News Column

Euro is funny money!

July 7, 2014



June payroll was a blowout 288,000 and the unemployment rate has fallen to 6.1 per cent with the labour participation rate stable at a 35-year low.



This is a classic "Goldilocks" message since wage growth is a mere two per cent. So Yellen Fed has its perfect excuse to avoid raising the Fed Funds rate in 2014. The impact of the data was predictable. All-time highs on the Dow above 17,000, the 10-year US Treasury note slammed to 2.69 per cent. The Yellen Fed is the world's central banking monetary ostrich because June ISM is 57 and inflation risk will be the next big theme on Wall Street, the reason I am long Freeport McMoran at 36 as Dr Copper signals a trading buy, with Chinese PMI and the Indian budget a catalyst. The awul winter growth data were an aberration. The US job gains are no fluke. The world is on the precipice of a policy U-turn in the Fed, carnage in the debt market and a property crash that will once again decimate the Gulf's overhyped, overleveraged inflated micromarkets.







It is no coincidence that a steeper yield curve last week lifted dirt cheap US money centre banks Citigroup, Bank Am and investment banks Goldman and Morgan Stanley. The move in Fed Funds futures in Chicago tells me that James Bullard, not Dove Empress Janet Yellen, will decide the timing and scale of the American central bank's rate hike timetable. Amazing that there are none so blind as those who refuse to see. Money centre bank shares outperform when the US Treasury bond curve steepens, loan growth surges, net interest rates widen, fees/capital markets income rises from depressed levels and economic growth/asset quality metrics accelerates.







This reinforces my preference for Citigroup, thanks to its lovely discount to tangible book value, another $50 billion in Citi Holdings asset sales, a clean up in Mexico'sBanamex, excess Basle Tier-One capital and stellar balance sheet street. Morgan Stanley is a transformation story from Jamie Gorman, arguably UBS' successor as the world's foremost wealth manager. Too bad Morgan Private Wealth has left Dubai, though not after handing family offices and sovereign wealth funds in the UAE such fabulous IPO gifts such as Glencore, Depa, Blackstone (in 2007 at $27) and Ren Ren. Thankfully, investors in the Middle East are both forgiving and forgetful, as all the Indian private equity geniuses will agree.







My strategic short position in the euro, particularly against sterling, continues to make sense even though the euro/sterling cross has plunged below 0.7950. The "winter growth shock" that depressed the US dollar in the past six months is now over. I was delighted when RBA Governor Stevens echoed my view, published in successive columns, that the Aussie dollar is overvalued (it is, mates!). The shock Riksbank rate cut makes it feasible to buy Norwegian kroner against the Swedish kroner, or long Nokkie/Stokkie, in the lingo of the currency gnomes.







The Weimer obsessed, hard money, Machtpolitik mercantilist policies of Germany will create another financial firestorm in Europe. Germany's inflation rate is one per cent and external trade surplus is seven per cent, three times that of China, while its trading partners endure Chancellor Merkel's austerity diktat, the most savage unemployment and wage distress since the Great Depression. The global liquidity tsunami has allowed Club Med bond yields to fall to epic lows, enabled dozen of de facto bankrupt Old World banks raise offshore capital (zombie investors wanted for zombie banks, Achtung Habibi!) and new highs in the Stoxx 600. Wunderbar! A former French president could go to jail, as should a former Italian premier with a penchant for bunga-bunga frolics.







Populist, even fascist parties boast elected MP's in Strasbourg. Europe's high-wage welfare state is broken. Europe's banking system faces a credit crunch. If deflation deepens, simple math predicts a new wave of debt restructuring, even sovereign default. Banking union, stabilisation fund, common debt issuance is stillborn, torpedoed by German political exigencies. Major banks have balance sheet black holes in the kingdoms of Funny Money. A hundred years after 1914, it is finally Deutschland Uber Allas in Europe but the endgame will still be 1.28 euro!







Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at matein@emirates.net.ae




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Source: Khaleej Times (United Arab Emirates)


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