Forget Cyprus: Low Competitivness and High Unemployment Are the Real Drag

Lots of media space is given to the crisis in Cyprus. The real problem however, is the low competitiveness of Southern Europe. The chart below taken from the FT, displays the low unit labor costs of Germany against the rest of Europe.

Meditereanan countries used to devalue their currency once a while in order to regain competitiveness. After the joining the European Currency Union they no longer have this economic policy option. The result is rising labour costs, lower competitiveness and higher unemployment rates (see chart below):

Looking at the chart above, I do not see any solution of the Euro crisis any time soon!

BCA roundtable, 21st of March 2013: US Investment Strategy

I attended this morning a presentation of BCA about the US macro environment. That's what Mark McClellan had to say:

US growth should accelerate Q4 2013

US  is following a “Classic cycle” after a housing and credit bust (US is solid line; other countries dashed line)

… after the bubble breaks, the recovery is usually slow.

US can still disappoint if austerity measure kick in two front loaded in Q3. But BCA expects that congress will strike a watered down deal. Also state budgets are all balanced now, apart from Illinois.

In 2014 the growth should be strong!

US interest rates: Beware

Fed policy has changed: While the Fed historically increased rates 6 months before the anticipated closure of the output gap, they will only increase rates at the time were the gap is actually closed. The Fed hereby risks consciously an overshoot of inflation of 3 to 4% in 3 to 5 years years.

According to BCA calculations the markets imply in its forward rate, an increase of 0.14% per Quarter instead of a 0.25% increase expected by BCA (due to inflation pressure).

The likelihood of a bloodbath in bonds in the coming years is therefore high. 

US Equities:

The equity risk premium has been high in the last few years. It willl eventually come down because of higher multiples (increased stock prices) and higher inflation (which will drive nominal bond yields up).

However in 3 to 5 years, when inflation hits its peak the outlook for equity is bad:

As long as inflation is no problem the Fed can always counter a market shock by throwing tons of liquidity. However, once inflation is here Bernanke's options are limited. The time for the Bernanke Put will be over!

US Dollar

Due to strengthening economy the dollar could move upwards in the short term. Long term the Dollar will trend downwards, especially against the Euro. However, asked about the crisi in Europe. He ducked the question by referring to his colleagues covering Europe. 

Gold

Fair value between $ 600 and 1100. Inflation has to be at 18% for 5 years to justify current gold price.

Gold shot up 2005, and is significantly above inflation (CPI)

Even when measured against real rates (TIPS yield, displayed on an inverted scale below), BCA thinks Gold is in dangerous territory, since bond yields could jump suddenly

But… I sat during the presentation next to a senior analyst of the Swiss National Bank, and he confessed that the bown up money supply of the worlds central banks is frightening (see chart above. We are in uncharted water and central banks have no exit plan for QE. This could mean that we have huge inflation at the end, and rocketing gold prices!!!