Financial

Who does the euro destroy?

After the 2015 introduction of the common currency in Lithuania, much has changed. On the one hand, the euro positively influenced economic growth, as loans became cheaper, resulting in increasing exports and investments, on the other hand, the gap between rich and poor and between the level of living in the cities and in the countryside deepened. Until the beginning of the post-pandemic inflation, prices and salaries increased continuously in the Baltic country, but the latter mainly in the cities. Already between 2015-2019, prices increased by 10%, among others food by 6% and services by 22%. In the post-pandemic period, all Baltic countries are now among those with the highest inflation, with salaries, including those of the richer urbanites, unable to catch up with galloping food prices for a good two years. The ECB’s policy is not helping anyone. If one speaks to a Lithuanian or Latvian on this topic, one hears the following: I used to be able to often invite my girlfriend to the restaurant, now I can hardly afford it (a Latvian truck driver aged around 30). Prices have become European, salaries have not.

However, the argument with growth seems to be a bit misguided. Polish economy with its own currency is growing faster than that of Slovakia and Slovenia, which quickly adopted the euro. Since the introduction of the common currency in the PIGS countries, they systematically lose their growth rate compared to Germany. Contrary to the widespread complaints in the German media about Polish fiscal policy (and the hope that it would be “disciplined” after the introduction of the euro), public debt in Poland is keeping within limits – and this despite the policy of social transfers never seen before. In the euro zone, on the other hand, debt is exploding, despite various formal restrictions. This is true even for the countries that joined the euro without having a public debt problem. The debt has been created over time – precisely in this oh-so-fantastic union. This fact is illustrated in the following graph.

Source: Ameco

The culprit is the crazy idea that one monetary and fiscal policy should fit all countries like a universal recipe (one size fits all). One policy for 24 countries – that can’t work, like a 5 year plan for all Soviets, or one for the so very different regions of China. The same interest rate for the entire Eurozone cannot be effective. It leads to destabilizing and costly imbalances in individual member states, which subsequently spill over to the entire euro area, which cannot develop fast enough vis-à-vis the U.S. and China.

But what’s all the talk about? After all, it’s summer vacation and you want to relax. That’s when we recommend a vacation in Croatia – the latest to enjoy the benefits of the single currency. After the introduction of the euro this year, prices in the once cheap country rose to the level of Austria. The Austrian “Kronenzeitung” even compared the price level with Swiss health resorts. The Croatian newspaper “Slobodnaja Dalmacija” calculates that a kilo of cherries and figs now costs 8 euros – 10 percent more than a year ago. Wholesalers have to pay 5 euros for a kilo of pears, 3 euros for cucumbers and 5 euros for peaches. No wonder tourists are canceling their reservations in the country that depends on them the most in the whole EU (11% of GDP comes from them). Another local newspaper “Jutarnji list” points out the surprisingly high cost of daily rent of a deck chair. On the island of Hvar it costs €40, in Split €35 and in Dubrovnik €33. On Croatian social media, a video of an American tourist is very popular, where she aptly notes that the price of the service remained the same after the currency conversion from kuna to euro. The greed of (small) entrepreneurs is one downside of it all, the other is that the euro is actually always Teuro. So we wish you a nice vacation in Poland.

Why do people trust central bankers?

I can’t understand that. I would rather say: There should be a movement here and there under the prevailing circumstances, a kind of yellow vest against the bankers. But lo and behold, the anti-globalists protest against the “rulers” during the G7 summits, as if they don’t know who pulls the strings in G7. The bankers were, are and will be spared. Look at the history of the “Occupy Wall Street” movement, how it was mercilessly swept away by the rulers. You could say: like an oppositional movement in Russia, but in the middle of freedom-loving America. What does the dictatorship of the bankers look like at the moment? And what threats does it pose to us?

Mario Draghi. Remember his assurance that he would do everything to preserve the euro and its stability? Whatever the cost? This is what he said and did in fact, but at the expense of taxpayers. A more recent example: Jerome Powell, the head of the FED assured on June 21 of this year, in relation to the problems of cryptocurrencies in the U.S. market, made by rigorous actions of the FED and SEC against the platforms and banks dealing in this digital money, that he would do everything to preserve the dollar as the main reserve currency in the world. How much will this cost the American taxpayers? Hello, Mr. Powell! Have you lost touch with reality? The Saudis are renouncing U.S. guarantees and reconciling with Iran; China is trading with the yuan with its partners; The BRICS countries are banding together, looking to add new members, including perhaps France – who knows? And you, Mister Powell, together with your colleagues, want to introduce the digital dollar, called “FED-NOW”, sometime in July 2023 at any cost to show every country in the world who rules here? Pride always comes before a fall.

As always, the next crisis is carefully prepared. One day an article appears, for example in “Financial Times”, the other “qualitative” media follow the topic. Then comes the “crisis,” always like a bolt from the blue. What is the “Financial Times” writing now? That the Bundesbank is broke. And that’s true. But then they publish a counter-statement. After all, the “crisis” has to be baptized in the media at the right time. They have to wait until the bankers themselves (the owners of the leading media) will give a sign to the editors; Yes, you may write that now because all the rats have long since fled the sinking ship and the captain never existed.

Why would the Bundesbank need a bailout right now? Because it is, of course, too big to simply let it fall? Yes, of course. But the reason is too boring for the average citizen, so he ignores the facts, but as always only until the headlines sound the alarm or until the next “unexpected” tax increase comes along. It is about bonds, the world of the bankers, which hardly everyone understands and therefore fails as a small investor mostly because he invests against the current, by the way.

Super Mario, otherwise called “Cost what it may”, bought for years from the member banks of the ECB their government bonds so that they (especially his Italian home central bank) could service their debts. Thus, the over-indebted PISA countries did not become insolvent. But, wait, wasn’t that forbidden by the Maastricht Treaty? Yes, of course, but only if the bank in Frankfurt am Main had bought the debt directly from the states. The states, however, wisely sold their debts to the biggest bigwigs in the financial world, including the infamous funds like Black Rock. Thus, the ECB financed and continues to finance the private US money industry, which has done nothing to any EU citizen. These piles of the securities were hoarded in the bunker in Frankfurt and the great Italian banker had hoped that they would not lose value. But then inflation came, and his successor (remember: he himself did not) had to raise interest rates significantly. Since while prime rates were rising, fixed-income securities were losing value, it turned out that the bunker was full of toilet paper. Independent journalists (not those from the leading media) have calculated that the total loss of the EU monetary guardians could be as high as 500 billion euros. If the Bundesbank takes a stake in the ECB of about 10%, that’s already a small problem. But as a well-known German politician once said: Not all Germans believe in God, but they all believe in the Bundesbank. The euro will last forever. Maybe for 1000 years. 

FED in a china store

We have recently seen a significant increase in the price of gold, which today is approaching the mark of $ 2,000 per ounce. The appreciation we predicted in the recommendations of our bulletin was largely fueled by the liquidity crisis, which was only exacerbated by the expansion of the Federal Reserve’s balance sheet and a small rate hike (25 pts) by Jerome Powell and his colleagues. It is worth noting that the market was expecting a 50 basis point hike even before the Silicon Valley Bank problems.

The Fed’s head insists that the $297 billion increase in total assets is the result of a completely unique situation related to banks’ liquidity needs. What is crucial, however, is not the reason, but the fact that further substantial funds were created out of thin air – and this is directly related to another dose of fuel for inflation, which continues to show no signs of abating. So the risk of stagflation caused by an economic slump remains.

The last notable example of an exit from stagflation in the U.S. occurred in the 1970s. In response, Paul Volcker, then chairman of the Federal Reserve, raised interest rates above 19% to restore confidence in the economy. The positive real interest rates achieved at that time (with inflation at 13.5%) are out of reach for central bankers today.

An economic crisis will happen sooner or later for one reason or another. History simply shows that. The important question, however, is what methods will be available to central bankers when that crisis occurs (if we don’t already have it). In past decades, these were based primarily on lowering interest rates and expanding the money supply. However, the above measures are now being drastically curtailed because of their impact on the rise in inflation. A further rise in inflation would probably only prompt investors to withdraw their money from financial institutions in order to protect their capital elsewhere from the increasing loss of purchasing power. Such decisions would only lead to further liquidity problems. It also cannot be ruled out that the Fed will decide to raise interest rates further. These in turn would devalue the bonds held by banks, which would also deal a severe blow to the financial system. The impact is likely to be similar in both cases: either a liquidity crisis or inflation that is likely to spiral out of control sooner or later, or a combination of both. Janet Yellen and Jerome Powell thus seem to be caught between the hammer and the anvil, and their actions resemble those of an elephant in a china store.

Also worth mentioning is the recent news about the growing risk of a Deutsche Bank default. The banking crisis seems to be coming to a head, also in Europe. Even more important than the crisis itself, however, as already mentioned, seems to be the considerably limited room for maneuver of central bankers to counter it.

Silicon Valley Bank – what is this all about?

It is not inflation, nor the Fed, nor the NFP, and certainly not the hostilities in Ukraine that is attracting investors’ attention, but the major problem that the U.S. banking sector is beset with, rendering especially Silicon Valley Bank barely capable of making payments to its customers. All this reminds us of 2008, although there are no clear signs yet that we are on the verge of collapse.

SVB is a very specific bank in the US market. It is a bank that deals mainly with technology companies. Though it provides financial services to them, primarily it takes deposits from them. The bank participates in venture capital projects (venture capital), but it has also invested the surpluses in the US bond market or in MBS. The sharp rise in interest rates and the resulting significant revaluation of bonds resulted in a large financial loss in the bank’s portfolio, which is nothing unusual. In fact, this was something normal across the financial sector. However, this is where the peculiarities of SVB itself come into play. It is a bank that manages hundreds or even thousands of technology companies or start-ups. This sector, in turn, has been struggling for some time to catch its breath after the strong last 2 years. Companies have begun to slow their growth, look for savings and reach for capital from deposits. In order to get liquidity, SVB was forced to sell all liquid assets worth over $20 billion, incurring a loss of almost $2 billion! That’s a sizable hole in the bank’s balance sheet. At the same time, the bank announced an additional equity offering to close the gap, prompting investors to divest themselves of the bank’s shares. Yesterday (March 9, 2023), the shares plunged by as much as about 70%! These problems are still deepening today before the weekend, which is why some have already drawn parallels with 2008.

Of course, it’s important to remember that SVB and the tech industry are a specific sector and may have less overall impact on the overall stock market than the collapse of Lehman Brothers or the problems that occurred at Bear Stearns. The key question is whether this is just an isolated incident or a major problem across the industry. 

Fit for 55 or sustaining sustainable sustainability

It surely is a religion: the worship of the planet earth. No doubt about that. At the same time it is risible: a peninsula attached to a huge Asiatic continent wishes to make the global climate better and – as if the movement of waters and winds could be stopped at state borders – to make its own climate better. How? By banning the fossil fuels (which means: by banning the combustion engine), relying on renewable sources of energy and developing the CO2 market (you know, the market where you buy and sell CO2 quotas). You see, in the Middle Ages people would trade in relics: in the 21st century people trade in CO2! Isn’t that one thing alone a grand exploit that the European Union has pulled off?

No combustion-engine cars to be manufactured after 2030 plus net CO2 emissions by 2050! Why? For what purpose? Well, to save the planet, stupid! We all know that Mother Earth is suffocating and getting overheated (or overcooled, depending on the currently valid scientific version concerning the global climate); we all know that it is man-made. If you are not convinced, then look at the children: they know it! They know it for certain! That’s why they are protesting and begging you (if that is not enough: demanding of you) that you reconsider your life choices.

You know, it is not only the climate. We are all running out of water and food. What do you think will happen once water and food are in short supply? Famine? Y-e-e-e-s. Try hard to follow the thought where it leads. Imagine a global famine and water shortages. What do you think it will lead humanity to? Yes, bingo! To war! So, to prevent war over food and war over water from breaking out, the men and women (or the representatives of the other sixty or so recognized genders) who happen to be at the helm of the European Union do their best to spare us the bleak future. Yes, we will all pay for it: prices will shoot up, but then health, life and peace are invaluable. We will all willingly sacrifice our comfort and resign from the luxuries and pleasures of the flesh to… save the flesh.

Ursula von der Leyen (President of the European Commission or in plain English: the EU’s prime minister) and Frans Timmermans (Executive Vice-President of the European Commission or again in plain English: the EU’s deputy prime minister) along with all the Directorates-General (in plain English: ministries) indefatigably keep foisting upon us the magic phrases of European green deal, climate neutral Europe, reduction in emissions, clean transport, electric vehicles, sustainable (their beloved word!) houses, clean energy, renewable energy, protecting nature, a healthier future, support for vulnerable citizens (always the same!), and they assure us that all this is doable. Ursula von der Leyen says that she wants Europe to become the first climate-neutral continent in the world by 2050. She says verbatim: “I want Europe to become…”. You see? Occasionally, they let a word out here and there for all to hear: they want to enforce those changes, Ursula von der Leyen, Frans Timmermans, and company. Whenever they are on their guard, they say that it is the Europeans who want it, but when they are off their guard, they say as it is. Continue reading →

The ruble as an international currency

In retaliation for freezing Russian assets by the West, President Putin has signed a decree that enables Russian exporters of gas to demand rubles rather than dollars or euros. This is an interesting development in the war that is being waged between the West and Russia. The European Union depends to a very large extent on Russian gas. The efforts to create the green economy (they like to call it sustainable economy) are far from being completed. (To think of it: they have sought to put us on the green economy to spite Russia! Climate change was the bait for the gullible to join in.) Europe will need Russian gas (and oil). In order to buy it, it will need to have the Russian national currency. To acquire the Russian national currency, the West will be forced to trade dollars or euros for rubles at the Moscow stock exchange, thus raising international demand for the Russian currency and turning it into a means of international exchange. Sanctions work both ways.

On March 18, the Luzhniki Stadium gathered thousands of Russians in a patriotic rally, attended by various artists and the Russian president himself. Vladimir Putin delivered a speech in which – quoting the Gospel – he praised the efforts of the soldiers of the Russian Russian Federation fighting in Ukraine. A sea of waving Russia’s national white-blue-red flags dominated the scenery. The event was an eruption of patriotic feelings, something unknown in the West. If you think that the “regime” in Moscow is about to collapse or to be toppled, then think again.

Government bonds or shares are all rubbish. What to invest in?

The answer is not easy. Bill Gross, the founder of Pimco and “king of government bonds”, predicts that the yield on US 10-year bonds will rise to 2% next year. This would mean the 3% loss for investors at the current inflation rate. The dynamics of demand and supply also point to the further fall in the prices of US government bonds (rise in yield). Today, the FED is buying 60% of all US bonds as part of its quantitative easing, but will soon have no choice but to reduce the scale of US bond purchases in the face of inflation. At the same time, China, Russia are massively dumping these debt securities. So should one invest in equities? Now, when their prices are shooting through the roof? After all, shares can turn out to be rubbish if companies’ profits don’t want to rise as they have in recent years. With today’s inflation, it’s not worth holding cash either. The situation is becoming dramatic.

If you want to learn more, if you are looking for tips for your investments, please read recommendations and warnings for investors in our bulletins.