relations with the US will deteriorate because it does not accept the EU protocol between Northern Ireland and the Republic of Ireland. Besides tax cuts and deregulation, defence spending also goes up by 1 per cent of GDP. This increases the budget deficit. Meanwhile, she blames rising inflation on the incompetence of the UK central bank.

Inflation is a symptom of too much money looking for too few goods and services. It cannot be solved by improving Britons' disposable income. Yet Truss is not entirely alone in this. The extent to which energy is subsidised in Europe is striking. Meanwhile, Kwarteng is Britain's first finance minister with a PhD in economics. The question is whether Truss and Kwarteng's unorthodox approach to tackling stagflation is going to work. Ordinary macroeconomists cannot properly explain the combination of recession with inflation (stagflation). Truss' measures are aimed at tackling inflation through a cap on energy prices, more measures against unions and strikes, and putting pressure on the central bank to tighten. So at the same time, they are taking many measures to spur growth, but in doing so, unlike Thatcher, she is pulling out a package of Keynesian measures. As with Thatcher, Trump and Reagan, many economists are now declaring Truss crazy, but if her plan succeeds, she will go down in history as the only successful Conservative prime minister beside Margaret Thatcher.


Outlet for foreign currency

By Chelton Wealth, September 22


In brief

The Federal Reserve raised interest rates by 75 basis points.
Fed policymakers expect interest rates to rise to 4.6% by the end of next year.
Earlier, they still assumed a peak of 3.8%.

With a third rate hike of 75 basis points in a row, to a range between 3.00% and 3.25%, the Federal Reserve is keeping up the pace to cool down the overheated US labour market. According to Chairman Jerome Powell, the policy rate is only now at the level where the economy is somewhat squeezed. For inflation to return to its 2% target, many more interest rate hikes will be needed.

The so-called dot plot, the point cloud of interest rate expectations of individual policymakers published every three months, shows that they now expect interest rates to stand at 4.4% by the end of this year. In 2023, they expect a final level of 4.6%, to fall to 3.9% in 2024. Three months ago, policymakers still thought the peak would be at 3.8% by the end of 2023. Initially, financial markets were shocked by this. Equity indices fell 1% immediately after the publication of the point cloud, while interest rates rose.

'Let me be clear, our stance has not changed since Jackson Hole,' Powell said before seeking to answer the first question at the press conference. At the Jackson Hole conference, Powell suggested that the central banking system takes a recession for granted, just so long as inflation gets under control. That seemed to be the cue for equity markets to hit the ride back up and bond yields also moved back down.


Combative language

However optimistic the markets want to take Powell's words, Powell's language during the press conference remained combative. He continued to stress that the Fed will continue to raise interest rates until inflation is under control, subtly referring to his illustrious predecessor Paul Volcker, who raised interest rates to above 20% and dragged the United States into a deep recession, but did get sky-high inflation under his thumb.

'Without price stability, our economy cannot function properly,' Powell said. In particular, he pointed to the labour market, which he said is "extremely tight" and where the balance between supply and demand for labour will have to be restored. According to Powell, the economy will have to run below potential for quite some time and for that, unemployment will also have to rise. The Fed expects it to rise to 4.4% next year. That is above the 4.0% the Fed sees as an equilibrium level for the longer term.


Inflation expectations up

Still, the Fed's new growth forecasts do not point to a recession. Those growth forecasts were, however, revised down significantly. The Fed expects the economy to grow 0.2% this year, down from 1.7% three months ago. For next year, growth is estimated at 1.2%, down from 1.7% in June.

Although the Fed is raising interest rates further, inflation will not return to target for now. In fact, expectations for PCE inflation, which measures the monetary depreciation of personal consumption and is the Fed's favourite indicator, were revised upwards further. The Fed expects it to rise to 5.4% this year from a previous expectation of 5.2%. The expectation for next year was also raised by 0.2 percentage points to 2.8%. Only by 2025, the Fed thinks that inflation will be back to 2.1%, just above the target.


Foreign Exchange Outlet

By Chelton Wealth, September 19


There is a growing imbalance in the world. Large trade surpluses are offset by large deficits elsewhere. In the face of monetary prudence, there is the monetary madness that seems to result from the idea of modern monetary theory, a concept that is neither modern (namely many centuries old) nor monetary (as goes via taxation) and not a theory at all. The question is often asked how it should end with ever-increasing debt anyway. There are various solutions and central banks tried for years with their reflation policies (or financial repression) to keep debts bearable. Still, the ultimate outlet is the exchange rate of their own currency. No matter how big the debt is, countries with their own currency can always pay off that debt to the last cent. Coins are simply reprinted, only one can then rightly ask what the value of such a currency still is. High inflation is often accompanied by a weak currency. Apart from the euro, all currencies in the world are linked to a national state. This immediately explains the inherent weakness of the euro. The national state is a product of the 19th century. According to German thinkers, the national state was based on race and ethnicity, according to the French, on the “will to live together, a shared history and shared culture”.

In countries where King Charles III’s head will soon be on the banknote (UK, Canada, Australia and New Zealand), there is such a will to live together. Regardless of distance, they all seem to accept the new British king as the national symbol elevated above politics. This while in the European Union, but also in the United States and Hong Kong, for example, that ‘will to live together’ is much less present. The situation is most acute in the euro. The euro cannot survive without transferring much of the sovereignty of the national member state to Brussels. This means that especially in fiscal matters, Brussels must be given much greater power to preserve the euro. At the same time, it means that the Netherlands with 60 per cent national debt and Italy with 160 per cent national debt will be treated equally. All those Calvinist years of austerity and neatly minding the shop will then have been for nothing. The Italians work to live and the Dutch live to work.

In the United States, there is an increasing divide between Democrats and Republicans, not a reassuring thought in a country where an average of three guns are present in every household. While in Europe it is mainly the Southern member states (with Italy at the forefront) that are feeling the financial impact of the corona crisis, in the United States it is cities like New York, Chicago, Baltimore and the state of California that are bearing the burden. These are Democratic cities and California is as blue as it gets. Just as if it is just a question of whether Northern Europe wants to pay for Southern Europe’s debts, it is also a question of whether Republicans want to pay for these cities’ debts (let alone California’s). This phenomenon does not make the currency stronger. It means that currencies with Charles III’s head on the note are better protected, including the currencies of countries like Switzerland, the Nordic countries, China, Japan, South Korea and Singapore. Besides the US and the EU, the currencies of Hong Kong, Mexico, Brazil and South Africa are also inherently weak for the same reason. They are divided and this division is reflected in a growing mountain of debt needed to iron out the folds.

The US dollar has risen some 20 per cent over the past 12 months. Historically, this means that the stretch is pretty much over. The euro has fallen over the same period, largely due to the strength of the dollar, but do not underestimate its growing weakness either. The surge in gas and electricity prices is making the euro weaker. Compared to a year ago, Europe receives only a fraction of the amount of natural gas from Russia. At the same time, drought and Europe’s inadequate energy infrastructure are actually increasing the need to fuel gas. Energy from Russia used to be paid for overwhelmingly in euros. Much of that money came back to the eurozone in the form of investments and deposits in various banks. A lot was also invested in real estate, luxury yachts and a football club here and there. That money has disappeared. Now Europe has to buy the energy it needs in hard dollars, this mechanism creates an additional supply of euros towards the dollar. On top of that, because of the sanctions against the Russians, the Arabs and the Chinese will also become more reluctant to hold their reserves in euros. The Russians had counted on rule-of-law protection, which is also a major reason for Arabs and Chinese to invest in Europe.

The euro may start hitting the lows of the year 2000, which means that some 20 per cent could still come off. There are enough people in the financial world who believe that holding investments in foreign currencies causes portfolio risk to increase. Only this time, the euro is the source of the risk. Even in the short term, a fully euro-hedged portfolio of stocks and bonds actually creates more rather than less risk. This is because when the world is turbulent, investors take refuge in the reserve currency, the dollar. Those who hedge that dollar to euro do not benefit from a strengthening dollar and actually lose twice in their portfolio. It is often argued then that the average citizen in Europe mainly has liabilities in the euro, but that has changed greatly thanks to the recent energy crisis. Energy must now be purchased in hard dollars. Given Europe’s widening trade deficit, Europe needs to start earning those dollars first. Otherwise, the euro will become even weaker.

The Chinese have increasing arguments to be less dependent on the dollar. This started back in 2008 when problems in the Chinese financial system had a major impact on the Chinese economy. By using the dollar as a weapon against Russia, China will realise that its trillions in dollar reserves will become worthless in a short time if the US seizes them. So the Chinese want to get rid of the dollar as soon as possible, but that is difficult because the dollar has a reserve currency status. Now a reserve currency is not something that is formally confirmed, it is a status that a currency can achieve. For that, a currency has to be especially popular. The most popular currency to do business with internationally achieves reserve currency status. This is not always the same currency; it often depends on a country’s economic power. For instance, the guilder was the world’s reserve currency in the 17th century, then succeeded by the French franc, the British pound and eventually the US dollar.

Since 2008, three-quarters of all international transactions have been in US dollars. The dollar is also the currency of 60 per cent of all debt and 60 per cent of all central bank reserves. Yet the dollar’s power is gradually declining, although no other currency has a status even close to the dollar. China would like the renminbi to have such a status, but like the Windows operating system, it is difficult to compete against it with a new operating system. Even Apple never succeeded or did. With the mobile operating system IOS, Windows’ monopoly was quickly broken. By adding something, Apple managed to push Microsoft aside. Now the dollar relies mostly on traditional payments, a powerful system as evidenced by the recent SWIFT sanctions against the Russians. But it is not a flexible system suitable for all the portable micro-payment options made possible thanks to the internet. A digital version of the yuan could do this.

In the meantime, the yuan (or the renminbi) has become Russia’s de facto reserve currency. Other countries that do not have such a good relationship with the Americans will also prefer the yuan. In that context, it is remarkable that only 1.5 billion people live in the countries supporting the sanctions against Russia. Six billion people live in countries that did not support them before. Those countries often have a greater trading relationship with China than with the relatively closed US economy, many of which will then gradually switch to the renminbi. It is possible that the renminbi will never reach reserve currency status. Fundamentally, enough investors still hiccup against property rights in China and the lack of Democratic rule of law. In practice, the situation is not that bad and property rights are trampled by governments, especially in Western Europe and, to a lesser extent, in the United States. Also, the rule of law seems to be working less and less well here. What China’s efforts could potentially lead to, however, is the dollar no longer having the status of a reserve currency. In a multipolar world, multiple systems can co-exist without any one currency being able to be labelled as a reserve currency. If that reserve currency privilege is going to disappear, Americans will have to scramble to keep their economy competitive.


Worse than the 1970s

By Chelton Wealth, September 8


This bear market is similar in many ways to the bear market that followed the 1973 oil crisis. Then too there was an oil shock. In a short space of time, the price of oil tripled, and during the entire 1970s oil became nine times more expensive. Today, the world consumes six times as much oil as in the 1970s, yet on balance, the global economy is lessdependent on oil. Looking at the explosive rise in natural gas prices and electricity prices in Europe, one could argue that things are worse now than they were in the 1970s. Yet it is often said that things are not nearly as bad as in the 1970s and that it is unlikely that the mistakes of the 1950s will be repeated.

According to Niall Ferguson, this time it is worse than in the 1970s. According to him, the mistakes central bankers made then are very similar to the mistakes they make now. Inflation was seen as temporary and insufficiently combated. But no negative interest rates and quantitative easing then, post-Corona, monetary madness has struck. He also pointedto higher geopolitical tensions. The current war is lasting much longer than the Arab-Israeli war of 1973. Then it was over in 19 days, now we are already six months further after the Russianinvasion in a war that already started in 2014.


The important difference between then and now is that productivity growth is now even lower, while global debt has risen sharply. Demographically, too, our situationis much worse. In the 1970s, the baby-boom generation started working. At the same time, these people started saving for retirement, which meant that although they were productive five days a week, they were soon working one day a week for retirement. Not surprisingly, inflation then starts to fall. Now the baby boom generation is retiring. That means they are no longer productive, but thanks to the well-filled savings pot they are going to consume five days a week, which causes more inflation.



Since the Cuban crisis, there has been a steady decline in tension between the Soviet Union and the United States. The rapprochement with China ultimately ensured that the Soviet Union stood alone. Now, on the contrary, tensions are constantly rising and, while sleepwalking, the likelihood of greater accidents is increasing. Furthermore, Ferguson points out that such geopolitical shocks occur in clusters, just like shocks on the stock exchange. The financial crisis and wars coincide remarkably often. The mistake people make is that in such an environment they do not give sufficient consideration to extreme outcomes, because they rely on the relative stability of the immediate past.

The Gini coefficient also peaked in the 1970s. Not since the start of the industrial revolution had incomes been so evenly distributed. Since then, this has gradually decreased and an increasing part of the population is no longer able to buy a car or a house. That creates polarization, just like in the 1970s. But in the 1970s there was lively politics, and in the end, the battle was fought in parliament. Nowadays, many countries are democracies in name only and the contact between politicians and citizens has been diluted. Moreover, democracy must be constantly defended, but now many government leaders seem intent on dismantling it.

What is important for investors today is that there is a good chance that we are in a different environment, a different regime, away from the forty years of falling interest rates and constantly rising profits, with Goldilocks as the ultimate ideal. The outcome need not be worse in the long run, by the way, but it does mean that we should not rely too much on rules of thumb that worked in those forty years and that we should take more account of extreme outcomes.


From Fire to Ice

By Chelton Wealth, September 5


The year 2022 is not an easy one for investors. European investors have the 'good fortune' of a strong dollar and, as a result, the global equity market in euros is only down 6% this year. However, the eurozone has the misfortune that the sanctions targeting Russia are mainly hitting the European economy, to the point where a recession is the base scenario. Whereas in the United States demand has a major influence on overall inflation, something that a central bank can do something about, in the eurozone inflation is determined by Putin first and foremost. 

Thanks to the strong dollar, the US market is once again doing better than most major markets. Only commodity markets such as Canada, Australia and theUnited Kingdom are performing better. In dollar terms, the US equity market is 16 per cent negative, with growth (-22 per cent) performing worse than value stocks (-9 per cent). In addition, bonds are doing worse than equities, and in a neutral portfolio, this quickly means that price losses hit much harder than with past corrections. Only 24 per cent of shares are in the black. By comparison, at the end of 2008, 48% of shares were in the black. These figures show that, once again, it has not been wise to 'hedge' currencies. When there is a crisis, the dollar tends to rise in value; people simply take refuge in the reserve currency. Moreover, the dollar is also strong when the US economy performs better than the rest of the world. That is exactly the reason why interest rates have to rise. Exposure to the dollar provides a cushion, although that role will be partially taken over by the renminbi in the future.

The market has recently been moving back and forth between the fire of inflation and the ice of recession. In the past week, the market has again been preparing for an ice scenario, as Powell, in his speech a week ago, left no room for a turn in monetary policy. As a result, for the first time in a long time, the global bond market is now in a bear market, a bear market that could last until the end of this decade. It would be much better, also for long-term returns, to take the pain now and allow interest rates to rise sharply. At least then it would be possible to reinvest at higher interest rates. Not that the Fed is not making great strides; who would have expected at the beginning of this year that the Fed would raise interest rates several times by three-quarters of a per cent?

We have probably not seen the bottom of this bear market yet. September is not a great month for equities either and much of the recent bear market rally was unjustified. That potential for decline applies mainly at the index level, by the way. It is possible that many individual stocks have already seen their provisional low in June. From this point on, it is less about the development of interest rates, but more about the development of profits. Analysts are still counting on positive earnings growth and with a severe recession on the way, such a development is not so likely. Higher interest rates and a recession also require a higher risk premium (read lower valuation). The valuation has clearly come down but on the basis of the now valued (too high) earnings. The risk premium has decreased due to the rise in interest rates. Higher risk premiums and lower profits give room for further price falls. However, the moment is approaching when inflation will also peak in Europe. The ECB will undoubtedly raise interest rates next week but does not need to make much effort to push Europe into recession - leave that to Putin. Today starts quietly with US stock markets closed, although Friday's close does not help and the indefinite closure of Nordstream 1 will also weigh on prices.



Jackson Hole 2022

By Chelton Wealth, August 22


This week, central bankers will meet in Jackson Hole, Wyoming. From 25 to 27 August, the Federal Reserve of Kansas will hold a meeting.The agenda will be announced the evening before (on the 24th). This meeting is held every year and foreign central bankers also visit. The event is often used as a platform to communicate important policy changes.

Powell is likely to give a speech on the morning of 26 August. The timing of the symposium is again impeccable, as investors are looking for clues as to how aggressively the US central bank will continue to raise interest rates. It has not happened before at this conference that inflation has been so high. The latest US inflation figure may have shown a decline, but at 8.5 per cent it is still extremely high. Moreover, Powell reacted to this figure by saying that he would like to see more evidence that inflation is heading towards the target of 2 per cent. According to most analysts, the Fed will not act until core inflation (core PCE, now 4.8 per cent) falls below 4 percent.


Over the past week, comments from various Fed members have created more questions than answers. After the reasonably balanced minutes from the last FOMC, Bullard, Kashkari and George came out with comments on Thursday that raised the odds of a 75 basis point rate hike in September. Most parties are banking on a 50 basis point rate hike after the earlier ‘better than expected’ inflation data. This will be followed by another 50 basis points and then another quarter after which the Fed will pause and cut rates in May next year, at least according to what is currently priced into the market. With inflation at 8.5 per cent (or core inflation at 4.8 per cent), it is strange that the market is already counting on rate cuts, as interest rates are still well below (core) inflation. However, looking back at recent policy adjustments by the Fed, this is not so strange. In the summer of 2007, the Fed raised interest rates, but then cut them again a year later. Furthermore, the Fed raised interest rates in December 2018 only to change course again in January 2019. Markets are conditioned on this recent past, despite the fact that there is a clearly different regime (i.e. much higher inflation) than in recent years.


The data on inflation and wages in the United States are simply too strong to suggest that the Fed can take it easy. Moreover, the labour market appears to be picking up, even before the latest jobs report. Core inflation rose by 7 per cent over the past six months on an annual basis. The same figure for the past three months is 8 per cent. Wage growth briefly appeared to slow to a level of 3.5 to 4 per cent, but now the Atlanta wage growth tracker shows that wage growth rose to 6.7 per cent in June. The data on average hourly wages were also revised upwards. The Fed’s favourite indicator is the Employment Cost Index (ECI), which showed private sector wages rising 6.5 per cent year-on-year. Now, the labour market mainly looks back and not forward, so as a predictive indicator you can’t do much with the labour market. But rising wages can ensure that inflation remains high for longer. It will not be easy for the Fed to get inflation back to 2 per cent if wages rise by 6 per cent. Although central bankers do not like to admit it, the primary objective of monetary policy at the moment is to make people lose their jobs. If only enough people are unemployed, wages will rise less quickly, so the thinking goes.

Monetary policy works with a long delay. That is why, in the past, central bankers based policy on forecasts. The actual figures were not even allowed to be the basis for policy. Nowadays, the Fed first wants to see evidence that inflation is rising, and now that it is falling. The danger here is that policy will overshoot (both upwards and downwards). Moreover, this makes the Fed’s policy unpredictable. In itself, this can also be an objective of the central bank. In the past, the Bundesbank was able to get the economy in line simply by threatening to raise interest rates. On the other hand, Bernanke’s interest rate hikes, which were probed well in advance, from 1% in 2004 to more than 5% in 2006, made the market more willing to use leverage because, thanks to Bernanke, people knew exactly where they stood. This contributed to the Great Financial Crisis, not the interest rate increases, but the predictability.



This time the credibility of the central bankers is at stake. It has not been this low since the 1970s. Incidentally, inflation in the 1970s did not go up in straight lines. There were also fluctuations, with sky-high inflation one year inevitably having the effect of moderating inflation the next. That is the nature of measuring inflation. There are still plenty of structural factors that make inflation higher than the 2 per cent target set by the Fed and many other central banks. In this context, it is unlikely that Powell will indicate in Jackson Hole that the central bank will cut interest rates again next year. Rather, it seems that the Fed has not finished raising interest rates and that the final target level is much higher than what the market is now counting on. At the end of last week, the market also seemed to be moving in that direction, given the losses in the bond market and the rise of the dollar towards parity with the euro.


False turn

By Chelton Wealth, August 19


The chances of a recession are increasing worldwide. The US economy has been in a technical recession since the beginning of this year, defined as two consecutive quarters of contraction. This contraction is explained by corona-lockdowns and stock effects. To qualify as a real recession, a significant drop in economic activity is required and, judging by various indicators including the labour market, retail sales and industrial production, this is certainly not yet the case. There are an increasing number of indicators that point to an impending recession, but normally in the United States, it takes an average of ten months before a recession ensues. The Chinese economy also contracted in the second quarter, the result of strict corona controls that left cities such as Shenzen, Shanghai and Beijing partially or totally closed. There, the question is not if, but when there will be a recovery. The corona policy is gradually being relaxed and more relaxation will follow after the People's Congress at the end of the year. In addition, measures are being taken to stimulate the housing market. Nowhere is the likelihood of a recession greater than in Europe. In fact, a recession is the base scenario there. With the Russians cutting off the supply of natural gas, energy prices have risen further. This will depress growth for the rest of the year. In the second quarter, there was still economic growth in the eurozone, but that was mainly due to the opening up after the corona crisis. The annoying thing is that any normalisation of natural gas prices will have little impact on the economic scenario. Indeed, by now winter prices are largely fixed and the drought is exacerbating energy shortages. Furthermore, the ECB needs to raise interest rates further and it does not look like the headwinds of rising energy costs and interest rates will subside any time soon. All in all, the global economy is likely to grow by 2.5 per cent this year, up from over 6 per cent last year.

The growth of the US economy in the second quarter was depressed by 2 percentage points due to inventory reductions. That is good for the current quarter. Furthermore, the latest labour market figures were strong. It has not happened since the 1970s that so many jobs were created during a recession. It is up to the US central bank to slow down the economy to such an extent that fewer jobs will ultimately mean less inflation. Once that has been achieved, the Federal Reserve has the option of easing policy. However, financial markets have been betting on such a soft landing in recent weeks. As a result, interest rates have fallen and equity markets have recovered. Several Fed members are rushing to say that the US central bank will continue to raise interest rates for some time, but markets seem to be paying more attention to the direction of the figures and less to the absolute level. For example, according to the latest figure, inflation fell from 8.7 per cent to 8.5 per cent. That does not mean that prices are falling, but that they are now rising by 8.5 per cent instead of 8.7 per cent. Still, such a high percentage that a few years ago would have been hard to imagine. Economic growth indicators are also weakening, but growth itself still looks robust. At the same time, the high level indicates that the likelihood of the Federal Reserve turning monetary policy around any time soon is extremely low. The market is therefore too far ahead of the music and, given the absolute level of inflation and growth, interest rates will have to rise further, which could lead to a severe recession. Post-corona, the world has been simultaneously hit by supply shocks, higher commodity prices and a rising US dollar. Central banks are raising interest rates to curb inflation. It is possible that there has been a spike in inflation or that the spike will soon follow, but the full effects of higher interest rates have not yet been felt in the economy. Even if we manage to avoid a recession, it is hard to imagine that the economy will return to pre-corona levels.

The fact that equity markets have anticipated too much of a turn in monetary policy that is not forthcoming makes them vulnerable. It is too early to speculate that the US central bank will stop raising interest rates or that it will abandon its policy of quantitative tightening. Although the ECB has little influence on rising energy prices in Europe, this central bank also has little choice but to raise interest rates further. Inflation is simply still too high. For bondholders, the current level of inflation is destroying capital, regardless of maturity. Unfortunately, the war between Russia and Ukraine is creating more inflation, as wars always do. Inflation is, after all, the result of subsidising expenditure that yields no return with money that does not exist. Inflation is rising because of deglobalisation, because of the energy crisis and its accompanying energy transition, because of a shrinking labour force and because of the need post-corona to make longer supply chains more robust. Central banks seem convinced that the current high inflation is mainly related to supply-side distortions and the developments around Taiwan and Ukraine could prolong it. Meanwhile, wages are rising, in the United States, but now also in Europe.



By Chelton Wealth, July 28


The situation in Italy is always serious,but rarely hopeless. Draghi is definitely leaving as Prime Minister of Italy. After President Mattarella initially refused him his resignation, the last attempt to reconcile the coalition failed. Draghi still has a lotof support among the Italian population, 50 to 65 per cent would have preferred him to stay on. This may help in the upcoming elections. Meanwhile, the hashtag #poveraItalia is trending on social media.


The anger is now directed mainly at the Five Star Movement and Lega, the parties that caused the crisis. Yet it seems better for the survival of the eurozone that elections take place now rather than next year. Next year, Italy will probably be in a deep recession and there will be a new flow of refugees from Africa (possibly even bigger than after the Arab Spring and the current refugees from Ukraine). To hold elections at such a time would probably mean that more than 50% of the votes would go to right-wing and originally euro-sceptical parties.

If elections are held now, the Fratelli d'Italia willbe the big winner. This right-wing opposition party was the only major party to successfully oppose the coalition led by Draghi. There will now be elections on 25 September. This could create problems in drafting a budget for next year, which is one of the conditions for receiving funds from the European recovery plan. Draghi may be gambling that he can work better (also with Europe) with the government that follows the September elections than with the coalition that results from next year's elections.



Draghi's government has lasted longer than average, no less than 17 months. Since the Second World War, Italy has had a new government 69 times. This is also due to the tactical game that is played every time a party thinks it will benefit from new elections. Furthermore, quarrels within a coalition break out more often than average.


Italy has not enjoyed participating in the first 20 years of the euro's introduction. The country is regularly plagued by recession and, all in all, the Italian economy is the same size as it was 20 years ago. Meanwhile, the debt has risen to 150% of GDP, which, at normal interest rates, means that the debt is rising faster than the economy will grow. The greatest risk is that the right-wing parties will decide that leaving the euro is the solution.

Recent developments in interest rates continue to show that the eurozone is a divergent and therefore inherently unstable system. The advantage of leaving is that instead of painful reforms, the adjustment is painless via the currency. When Italy leaves the eurozone, the European Union will probably end too. It will be succeeded not long afterwards by a new Union potentially twice the size (including the UK, Switzerland, and Scandinavia). 


At the same time, Italy has been in decline since the fall of the Roman Empire and, in the meantime, was the cradle of the Renaissance, opera, radio, the piano, newspapers, espresso machines, banks and Ferrari. For three centuries, the Venetian ducat and the Florentine florin were even the world's reserve currencies. Europe's strength clearly lies in its plurality, not its uniformity. Yet the simple fact that there are now elections in Italy could cause another euro crisis. Speculation on the outcome of the elections will keep foreign investors away for a while. 25 September is not the best time for an election on the stock market and there is little chance of a stable coalition emerging afterwards. The ECB will watch over Italy in the eurozone but is forced to move to higher spreads than it would like. A spread of 300 basis points inevitably means that Italian debt will eventually be unsustainably high.


The credibility dilemma

By Chelton Wealth, July 25


With an interest rate increase of half a per cent, the ECB is once again surrendering some of its credibility. From now on, the ECB will also be guided by economic data and the central bank will be indicating that forecasting is pointless. There is also an advantage to this: You no longer have to listen to the many speeches by ECB President Lagarde. Last Thursday, the ECB raised interest rates for the first time in 11 years. The consensus counted on a quarter, it became an increase of half a per cent. This brings an end to six years of negative interest rates.

Now that inflation in the eurozone has reached 8.6%, a negative policy rate is no longer considered appropriate. This statement seems somewhat absurd, but the painful thing is that the ECB is faced with a major dilemma. The ECB will have to be careful about raising its policy rate as this could cause interest rates to rise ‘disproportionately’ in several eurozone countries. To prevent this from happening, the ECB has introduced TPI, a transmission protection instrument. The ECB can buy up an unlimited amount of bonds if the market dynamics demand it. Lagarde, who when she took office stated that the ECB was not there to monitor credit spreads, is doing exactly that with this mechanism. As soon as the interest rate differences in the eurozone increase to such an extent that the continued existence of the euro is threatened, the ECB intervenes.

The weaker eurozone countries can now count on unconditional support from the ECB if interest rates rise too much. There are conditions to the TPI, but the ECB is deliberately vague so that it cannot be determined whether weaker euro countries comply with it or not. From now on, the ECB will watch over the continued existence of the European Union. Not so strange, because without the euro there would be no ECB.

The conditions for TPI are that a country must comply with the fiscal rules of the EU, that there may not be any serious macro-economic imbalance, that the national debt must be sustainable, both according to Brussels and the IMF, and that a sound macro-economic policy must be pursued, such that the conditions for payment from the European Recovery Fund are met. It is possible that Italy still meets them at the moment (looking back), but soon it will not.

If the ECB buys Italian debt before the Italian elections, the incentive for the new Italian government to carry out reforms will disappear. However, the ECB will now determine which credit surcharge is justified on the basis of weaker fundamentals and which part must be covered by TPI intervention. It is almost impossible to make this distinction. Italy is now in the vicinity of Indonesia and Mexico.

In addition, the ECB mainly does business with commercial banks. They tend to tighten their credit conditions when interest rates rise. Especially in countries where interest rates are rising sharply, the tap is turned off. In countries like Italy, France and Spain, credit conditions have been tightened recently, while in a country like Germany they have not changed. In addition, the ECB wants banks to stop drawing money via the TLTRO (targeted longer-term refinancing operations), something that particularly affects banks in the weaker euro countries.


Furthermore, the ECB is trying to solve a supply problem by depressing demand. The big engine of inflation in Europe is the price of (Russian) energy. Putin may be supplying natural gas to Germany again via Nordstream 1, but it is less gas than before. An energy shortage threatens to strike at the heart of German industry. An energy shortage combined with an Italian political crisis cannot be solved by the ECB seeking to depress demand by raising interest rates. It is more likely that the combination will actually create more problems in the eurozone.

Last week, large parts of Europe suffered from the greatest heat ever recorded. In many countries, people were advised to stay at home and, above all, to drink a lot. In half of the European Union, there is now a severe drought, which also has economic consequences. The low water level in rivers reduces the amount of transported goods (in 2020, 6% of all freight was transported by the river in Europe). Water levels in the Rhine have not been this low since 1970. This causes new delays in supply chains. The last time it was this dry, production in the pharmaceutical and chemical industries dropped by 15 per cent. Furthermore, a lot of coal is transported across the river. The warming-up in combination with the low water levels also means that nuclear power plants, for example, can supply less electricity. Hydroelectric power stations supply less electricity because of the drought. This happens to affect mainly France, Spain and Italy. All at a very unfortunate time. 


The most predicted recession ever

By Chelton Wealth, July 20


It is remarkable how many sides are predicting a recession,while such a recession has obviously not yet been factored into the share prices. Even in the first week of the number season, in which mainly financial institutions reported results, there were no signs that a recession was imminent.

A recession in Europe is fairly digital, it depends mainly on what Putin is going to do. Meanwhile, Russia has found enough alternative buyers for its gas and oil.


Natural gas calendar


Even Saudi Arabia is buying cheap Russian oil so that it can export more oil. Furthermore, Putin knows that in a few years' time he will no longer be supplying Europe with natural gas and oil, which means that he can make Europe suffer to the maximum by not supplying any more oil and gas next winter. The effects of a total blockade are so great that it would be relatively easy for the European Union to fall apart. It would mean the end for German industry, which is heavily dependent on cheap Russian gas. Already, for many Europeans, the energy bill is unaffordable, and when people do not have enough left over to buy food, they have to choose between a deal with Russia that will directly lower the price of natural gas and oil and have the added effect of preserving the European Union and the euro, or continued aid to Ukraine, which could result in major social unrest on the European continent and the end of the European Union and the euro. Seen in this light, the choice seems simple. Putin gets the Donbas and in return, we get 'peace in our time'. Now the Americans also have to cooperate on such an agreement and for a long time, they seemed to be pushing for regime change. The moment Putin is called a war criminal by Biden and Biden has accused him of genocide, the door should be reasonably closed. But three years ago, Biden also accused Mohammed bin Salman (MBS) of the murder of Jamal Kashoggi and indicated that Saudi Arabia should be seen as a pariah, with whom nobody wants to do business anymore. Last week, the same Biden begged MBS for more oil. It was a hopeless task as the country is at maximum production, but perhaps Russian imports could ensure that more could be supplied. Meanwhile, MBS has promised to be able to deliver 13 million barrels a day, perhaps with thanks to the Russians.

Also noteworthy is the deal agreed late last week between Russia and the US to fly each other's astronauts and cosmonauts to the ISS. The top man of Roscosmos, Nasa's counterpart, has just been replaced by Yuri Borisov, Russia's former defence minister. This man is less confrontational (although you would not say so with his previous position) than Dimitri Rogozin. Rogozin said earlier that the US should start using brooms to fly into space.

A recession in the United States is not likely in the short term. Consumer confidence is low because of inflation, and for producers, it is mainly because of a lack ofpersonnel. These are not exactly signs of a recession, but rather of overheating. If a recession doesoccur in the United States, it will probably not be before the second half of next year. Furthermore, a relatively mild recession will probably not be enough to bring inflation under control. Meanwhile, the market is even counting on some interest rate cuts for next year.


The figures of the financial institutions in the United States did notyet point to a recession. Although the share of the largest, JP Morgan, fell by 4 per cent on the figures (after the 30 per cent fall in the share price this year), debit and credit card sales were 13 higher in the second quarter compared to the first quarter and 15 per cent higher than a year ago. Loans to consumers rose 7 per cent and the percentage of non-performing loans declined. In total, that is less than 1 per cent. Of course, JP Morgan also increased those provisions, but when everyone is talking about a recession, that is obvious. Even Jamie Dimon does not know what the economy will look like in two years' time. Only mortgages show a clear return, not so strange after an interest rate increase from 3 to 6 per cent (now 5.2 per cent). But there are hardly any variable loans anymore, almost everything is fixed for 30 years at much lower interest rates.


Furthermore, a mortgage rate of 6 per cent is still lower than the mortgage rate during the housing bubble, but it is true that the higher interest rate combined with the high house price means that for new buyers, houses in the US have become fairly unaffordable. On top of that, too little has been built in the US - good news for landlords in the rental market. The fact that fewer mortgages are being granted does not automatically mean that house prices are falling or that consumers are spending less.

Looking at the various indicators that point to a coming recession, there are some doubtful cases. For example, the number of new jobs is decreasing compared to last year, but historically there are extremely many vacancies and extremely low unemployment. Not the signal of a recession.


The non-farm quits rate also fell from 2.8 per cent to 2.5 per cent in May, but apart from that 2.8 per cent is still the highest rate this century. Not really an indicator of a recession.

The number of jobless claims is rising, but again from an extremely low level. Only in the 1970 recession was the number of jobless claims lower than today, but then there were also 200 million people living in the United States, compared to more than 300 million today.

A good indicator of a recession is the yield curve, especially the 10-year minus 3-month curve. It is not yet negative, but according to the forwards, it will be in the fourth quarter of this year.

Meanwhile, earnings estimates are being lowered and even a striking number of companies are being downgraded, but strangely enough, this is not causing any price pressure.

According to several investment banks, there is therefore further downside for US equities if profits come under pressure or if interest rates rise further as a result of further disappointing inflation figures.

The conclusion still remains that the probability of a recession is overestimated by the market and the probability of persistent inflation is underestimated. There may be a recession at the end of 2023, but it will not be deep enough to eradicate inflation.


King dollar

By Chelton Wealth, July 12




This morning, for the first time in 20 years, it was possible to buy a euro with a single dollar. A one-to-one exchange rate is known in the financial world as parity. At the turn of the year one had to pay 1.13 dollars to buy a euro. At the beginning of 2021 it will be 1.23. The dollar is on a huge upswing, which is affecting the most important financial market - the currency market - these days.


All the plagues of Egypt


A growing fear that central banks will raise interest rates further to fight inflation, just when fears of an impending recession are spreading. An inverted yield curve, sharp falls in commodity prices and slumping consumer spending are not helping to lift sentiment on the stock markets. In the background, the devastating war in Ukraine seems to have no end in sight and an energy crisis in Europe is looming, should the Russians permanently cut off gas supplies to Western Europe.


Dominant status


All this has contributed to the unprecedented rise of the world's most important currency. The dollar has traditionally been a popular refuge among investors in times of turmoil. After all, the United States is by far the largest and most liquid market. And because the dollar still has a very dominant status, it is also the safest. A flight into dollars is therefore not so strange.


No longer behind the curve


Another factor is that the central bank of the United States has been busy for months raising interest rates and has started to tighten its broad monetary policy. In this respect, the United States is far ahead of the European Union. Whereas it was long claimed that the Federal Reserve was behind the curve, this now seems to be less and less the case. Certainly in view of the now lowered inflation expectations.




In the European Union, inflation appeared for a long time to lag behind that of the United States, but that gap has now been more than closed. Thanks to the Russian threat to possibly cut off the gas supply to the European Union altogether. The European Union has made itself very dependent on imports of Russian gas in recent decades. The business model of the German economy in particular, but also that of Italy, seems to be based on it. In contrast, the United States, partly as a result of the shale revolution, is largely self-sufficient when it comes to energy.


Energy crucial


In the coming period, energy will therefore prove to be the crucial factor in the further development of the dollar against the euro. Is the European Union's dependence on Russian gas structural or is the European Union capable of wresting itself from the clutches of the Russian bear? As long as this is not the case, there could be talk of a fundamental restructuring of the world economy. A restructuring that will not benefit the European Union. The United States is in the hot seat in this energy crisis, while the European Union can only hope for a happy ending.


Climate change good for something


When policies are based on hope, mistakes have been made in the past. Decades of carelessness regarding our energy dependency are now exacting a heavy price. How high that price will be depends in part on the weather gods. A harsh winter may put the hard-won consensus in the European Union under severe strain. Perhaps global warming will still be good for something and a mild winter will follow.


"Adjusted for currency differences"


For the time being, the euro is weakening further and further. That does not help to fight inflation either. After all, many commodities are paid for in dollars. For the United States in particular, the strong dollar is an advantage. It is the helping hand the Federal Reserve needs to fight the inflation spectre. The sharply higher dollar is, however, disadvantageous for the large American multinationals. Profits made abroad are lower, converted into dollars. In the coming weeks, the term "adjusted for exchange rate differences" will be used frequently in the publication of the many quarterly results. 


Exit Boris Johnson

By Chelton Wealth, July 11


Boris Johnson's departure from Downing street 10 seems inevitable, though you never know with Boris. Johnson, of course, was the Prime Minister who campaigned on 'Get Brexit Done' and his departure inevitably means a greater rapprochement with the Eurozone. Johnson's ideology does not bind the new Prime Minister (because of Johnson there was talk of a hard Brexit). Johnson's successor will be likelier to listen to lobbying companies advocating a rapprochement with the European Union. Nobody is waiting for a trade war with the EU. This means that an agreement can also be reached on Northern Ireland. Eventually, the UK will have a relationship with the EU similar to Switzerland or Norway (something the Brexiteers do not want, but which was the most likely scenario from the start). This also means that the loss of the pound versus the dollar since the Brexit referendum (-20 per cent) and versus the euro (-11 per cent) can be made up, now that Johnson has left the field.



The new Prime Minister will have to try to stabilise the British economy. Now the UK seems to be the textbook case of stagflation, with a stagnant economy and inflation rising to 11% in October this year according to the Bank of England. Expect a more traditional conservative policy. That also means a tighter monetary policy. Taxes may be cut, but UK government spending is likely to be reduced even more. A recession will be accepted as a means to control inflation. Moreover, one can easily refer to Johnson's mistakes to explain the recession.

Johnson's departure has increased the likelihood that the Conservatives will win the next election (January 2025). Depending on popularity, it is even possible that the new Prime Minister will call an election sooner.

The challenge for the new prime minister is not so much Brexit but above all find a solution to the stagnating British economy. Between 2004 and 2019, incomes in the UK rose by 12 per cent (the top 11 per cent and the bottom 2 per cent). By comparison, over the same period incomes rose 34 per cent in France, 27 per cent in Germany and 23 per cent in the Netherlands.  Moreover, the UK has the second most unequal income distribution of any developed country after the United States.

The favourite successor to Johnson according to the Conservatives is Ben Wallace, but he has indicated that he will not compete for the leadership. Wallace is the finance minister and the only remainder in Johnson's cabinet. Moreover, he is popular because of his arms support for Ukraine. Nadhim Zahawi is not running either. Rishi Sunak is, and so is Liz Truss. The latter could control both wings of the party. There are also Kemi Badenoch, Tom Tugendhat and Suella Braverman. When selecting the next Prime Minister, MPs may first choose two candidates from the longlist. These candidates will then be presented to the 100,000 members of the Conservative Party. The parliamentary process is likely to be completed before the summer recess (21 July).



The global imbalance

By Chelton Wealth, June 28


A current account deficit is usually seen as a clear sign of macroeconomic problems. But every deficit is a surplus somewhere else. When there are many surpluses and deficits, there is a global imbalance that can cause instability. Just before the Great Financial Crisis, the global imbalance had reached 3% of GDP. During the Great Financial Crisis, countries with current account deficits found it difficult to finance themselves, but a weaker currency and a severe recession quickly rebalanced them.

In recent years, the global imbalance has increased again. As a percentage of GDP, it is now 2.2 per cent compared to 1.6 per cent in 2019. Raw material countries and especially countries that produce oil play a particularly large role in this, even more so than before the Great Financial Crisis, when the surpluses were mainly to be found in the countries in Asia where the world’s factories are located. As of then, the US economy still has a structural current account deficit. The world is still willing to finance American consumption, and all this is thanks to the privilege of the reserve currency. Yet this is less extreme than in the past. In 2006 and 2007, the US current account deficit was about 6%, now it is about 3.5%. It helps, of course, that thanks to the shale revolution the United States has become an oil-exporting country again.

The moment oil prices rise further, the imbalance will increase further. A further rise in the oil price is still the base case. Recently, however, the oil price has fallen somewhat. Not so much because of fears of recession but more because the marginal seller (Russia) and the marginal buyer (China) reached a new equilibrium price at USD 93 per barrel. Now, the price of oil has not fallen to a barrel, but the price of oil is in backwardation and if you look at a two-year timeframe, is now on the boards. There is still a fairly serious shortage of oil in the world. We are running down stocks and ten of the eight largest OPEC countries are struggling to meet production agreements. There has been a complete lack of investment for years and, even at this oil price, investment is so far behind that the problem is only getting worse.

The difference from the situation before the Great Financial Crisis is that the imbalance is now increasing at a time when economic growth is slowing down. Before the Great Financial Crisis the world economy was growing strongly. In combination with the monetary policy this created extremely favourable financial conditions. In other words, deficits could be financed quite easily. Now, it is precisely the weak growth that makes financing so much more difficult. The solution can only be a weaker currency until there is a balance again.

In a normal cycle, slower growth and tighter monetary policy should lead to lower oil prices and a quick return to balance. Now, the persistently high (and probably still rising) price of oil is causing the imbalance to increase. The only way to deal with this imbalance is through the currency, the ultimate outlet for any economy. Because the United States is now a net exporter of energy, the United States and thus the dollar are hardly affected. But other countries with rising deficits are. Take the Japanese economy, for example. For years, the country had a current account surplus, but due to the rising price of oil, this has suddenly turned into a deficit. The Japanese yen has weakened quite spectacularly this year, which is also due to the sharp contrast in monetary policy between the BoJ and the Fed. Another region with a sharply rising current account deficit is the eurozone. Within the eurozone, the imbalance is very visible. The countries in the North have absurd surpluses and the countries in the South have substantial deficits. The euro is too soft for the Northern member states and unfortunately still too hard for the South. But this imbalance cannot (yet) be adjusted by exchange rates since we have linked our currencies through the euro. It can only be solved by quitting the euro.

So the eurozone is an inherently unstable system. Now a large part of the energy for the eurozone came from Russia. In fact, all this energy was paid for in euros. Perhaps it was calculated in dollars, but the money flowing into Russia came back in the form of Russians spending their euros on football clubs, luxury yachts and houses in London and Paris. In addition, every self-respecting restaurant had a Russian section of the menu, that is, the section where the bottles of wine start from 1,200 euros a bottle. If there was any money left over, it was parked in European accounts. The oligarchs (wrongly) realised that they too were protected by the rule of law. Even the central bank dared to park reserves in euros. Those days are over; from now on Europe has to earn hard dollars to pay for its energy. If things go wrong, even the Arab oil sheikhs and Chinese billionaires no longer want to put money into the eurozone. After all, it could well be their turn in the next conflict. That is what happens when you use your currency as a weapon. So suddenly there is an acute current account deficit, something that can be solved by a further weakening euro. Only that weaker euro causes more inflation, something the central bank then has to combat by raising interest rates (except for Italy, right?). Every time financial conditions rapidly deteriorate, a big company or country falls. It could well be that this time it is the eurozone’s turn. For years, such a currency crisis in Asia or Latin America seemed a far cry from the past, but soon we will suddenly find ourselves in the middle of it.


The perfect inflation storm

By Chelton Wealth, May 16


In the past six weeks, shares have fallen every week. This has not been the case since mid-2008. It is only that the S&P 500 recovered last Friday, otherwise it would have lost more than 20 per cent from its peak last year, the point at which there is a formal bear market. More than 4,000 US stocks fell to their lowest point in 12 months last week. The average share is even 40 per cent below the top.

There are several reasons for this decline. It started with the turn in monetary policy in the United States, the moment when the narrative of 'temporaryinflation' turned into 'persistent inflation'. After last week's US inflation data, there appears to be plateauing rather than a recent spike in inflation. Inflation is also increasingly spreading in the economy, not only in products but also in services. However, there is a widening gap between Core CPI (5.7 per cent) and Core PCE (3.3 per cent). This does not make communication from the Fed any easier. The PPI figures show that there is still plenty of inflation in the pipeline. When theMarch and April figures are added together, there is no two-month period in US history when producer prices have risen so rapidly.

The only way to curb inflation is to slow down economic activity. Apart from the Bank of Japan and the Peoples Bank of China, central banks are now doing this. The market now seems to be more afraid of the slowdown than of high inflation. The market still seems to underestimate long-term inflation. This fear of a slowdown is also fuelled by the Fed's statement that, instead of the intended soft landing, it could at most be a 'not so soft' landing (softish). On the one hand, Powell is thus indicating that he is prepared to hurt the economy, but on the other, he would also prefer to see a lower stock market. After all, the consequence of a somewhat more complex landing on the economy is that company results come under pressure. Whereas US equities corrected mainly based on valuation until mid-April, there has hardly been a correction based on deteriorating earnings prospects.

In addition to inflation, monetary policy and the slowdown in growth, thestock market has of course not been helped by the war in Ukraine and the lockdowns in China. That has also helped push prices down. Some investors dare to buy sharply lower stocks, under the motto that all the bad news is discounted in the price, and given the recent deterioration in sentiment (see, for example, the Fear & Greed indicator), a bear market rally after six weeks of decline is quite possible.

In November, the S&P 500 was still valued at 21.5 times earnings. This has now fallen to a perfectly reasonable 17 times earnings, but it is the earnings that are now being called into question. Moreover, the rise in interest rates has caused the risk premiumon shares to fall rather than rise. The first-quarter figures were still fine, but expectations for the second quarter have been lowered, while those for the whole year have remained the same. This means that more has to come out of the second half of the year when there is a slowdown in growth, not a good combination. To compensate for this, the S&P 500 should now rather be at 14 to 15 times earnings. The only question is whether the market will take the worsening earnings outlook into account now or only when it is formally confirmed by the companies.



In addition to lower profit margins, there is also the issue of inflation in the somewhat longer term. The market seems to assume that 80 to 90 per cent of interest rate increases have already been discounted. Many interest rate rises have indeed been priced in, but, remarkably, the expected peak in interest rates will not be higher than inflation. This is even though a positive real interest rate is required to slow down the economy. Even though Powell wants to come across as Volcker, there is still a chance that if inflation levels fall a little in the second half of the year, the Fed will declare that monetary measures are effective and that it can ease policy a little. This could lead to a rally in equities, but at the same time, it would leave us with relatively high inflation for much longer.

In the end, it all comes down to inflation expectations. In that respect, unfortunately, there is a perfect storm. Many long-term structural factors are causing inflation to rise this decade. For example, the ageing of the population is causing more inflation. People who for years worked one day a week for their pensions are now going to consume that amount, while they no longer contribute to the economy. That is inflationary by definition. The comparison with Japan is often quoted, but the structural deflation there was mainly a consequence of the bursting of the double bubble in the early 1990s, not of ageing. Another structural factor is deglobalisation or regionalisation, something that increased in the world after the Russian invasion. In addition to globalisation, telecommunications and IT have also depressed prices in the past. Most IT companies have now become monopolists due to their disruptive innovation, not a market form known for falling prices. There is also a clear social movement away from the capital-labour pendulum and towards the labour factor. Perhaps under pressure from social media and aided by the tight labour market, employees can demand a larger share of the profits. This depresses profits and creates the dreaded wage-price spiral. Another structural factor causing more inflation is the changed monetary policy to solve the high debt mountain. Whereas before the Great Financial Crisis (GFC) the policy was aimed at less inflation, now it is more inflation (financial repression/reflation). After all, debt is always expressed in nominal GDP. More inflation helps to reduce debt as a percentage of income. Furthermore, the post-GFC and certainly post-Corona policy has become much more Keynesian, with a greater role for government with many investment programmes, actually financed by the central bank and, on balance, more inflation. 


On top of these structural factors that lead to higher inflation, there is the tactical monetary and fiscal policy that is now causing more inflation. In a short time, the money supply has increased by 30 per cent and, as inflation is primarily a monetary phenomenon, we are now seeing the downside. In the short term, this 30 per cent demand impulse has alsocaused problems in supply chains and the consequent overheating of the economy. Finally, there is the war in Ukraine. Not only do wars always cause more inflation, but the fact that this causes an oil shock and also a shock in food prices (1 in 8 calories in the world comes from Ukraine and Russia) completes the picture of the perfect inflationary storm. It is virtually impossible to reverse this with the Fed's currently intended policy. The Fed will have to inflict more pain on the economy and thus the market.

The result is, first of all, that more air will run out of the bond market. The past few months have been fast; the sequel will be more gradual. Higher interest rates and inflation make US equities relatively expensive, also because equities outside the US were already cheap before. When we talk about the stock market these days, we are talking about US equities because two-thirds of the total stock market consists of US companies and many stock markets outside the US are strongly correlated with the US stock market. That is the characteristic of expensive shares, they have a heavy weighting in the index. So there will be a further rotation from the more speculative sectors too, for example, energy, mining, agricultural companies, forestry, etc. These stocks have already risen sharply recently, making it difficult for many investors to buy them now, but valuation and fundamentals justify another doubling. The time is also approaching when Chinese equities and emerging market commodity stocks will outperform those of countries where monetary madness has struck. The dollar is still the safe haven but will weaken in the long term, especially against Asian currencies.



The Divided Kingdom

By Chelton Wealth, May 10


Sinn Féin, the political arm of theIRA, became the largestparty in Northern Ireland with 27 seats. The Unionist Protestants won 25 seats. When the Irish Free State was declared in 1921, Northern Ireland remained occupied by the British. Sinn Féin's goal is reunification with Ireland and this landslide has brought that a lot closer. It is possible that there will be a referendum on joining Ireland and, according to the agreements of 1998, at least half of the population must agree. Moreover, London must approve such a referendum.


Northern Ireland assembly elections


According to the latest polls, one-third of the population now wants to join Ireland. That may change the moment a hard border is drawn again between Ireland and Northern Ireland. The reason why the Unionists lost is not only because they are no longer in the majority (the Unionists do have 17,000 more votes, but the distribution of seats is a result of the district system), but it is also because of the great dissatisfaction with Brexit and especially the Northern Ireland Protocol. As a result, there is now a (trade) border between Northern Ireland and the rest of the no longer so United Kingdom.


How checks between Britain and Northern Ireland work


Now the Unionists only want to be in government with Sinn Féin if the problems surrounding the Northern Ireland Protocol are resolved. With that, a coalition is not possible. The British government would then have to renegotiate Brexit and, of course, London does not hold the strongest cards, especially against Macron who has just been elected for a second term. Moreover, this victory inspires the pursuit of independence for Scotland and now Wales as well. It is unlikely that the European Union will support the independence of the Scots or other parts of Great Britain. Especially a country like Spain does not want to set a precedent for Catalan or Basque independence.

As early as the Brexit referendum, it became clear that a vote for Brexit would be a vote against the United Kingdom. Many countries in the European Union have similar problems to the United Kingdom. Europe is actually made up of more than 100 regional areas with often forced national states above them. As these nation-states transfer more and more of their sovereign power to Europe, the link between the voter and the politicians is being diluted. This provides new impetus for regional parties. Europe's strength lies in its uniformity and not in a European unitary state led by France and Germany. More political power for the different regions is required to make a united Europe a success, but the nation-states will not want to give up their power so quickly.

Indirectly, the war in Ukraine contributed to Sinn Féin's victory, as the party's main agenda during the elections was a social one, including the sharp rise in prices due to Brexit and the Russian invasion. Next year, elections will be held in Italy and Spain, among other countries. There, economic conditions will play a bigger role in the outcome than in the last French elections. In addition to the negative effects of the coming recession in Europe, the sharp rise in prices has a negative effect on the political uncertainty index. Bear in mind that the European Union, and with it the euro, is still a divergent system. France is just one recession away from Italy and the ECB's primacy is above all to preserve the euro (no euro, no ECB) therefore even fighting inflation comes second.


The tap closes

By Chelton Wealth, April 28


The US equity market had a bad day last Friday, a bad week, a bad month and a bad year too. If this continues, 2022 will be the worst year for US equities since 1974. As if that were not enough, it is also an extremely bad year for bonds. The bond market is on track for the worst result since 1920. So much for the neutral portfolio. The reason is as simple as it is sobering. The Federal Reserve, the system of US central banks, has been twisting its policies in a way that even Paul Volcker would have envied. The Fed is intent on both slowing the economy and removing liquidity from the financial system. Two hard knocks for financial markets. This is never a smooth process, but the current speed is remarkable. It is also the moment when the risk of financial accidents has rapidly increased.


According to the Fed futures market, there is now a 90 per cent chance that the Fed's policy rate will stand at 1.5 per cent in June. This week, the Fed is likely to raise the policy rate by half a percent. There is now a 75 percent chance that the policy rate will be higher than 3 percent by the end of the year. At the beginning of this year, markets were still expecting a policy rate of 1 percent at the end of this year. The Fed wants to curb demand, create fewer jobs, reduce investment and cool consumption. The US yield curve is now flat as a dime, indicating that the Fed will succeed. Although at the time of writing the Fed has only raised interest rates once by a quarter, the announcements are already having an effect. Mortgage rates in the United States are above 5 per cent, up from 3 per cent at the beginning of the year. Naturally, this means that applications for new mortgages are falling and fewer houses are being sold. The Fed's policy is also making the dollar strong against just about every currency, not good for US exporters. US purchasing managers see the outlook deteriorating. The Fed does not have to do the job alone. China's lockdowns since March have slowed exports, production, consumption, investment and the property market in that country. Combined, this is happening so fast that one might even wonder whether there is any growth left in China at all. When the second economy (the first based on purchasing power parity) does not do well, it also affects the world economy. Incidentally, the downturn in China hits Europe harder than the United States, and in Europe the Fed is helped by the Russian invasion of Ukraine. This will almost certainly cause a severe recession on the European continent.


The Fed is also helped by the drying up of liquidity in the financial system. The Fed is about to undertake quantitative tightening, but has actually already started to do so. It is also called sudden stealth quantitative tightening. The US government receives a lot of taxpayers' money this time of year. That draws money out of the system, because the proceeds are not immediately spent. The Fed is also withdrawing money from the system via the repo market. So it is not so strange that investors sell shares and bonds. The big question is, of course, whether the policy so far has been sufficient to reverse inflation. We have probably seen the peak, but I fear that inflation will be more persistent this year and next than what markets and also the Fed currently assume. Rising energy and food prices are driving higher wages. Despite higher inflation, consumers continue to spend. Apparently, a recession or a sharp correction in the stock market is required to curb growing consumption. This reduces the likelihood of a soft landing. In addition, structural factors allow inflation to remain high. These include an ageing population, deglobalisation, the costly energy transition and the fact that China no longer wants to be the world's deflation engine. Then there are also temporary factors that make for higher inflation. For example, wars are always inflationary. It also leads to higher oil prices and, because there are many days between the production and consumption of oil, all of that has to be pre-financed. With 100 million barrels a day, this amounts to many hundreds of billions, all of which disappears as liquidity. Problems in supply chains have also increased this year. In addition, the pendulum between labour and capital is swinging ever further in the direction of labour. Social media play a major role in this. Social media have already ensured that the approach to the corona crisis was much more robust than usual, that the sanctions against Russia were also much tougher than usual and that now the power of employees is also much stronger than usual. Trade unions are superfluous, a social media boycott is enough to ensure that workers get their way.


In almost every liquidity crisis of the past decades, accidents happen in the financial system. The cause is that debts are too high, but a financial crisis is never about solvency, it is about liquidity. In a liquidity crisis, suddenly existing debts can no longer be refinanced. It takes less to get to the Minsky moment. The difference with the liquidity crises of recent decades (e.g. the Mexico crisis, the burst of the Japanese double bubble, the dotcom bubble, the euro crisis etc.) is that this time inflation is so high. Every previous crisis caused deflation, not inflation. That makes it difficult now for the Fed to lend a helping hand when things go wrong. Markets probably do not realise yet that the Fed-put is gone for now, or at least that the strike on that put option is a lot lower than where everyone thinks it is. On top of that, the strong dollar is not good for Europe, which will soon no longer be able to buy its energy in euros, but only in hard dollars that have to be earned first. This will probably mean that long-term interest rates will have to rise in Europe. Because Japan for the time being is sticking to a fixed ten-year interest rate (yield curve targeting), the yen is rapidly weakening, which is rapidly improving Japan's competitive position compared to Europe, the United States and even China. The only way to solve this is for long-term interest rates to rise in Japan as well. This means that the tap will be turned off not only in the United States, but also in Europe and Japan. Now we have to find out which country, bank or large company will be in trouble this time.


Japanese Yen under pressure

By Chelton Wealth, April 28


The Japanese government has been pushing for a weak yen for a long time. A weak currency led to higher profits for Japanese exporters and to more import inflation, which is handy if you are trying to get inflation up. At the same time, the Japanese are very rich, but they do not get a return on their savings in the country itself.The Japanese therefore lend out the money in other currencies and, in order to boost the result a bit more, they are also happy to lend out some more in yen.


In Japan, it is the woman who is in charge of the family's financial affairs, and thus the proverbial Mrs Watanabe, stereotypical of one of the world's leading currency traders, was born. Whenever there was stress in the financial system, Mrs Watanabe's positions were scaled back, which automatically caused a demand for yen. The result was that, like the dollar and the Swiss franc, the Japanese yen acted as a safe haven, something that can also play an important role in an investment portfolio.



This year the yen is weakening, despite the war in Ukraine. One of the reasons is the sharp rise in commodity prices. These are traded in dollars or possibly in renminbi, but not in yen (apart from Azuki Red Beans). As a result, Japan's trade balance is deteriorating and with it the yen. Another reason is that the Fed and other central banks will raise interest rates. It is also widely expected that the ECB will raise interest rates, while markets expect the Bank of Japan to do nothing. For Ms Watanabe, wider interest rate differentials also mean that it has become more interesting to borrow in yen and to sell in dollars.



The result is that we now have an undervalued stock market and an undervalued currency, an attractive combination in itself. But markets can remain undervalued for a long time. What matters is that there will be fundamental changes that will lead to a greater appreciation of Japanese equities and/or the Japanese currency. Incidentally, the sensitivity of Japanese business to the yen is not too bad; much production has been outsourced to parts of Asia and is now located in countries such as Vietnam and Thailand.



Japan does not compete with other countries in Asia with its products, not even with the United States. Japan's main competitor is Europe and particularly Germany. Toyota's competitor is Volkswagen and not, for example, GM. The higher segment of Toyota is Lexus and that is mainly set up as a competitor of Mercedes. Also in the field of capital goods (robots), pharmaceuticals, recycling and alternative energy, the competitors of Japanese business are mainly in Europe. Now that the whole world is experiencing supply problems, especially in long chains, Japanese business suddenly has an extra competitive advantage in Asia. That Volkswagen or Mercedes cannot be delivered in China for a while, but the Toyota or the Lexus can. With the current weak yen, it is now time for Japanese business to take market share away from Europe. Moreover, China would probably rather cooperate with Japan than with, say, Germany. If sanctions are imposed on China, that country will have more control over nearby Japan than over distant Germany.



Although factors such as the trade balance and monetary policy do not favour the yen, the currency is already firmly undervalued and many Mrs Watanabes are now short yen. This combination ensures that Japan can continue to play its role as a safe haven in the future, even in the face of global financial stress.


Currency shifts

By Chelton Wealth, April 12


The three decades or so that coincided with the Bretton Woods system are often seen as a time of relative stability, order and discipline. But given that it took almost 15 years after the Bretton Woods conference in 1944 for the system to become fully operational, and that even then there were many signs of instability, it is clear that it is not easy to maintain such a system. Bretton Woods was more of a transition phase to a new international monetary order that we still live withtoday. Bretton Woods gave rise to institutions such as the IMF and the World Bank which, together with the United Nations Security Council, were intended to ensure stability. When that system ran into trouble in the early 1970s, the G7 was created, in 1998 it became the G8 with Russia, and since 1999 there has been talking of the G20. But the system is starting to crack.



The US does not want to attend a G20 meeting where Russia is alsopresent. The Security Council, too, is proving to be a toothless tiger. The chance of UN security forces in Ukraine is nil, no matter how great the genocide or the crimes against humanity. The IMF is supposed to promote financial stability, economic growth and international trade, a role that is increasingly questionable after the Great Financial Crisis. The World Bank is identified with globalisation, whereas regionalisation has been going on for almost 15 years. It seems time for new world order, with new institutions and new agreements.


It seems that the whole world is pulling together to condemn the Russian invasion, but there are also important countries that have abstained. Outside Europe andthe United States, the war on the European continent plays a much smaller role, just as wars in Africa andthe Middle East also receive only brief attention from the West. Countries like South Africa, India or China and more emerging countries refuse to condemn Russia. Countries in the Middle East are also trying to cover themselves for the coming Sino-Russian dominance, especially now that the Americans have become self-sufficient in oil and their image has been dented after leaving Afghanistan. The Americans' security umbrella has disappeared. With it, these countries are also detaching themselves from the system that emerged from Bretton Woods.


The dominance of a reserve currency usually ends with war and, at the same time, war is also the basis for a new monetary system. At the moment, China in particular has big plans to be less dependent on the euro and, given the sanctions against Russia, lessdependent on SWIFT.


Last week, Zhang Yanling of the PBoC argued that the sanctions against Russia would cause the US to lose credibility and undermine the dollar's hegemony. China wants to say goodbye to the dollar sooner rather than later. Now the end of the dollar has been predicted so many times, but in practice, it is much less easy. A characteristic of a reserve currency is that everyone accepts it and can work with it, just as internationally everyone takes English for granted and Windows for granted as an operating programme. 


The dollar has been used as a weapon before, but then it was mainly about blocking terrorists' money or in very specific cases such as blocking Iran's nuclear programme. Targeting an entire country, including its central bank, financially is new. It is remarkable, for example, that last week sanctions were also announced against Putin's daughters. The fact that Switzerland is cooperating fully with the implementation of sanctions can also be seen as a major step. During the Second World War, Nazi money was always safe in Switzerland, but the Russians, Arabs and Chinese can no longer rely on it. An attractive feature of Western currency for foreigners has always been the presence of the rule of law. It offered protection to everyone, but nowa Russian surname seems sufficient to seize houses, boats and bank accounts. The fact that some European Member States are having difficulty seizing Russian assets rather means that there is something left of the rule of law. Furthermore, the Russian sanctions coincide with the monetary madness in the same group of Western countries that are undermining the purchasing power of various currencies. There is an overlap between countries that have apparently chosen to undermine their own currency and support the heavy financial sanctions against Russia and a group of countries that are keen to preserve purchasing power and distance themselves from the financial sanctions against Russia. 


The PBoC has a discipline similar to that of the Bundesbank in the past, and many emerging countries have reacted energetically to rising inflation, in stark contrast to, for example, the ECB and, until recently, the Fed. The spread between a Chinese government bond and a US government bond has narrowed to 10 basis points, even though core inflation in China is more than 5 percentage points lower than in the US. Suddenly, this makes emerging market currencies look very attractive.


Saying goodbye to a reserve currency takes many years. In that respect, the dollar can hold out for some time. This does not apply to other Western currencies of countries that were involved in the sanctions. It is possible that many countries prefer to hold dollars to euros, if only because of the ECB's monetary policy and the eurozone's sensitivity to the Ukrainian war. Also, the premium in the Swiss franc may quickly disappear due to the shaming of its main customers (Russians, Arabs and Chinese). Even the Japanese yen is struggling to maintain itself as a safe haven. There are not many alternatives, although the outlook for many emerging currencies is improving rapidly.


Crumbling privileges

By Chelton Wealth, April 4


Since the launch of the Marshall Plan, the U.S. dollar has been the world’s undisputed reserve currency. The main role of a reserve currency is to provide liquidity for the rest of the world. This is only possible if there is a permanent current account deficit. That deficit is a direct result of the overvaluation of the reserve currency versus most other currencies.That overvaluation causes the traditional commodity sector to become smaller and smaller over time. This means that the reserve currency economy must specialize in high technology, services, and more specific financial services. The role of the reserve currency is to recycle excess savings into debt, in this case, Treasuries, which can then be converted back into equities. This benefits the financial sector. This explains why the City of London became the financial heart of the world, and then post-Marshall Wall-street took over.



The structural overvaluation of the dollar allowed industrial companies outside the United States to benefit. The extra return became visible in the form of high savings, first in Japan, later in China. Trump has tried to eliminate that extra return, and thus the savings, through high trade tariffs. Those trade tariffs are equivalent to a devaluation of the U.S. currency for producers outside the United States. This partly explains the good performance of the U.S. stock market versus markets outside the U.S..long term returns on U.S. stocks and non-U.S. stocks are equal. So if the U.S. stock market has been doing well lately, it’s about time for an opposite move, only to be frustrated that in some ways Biden is more extreme than Trump.



There are trillions of dollars of debt outstanding with non-U.S. governments and corporations. Those parties assume they can always finance themselves in U.S. dollars. But U.S. authorities have turned the dollar into a weapon. Virtually every financial institution operates in the United States and thus must comply with U.S. regulations that apply worldwide. Countries like Iran, Sudan and Venezuela have already experienced what it means when they no longer have access to international payments. Recently, Russia was added to the list; even the Russian central bank can no longer access its dollar reserves.


The monetary madness in the Eurozone and the United States makes it unattractive to hold dollars or euros. In addition to interest rates being too low, this policy is causing inflation to rise. Now that it appears that even central bankers can lose all their money in euros and dollars, the popularity of these two currencies is declining further. Nobody is going to hold reserves in a country where they can be quickly confiscated. A large part of world trade is in dollars, but gradually the dollar share is decreasing as a result. This movement has been accelerated by the Russian invasion.


Since the Great Financial Crisis, China has been trying to become less dependent on the United States and the U.S. dollar. One way it is doing this is by strengthening financial ties with countries in Asia. Just as the Marshall Plan had a levelling effect on European interest rates, interest rates in the large Asian trading bloc will also converge to those on the Chinese renminbi. The advent of the digital renminbi will accelerate this process.


Japan as a safe haven

By Chelton Wealth, March 28


The outlet for all financial imbalances is ultimately thecurrency. At the same time, that is also a big risk for a currency union like the Eurozone. Mutual imbalances have to be solved in a different way, which amounts to saying that we should all be like Germany, the Germanization of Europe, something that has come closer with the new Ostpolitik. But this aside. Countries with a lot of debt and their own currency, including even Japan, can always pay off their debt in full. The big question is only what the currency will be worth then.



Currently, the yen is undervalued on a purchasing power parity basis, and in recent months the currency has come under further pressure (especially against the US dollar). This is primarily due to rising commodity prices, which means that Japan now has a widening trade deficit. The country imports 80 percent of all its energy needs and otherwise has hardly any raw materials at its disposal. Then there are the increasing differences in monetary policy. This has caused the difference in interest rates compared to the United States to widen. Where the Federal Reserve has begun to raise interest rates, Kuroda of the Bank of Japan indicates that the central bank will respond only to inflation and not to the currency. And the differencein inflationbetween the U.S. (7.9 percent) and Japan (1.3 percent) is far greater than the interest rate differential. Japan is the only country where there is actual yield curve targeting, and it works so well that the central bank actually hardly has to buy any more bonds.



Policymakers in Japan have long steered toward a weak yen. After all, that's good for exporting businesses. It does raise the cost of goods that must be imported, but the associated inflation is a nice bonus in a country that has struggled with deflation for decades. The policy of weakening the yen has allowed the country to build up large foreign exchange reserves. More than 90 percent of Japan's national debt is held by the Japanese. Moreover, the problem is not even so much the debt as the fact that the country did not grow for decades. There was such growth per capita, but due to the aging population, labor force is shrinking. Debt is usually expressed as a percentage of GDP. In Japan, it stands at about 250 percent. Adjusted for the high foreign exchange reserves of .4 trillion (partly due to the trade surplus and partly to targeted policies to weaken the yen) and the fact that the economy has not grown on balance since 1990 (that of the United States more than tripled in the same period), that debt percentage can be nuanced. Also, the Japanese are rich because the tax system in Japan is more similar to the United States, but the government on the spending side is more like a European welfare state. So the national debt problem is solvable, but because more than half of the national debt is now in the hands of the central bank (pocket-to-card) it is actually a non-problem.



Because Japanese savers are rich but cannot make a return in yen, Japanese investors (mainly women, because in Japan women manage the family wealth) have been active in the international markets for years. The money is deposited in higher-yielding currencies, even with leverage, and combined with a weak yen, this produces excellent returns. The archetypal investing Mrs Watanabe actually runs only one risk and that is when there is a crisis in the world. Then everyone wants to say goodbye to overly risky positions with leverage and Mrs Watanabe also flees back into the yen. This ensures that the Japanese yen could also play the role of refuge alongside the United States and Switzerland.



In the past, the financial stress this year would have caused the yen to strengthen, but the trade deficit and monetary policy divergence have actually weakened the yen against the dollar. It is possible that the yen has also fallen victim to the use of the dollar and euro as a weapon in the fight against Russia. Japan has neatly complied with this and the Russian central bank cannot access its yen-denominated assets either. By also using the yen as a weapon, the Russians, and with them the Arabs and Chinese, suddenly have less need for yen. They would rather choose the renminbi, for example. Mrs Watanabe is now speculating on a recovery of the yen. That in itself is not so strange because the inflation differentials with the United States will narrow in the rest of the year and a hint from the Bank of Japan that policy will be tightened is enough to set the yen in motion. Then the structural undervaluation of the yen could well turn into a premium. 


Japanese companies are better able than before to pass on higher costs to customers. The likelihood is increasing that inflation in Japan will finally exceed 2 percent. Japanese companies are also no longer as dependent on a weak yen, as much production has been outsourced to various countries in Asia. The need for a cheap currency is no longer there. In Japan, more than in other markets, it pays to invest actively. In the past decades, it was relatively simple; those who did not invest in Japanese financials achieved an outperformance. It remains to be seen whether this will still be the case when inflation structurally exceeds 2 percent. Furthermore, after the double bubble of 1990, a distinction was gradually made between the old Japan and the new Japan. Japanese are incredibly good at improving an existing product. Unfortunately, much of the added value lies "out of the box. This is precisely what determines the success of Silicon Valley. That's where anything but perfect products come from, but they are innovative and have great success. These days the quality from the valley is, fortunately, better, but I have cursed Microsoft several times in the past because of the blue screen that indicated that the system had died, one of the reasons that this text is typed on a Mac.

The Japanese stock market is virtually unchanged in yen terms this year, the return is depressed by the yen. The valuation of Japanese stocks is still extremely attractive. Companies have no debt on balance. In the past, Japan's economy was considered a "warrant on the world economy" because of its high operating leverage, which meant that the Japanese stock market performed particularly well when global economic growth picked up more strongly than expected. This is now not the case, but Japanese companies are actually profiting much more from structural trends such as the energy transition, circular economy and even deglobalization, because production in Japan is seen as much safer than in, say, China, Taiwan or even South Korea.


The German Revolution

By Chelton Wealth, March 21


Vladimir Putin speaks fluent German due to his past work for the KGB in Dresden. He bills himself as an expert on German culture. It is this same Putin who is now the cause of a true revolution in German politics. The day after the Russian invasion of Ukraine, all dogmas went overboard.


It began with the writing off of Nordstream 2, the gas pipeline from Russia directly to Germany. Before then, German politicians dismissed it as a private project, without a geopolitical dimension. When that dimension did come, Nordstream 2 was doomed. Then the new Chancellor Scholz set out to cut off Russian banks from the SWIFT system, and the already remarkable coalition of Greens, Socialists and Liberals signed a long list of sanctions against Russian institutions and individuals. The goal: complete economic, financial and political isolation of Russia under Putin.


It was a definitive departure from the Ostpolitik initiated by socialist Willy Brandt, in which the relationship with Moscow was actually strengthened. The biggest surprise was the German rearmament in combination with the fact that the country itself is sending weapons to Ukraine. This will probably be the biggest shock for Putin. It is only 800 kilometres from Dresden to Lemberg, today’s Lviv, and in Putin’s eyes, belligerent Germany is back on the world stage. The German army, barely able to defend its own territory, was given an additional 100 billion in one fell swoop to rearm the country. Gone is the debate about American nuclear warheads in Germany, there was even a mea culpa from the Greens and Socialists that they had seen it wrong all along. Germany is no longer the bridge between East and West. Dialogue is replaced by deterrence. National German interests again take precedence and the only way to stop Putin is by force. The Prussians again have the upper hand in German politics.


This German revolution put the country more in line with other European countries. Because of its wartime past, Germany had always had a pacifist position of exception within Europe, especially when it came to military or foreign affairs. Partly because Germany could no longer boast of a great army, the country became Exportweltmeister. Tanks were replaced by BMWs. The country became a democracy without enemies. Many decades of demilitarization followed, conscription was abolished, in their pacifism, the postmodern Germans even felt superior again. The Nordstream 2 gas pipeline was intended to secure Russian gas for Germany, because of possible military risks in countries like Ukraine, Poland and the rest of Eastern Europe. It allowed the country to stop using nuclear power, further increasing its dependence on Russian gas. The years of antimilitarism, when German soldiers were spat on in the streets, were over. It did require a new war on the European continent for the Germans to change course. Putin succeeded in changing German history in one fell swoop, though he will not be happy with the outcome.


This German revolution has made it highly unlikely that Europe will reconcile with a new status quo in Ukraine. Whereas Russia got away relatively well in 2014 after occupying Crimea and the Donbas basin, the chances of a new German appeasement policy are slim. Partly due to social media pressure, there is no going back, not for Putin and not for the West either. Apart from a thermonuclear war with NATO, the most gloomy scenario regarding the Ukraine crisis was that Russia would turn off the gas tap. Russia has not yet done so, but now the West wants to boycott Russian gas. The consequences for the European economy are the same. A recession on the European continent thus seems inevitable. This is at least the conclusion of investors who are leaving the European financial markets en masse. This while at the beginning of this year the Eurozone still had good chances to grow stronger than the United States. This while the ECB under Lagarde had changed course only a few weeks ago by emphasizing that fighting inflation was more important than financial stability.


But much has changed in recent weeks. The central bank simply cannot print oil and gas. By tightening now, financial conditions in the eurozone deteriorate, increasing the risk of financial instability. Despite the rhetoric of the ECB, the central bank will ultimately give priority to financial stability. The German aversion to inflation can be linked to the German aversion to war. Even fundamental principles had to give way to the new German revolution, so long as inflation was fought. But now principles are allowed to cost money. If inflation goes up because it is required to get Russia under it, so be it. It is, of course, nonsensical that on the one hand, the ECB takes money off the table, while on the other hand national governments run around subsidizing energy. Such subsidies do not come cheap. After the corona crisis, debt as a percentage of GDP is above 115 percent in France, above 130 percent in Spain, 150 percent in Italy and 200 percent in Greece. This increases the likelihood of more European financing, of Europe subsidizing its citizens in the area of energy. Europe is already doing that in the defence field, all weapons to Ukraine are funded by the European Union. The next step is a European army, funded by European money. Germany is ready for it.


The external threat has increased unity in Europe. Further integration is required because in its current form there is a good chance that the European Union and the euro will not survive the next deep recession. Further, that political unity with its emphasis on principles combined with the boycott of Russia has a price. Not only in the form of a higher level of inflation, but also through large shifts in the trade balance. There has been a deficit for three months now, as energy prices have risen sharply (including before the invasion of Ukraine). But soon oil and gas can no longer be paid for in euros but must be deposited in hard dollars. In the past, we got a large part of the euro back from the Russians, in consumption and in investments, but that too is falling away. The last time there was a trade deficit for several months was in 2011, indeed during the previous euro crisis. Add to that the fact that Middle Eastern petrodollars and Chinese billionaires may also start to avoid the eurozone, fearing similar sanctions that are now hitting Russians, and that there will even be central banks that will start to doubt the value of their euro reserves, and the European currency thus seems to be getting weaker rather than stronger.


Despite the war in Ukraine, stocks worldwide (including European stocks) are higher than at the time of the Russian invasion. Equities are also higher than in the last week of January. At that time, the focus was still on the interest rate hikes as a result of rising inflation. As great as the humanitarian drama in Ukraine is, on balance the financial markets appear to be experiencing a non-event, or at least an event where pluses and minuses can be cancelled out against each other. This is the case with most geopolitical events. But just as after the fall of the Wall or the attacks of September 11, 2001, it is not so much the short-term consequences as the long-term consequences that will have a major impact on financial markets. In this regard, it does not even matter now what scenario will unfold around Ukraine in the coming weeks or months. Russia will disappear behind a new Iron Curtain, various countries and regions will strive for a higher degree of self-sufficiency in energy, technology, defence, finance, essential commodities and food, and trends such as the energy transition, deglobalization, the regulation of tech and in sustainability will continue to accelerate.


The Fed balances on a thin rope

By Chelton Wealth, March 17


"Whatever it takes''

Earlier this month, Federal Reserve Governor Jerome Powell was asked in Congress what he intended to do about rapidly rising inflation. He told "do whatever it takes" to bring inflation back under control "regardless of the cost". Indeed, producer prices in the United States have already reached a level of 10 percent. Consumer prices have risen to 7.9 percent, the highest level in 40 years. In June 1981, the then governor of the Fed, Paul Volcker, took the historic step of raising interest rates to 20 percent. A deep recession followed, but inflation started to fall from then on and would not stop until 40 years later. Paul Volcker could no longer walk the streets without security at the time. He would go down in history as the man who brought the rampant inflation of the 1970s under control.  


Less spectacular

Yesterday's interest rate increase by the American central bank was less spectacular, a quarter percent. The market had already priced in the increase in interest rates. After an initial fall, the stock markets continued their rise of recent days. The markets seem to have every confidence that the Fed can bring inflation down again without causing a major economic recession. The 2-year US government bond yield rose to 1.95 percent, but the 10-year yield remained at 2.15 percent. The yield curve is therefore flattening further.


Towards two per cent

The remaining six rate hikes announced by the Fed this year appear to be priced in by the market. The Fed expects a Federal Funds Rate of close to 2 percent by the end of this year. The 10-year rate indicates an expected slowdown in growth as a result of these rate hikes, but not yet a recession. However, the Federal Reserve also indicated that it would continue to raise interest rates next year, to a level of 2.75 percent. That is precisely the level of inflation the Fed expects to see by the end of next year. Inflation and interest rates could therefore return to more or less normal levels by the end of 2023.


A balance sheet of 9,000 billion dollars

In addition to the interest rate hikes, however, the Fed is also struggling with a somewhat bloated balance sheet of almost 9,000 billion dollars in government and mortgage bonds. They want to get rid of that. Yesterday it also announced its intention to start reducing them from the next meeting - in May. The disappearance of the biggest buyer on the bond market may well cause interest rates to rise further.


Reality is usually different

In reality, however, things do not usually turn out as expected. Last month, for instance, a violent war suddenly erupted in the east of Europe. In addition to decreasing confidence in the economy, this war also caused a sharp rise in the prices of all kinds of necessary raw materials. In addition, the authorities in China appear to be having a lot of trouble realising group immunity against the coronavirus. Once again, lockdowns in the world's second-largest economy followed, with the necessary consequences for the supply chains of many goods in the world. Not good for inflation.


Swelling criticism

There is growing criticism of the Fed's policy. According to many experts, the American central bank is playing with fire by reacting so slowly to the sharp rise in inflation. The Fed itself expects inflation of 4.1 percent at the end of this year. That is still considerably higher than a Federal Funds Rate of close to 2 percent.  It cannot be ruled out that the Federal Reserve will ultimately have to apply the brakes much harder than currently announced. It will be a real balancing act on a tightrope for the central bankers to avoid a recession in such a situation. Will Powell go down in history as a second Paul Volcker or will he and a whole generation of central bankers go down without trace?


Oil, the dollar and the renminbi

By Chelton Wealth, March 14


Oil is the most traded commodity and has always had a major impact on the economy and financial markets. At current oil prices, the oil market is over trillion. Most oil is still traded in U.S. dollars. But now that the dollar has been used as a weapon against Russia, one of the largest oil producers in the world, it remains to be seen whether that will continue. This is not the first time the Americans have cut off a country from international payments. Iran, Sudan and Venezuela - coincidentally all oil producers - suffered the same fate. Given the limited supply, oil prices may continue to rise. That's good news for oil producers. Today, the United States is also a major oil producer. That's good news for the U.S. trade balance. Before the shale revolution, half of the trade deficit was oil; now it is less than 15 percent. That shift from billion a month in 2008 to billion a month last year has helped ensure that the U.S. dollar has been relatively strong in recent years.


The United States is not the only oil producer in the world. OPEC's market share has increased, in part because there has been less investment in new oil production under pressure from the energy transition in the Western world. Incidentally, there is also much less investment within OPEC than there used to be, but that has more to do with the bear market in oil between 2018 and 2020, which eventually culminated in a negative oil price. That lack of investment and OPEC's increasing power are contributing to an oil price that could remain high for the foreseeable future.



There are roughly three different types of oil producers:

There are oil-producing countries that get along relatively well with the United States. Canada, Mexico, Brazil, and Colombia have floating exchange rates, and the currencies of these countries benefit from higher oil revenues. Much of the money is also reinvested in U.S. assets.
There are also oil-producing countries that spend the money mostly outside the United States, but at the same time can get along reasonably well with the United States. These countries have pegged their currency to the dollar, and with oil prices rising, these countries buy more U.S. Treasuries to guarantee the peg to the dollar. These are countries like Kuwait, the Emirates, Qatar, Nigeria and Saudi Arabia.
There are also countries that do not get along with the United States at all, they convert their dollars into something else as quickly as possible. Russia has tried to get rid of its dollar position as much as possible in recent years and the fact that the Russian central bank can no longer access its dollar reserves in times of crisis will not have increased the incentive to hold dollars as reserves from now on. In addition to Russia, these include countries such as Iran, Iraq, Venezuela and Libya.

Between 2002 and 2008, many petrodollars were converted into a new currency, the euro. This was not only true for the Norwegian Investment Fund or the Libyan Investment Authority; virtually every other entity that benefited from the then-rising price of oil invested in part in euros. Partly as a result, the value of the euro doubled against the dollar between 2000 and 2008.


After the heavy sanctions towards oil producer Russia and the sharp rise in the price of oil, the question is what will oil producers do with their excess oil dollars? At this oil price, the budget is more than covered and there are also enough reserves to defend the currency. They can, of course, invest in the United States, but both the stock market and the housing market have risen sharply and the return on Treasuries adjusted for inflation has also been better at times. Only the moment they buy weapons does the money almost automatically come to Americans. The largest arms producers are in the United States.

A growing proportion of petrodollars are going into the new alternative to the dollar and the euro and that is the renminbi. The Chinese themselves want to get rid of their dependence on the dollar and today much of the oil for China is traded in renminbi. In recent years it has become much easier to trade in Chinese stocks and in Chinese government bonds. They are also reserves beyond the control of the Americans. For countries that don't get along so well with the Americans, this is a better alternative than holding the reserves in dollars. This process has been going on for some time. There is a reason why the Chinese currency is the best performing currency over the past year, three years, five years and even ten years. Of course, this is not just because of recycled petrodollars. China also has a rising trade surplus. Furthermore, monetary madness has not struck in China either, the PBoC is more like the Buba in its fight against inflation. Incidentally, China still has trillion that in times of need is worth no more than the paper it is printed on. That is still a reasonable amount because 1 million dollars in 100-dollar bills weighs about 10 kilos, so we are talking about 30 million kilos of paper.


Countries in the second group, including Saudi Arabia and even the Emirates, have abstained from voting in condemnation of the Russian incursion. Now that the United States is much less dependent on the Middle East, these countries are trying to secure their future position and the combination of China, Russia and possibly Iran does become a very large geopolitical factor. For these countries, an investment in a structurally rising currency like the renminbi is a very attractive prospect. Chinese government bonds then form the new safe haven and the renminbi can rise further.


A repeat of the '70s?

By Chelton Wealth, March 9


Rapid developments

Since the Russian army proceeded to invade neighbouring Ukraineȉne developments have followed each other in rapid succession. Not only on the battlefield but also on the stock markets. Initially, stock prices began to rise as the guns began to roar. That was as expected. In fact, it has almost always been that way in history. Later, however, doubt crept back into investors’ minds. The unprecedented aggression of the Russians made many people flinch. Even a threat of the nuclear option was not avoided. Moreover, the prices of energy, metals and grain exploded. And this is just at a time when the world is already way up in the air with far too high and stubborn inflation.


Yom Kippur War

This enormous increase in the prices of all kinds of raw materials, especially oil and natural gas, caused the markets to tremble. Comparisons are even being drawn with the 1970s and are not entirely unjustified. The Yom Kippur War — a military conflict between Israel and Egypt and Syria — then led to an oil embargo by the Arab states. The big oil price hike that followed ushered in a very lean decade for investors. A slowdown in growth and later even a recession combined with sky-high inflation and eventually even mass unemployment. For the economy and the stock markets, the 1970s were not very kind.


History is repeating itself

Just like then, a war seems to lead to a spectacular rise in energy prices. That was just at a time when the markets were already struggling with historically high inflation. Once again, stagflation — a slowdown in growth combined with inflation — lurks. Or worse, even a recession. A possible decision by the United States to stop buying Russian oil sent the price of oil briefly soaring to 9 a barrel. The price of gas in the European Union even rose to 335 euros per megawatt-hour. That was 16 euros a year ago. The European Union is a good 10% dependent on Russian oil and no less than 40% dependent on Russian gas.


The dollar rules again

While the United States is reasonably self-sufficient in energy, the European Union and Japan have a slightly more problematic situation. The terms stagflation or even recession are being used more and more often. Although the developments in this war follow each other in rapid succession, it can still be noted that the markets are perhaps predicting too black a scenario. Of course, economic growth will not be as exuberant as initially expected. And the expectation of many analysts that the less expensive European shares would do better this year than the expensive U.S. stock market can once again be scrapped. Not for the first time, by the way. The dollar rules again.


Less dependent on oil

But, unlike in 1973, dependence on oil has decreased considerably. Per barrel of oil, the Western world now produces twice as many goods and services as in 1973. Moreover, the price of oil — adjusted for inflation — is still not as high as in the 1970s. But more importantly, this time around, a response from governments and central banks will not fail to come to the aid of the economy and the affected citizens. After all, our economies are increasingly centrally controlled. After the corona support, governments will once again be deep in their pockets. If only to cope with the large influx of refugees from Ukraine and to increase military spending. The economy will benefit from this.


New emergency plan?

And lo and behold, as this stock market report is being written Bloomberg announces that EU leaders will have a rescheduled summit in Versailles on March 10 and 11. A plan will be unfolded in which bonds will be issued on a large scale to finance the necessary spending on energy and defence. Further amounts are still to be announced. In reaction to this, the stock markets already rebounded a bit this morning. Although this is good news, the question is whether this will not eventually throw extra oil on the inflation wave.


Powell calms Wall Street

By Chelton Wealth, March 4


Jerome Powell, the chairman of the US Central Bank, put an end to speculation about the Fed’s rate hike this month during a presentation to the House of Representatives on Wednesday. Given the strong labour market and an inflation rate that is much higher than the desired two percent, and taking into account the uncertainty caused by the Russian invasion of Ukraine, he considers it appropriate to raise the policy rate by a quarter, or 25 basis points.

This is a reassuring message because it implicitly indicates that Powell expects the economic damage to the United States from the war in Ukraine to be limited. In addition, he removes the fear of a possible interest rate increase of 50 basis points, which until recently was still seriously considered. Later this year, he might be willing to step up a gear if inflation does not fall as quickly as expected, but he is not going to let that stop him. Looking at the money market, it is currently pricing in 125–150 basis points of interest rate increases this year, up from 175 basis points until recently. As for the timing and pace of the Fed’s planned balance sheet reduction, which has grown to nearly USD 9 trillion in recent years, no decision has yet been made. Powell did say that this would be done in a predictable way by not reinvesting all the proceeds of the bonds that are released.

For investors, the words mean a little less uncertainty and, on balance, a positive message. Despite the fact that the ten-year interest rate in the United States rebounded from 1.72 percent to 1.87 percent (until recently at 2.05 percent), the equity investors on Wall Street enjoyed themselves. The Dow Jones, S&P 500 and Nasdaq rose by 1.79 percent, 1.86 percent and 1.62 percent respectively.

The ADP job figures came out higher than expected. In the month of February, 475,000 new jobs were added, compared to an expectation of 400,000. The January figure was even adjusted from a loss of 301,000 jobs to a gain of 509,000 jobs. But such a mishmash of figures gives some food for thought…

The OPEC+ meeting, in which Russia is also represented, was a mere formality that was concluded within ten minutes. As expected, OPEC+ will pump up to 400,000 additional barrels per day, if they manage to do so at all, because a large part of Russia’s exports will be lost. Officially, there are no sanctions in place, but there are fewer and fewer shipping companies, for example, that dare or want to send their tankers to Russia without war insurance to pick up oil. It is estimated that this will reduce Russian oil exports by a quarter, or 2 million barrels a day. They prefer to get the oil from the Middle East or the United States, which also explains part of the sharp rise in the oil price. Oil from Russia is currently trading at a discount of 18 dollars to Brent.

Russian equities as good as written off

Meanwhile, Russian shares have been minimised to penny stocks. The Moscow stock exchange has been closed for days and the London stock exchange, where trading was still possible, has lost more than 90% of its value in the past two weeks. Last night, the two leading index builders MSCI and FTSE Russel announced that they were removing Russian shares from their indices. More are expected to follow. In principle, the financial world has thus written down Russian shares to 0. Many Eastern European funds with large exposure to Russia closed earlier in the week because it was too difficult to make a fair price. Getting out for their investors is therefore no longer an option. It reminds one of the scenes of the consequences of the credit crisis. Risk and return are once again inextricably linked.


Swift sanctions

By Chelton Wealth, February 28


A far-reaching sanction is to exclude the Russians from international payment traffic. SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure mail network between 11,000 financial institutions and companies in more than 200 countries. Last year, 42 million international messages (payments) per day were processed. SWIFT was created in 1973 to reduce dependence on the Telex. Excluding a country from SWIFT has major consequences. Iran was excluded between 2012 and 2016. In 2014 after the invasion of Crimea, there were also threats to throw the Russians out of SWIFT. According to Alexei Kudrin, Russia’s former finance minister, this would cost the country 5 percent of GDP. Medvedev then said that if Russia were to be cut off from SWIFT it would be seen as a declaration of war. Excluding Russia from SWIFT also means that Russia’s exports (oil, gas, metals and agricultural commodities) can no longer be paid for. Why would the Russians still deliver if they do not get paid for it? Perhaps that is why the decision was made to partially exclude Russian financial institutions. Especially the sanctions against the Russian central bank are coming, also because this affects the trust in the rouble. This also creates a bank run on Russian banks. The Russian central bank currently has about 0 billion in foreign exchange reserves with other central banks in New York, London and Frankfurt. What is the currency worth of a central bank that can no longer access its reserves?


Yet there is also a risk to the Americans in using SWIFT as a weapon. In fact, the Americans are using the dollar as a weapon. By excluding countries such as Iran and Sudan, payments in dollars have not become more popular in those countries. Countries that do not have such a good relationship with the United States are, thanks to SWIFT, effectively at the mercy of the United States. That is one of the reasons why the Chinese pay a large part of their oil in renminbi. This makes the renminbi an alternative to the dollar. By now using the dollar again as a weapon, the renminbi is a better alternative for even more countries. The digital renminbi in particular offers the ideal alternative to the SWIFT system in this respect. Incidentally, the SWIFT system is not completely safe from hackers either. In 2016, the central bank of Bangladesh lost million when hackers managed to convince the Federal Reserve Bank of New York to transfer those funds. SWIFT is supervised by the National Bank of Belgium and representatives of the major central banks. China has been working for years to reduce its dependence on the dollar and the US financial system. The country is trying to position the renminbi as an alternative reserve currency to the dollar. This will probably not succeed in the area of SWIFT, but with the digital renminbi and its easy applicability in countries where the SWIFT infrastructure is only present to a limited extent, the Chinese have a good chance.



The climax in Ukraine

By Chelton Wealth, February 24


Russian troops entered Ukraine today. Airports throughout the country are being attacked from Russia, Belarus and Crimea. Martial law has been declared in Ukraine. The airspace is closed. Putin states that he wants to 'demilitarise' and 'denazify' Ukraine. Russia wants Ukraine to become the vassal state it once was. Financial markets reacted sharply to the news. In recent weeks, the escalation has already caused oil and gas prices to rise further, and today, for the first time in a long time, the price of a barrel of oil has passed the 100 dollar mark. Although this was always one of the scenarios that financial markets took into account, the base case was based on a gradual de-escalation. Now that the raid is a fact, at least the uncertainty about the different scenarios falls away. Markets will now focus on the possible consequences.

The consequences of this possible annexation for the world economy are mainly felt in commodity prices. Russia is a major oil and gas producer. Although Putin has promised that natural gas deliveries to Western Europe will not be disrupted, there is already a third less natural gas being delivered to Europe than before the corona crisis. Cutting off gas and oil supplies is really the only way Russia has responded to new Western sanctions. These sanctions have had no economic impact to date, but this is the first war on the European continent where social media will influence the reaction of various governments. The shutdown of the gas tap will mainly affect the European economy, as shortages of natural gas, in particular, mean that it will have to be rationed. Large gas consumers that are not essential to the economy will then be temporarily shut down. This, of course, affects economic growth in Europe. Furthermore, rising commodity prices will fuel inflation. Besides oil and gas, Russia is also a major exporter of many metals. Ukraine is one of the largest exporters of agricultural raw materials, but in terms of size, the economy is of little significance for the world economy. However, the climate crisis and La Nina are already threatening food shortages and a further rise in food prices could cause much social unrest in countries where a large part of the budget is spent on food.

The ultimate impact on the global economy will depend on developments in the coming weeks. Once the West accepts that Ukraine has become a vassal state, Russia will no longer have any interest in cutting energy supplies. The fact that Russia is using energy supplies as a means of pressure will make Europe decide to be less dependent on Russian oil and gas in the long run. Historically, we see that the negative effect of even the largest military conflicts on the stock market is usually short-lived. Often stock exchanges are under pressure in the run-up to the conflict, and the start of the conflict is often the property of the business. A new reality that is quickly discounted, but otherwise has no significant impact. Consider further that the worst days on the stock market and the best days on the stock market are usually clustered. Historically, these are usually not the best times to exit. Prices that come under pressure do, at the same time, ensure lower valuations. People who would rather not get in at the top now have the chance to take advantage of the opportunity. Today our hearts and minds are first and foremost with the people of Ukraine.


Oil price not yet at peak

By Chelton Wealth, February 22


Now that oil prices have approached the 100 dollar mark again, the question arises as to how much is left in the barrel. Demand still exceeds supply, causing inventories to fall for more than a year. OPEC+ is gradually ramping up production, but the reality is that it is lagging behind previous promises. Sometimes because countries do not want to, but much more often because they simply cannot produce more. Despite the high oil price, investments by oil companies lag behind. One of the larger shale farmers in the United States indicates that even at 200 dollars a barrel, he does not intend to invest more. The rising interest rates also play a role in this, since many shale farmers are rather heavily financed. It is therefore unlikely that the oil price will be driven down in the short term by additional supply, or Iran would have to return to the oil market soon. So that means that the oil price can only be slowed down by a drop in demand, and for that, the price will have to go up further. In that respect, there is still enough room for a higher oil price.

Climax Ukraine

At the moment, we are close to a climax in the crisis surrounding Ukraine. Putin has actually got his way on several fronts, without there being any victims on the Russian side. Moscow has more to say in Kazakhstan and Belarus, Germany and France think that Putin has legitimate objections against NATO expansion, there is a division within NATO, there are few countries that want to support Ukraine militarily so Putin has a better negotiating position with Kyiv and thanks to the renewed friendship with China, it is now the United States that is being isolated. As one of the largest oil exporters and an important supplier of gas to Europe, Russia has the best cards in its hand; no economic sanctions can compete with that. The conflict with oil producer Russia has pushed up gas and oil prices. This would mean that when peace returns, prices will fall.

More demand than supply

Yet the downward potential seems limited. This year, for the first time in history, demand for oil exceeds supply. This is significant because in the past OPEC+ and especially Saudi Arabia always had spare capacity. Since the oil price halved from 0 to a barrel after the invasion of Crimea in 2014, many investments have been put on hold. First because of the low oil price, then mainly because of the energy transition. Central bankers are telling commercial banks to be careful about financing fossil fuels. Western oil producers are bombarded by demonstrators and angry investors. Some even went so far as to decide to sell their entire position in fossil fuel companies. In one case, the courts were even called upon to push through a more sustainable policy. Despite all this pressure not to invest, the same parties apparently have no problem consuming oil. The demand for oil is greater than ever and the energy transition is not visible in the statistics.

Drawing on stocks

April is historically the best month for oil prices. Prior to the ‘driving season’, demand increases during the summer period. This year, there will be an additional demand impulse post-Omicron. Demand for paraffin in the United States is now only 10 per cent below the pre-pandemic level, while US oil production is more than 10 per cent below the pre-pandemic level. The fact that the market share of OPEC plus Russia has increased is not a good signal either. In the past, oil prices always rose when OPEC gained market share. Stocks have been cut for more than a year, first by an average of 1.9 million barrels a day, and since November by 1.2 million barrels a day.

Demand remains strong for the time being

Even if investment were to increase due to the high price of oil, it would still take many years before production increased. With little chance of an increase in supply, it will have to come from the demand side. The demand for oil is fairly inelastic, but somewhere there is a pain barrier. The previous peak in the oil price was 147 dollars a barrel in 2008. At that time, petrol prices in the United States rose to USD 4.09 per gallon. Adjusted for inflation, that would now be .21 per gallon. To get gasoline prices above a gallon, oil prices would have to rise above 0 a gallon. Energy consumption in Europe is 3 to 4 per cent of GDP. The historical peak was reached in the 1970s when 10 per cent of GDP went on energy. In this respect, there seems to be plenty of room on the demand side, also because, precisely because of the high gas and oil prices, consumers in many European countries are being subsidised to continue consuming. And we already spend twice as much on fossil fuel subsidies than on alternative energy subsidies. The only ray of hope is that higher oil prices will eventually increase the supply of alternative energy.


Wartime Investments

By Chelton Wealth, February 16


Tensions in Ukraine

For weeks now, tensions have been rising on Ukraine’s border. An enormous Russian military force has gathered at the country’s borders. In the east, in Russia itself, in the north, in neighbouring Belarus and south of Ukraine, in the Black Sea. Fears that the attack on Ukraine could begin at any moment caused a real selloff in the stock markets on Monday. Fearing that the oil supply from Russia would be hindered in a possible conflict, the price of a barrel of Brent oil rose to over 96 dollars. The US security adviser stated that a Russian attack could start any day now.

The correction was already underway

The falls on the stock exchanges fell in the middle of a correction that had been underway for some time. Besides the threat of war, the fear of imminent interest rate increases by the Federal Reserve played an important role in this. Since Friday evening, however, investors have discovered that there are more frightening things than interest rate rises. The threat of a military conflict between two superpowers brings much uncertainty. And if there is one thing investors do not like, it is uncertainty.

“The last thing you want to own is cash”

Strangely enough, past experience shows that wars do not have to be so bad for the stock market. Something the world’s most renowned investor has known for some time. In an interview with CNBC, Warren Buffett stated: “You have to invest in something. And if we can be sure of anything, it is that wars affect the value of money. That happened in almost every war as far as I know. So the last thing you want to own during a war is cash. During the Second World War, the stock market soared”. A still young Warren Buffett bought his first shares in 1942, just after the Japanese attack on Pearl Harbor.

War returns

Buffett is right. During World War I, the Dow Jones index rose by more than 43 percent between 1914 and 1918. A return of 8.7 percent per year on average during the war. In September 1939 the Germans invaded Poland. It was the beginning of the Second World War. The Dow Jones rose by almost 10 percent in one day. When, in 1945, the bloodiest military conflict in modern history ended, the Dow Jones index rose by 50 percent during this period. A return of 7 percent per year on average.

Korea, Vietnam, Cuba and Iraq

The Korean War raged from 1950 to 1953. Investors were able to book a return of 16 percent per year on average during this period. Vietnam? Between the sending of US troops in 1965 and their hasty departure in 1975, the index averaged 5 percent per annum. The infamous Cuban Missile Crisis in 1962? The confrontation lasted 13 days. The Dow Jones lost slightly, but only 1.2 percent. Incidentally, the index would rise more than 10 percent in the following year. The US invasion of Iraq in 2003? The index rose 2.3 percent the following day and would end the year with a gain of more than 30 percent.

Buying when the guns are roaring

History teaches us that it is not so much the war itself, but the enormous uncertainty that precedes it, that causes prices to fall. The increasing probability of war contributes to falling prices. The moment the long-awaited war actually breaks out, the uncertainty disappears and the prices start to rise. Research shows that the volatility on the stock markets during wars is lower than average. Indeed, old stock market wisdom says that you should buy as soon as the cannons start to roar.

Cash is a bad investment

Cash is a bad investment in the long run and it will only go down in value. During a war, this process is only accelerated. Investors are better off with productive assets such as shares. Rumour has it that a Russian attack could happen at any time. However, a small nuance is in order. A war is just when central banks have to pull out all the stops to fight inflation. Is that not a bit too much of a good thing?