Radio Show Notes: Fischer, ECB, dollar, gold & Chinese markets

Thursday, September 07, 2017 // Written by Enzio von Pfeil

A random walk. We are very worried about Prof. Fischer resigning. Expect more ECB garble. The dollar remains soft whilst Euro-yields rise. Gold rises off the back of a soft dollar, and keep buying the Mainland and HK markets!

1. Stanley Fischer.  That this erudite MIT scholar is leaving the Fed is deeply worrying: he is pro-strong bank regulation, which Trump wants to obliterate. So by elbowing Fischer out, Trump is setting the stage for an horrendous re-run of 2007/8.

1.   2. The European Central Bank (ECB) meets today: can we expect any fireworks?  è No!

a.   Weaker inflation. With the ever-strengthening Euro, inflation is going to be contained even more. That’s because Europeans need to spend less Euros per dollar, so down go import prices.

b.   Policy implication.  Europe’s Economic Time® is just find: there is an excess supply of money and an excess demand for goods. Thus, growth will remain strong for the next couple of quarters on a cyclical basis. With strong, non-flationary growth, the ECB can start to taper its bond purchases of €60 bn/ month. 

c.   Effects of less bond purchases. The key point is that if the Central Bank gets less bonds, it

                                                   i.     Gives less money into the system, thereby fractionally reducing Europe’s excess supply of money, and

                                                 ii.     Stops driving up the price of bonds, thereby lowering yields.  Instead, expect Eurobond yields to rise marginaly.

                                               iii.     Investment implications

1.   A stronger Euro.  With Eurobond yields rising, expect the Euro to strengthen even more, up from its current USD 1.19/€
 to say USD 1.35/€

2.   Stronger Euro stock markets. With foreign money pouring into Eurobonds, Europe’s excess supply of money rises even more, so there is even more spare cash around that can be parked into Europe’s sparkling stock market.


2.   3. Why does the dollar keep wilting? è Its insurance value has plunged

a.   The “good old days”.  In “the good old days” (BTW: when did these ever exist?), geopolitical  military tension led to purchases of safe haven assets, namely the dollar, the Swiss Franc and gold

b.   Paradigm-quake. That paradigm has changed: who is more dangerous – Kim Jong-Un or Donald Trump? They are both rambunctious bullies.

c.   Adieu dollar safe havenRambunctious Don has gutted the insurance value of his mighty dollar – putting in to some doubt “In god we trust – but cash is better”

d.   Investment implication.  A weaker dollar means that non-dollar investors in US assets lose-out on the currency front. So you should be buying US assets that have strong overseas earnings…..


3.   Whither gold? è Keep buying!

a.   New paradigm. The more recent trade has been: a weaker dollar begets stronger gold prices, as non-dollar investors are having to buy less dollars per unit of gold.

b.   Investment implication. Keep buying gold as a safe haven during the jousting of these two rambunctious bullies – Kaiser Kim Jong Un and  Kaiser Don.  As  these school boy bullies will keep jousting on the geopolitical playground in order to deflect from their respective domestic messes, then expect gold to rise from its current $1,337 / ounce to about $1,600/ ounce on a one year view


5.   4  Do we keep buying the mainland’s  and thus Hong Kong’s stock markets? è yes!

a.   China’s good Economic Time®.  China’s Economic Clock® has been ticking more cheerily for some months, indicating an

                                                   i.     Excess supply of money and thus an

                                                 ii.     Excess demand for goods (witness her voracious appetite for metals, for instance!)

b.   The Hong Kong derivative. We are the water skier off the back of the Chinese speed boat. Where China goes, we go.

c.   A promising party congress.  The 19th party congress starts on Wednesday, 18th October.  It will be a success because President Xi will announce his consolidated power base, meaning that leadership at the top will remain united in its vision and execution.

d.   Investment implications.

                                                   i.     Keep buying the mainland and Hong Kong markets, in particular tech and consumer cyclicals and infrastructure plays. 

                                                 ii.     Defence plays are important, given our rambunctious North Korean school boy bully, and also throw in some industrial metals e.g. copper.  


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