Jan 162015

Yesterday evening I was fortunate to be amongst a select few who had the privilege to be invited to hear the investment advice of the chief strategist of a major Swiss bank. (I should mention at the outset that the vast majority of the audience’s reference currency is the Swiss franc.)

The speaker was clearly an erudite man and his delivery was flawless. The underlying theme of his speech was divergence in today’s economy: in interest rates, in GDP, in unemployment, in central banks’ strategies, and so forth. Render unto Caesar, his presentation was concise, well-researched and extremely persuasive.

The conclusion of his argument was the bank’s investment strategy. In a nutshell, Swiss and European equities present few opportunites. On the other hand, the USA appears to have left recession and is showing strong growth perspectives, which he estimated at around 6%. The bank’s strategy is thus to move their clients’ assets to Swiss and European gilt of the highest quality for portfolio protection and to US blue-chips for revenue.

When questioned on the Swiss National Bank’s strategy of locking the Swiss franc to a floor of 1.20 CHF/EUR, he was of the opinion that the floor to the Euro would be replaced by a floor against a basket of currencies, probably EUR/USD/JPY, sometime in 2015.

Were I to have followed his advice, this morning, first thing, I would have moved my investments into US blue-chips, the stocks that participate in the Dow-Jones Index: American Express, Boeing, Caterpillar, etc. in the hope of a return of some 6% instead of the measly percent or two that I get on Swiss franc holdings.

With the most tragic timing for our strategist, some 14 hours later the Swiss National Bank announced that it had abandoned the 1.20 floor. The effect was instantaneous: the EUR and the USD crashed against the CHF, settling at day-end to ~0.86CHF/USD and CHF/EUR at a similar rate.

Had I bought those American shares some hours previously, I would have taken a 15% hit on my portfolio in so-many hours; even if the strategist’s predictions come true, I’ll have to wait two and a half years before breaking even.

There are several lessons to be learned from this story:

  1. Despite everything that your banker, hand-on-heart, assures you, he has no interest whatsoever in your financial well-being. His sole aim in life is to persuade you to trade your holdings as often as possible so that he can gather a maximum commission. If, despite the commissions, you make money, he’ll congratulate himself on having helped you. If you lose money, he’ll appear heart-broken at your misfortune, which was entirely due to the unfavourable market.
  2. If your reference currency is the CHF and you invest in higher-yield USD-labelled assets, you’re exposed to the CHF/USD exchange risk. Momentarily you might get away with it; as this example shows, you are likely to take a caning.
  3. Inversely, if your reference currency is the EUR and you buy CHF assets, your yield will be much more frugal… but your capital will be better preserved.

The take-away from all this is that in today’s liquid markets there is no free lunch. If your ambition is to receive the rate of inflation plus a whisker on your investments, there’s a strong likelihood that you’ll get it. If your ambition is get 6%, be prepared to lose 15% momentarily when things go tits-up.

P.S. For those whose mother-tongue is not English, the title is a pun

Dec 102013

18 months ago I suggested that UBS get out of investment banking, if for no other reason than I was sickened by having to pay thousands of francs to bail a too-big-to-fail greedy bunch of arseholes who should have been hung out to dry long ago. I apologise for the strong language, but I really am sick and tired of this. In an unexpected move, they appointed Sergio Ermotti, a wise Swiss-Italian (like the brilliant Alfredo Gysi) as group CEO and he had the sense wind down the loss-making division. I’m far from ready to heap praise on UBS, but let us render unto Caesar, it’s a step in the right direction.

Mar 172013

The European Union has decided to bail out the Cypriots on the condition of imposing a 9.9% one-off tax on holdings over €100’000 deposits in Cypriot banks and 6.7% below €100’000. The justification is that Cyprus only represents 0.2% of the EU GDP and the holdings in question are held mostly by rich Russians and a handful of under-represented Brits. Be that true or not makes no difference; citizen X living in Cyprus has exactly the same rights as citizen X living in France, Germany or wherever. Unilaterally confiscating a citizen’s assets without due cause is not only unacceptable, it is theft. Were my government to propose such a measure, my instinctive reaction would be to buy a weapon; for if my basic property rights are no longer secure, there’s little left else to lose.

Mar 012013

The European Union seems close to making a law that limits excessive bonuses. Few will disagree that the finance industry needs to be curbed, and the intention is good. The problem is in the method proposed; no matter how carefully it will be worded (the text apparently runs to over 1’000 pages), they’ll always be someone smarter to find a work-around.

The wiser and far more concise solution problem was proposed by the Swiss entrepreneur Thomas Minder in the initiative he made back in 2008. Here is an English translation, which I made from the official German and French texts:

Federal Peoples’ Initiative “against Rip-off”[1]
The Swiss Federal constitution of 18 April 1994 is completed as follows:

Article 95, alinea 3 (new)

In order to protect the economy, private property and shareholders and to ensure sustainable management of businesses, the law requires that Swiss public companies listed on stock exchanges in Switzerland or abroad observe the following rules:

  1. Each year, the Annual General Meeting votes the total remuneration (both monetary and in kind) of the Board, the Executive Board and the Advisory Board. Each year, the AGM elects the President of the Board or the Chairman of the Board and, one by one, the members of the board, the members of the Compensation Committee and the independent proxy voter or the independent representative. Pension funds vote in the interests of their policyholders and disclose how they voted. Shareholders may vote electronically at a distance; proxy voting by a member of the company or by a depositary is prohibited.
  2. Board members receive no compensation on departure, or any other compensation, or any compensation in advance, any premium for acquisitions or sales of companies and cannot act as consultants or work for another company in the group. The management of the company cannot not be delegated to a legal entity.
  3. The company statutes stipulate the amount of annuities, loans and credits to board members, bonus and participation plans and the number of external mandates, as well as the duration of the employment contract of members of the management.
  4. Violation of the provisions set out in letters a to c above shall be sanctioned by imprisonment for up to three years and a fine of up to six years’ remuneration.

Article 197 chapter 8 (new)

Pending implementation of the law, the Federal Council shall implement legal provisions within one year following the acceptance of article 95 alinea 3.

The genius of Minder’s text is that instead of setting limits on bonuses, it simply forces shareholders to approve them every year, whilst ensuring that it’s the real shareholders that vote.

We’ll be voting on it this weekend (I already voted for) and it seems that it has a good chance of passing. If it does,

Minder’s text was passed on the 3rd of March 2013 by all the counties and an astonishing 67.9% of the voters. Of the 183 initiatives submitted to the vote in Switzerland since 1893, only 21 (8.7%) have been accepted. 67.9% is the 3rd highest score ever obtained by a popular initiative. The highest score, 83.8%, was obtained in the 1993 initiative to make the 1st of August a National holiday; hardly ground-breaking. The 2nd highest score, 71.4%, was for the 1921 initiative on international treaties.

I predict that the concept will gradually be adopted globally and Thomas Minder will be recognised as the father of a new era in corporate governance.

1. It is difficult to find an exact translation of Abzocker. Cheater, swindler, deceiver and liar are all close. Abzockerei literally means rip-off, but Abzockerei isn’t slang. Scam is another synonym.

Aug 142012

So S&C get a huge fine for having traded with Iran. Naughty boys. In our capitalist society, nobody will question that banks are there to make money, which by definition is odourless. Punishing a bank for dealing with X is morally identical to punishing Smith and Wesson when a gun they manufactured is used to kill X. If a criminal steals a gold ingot and buries it, are you going to take the soil to court? Going after banks is no more than a short-cut to apprehending the criminal in the first place. Much easier of course, but fundamentally incorrect.

Lest I be misunderstood, I have not the least sympathy for bankers and their ilk, but “money-laundering” is a euphemism for “finding the criminal is too much effort”; there’s nothing wrong with looking after X’s money; if X got it illegally, then have him punished for his crime. Smith and Wesson anybody?

Aug 012012

So UBS has lost $350M after Facebook’s botched launch, and the only people to be surprised are those who were stupid enough to try and buy the shares instead of buying puts (which would have made them significantly richer).

UBS is supposed to be one of the world’s leading banks, and yet time and again they squander money in a manner which beggars belief. I’d find it laughable if I hadn’t been forced to pay my taxes to provide UBS with a 65billion$ bailout a couple of years back; the way things are going it seems more than likely that they’ll be back, cap-in-hand, in the not-so-distant future.

What does surprise me is the naivety of all concerned. It appears that many well-paid employees at UBS subscribed to the idea of buying shares in a company whose business model is based solely on displaying advertisements which are completely ignored by a barely-literate proletariat bent on exchanging mindless drivel.

In a few years, Facebook will be remembered as an ugly skid-mark on the digital toilet.

Hopefully sooner, UBS will nominate a CEO who can learn from his predecessors’ mistakes: sell off the investment banking division, close all operations in the USA and  focus on what the bank does well: private banking. The Swiss will once again be proud of their successful bank and grateful both for the reduction in taxes and hassles from the Americans.

Jun 222011

Just before Christmas 2010 I gave my yearly prediction as to how I saw the forex market evolving.
Those that read it heaped ridicule on me: “the dollar couldn’t devalue, it’s unthinkable, it’s the world’s reserve currency, you’re crazy”, “the Euro could never fall like that”.

Six months down the road, let’s take a look at how things really turned out.
The red line (USD) and pink line (EUR) are those I drew last Christmas, the green ones are the current situation on the 22nd of June 2011 (1 CHF=0.8360 USD = 1.2030 EUR):

The figures speak for themselves.

Jun 182011

The media are once again obsessing about the economy, or more accurately the lack thereof, to a back-drop of procrastinating politicians who are no more qualified to administer public finances than chimps are to perform brain surgery.

Everyone seems to accept that a country’s economy shall be measured by the ratio of its public debt to its GDP. I question this, on the grounds that whilst America’s 8.5 trillion dollars is a lot of debt, it represents about 27’000 per inhabitant, which doesn’t really sound that bad. The Icelandic 15 billion dollar debt pales in comparison, but per inhabitant it’s 47’000, which is nearly double that if the USA.

Here’s the Public Debt versus GDP for a cherry-picked set of countries, essentially the developed and significant nations:

The numbers are in USD, source CIA Factbook, IMF and World Bank, in this spreadsheet PublicFinances.xls. The horizontal scale shows productivity, the vertical scale measures indebtedness. The grey triangle encompasses those countries whose public debt is less than a year’s GDP.

There are three coloured clusters, which group those who have similar economic habits.

  1. The Spendthrifts, with debt exceeding GDP. Japan has been trying to kick-start its economy for over a decade, it clearly hasn’t worked. That Iceland, Ireland and Greece are heavily in debt is hardly a surprise, but I didn’t expect Belgium and Singapore to be here.
  2. The Western Norm, with debt between 50% and 100% of GDP. Essentially the rest of Europe and the USA. Israel’s economic habits, predictably, are the same.
  3. The Cautious, with debt less than 50% of GDP. Here we have the Nordic countries, the true bankers and unexpectedly, Canada and Australia.

The others make for a few interesting observations.

China and India, regularly upheld as models of economic development, are still in abject poverty at the individual’s level. When average inhabitant generates 4$/day (India) or even 19$/day (China), even a homoeopathic increase in employment will give you 10% growth a year; certainly not a notable achievement. To put that into perspective, if China’s GDP increases by 10% (compounded) every year, it’ll reach Germany’s current productivity in 2035. I’m not holding my breath.

Despite their immense income from oil, the average Saudi’s income is barely a third that of an Irishman (but the Irishman has twenty times the debt).

Finally, for all the current fretting over the American debt, it’s comparatively modest in relation to the population. The Greek and Irish economies are getting lots of publicity, but there are others whose public finances are much worse. Italy, Belgium, Iceland and above all Japan are going to have a much rougher time putting their houses in order.

May 292011

The Democrats and Republicans are slogging it out, trying to find a way to reduce the US debt. A laudable effort, but frankly, it’s pissing in the ocean. To see the big picture, we’ll take a look how the US government has been running its shop over the last century or so. Take the first half of that period, up until 1970, when the gold standard was abandoned. Notice that all numbers are in millions of dollars:

The second World War made a nasty dent in the finances, but that’s perfectly understandable. I’ve shaded the years where the books showed a ‘profit’ in green; there are precious few and the amounts are insignificant.

Since 1970, the picture changes drastically, we have to multiply the scale by a factor of 50’000; we’ve moved from millions to billions:

You might notice, correctly, that the debt in 2011 is shown around 9.6 trillion, when it is in fact 14.3 trillion. Presumably there’s another 5 trillion that was borrowed somewhere; a trifle that we’ll ignore.

The message to take away here is that the US government has balanced its books in 4 years out of the last 40. Perhaps more telling is that those 4 rare years are thanks solely to the dotcom bubble and the true value is directly correlated to the main thing it generated: hype.

The average American thus owes some 47’000$ on behalf of his government (and an average of 7’000$ on his credit card, but that’s another story).

Put in household terms, this is like earning 100’000 a year, spending 176’000 and borrowing a further 19’742 to pay the interest on the 657’864 that you borrowed in previous years.

Let’s zoom in on how the White House sees that debt evolving:

The dotcom money is put into perspective and we get to the part where I’m asking myself who’s been smoking something dubious. Remember, these are the numbers I obtained from the White House, which predicts that the debt will be reduced by 1’000’000’000’000$ in the next 4 years.

Thus, every American man, woman and child is going to reduce spending by 833$ every year, not to eliminate the debt, but simply to halve the yearly budget deficit.

The Americans are definitely in the shit; but the shit they’re in isn’t the shit that they’ve been smoking.

Dec 212010

A year ago I wrote an article predicting that the US dollar would be worthless, against the Swiss Franc and the Japanese Yen, by around 2020. A year has passed and the US dollar has been falling in line with my prediction, so I felt it might be interesting to re-visit the subject with a slightly different tack. Also, today seems like an auspicious date for doomsday predictions.

Rather than dealing with absolute exchange rates, I set out to try and show the relative strengths of currencies amongst themselves. To illustrate, let’s suppose that a glass of wine costs 5 USD.

  • On day one, we buy a 100mL glass with a dollar’s worth each of USD, GBP, EUR, JPY and CHF.
  • A month later, we need a refill. The wine still has the same value, but the exchange rates have changed.
  • Suppose GBP has risen by X% (and nothing else has changed). As we’re buying the wine with equal fifths of each currency, the USD’s value must decrease by X%, thus we will to pay more USD and less GBP.
  • These increases and decreases change the relative strengths of the currencies, and it is this that we shall study.

This is nothing more than my own version of the Dollar Index. The maths is simple, as you may surmise from this Excel spreadsheet:  forex2010

A first look over the past decade seems to illustrate some trends (click to enlarge):

The first 2 years show a pronounced strengthening of the USD, in the aftermath of the dot-com boom, but as of 2002 the USD has been declining steadily. The Federal Reserve Bank of Cleveland wrote an eloquent paper suggesting that the decline was due to the US current account deficit. This correlation held for a few years, but the USD continued to fall even when the account deficit started diminishing in 2006. I find it reassuring that the experts’ tea-leaves are no better at forex predictions than mine.

Moving on, if we set the starting point in 2002, the picture becomes much clearer:

Notice that the stock market crash of 2008 occurred on the 16th of September 2008, yet the currencies tumbled 6 weeks earlier. The documented mass buying of USD and JPY started then, not in September. I wonder why?

From 2002 to 2008, the EUR was clearly the strongest currency, even through the crash, and things remained relatively rosy until Greece admitted to cheating in its financial reporting and more than doubled its deficit in late 2009.  The Greeks were followed by the Irish, the Portugese, et al in a landslide where most of Europe had to own up to the vast borrowing over the past decade.

For the USD, its been downhill pretty well all the way. 2005 showed a slight rally, at least in part due to the Chinese severing the dollar peg mid-year. The second rally during the 2008 crisis was due solely to panic selling and Obama’s election in January 2009 created but a short-lived blip. Finally, the first half of 2010 saw the USD gaining some lost ground, but it was quickly reversed once the Fed starting printing money in earnest.

Returning to the glass of wine analogy, if in 2000 you held Swiss Francs, today you’d get a 136mL top-up; if you held US dollars, you’d only have 82mL in your glass. If you see the glass half-full, that’s a 60% loss; if you see it half-empty, it’s a 66% loss, either way it’s a huge difference.

My predictions

The Americans have chosen to get rid of their debt by devaluation. They don’t care, it’s not their loss. I’m very bearish and if the Chinese start selling their T-Bills in the not-so-distant future, the USD will become worthless overnight.

The Brits will take their medicine better than most, but the GBP will continue to lose value steadily for many years to come.

Europe will never really get its act together, simply because a single currency doesn’t make a single mentality. Issuing more and more bonds to buy back yesterday’s borrowing is just a stop-gap solution to delay the inevitable devaluation of the Euro.

The Japanese, industrious and disciplined, will grind on and climb steadily back to a comfortable position, exactly following the slope of the last decade.

For lack of a floating rate, it’s impossible to foresee how the Yuan will progress, but even cave-dwellers can see that it can only be upwards.

Finally, Switzerland, as usual, will remain a haven for both clean and slightly-soiled money. Their relations with their European neighbours will degrade (for a good part due to jealousy), and like the Yen, I predict that the CHF will continue on its current slope.

Graphically, here’s how I see the relative strengths:

which in forex terms, looks like this:

In summary:

  • The GBP will fall more or less in step with the EUR
  • Near the end of 2012, we’ll see 100 JPY = 1 EUR
  • At the end of 2015, the big bang when 1 CHF = 2 USD = 2 EUR.

Remember, you read it here first.