2014 Forecast

THE BIG PICTURE

We've been in a bull market across all developed countries. In the United States this bull market was triggered by FED's asset buying program, called Quantitative Easing (QE), and in Europe by Mario Draghi's declarations of summer 2012. Ultra-aggressive FED's monetary policy allowed significantly improve american real estate market, generate GDP growth, bring stock market to historical highs and return confidence in the world's biggest economy. Europe has followed the same trend relying on a one single Mario Draghi's statement that "....ECB is ready to do whatever it takes to preserve the euro and believe me, it will be enough". Since then nothing has really been done but Europe believed that in the worst case scenario ECB will be here to support Europe and euro. PIIGS government bond rates fell, stock market rose and the broad economic sentiment improved. The similar declarations have been made in Japan where the prime minter is trying to fight deflation. As in Europe these declarations where not followed by actions but drove yen to its lowest levels. The emergent markets are performed poorly this year. The slowdown of the external demand makes Asian economies to cut their growth forecasts. A lot of investors are considering Europe more attractive changing investment flow direction from Asia to Europe and driving euro to its surprisingly high levels.

Analysis

Last years the most of economic improvements have been relying on the actions and/or promises of the central banks. In my opinion it has been the most important driver for all developed and (indirectly) emerging economies. Best economic indicators were reported by the countries where the central banks were the most aggressive. I have a mixed opinion on the FED's monetary policy as it allowed to avoid economic collapse and brought the rates lower. On the other hand it has pumped a new stock market bubble in the US and probably in some other US-dependent markets.

As many other investors I believe that FED will gradually taper the quantitative easing through 2014. This process will have a world wide economic impact. I also believe that american corporations are likely to miss more and more often the consensus and review their outlooks to more pessimistic. This can have an impact on the american stock market.

I'm still expecting an action from ECB in terms of monetary easing. I'm surprised that it didn't happen earlier regardless continuous euro's strengthening, deflation risks, unresolved debt problems, credit crunch for small the business and South Europe still struggling with a huge unemployment. I can explain this phenomena only by last year's election in Germany who is historically reluctant to the currency's devaluation approach. I'm repeating my concerns about France. Fortunately these concerns aren't shared by markets..... yet?

United Kingdom looks the most attractive so far. Ambitious reforms led by David Cameron are led to lower unemployment, even more attractive investment climate, very good visibility for businesses and safety for capital.

Japan's prime minister is keen on taking out the 3rd largest economy from 20 years deflation, so I believe that quantitative easing declarations and may be actions will multiply bringing the yen lower.

Emerging markets are very low but they are also very dependent on the developed economies. Russia looks particularly risky with a near-zero GDP growth and the risks of recession in the coming year.

STOCK MARKET

United States

As mentioned earlier I have a mixed opinion on FED's policy. I think that may be FED has gone too far with its quantitative easing and it should have stopped security buying earlier (for example in the beginning of 2013). Anyway were they wrong or not we have now a bubble on the american stock market. In my opinion it can burst at any moment and can be triggered by any event. I think that on January the 1st of 2014 the most of investors are realizing that the market needs to purge but none knows when it will happen. If speculations would continue through the beginning of 2014 the burst can be painful.

Positioning: I've taken a short S&P 500 position. I'll keep it until the market would purge at least of 10% from its current level.

Europe (Euro zone)

Technically Europe and the US are strongly correlated and I'm not expecting any rally in European stocks through 2014 unless ECB would take aggressive quantitative easing actions. In the latter scenario Europe is likely to outperform US but in case of bubble burst in the US stock market I'm struggling to imagine a profitable year in Europe.

Fundamentally Europe is still living with its old problems. EBC has reassured investors giving time to fix system drawbacks but nothing significant has been done so far on the political level. Spain is constantly reporting on "progress" achieved last year but the situation is still dramatic with 25% unemployment, very fragile banking system and huge sovereign debt. The only real improvement I can see is Ireland. But in my previous posts I have already mentioned that in my opinion Ireland has never been as fragile as other PIIGS because of its extremely liberal tax policy.
As last year I'm emphasizing attention on France. I have been wrong so far but still sticking to my opinion that it hides a huge risk for euro-zone. French economy is performing slightly better than its southern neighbors but economy is struggling of a very heavy social model impossible to finance without extending deficit gap already far beyond Europe required limits. French government, led by the most unpopular president of the 5th Republic, François Hollande, seems unable to overhaul heavy socialist system relying on overtaxed citizens and corporations. Latest UN statistics show that France has lost 77% of foreign investments last year. To reform the country the government has to take unpopular actions which could lead to social tensions and likely to give more and more influence to the euroscepticism.

But the main point about France is that any single doubt on the french debt would trigger broad sell off on the markets. The country is impossible to bail-out neither by European Union nor by IMF in case if it would struggle to refinance its debt on the market. Germany has clearly stated that it won't participate in such bail-outs with German tax payers money. So I keep praying that such a scenario will never happen.

Positioning: Except a short derivative to hedge my stock picking positions, I don't have any macro bets on the European market this year. I consider it as too dependent on the external events and political decisions that can be hardly foreseen. In case of any tension on the french debt I'll pass short quite aggressively.

Emerging Markets

Tapering of the FED's quantitative easing could lead investors to withdraw from the emerging markets. On the other hand the emerging markets are cheap and further down trend is likely to create a lot of opportunities. China is less dependent on the US than earlier and can partially rely on its own internal consumption.
Russia is struggling to generate growth with its commodities over exposed economy. Internal demand is satisfied by imported goods as domestic industry is very weak and uncompetitive. Foreign capital withdraw continues since the beginning of 2013 and is likely to accelerate along with FED's tapering. Country has a very bad outlook even with oil prices remaining high but in case of significant tensions on the oil market the consequences can become dramatic for Russia.

Positioning:

• Since the beginning of the last year I'm holding an ETF on China's stock market where I'm obviously loosing money. As long as I didn't allocate a lot to this position I prefer to keep it as I'm quite confident in China in the long run.
• I have an short position on the Russian market which I bought in the mid-2013. I'll definitely keep it as I expect a lot of bad news for Russia in the coming year.
• I'm currently buying Korean Stock Index. I'm not in position yet waiting for lower prices to enter.

INTEREST RATES

I'm expecting interest rates to increase on the US bonds for all maturities. The FED's tapering would reduce the demand on the US Treasuries driving rates higher. I'll change my opinion in case of severe stock market slump while investors are likely to move to the "safe-haven" and start buying US Treasuries and German Bunds.

Since mid-2012 I have been expecting higher rates on the french OAT but they are still remaining on the very low levels. My conviction is nevertheless the same - french debt is risky. So I'm betting on higher rates for the french government bonds.

I'm neutral on the German Bunds as in my opinion they are unlikely to raise especially in the context of higher market risks I'm expecting for the year 2014.

Positioning:

• I have a big short position on the US bonds as I'm expecting interest rates increase following FED's tapering. I'll close this position once the Treasury would reach 3.5% and I'll keep this position even in case of market slump accepting some lateral loses.
• I have a small short position on french OAT as I'm convinced that rates are too low but I'm not sure of timing when exactly they would rise.

CURRENCIES

Eur/Usd

This pair seems overpriced to me. ECB has been much less aggressive with its quantitative easing policy than the US and Japan. Many investors are expecting Draghi to take firm actions to ease financing in euro-zone and bring the currency rate lower to facilitate exporting. As mentioned earlier I don't understand why ECB didn't do it earlier but it might have some internal reasons may be related to German election. Anyway I don't see any reason why such a huge exchange rate would last in the long run. Another argument that FED's tapering is likely to increase the value of the US dollar against other currencies. In case of market crash dollar is quite secure as well as it is often considered as a "safe-haven" investment. For me there are enough arguments to short this pair.

Usd/Jpy

I'm expecting yen to weaken through 2014. The government gave clear indication of the policy it will implement and I don't see any reason why it would step back on it. In case of market crash, yen can be considered as a "safe-haven" investment what would strengthen this currency against others. However in this case the dollar is likely to get stronger too balancing pair's rate. To summarize I'm not expecting yen to fall in 2014.

Russian Ruble

Shorting of the Russian ruble is my strongest conviction since mid-2013. No growth, weak domestic industry, major part of GDP is in dollars and the social system became expensive while "good days" leaves no choice other than currency's devaluation. Devaluation may be smooth thanks to the currency reserves accumulated since beginning of the century. I'll write a separated article on the situation in Russia that I'm watching closely.

Positioning:

• EUR/USD: I have an aggressive short position.
• USD/JPY: I have a small long position that I'll increase but without taking excessive risks.
• USD/RUB and EUR/RUB: I have a huge long position as I'm expecting ruble to fall.

COMMODITIES

Oil

In my opinion the oil is on its long term down trend. My opinion is backed by slower oil demand from developed countries and China, Iran is likely to enter to the oil market in the coming years, developed countries are switching more and more to the alternative energy sources, exploration of the shale gas is developing in many countries, electric and hybrid cars are becoming more and more popular. Some political events can drive oil prices higher for some periods of time but I'll consider it as an opportunity to take a short position.

Gold

As I mentioned in other articles, I'm considering gold as a highly speculative asset that doesn't produce any return, and even generates saving fees. In my opinion it is incredibly difficult to define a "fair price" for the gold which is the main parameter for any fundamental investor. So for me there is no expensive or cheap gold as it has only market price defined by speculators.

I was shorting gold from 1400 USD per once levels and I sold my last short position by the end of 2013 at around 1200 USD. I'm not planning to speculate on the gold this year.

Positioning: Since the beginning of the 2014 I have started taking long term short positions on the oil.

Bulle Immobilière Parisienne

Cette année les prix d’immobiliers dans la région parisienne ont continués leur flambée. A Paris les prix ont atteint un niveau historique de 8500€ pour m2 en moyenne. La question qui inquiète tout le monde jusqu'ou ou ça va aller...

On a une situation classique: les acheteurs potentiels disent "c'est la bulle, cela ne peut pas continuer comme ça!" et les propriétaires disent l'inverse "Pas de bulle ! C'est le marché, il fallait acheter avant !". C'est normal car souvent on voit uniquement ce qu'on a envie de voir.

Pour comprendre ce que se passe regardons d'abord la définition d'une bulle immobilière.

"Une bulle immobilière est une bulle spéculative qui apparaît à l'échelle locale d'une région voire sur l'ensemble du territoire d'un marché immobilier. Elle est caractérisée par une hausse rapide de la valeur des biens immobiliers". (source Wikipedia).

 

La première chose qu'on remarque dans cette définition - c'est le mot spéculation. Donc posons la question autrement: "Y-a-t il une spéculation sur le marché immobilier parisien?".

Une pré-condition obligatoire et incontournable pour la spéculation - c'est l'accès facile au crédit dans les meilleures conditions. En effet la majorité écrasante des spéculateurs utilisent le mécanisme du levier (ou tout simplement de crédit) pour effectuer les achats spéculatifs. C’est vrai non seulement pour l’immobilier mais aussi pour les marchés financiers. Dans l’immobilier le recours au crédit est presque inévitable due au montant des transactions.

Analysons donc les conditions de crédit en France durant ces dernières années. On va prendre en compte 2 choses : les taux d’intérêts et la volonté des banques de prêter. On peut observer que les taux évaluaient environ entre 3% et 5.5% sur cette période. Et la plupart de temps entre 3% et 4.5%. C’est en ligne avec l'inflation donc rien d'extraordinaire, n'est ce pas? Les taux étaient vraiment très bas juste 2 fois: entre 2005-2006 et 2009-2010. Notons que la période entre 2009-2010 était marquée par la crise majeure et le fameux "crédit crunch" quand les banques ne faisaient confiance à personne même entre elles mêmes. C’est peut être le seul moment quand il y avait vraiment la réticence des banques de prêter. Et même dans cette situation elles continuaient à prêter quand même.

La courbe des prix immobiliers ne va surprendre personne. Si on compare les deux courbes on voit que l’évolution des conditions du crédit a très peu d’impact sur les prix d’immobilier et le niveau de crédit a toujours été en ligne avec le besoin de financement en France (sauf la courte période de  "credit crunch" en 2008). En effet les banques françaises ont toujours été prudentes dans leur manière d’étudier les dossiers de crédit et dans leur gestion des risques des crédits. 

L’absence du "crédit facile", en étant une pré-condition majeure pour la spéculation, permet d’avoir des doutes sur la présence de la bulle immobilier en France. Il y a encore plus des doutes que les ménages français ont tellement de cash dans leur coffrets qu’ils soient capable de générer la bulle sans crédit. Ce n’est pas la peine de comparer les prix d’immobilier avec le pouvoir d’achat des ménages français. Ce dernier est peut être valable en province mais pas dans la région parisienne ou les prix sont tirés par la forte demande et insuffisance de l’offre. En plus dans les pays émergents la classe moyenne, qui commence à apparaître, rêve d’avoir les pieds sur terre à Paris en devenant de plus en plus présent sur le marché parisien et non seulement dans l’immobilier de luxe.

Pour confirmer cette idée on a un contre exemple de l’autre côté de l’Atlantique. En effet aux Etas Unies, ou la bulle immobilière est indiscutable, il y avait bien une spéculation. Cette spéculation a été encouragée par les taux bas, les subprimes et surtout par des organismes de rehaussement de crédit immobilier (Fannie Mae & Freddie Mac). La plupart des français ne sont pas familiers avec ce principe purement américain de rehaussement de crédit. Le principe est simple: si la banque A ne veut pas vous prêter de l’argent, vous allez chez Freddie Mac et eux ils vous donnent cet argent en empruntant dans la même banque A. Pour la banque A c’est très bien car le même prêt n’est plus garantie par vous-même mais par une énorme société comme Freddie Mac. Magnifique, n’est ce pas !? Vivement la gestion des risques ! Donc, contrairement à la France, aux Etats Unies toutes les conditions de la spéculation sont réunies.

Pour cela on peut faire une conclusion suivante : il n’y a pas de bulle immobilière dans la région parisienne. Les prix sont définis par l’offre et la demande uniquement. Donc celui qui attend "l’éclatement de la bulle" risque d’attendre longtemps. En effet les prix montent à cause d’un déséquilibre entre l’offre et la demande, mais pas à cause des méchants spéculateurs qu’ont débarqués sur Paris.

Pour celui qui attend vraiment la baisse des prix dans l’immobilier, j’aurais plutôt conseillé de faire attention aux programmes gouvernementaux de la construction. Une fois que notre magnifique gouvernement commence à regarder dans le fond des problèmes économiques, ils vont vite se rendre compte qu’il faut construire plus de logement au lieu de taxer les propriétaires qui encaisse des plus-values de plus en plus élevées. Cela serait un véritable "plan de relance". La solution parait très simple : Paris intra-muros va toujours rester la région chic accessible aux personnes avec des moyens financiers très importants. Dans les banlieues c’est là ou il faut construire plus et surtout des bâtiments de qualité avec plus d’étages. Cela ne va pas dégrader la vue classique de Paris et permettra améliorer l’offre de logement. Mais apparemment le gouvernement a des choses plus importante à faire…

In "Buck" we trust!

Sometimes we listen people wondering « What is going to become with dollar ? » or « Is America going bankrupt ? ». These concerns have accelerated since recent U.S. downgrade by S&P rating agency. Let’s get deeper into details and try to understand what is really happening.

A Bit of History to Start

Let’s get back to 1944 when World War II was still raging and the most of developed countries were partially or completely destroyed trying to repair their economies and industries. At this time 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. This conference marked the beginning of the new Bretton Woods system of monetary management.

What this system was standing for ? United States being much less affected by the World War II than Europe, was nominated to be the country driving world’s post-war recovery. This decision was backed by huge gold reserves America was holding. The main outcome of the conference was the following : Traditional gold standard has been replaced by « US dollar standard ». It means that all currencies are backed by dollar and dollar is backed by gold. This principle allowed to significantly ease post-war monetary turmoil. 

Consequences

On August 15th, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, The Bretton Woods system officially ended and the dollar became currency backed by nothing but the promise of the federal government. This action, created the situation in which the United States dollar became the sole backing of currencies and also world reserve currency. Since that moment, most international trading and exchange has been done using dollars as the world exchange currency.

Back to Today

Why all mentioned above is important? We used to say that national currency is backed by national economy. It is true for all modern economies… all except United States! Intrinsic value of dollar isn’t entirely replying on the U.S. economy, but it is also dependent on the world’s economy as a whole. Basically we can compare the actual situation to gold standard with U.S. having exclusive right to “create the gold”. Some kind of monetary alchemy… Every dollar printed by FED has value “by definition”. In fact I can take this dollar go to Russia which would gather some new oil for me and sell it for this dollar. I can have the similar scenarios all around the world.

Conclusions

United State can print as much dollars as they want/need assuming that all “new dollars” go abroad. While they are abroad there won’t be hyper inflation in the United States itself. While dollar remains world reserve currency there is no risk of hyper inflation. Remember dollar has ALWAYS value! United States won’t never go bankrupt as they can print dollars and pay off their debt.

I’ll quote Alan Greenspan’s recent interview right after S&P’s downgrade of the United States. The former Federal Reserve Chairman said literally the following: "This is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default."

However I would mention some risks likely to change my opinion regarding the dollar :

-       Cirque shown by Democrats and Republicans regarding debt ceiling has revealed a presence of the political risks in U.S. which we tend to ignore sometimes. In my opinion this « risk » mostly bears to the pre-electoral battle rather than real « political risk ».

-    Second risk stands for loosing of dollar of the status of the world’s reserve currency. Here my opinion might appear questionable, but I’m tending not to take this risk seriously just because none on the Earth would win if America goes bankrupt. Dollar loosing its privilege status is the surest way to the U.S. default. Hopefully politicians are clever enough to understand that.