US GDP share and the dollar's global role

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GDP USD graph 03.2017

Sources : The conference Board Total Economy Database, IMF International Financial Statistics, Reinhart and Rogogg, and author's calculations


- since 1950, the size of US GDP compared to worldwide GDP has declined strongly

- during the same period, the dollar's role has risen substantially.

Which of the two would correct ?

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Brexit countdown

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Britain would be "naive" to expect generous trade deals when it quits the European Union, the German minister responsible for its financial center said on Monday, adding that Frankfurt would grab business from London.

 While France has long made no secret about its ambition to take business from London, German politicians have largely avoided such statements and Tarek Al-Wazir's show a desire in Germany to profit from Brexit, potentially complicating Britain's attempt to strike a trade deal with the EU.

Al-Wazir, a minister in the state of Hesse, in Germany's industrial heartland, told Reuters that British politicians were unrealistic in hoping for generous terms for future trade deals.

"It is naive to believe that countries are simply waiting to strike trade deals with Great Britain after Brexit," he said. "Whoever wants to attract companies with tax cuts cannot expect to be rewarded with generous trade deals. It won't happen."

Earlier this year, British Prime Minister Theresa May, when announcing that Britain would quit the European Union's single market, hinted that it could use tax breaks to fight to attract businesses if the EU imposed punitive tariffs.

Al-Wazir said he expected the clearing of trades in euros, a multi-trillion-euro business, to move from London to centers including Frankfurt, which he is responsible for promoting.

"It is hard to imagine that most business in euros will be booked in London after Brexit. Europe needs access if anything goes wrong. From the ECB's point of view, London is offshore after Brexit," he said, referring to the need for the European Central Bank to have oversight of the business.

"You can expect parts of the clearing business to be spread across many continental locations. I'm confident that Frankfurt can attract part of London's euro clearing business."

The collapse of merger talks between Deutsche Boerse (DB1Gn.DE) and the London Stock Exchange (LSE.L), however, could complicate this, with some observers predicting that the LSE is now more likely to move clearing to its Paris-based business.

Although Britain is not one of the 19 countries in the euro currency bloc, London dominates trading in the currency.

The trading of euro-based securities spans trillions of euros of derivatives deals as well as the 'repo' market providing short-term funding for banks – roughly 2 trillion euros of which experts say is based in London. On top of this, there is foreign exchange trading in the currency itself.

The Frankfurt-based ECB wants oversight of this business for a practical reason: if any disaster were to hit these markets like the 2008 collapse of Lehman Brothers bank in the United States, it would be responsible for dealing with it.

Reuters - By John O'Donnell and Andreas Kröner | FRANKFURT 

Where does the CAPE stand ?

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On February 2017 the indice stands at 28.44x.

A few speeches from numerous European Central Bankers about ECB monetary policy

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Mario Draghi: Hearing at the Committee on Economic and Monetary Affairs

It is easy to underestimate the strength of this commitment. But that would overlook the progress we have made. With the single currency, we have forged bonds that survived the worst economic crisis since the Second World War. This was in fact the original raison d'être of the European project: keeping us united in difficult times, when it is all too tempting to turn against our neighbours or seek national solutions.

But the objective of Economic and Monetary Union should be to strive to achieve "economic and social progress" as was the intention of the signatories to the Maastricht Treaty. And for this, we need sustained growth and job creation.

The resilient recovery we have witnessed in recent times has been a welcome step towards this objective. Over the last two years GDP per capita has increased by 3% in the euro area, which compares well with other major advanced economies. Economic sentiment is at its highest level in five years. Unemployment has fallen to 9.6%, its lowest level since May 2009. And the ratio of public debt to GDP is declining for the second consecutive year.

These are steps in the right direction. But these are just first steps. We need to continue on this path so that unemployment decreases further and more Europeans can benefit from the recovery.

Addressing financial risks in the euro area

One of those side effects concerns the impact on banks' profitability. Let us first look at the data. Following a slowdown in profit generation in the first quarter of 2016, the profitability of euro area banks stabilised in the second quarter. According to preliminary data, developments for the third quarter seem to be in line with those observed for the second quarter.

A second issue is the potential risk of credit or asset bubbles. Currently, we do not see compelling evidence at the euro area level of stretched asset valuations. Both corporate bond spreads and equity prices appear to be broadly in line with fundamentals.

Similarly, real estate price growth remains moderate in the area as a whole, although significant cross-country heterogeneity is observable. This assessment is corroborated by the fact that credit growth is still modest, which suggests that asset price developments are not accompanied by increasing leverage.

Nevertheless, the longer the accommodative measures need to be kept in place, the greater the risks of unwarranted side effects on the financial system become. For instance, asset prices may increase to levels that are not in line with fundamentals because investors might be tempted to take on more risk during times of low yields.

Such developments are best addressed by enacting appropriate macro and microprudential policies.

The euro area's resilience in 2016 despite a range of negative shocks shows that we are on the right track. It also suggests that reforms at national and European level are paying off in terms of economic growth.

Introductory statement by Mr Mario Draghi, President of the European Central Bank, before the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 6 February 2017.


Andreas Dombret interview with Handelsblatt on Feb. 23rd, 2017

Banks need to set capital aside to prepare for a rise in interest rates in the Eurozone, chair of German Bundesbank’s (Buba) regulatory body, Andreas Dombret (pictured), told Handelsblatt on Thursday.Dombret noted that increases in inflation in both Germany and the euro area are pointing towards a potential rate hike from the European Central Bank. He added banks need to prepare capital buffers to address the potential rate rise and pointed out: “The longer the low interest rate phase goes on, the greater the risks in the event that interest rates increase.”However, the Buba executive stated that, in the long term, higher interest rates are good for banks and they will help the sector stabilize.

Bundesbank Chief Jens Weidmann on Feb. 23rd, 2017

  • Eurozone's policymakers need to see whether they should keep communicating they are ready to increase asset purchases, Bundesbank chief Jens 

  • Weidmann said on Thursday as Germany's central monetary authority presented its annual results. The appropriate scope for easing is seen differently in the European Central Bank, according to the prominent member of its rate-setting panel, who revealed he didn't agree with the decision to extend the duration of the program at the meeting in December. Weidmann explained he believes expansive policy fuels risk. The monetary union faces no danger of price swings in either direction and the economic recovery is stabilizing, according to the central banker's remarks, but he did point to what he considers relatively strong uncertainty. He warned protectionist moves by the administration of United States President Donald Trump could create a domino effect, possibly shaking the "pillars of prosperity" that are upheld by international trade. Bundesbank revealed it booked €1.8 billion in provisions related to interest-rate risks for the first time, which drove down profits for the government. Net income came in at €399 million or 87% lower. The indication of caution also points to the need to shield the system before easing measures are scaled back and bigger interest rates start to impact earnings.


  • Peter Praet, the European Central Bank's chief economist
  • The departure of the United Kingdom from the European Union shows integration can change its course, said Peter Praet, the European Central Bank's chief economist. "A more widespread reversal of European economic integration would durably jeopardize economic prosperity," he said on Thursday at a conference about Brexit's impact on financial services in London, and claimed there will be widespread damage from the current process. Britain faces difficulties in trade with the rest of the bloc as barriers are seen building up, the central banker stressed, adding consequences will need to be mitigated on the other side as well. Praet attributed the developments to the "culmination of a broader anti-establishment and anti-globalization narrative" in advanced economies as, how he put it, uncertainty strengthened after the financial crisis. He also played down the role of monetary policy, reiterating the need for structural reforms "to build resilience to country-specific shocks and ensure the full diffusion of innovation" for balanced benefits across population groups. Asked about the measures in the pipeline of the administration of United States President Donald Trump, the member of the ECB's Executive Board said there are some "worrisome" indications, but that particular actions remain to be seen. "Despite the resilient recovery in the euro area, and strong indicators of confidence across all sectors, measures of political and policy uncertainty have been rising recently, although asset markets are not significantly pricing in tail risks. The recent bouts of uncertainty are a source of concern, and represent a downside risk to the economic outlook," Praet stated in prepared remarks.TeleTrader Newsroom / IT



    Markets are chasing the highest valuations in history, will it continue ?

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    Markets are chasing the highest valuations in history. And as usual, they are cheered on by an increasingly puerile mainstream media. Barron’s didn’t even wait for the ink to dry on the Dow Jones Industrial Average’s 20,000 print before declaring in a new cover story: “Next Stop Dow 30,000.” Barron’s argues that “[t]he Dow hitting 20,000 was no fluke. Today’s stock prices are well supported by corporate earnings and economic growth. In fact, if President Trump can avoid stumbling into a trade war – or a real war – the Dow could surpass 30,000 by the year 2025.” Leaving aside that this National Enquirer-style headline is a desperate attempt to pump up readership and is followed by an article lacking a modicum of analytical substance, let’s take a serious look at claims that corporate earnings and the economy are strong. The facts tell a different story than the one Barron’s tries to sell.

    Corporate earnings have been weak for the last two years. According to Factset, estimated non- GAAP earnings growth for S&P companies in 2016 was a paltry +0.1% (and GAAP earnings growth was negative). Revenues were up roughly 2.0%, which is zero growth once you back out phony government inflation data and negative if you use real world prices. In 2015, S&P 500 earnings declined year-over- year on both a GAAP and non-GAAP basis. But even these figures really don’t tell how poorly businesses are performing because GAAP and non-GAAP earnings are inflated by low effective corporate tax rates, low interest rates on the money borrowed to buy back stock and pay higher dividends, and sluggish wage growth. US corporations are significantly more leveraged than they were on the cusp of the financial crisis in 2007, a condition disguised by record low interest rates that are now rising. So-called non-GAAP S&P 500 earnings (which are best considered “earni ngs as we would like them to be” rather than as they actually are) are more than $20 per share higher than GAAP earnings. With almost half of companies reporting so far for 4Q16, the full year estimate for 2016 S&P 500 non-GAAP earnings is $108.66 and GAAP earnings is $97.98 This puts the market multiple at 21.1x trailing non-GAAP earnings and 23.4x GAAP earnings.4 By way of comparison, this multiple was 24x non-GAAP earnings during the Internet Bubble. Other valuation metrics such as the Shiller Cyclically-Adjusted P/E at 28.4x (versus a mean of 16.7x) and the S&P Market Cap/GDP Ratio of 125% are also at extreme levels. There are other signs of excess as well such as margin debt running above $500 billion compared to $380 billion at the market top in 2007. Wall Street strategists trying to tempt investors into buying more stocks at these levels are playing with fire.

    And Dow 20,000 isn’t what it seems. Drawing historical comparisons between index levels is an inexact science due to the fact that the composition of these indices changes over time. The composition of the Dow Jones Industrial Average has changed over time. As economist extraordinaire David Rosenberg points out, if the eight companies that were replaced in the Dow since April 2004 had remained in the index, we would be reading about Dow 12,886, not Dow 20,000.5 Also, as a price-weighted index, moves in certain stocks have an outsized impact on the Dow, creating false impressions about the overall strength of the market. For example, moves in Goldman Sachs Group (GS) have eight times the impact on the Dow as those of General Electric (GE), a factor that contributed to the index’s post-election rally. Tracking the Dow may make for good financial television (actually, nothing makes for good financial television today other than Realvision TV, bu t that’s a topic for another day), but it is comparing apples and oranges and means little analytically. All Dow 20,000 accomplishes is getting investors all stirred up that they are missing a rally. They should be careful what they wish for.

    The chase to peak valuations is occurring in a weak economy. Barron’s claim that economic growth justifies not only Dow 20,000 today but Dow 30,000 in eight year is malarkey. Barron’s ignores the fact that fourth quarter GDP sputtered to 1.9% and kept full year 2016 growth at a disappointing 1.6%, the slowest since 2011 and down sharply from 2015’s 2.6% pace. Last year marked the 11th consecutive year that America failed to reach 3% growth, the longest period since the Bureau of Economic Analysis started reporting GDP. U.S. industrial production has declined on a year-over-year basis for 15 consecutive months and the capacity utilization rate is a disappointing 75% (a level considered contractionary). And let us not forget that this tepid growth was boosted by eight years of zero interest rates and trillions of dollars of QE; without that support, the economy likely would have shrunk. Claiming that robust economic growth supports hi gher stock prices is nonsense. Stock prices are primarily supported by cheap money and, as we will see in a moment, important structural forces in the markets.

    Stocks enjoyed quite a run since Election Day. But even before Donald Trump surprised the world and won the U.S. presidency, stocks were on an epic run that began in March 2009 at the depths of the Great Financial Crisis. The most impressive aspect of this bull market is that it defied the worst economic recovery in the last century and survived eight years of Obama administration policies that were hostile to economic growth and markets.6 As noted above, rather than based on a solid economic foundation, the bull market benefitted from zero interest rates, lower corporate tax payments, wage suppression and financial engineering in the form of epic levels of debt-funded M&A, stock buybacks and dividend increases. These factors have little to do with the fundamental financial condition of American corporations (in fact, some of these factors weaken their condition). Eight years later, this leaves the markets (and the individual companies comprising them) overva lued and overindebted.

    But the important question for investors is not where the market has been but where it is going. Right now, it would be imprudent to fight the sentiment pushing stock prices higher. Donald Trump’s presidency represents a sharp break not only with the awful Obama years but the Bush II administration as well. The new president is laying waste to decades of failing domestic and foreign policies. It is hardly surprising that investors are willing to ignore serious structural impediments to growth in order to give the new president the benefit of the doubt. This sentiment will likely calm down once the realities of governing within the American constitutional system set in, but for the moment fighting the tape is a tough gig.

    By Michael Lewitt
    Excerpted from The Credit Strategist
    February 1, 2017

    Market sentiment or social mood

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    As said many times before, markets are not driven by the substance of news or exogenous events. Many social experiments have been conducted over the last 30 years which prove this to be true, despite the public's belief to the contrary. And, as these experiments have proven, what does control market direction is something we term "market sentiment" or "social mood."
    The prevailing social mood or market sentiment interprets the exogenous events we hear about, and then "spins" that news based upon the prevailing social mood. This is what moves the market. If sentiment is positive, then the market will react positively, even if the news is negative, and vice versa. This is why we often see markets go up on bad news and down on good news, and it makes so many scratch their head, especially if they are looking to "logic" in the markets or if they are looking for directional cues from the substance of the news or fundamentals.
    Avi Gilburt          from Elliott Wave

    London, New York, Hong Kong, Singapore and Tokyo remain the five leading global financial centres

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    London, New York, Hong Kong, Singapore and Tokyo remain the five leading global financial centres. London is one point ahead of New York (on a scale of 1,000 points this is insignificant). Singapore is 42 points behind New York in third place. Tokyo, in fifth place, is 60 points behind New York. The UK ‘Brexit’ referendum result is not reflected in the GFCI 20 results so far.  

    GFCI 20 was calculated based on data collected up to the end of June 2016 – a few days after the referendum result on 24 June. Looking ahead to GFCI 21, assessments given to London in July and August are significantly down from previous levels. GFCI 21 may show some significant changes...

    Western Europe remains a region in flux. Luxembourg and Dublin show strong rises in the ratings whilst Geneva and Amsterdam fall. Early indications following the Brexit referendum result are that decision-makers are looking around and considering Luxembourg and Dublin as potential locations if they need to leave the UK.

    Wealth management in Geneva may be suffering from increased transparency requirements of international regulators.  


    The Global Financial Centres Index (GFCI) provides ratings, rankings and profiles for financial centres.

    2017 could be the year of the active investor

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    “The outcomes of Brexit and the U.S. election have brought fundamental change, which equates to investor opportunity,” said Candace Browning, head of BofA Merrill Lynch Global Research. “If investors choose asset classes, sectors and stocks carefully, they can meaningfully outperform the market. 2017 could be the year of the active investor.”

    Key Themes:

    • S&P year-end target 2300

    • Fundamental investors to outperform the market

    • Focus on higher dividend growth companies

    • Return of value investing

    "We still think dividends are a very important part of the investment decision. But where you get your dividends will matter, and we prefer companies that are growing their dividends to those are simply paying out the maximum level of their earnings as a dividend."

    Michael Hartnett

    Chief Investment Strategist, BofA Merrill Lynch Global Research

    ACTELION's takeover by Johnson & Johnson

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    Do you own ACTELION ?

    I remember the stock was traded at CHF 30 in the late-nineties, before split ! It was at that time I began to follow the company.

    After twenty years, the company has decided today to accept the takeover price per share of CHF 280, from Johnson & Johnson equivalent to a $ 30 billion transaction value.

    Built on one drug sales (Pulmonary Arterial Hypertension), the company expanded its turnover through the search and development of innovative drugs for diseases with significant unmet medical needs.

    This is a great story thanks to Mrs and Mr Clozel with a happy end for shareholders.

    Now, what can we do with cash ?

    Please meet one of our Partners to be informed of the latest investment opportunities. 


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