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This article gives a rare up-to-date and in-depth situation of the Euro zone instability and a few constructive solutions to pass through future crisis.  Please feel free to send your comments onto : This email address is being protected from spambots. You need JavaScript enabled to view it.

 

PARIS – European leaders have devoted scant attention to the future of the eurozone since July 2012, when Mario Draghi, the European Central Bank’s president, famously committed to do “whatever it takes” to save the common currency. For more than four years, they have essentially subcontracted the eurozone’s stability and integrity to the central bankers. But, while the ECB has performed the job skillfully, this quiet, convenient arrangement is coming to an end, because no central bank can solve political or constitutional conundrums. Europe’s heads of state and government would be wise to start over and consider options for the eurozone’s future, rather than letting circumstances decide for them.

So far, Europe’s leaders have had little appetite for such a discussion. In June 2015, they only paid lip service to a report on the euro’s future by the presidents of the various European institutions. A few weeks later, the issue briefly returned to the agenda when eurozone leaders spent a long late-July night arguing about whether to kick out Greece; but their stated intention to follow up and address underlying problems was short-lived. Finally, plans to respond to the Brexit shock by strengthening the eurozone were quickly ditched, owing to fear that reform would prove too divisive.

gratte ciel 2016

The issue, however, has not gone away. Although the monetary anesthetics administered by the ECB have reduced market tensions, nervousness has reemerged in the run-up to the Italian constitutional referendum on December 4. By end-November spreads between Italian and German ten-year bunds reached 200 basis points, a level not seen since 2014.

The worrying state of several Italian banks is one reason for the mounting concern. Brexit, and the election of a US president who advocates Americanism instead of globalism and dismisses the EU, adds the risk that voters, rather than markets, will call into question European monetary integration. Anti-euro political parties are on the rise in all major eurozone countries except Spain. In Italy, they may well command a majority.

On the economic front, the eurozone has much unfinished business. The banking union, launched in June 2012 to sever the interdependence of banks and states, has made good progress but is not yet complete. Competitiveness gaps between eurozone members have diminished, and external imbalances within it have abated, but largely thanks to the compression of domestic demand in Southern Europe; saving flows from North to South have not resumed. Unemployment gaps remain wide.

The eurozone still lacks a common fiscal mechanism as well, and Germany has flatly rejected the European Commission’s recent attempt to promote a “positive stance” in countries with room to boost spending. Of course, when the next recession hits, fiscal stability is likely to be in dangerously short supply.

Finally, the governance of the eurozone remains excessively cumbersome and technocratic. Most ministers, not to mention legislators, appear to have become lost in a procedural morass.

This unsatisfactory equilibrium may or may not last, depending on political or financial risks – or, most likely, the interaction between them. So the question now is how to hold a fruitful discussion to map out possible responses. The obstacles are twofold: First, there is no longer any momentum toward “more Europe”; on the contrary, a combination of skepticism about Europe and reluctance concerning potential transfers constitutes a major stumbling block. And, second, views about the nature and root causes of the euro crisis differ across countries. Given the dearth of political capital to spend on European responses, and disagreement on what the problem is and how to solve it, governments’ excess of caution is hardly surprising.

Both obstacles can be overcome. For starters, discussion of the eurozone’s future should not be framed as necessarily leading to further integration. The goal should be to make the eurozone work, which may imply giving more powers to the center in some fields, but also less in others. Fiscal responsibility, for example, should not be reduced to centralized enforcement of a common regime. It is possible to design a policy framework that embodies a more decentralized approach, empowering national institutions to monitor budgetary behavior and overall fiscal sustainability.

In fact, some steps in this direction have already been taken. Going further would imply making governments individually responsible for their misconduct – in other words, making partial debt restructuring possible within the eurozone. Such an approach would raise significant difficulties, if only because transiting to such a regime would be a hazardous journey; but options of this sort should be part of the discussion.

To overcome the second obstacle, the discussion should not start by addressing the legacy problems. Distributing a burden between creditors and debtors is inevitably acrimonious, because it is a purely zero-sum game. The history of international financial relations demonstrates that such discussions are inevitably delayed and necessarily adversarial when they take place. So the issue should not be addressed first. The seemingly realistic option of starting with immediate problems before addressing longer-term issues is only superficially attractive. In reality, discussions should start with the features of the permanent regime to be established in the longer run. Participants should explore logically coherent options until they determine if they can agree on a blueprint. It is only when agreement on a blueprint for the future has been reached that the path toward realizing it should be discussed.

There are no quick fixes to the eurozone’s problems. But one thing is clear: the lack of genuine discussion on possible futures is a serious cause for concern. Silence is not always golden; for the sake of Europe’s future, the hush surrounding the common currency should be broken as soon as possible.

December 1st, 2016

Jean Pisani-Ferry is a professor at the Hertie School of Governance in Berlin, and currently serves as Commissioner-General of France Stratégie, a policy advisory institution in Paris.

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Inefficiencies are often perpetuated not by a lack of technology, but by (historical) structures. Blockchain technology is therefore not a patent solution for change, but it does provide an opportunity to make change.

Disruptive technologies require time to develop, mature and unfurl their full potential. Not every innovation succeeds, though, and it remains to be seen how the application of blockchain technology will develop.

Following the revolutionary beginnings with bitcoin, the prevailing view now seems to be that blockchain applications will spread rather more gradually. One might therefore speak of evolution rather than revolution. Before we can even ask questions about the broader use of this technology, we must first be sure that using this new technology is at least as secure, efficient and cost-effective in financial transactions as conventional technology.

Blockchain technology could become a game changer, in the financial industry and, perhaps in particular, beyond. The potential of blockchain technology is often compared to that of the internet. It should be remembered that it took some time before the truly beneficial applications of the internet emerged. With blockchain, we are only at the very beginning of a potential development of this kind.

Innovations are the lifeblood of a continually developing economy. Moreover, evolution processes are never linear. The first great wave of euphoria, which was also seen in the media, is being followed by a phase of checking, weighing-up and consolidation, before new offers and technologies are rolled out on a broad scale.

Ladies and gentlemen, Goethe once said: "We know accurately only when we know little; with knowledge doubt increases."

My impression is that with the increasing efforts being devoted to blockchain technology, doubts will also increase as to whether this technology can meet the expectations being placed on it, which in some cases are extremely high. The question that we want to examine in more detail in this workshop is what specific doubts we have and whether the technology can overcome them.

Carl-Ludwig Thiele Member of the Executive Board of the Deutsche Bundesbank, at the 6th Central Banking Workshop 2016, Eltville, 21 November 2016.

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Inflation Is Going to Rise; Here's How to Protect Youself

Something ugly is set to make a comeback: inflation.

It won't be like that seen in the 1970s when lava lamps and polyester suits only added to the hideous economic malaise. This time it will be subdued in comparison, but still higher than it has been in recent years.

The consumer price index, which is a measure of consumer inflation, has remained less than 2 percent for most of the last four years, according to government figures. But that period of historically low level of price rises is set to end soon. Here's why and what you can do to protect the purchasing power of your assets.

Commodity prices. "Inflation is rising – the easiest way to recognize it is in the price of commodities," says David Ranson, director of research at HCWE & Co. Commodities prices are rising. The price of crude oil hit a recent low of $26 a barrel in February before rebounding the mid-$40s. Similarly, the Thomson Reuters/CoreCommodity CRB Commodity index, which tracks a broad basket of commodity prices, hit a low of 155 in February before rebounding to 183 lately. "When commodities are rising you get strong inflation," Ranson says. "It won't show up very quickly but there is a lot of data, based on history, to verify that it will show up." It might not be apparent, but the price of gasoline goes into a lot of things we consume, such as bread, which needs to be trucked from where it is baked to where it is sold. So higher gasoline prices, which moves up and down with oil prices, will mean higher food costs.

Bond prices. The market for fixed-income securities gives us some clues as well. Government bonds have sold off following the general election in anticipation of higher growth in the U.S. under a Trump administration. Yields move inversely with bond prices. The 10-year Treasury note offered an interest rate of 2.12 percent a few days after the election, versus 1.78 before the election.

"Potentially, investors see a significant fiscal boost, which could be very, very good," says Sinead Colton, head of investment strategy at Mellon Capital in San Francisco. "The other thing that is playing in is higher growth and how that feeds through to inflation."

Inflation is low, but highly variable. Another important factor is that the headline inflation rate will belie bigger moves in individual components of the consumer price index. "Thanks to a cyclical upturn in non-tradable services inflation, year-on-year core CPI services inflation – boosted by shelter and health care inflation – is hovering around an eight-year high," says Lakshman Achuthan, co-founder of the New York-based Economic Cycle Research Institute. In simpler terms, health care insurance premiums are jumping, as are rents, and that's boosting the overall price level. On the other hand, gadgets and consumer technology items are sometimes falling in price.

"Yet they (the falls in some prices and rises in others) don't offset one another, any more than having one foot in ice water and the other in scalding water feels comfortable, on average," Achuthan says. That image of the boiling water and the ice gives some idea of the likely financial discomfort coming. You need a place to live, so you can't do much about rising rents. Plus, the law says you need to purchase health insurance or else pay a penalty.

It's likely those additional costs will take a bite out of discretionary spending on things such as dining outside the home. It may not be the right time to invest in restaurant stocks.

Economic Cycle Research Institute, November 15th, 2016

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Many commentators have hasted in concluding that the recent geo-political developments will have, after all, economic benefits. This may be the case in the short-term but the real negative effects of heightened uncertainty can come later. We should be cautious in drawing hasty, positive conclusions from those market developments because they may not necessarily indicate that the world economy will have an accelerating recovery with higher growth. So far, those developments point to a U.S. rise in economic growth, but in the context of an "America first" policy. Three factors may contribute to mitigate or even reverse its international spillovers.

The first is the possibility of rising protectionism - hard or soft - that can substantially reduce the effect of higher growth into higher U.S. imports. World trade, already quite weak, may continue to collapse, hurting all open economies dependent on exports.

The second are the negative effects that we are already witnessing in emerging market economies (EMEs). In fact, significant capital outflows and exchange rate depreciations already underway can hinder future growth. Protectionist measures directed particularly against large emerging economies may further decelerate world economic growth and create instability in foreign exchange markets.

The third factor concerns Europe. In this first wave, Europe apparently benefited from positive contagion with some increase in equity prices and a steepening of the yield curve, favouring financial institutions. As concerns equities, the low starting point seems favourable for European markets. Share price levels are relatively subdued in Europe with, for instance, a Cyclically Adjusted Price Earnings (CAPE) Shiller index of just 14 against 27 in the U.S. This means that European shares, including those of banks, are undervalued with respect to other parts of the world and could thus attract investors. However, we already observed a slight drop in European share prices last Friday. According to market analysts, this was explained by fears concerning protectionism and EMEs' growth prospects as well as the possible resulting decline in global trade.

Besides these external concerns, Europe's internal problems may deter it from fully reaping the benefits from the expected expansion in the U.S. Indeed, a range of political risks may induce economic shocks. To face heightened world uncertainty, Europe would need to deepen its unity and integration, relying more on its domestic market to underpin higher growth. In turn, this implies that Europe needs more expansionary macroeconomic policies and more reforms in the regulatory and competition policy fields, in order to improve the economy's supply side. Without higher real and nominal economic growth, Europe will have greater difficulty in overcoming its challenges.

Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the 19th Euro Finance Week: Opening conference, Frankfurt am Main, 14 November 2016.

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Recession or not ?

 Croissance PIB US depuis janvier 2015

Deceleration of the US GDP since Q1 2015.

Question : are we going into recession in the USA in 2017 ?

According to the last quarterly GDP report published a few days ago, USA recovered promptly with a 3.2 % growth in the 3rd quarter ending in September 2016. It ends a long period of weakness.

November 30th, 2016 / Jean-Pierre Riepe

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Bas du formulaire

 Swiss ProfilInvest photos docs"Geneva is the world’s first sustainable finance center”, said Federal Councillor Doris Leuthard during a recent speech at the Graduate Institute of International and Development Studies, where she defended the Swiss government’s opposition to the popular initiative for a green economy (Geneva is the only canton having voted yes). Sustainable finance, usually defined as the integration of Environment, Social, and Governance (ESG) factors into financial decisions, has indeed been gaining importance in Geneva over the last years. For instance, the law establishing the pension fund of the canton (CPEG) indicates that it shall operate in line with the principles of sustainable development and responsible investment. In its economic strategy 2030, the canton intends to promote the development of Geneva as an international crossroads of sustainable finance. This vision is at the heart of Sustainable Finance Geneva (SFG), an association founded in 2008 by a group of professionals convinced by the opportunity to connect the financial center with the locally-based international and non-governmental organisations, this “research laboratory on global issues”, in the words of Ivan Pictet, former managing partner of the Pictet Group.

Source: Antoine Mach, Covalence SA, Gencom newsletter October 2016

https://www.letemps.ch/economie/2014/10/30/finance-durable-prend-enfin-galon-universite

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Since last week’s shock result, the nation’s benchmark stock index has rallied into a bull market and the yuan -- while falling to a seven-year low against the dollar -- has risen against a basket of peers. The nine basis point increase in China’s 10-year sovereign debt yield is dwarfed by the 33 basis point jump by U.S. Treasury yields.

The resilience is notable given China was in the cross-hairs of Trump electioneering, with the Republican branding the country a currency manipulator and threatening to impose tariffs on its goods. While Pictet Asset Management Co. says the president-elect’s plans risk sparking a trade war between the world’s two largest economies, Mark Mobius is turning more bullish on Chinese equities, arguing Beijing officials may accelerate market opening.

"I’d say we are more positive on China in a sense that Trump will help open the door up more," Mobius, executive chairman of Templeton Emerging Markets Group, said by phone from Dubai. “There’s a fear that Trump will institute protectionist policies but I don’t think that’s the case. Trump will be more business-like and realistic when negotiating with the Chinese."

Article from Bloomberg dated Nov. 15th, 2016.

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This article is interesting because it makes you understand the role of the ECB and where we stand in the current banking system strengthening. If you have any question, please contact : This email address is being protected from spambots. You need JavaScript enabled to view it.

Interview with Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism, in Süddeutsche Zeitung, conducted by Ms Meike Schreiber and Mr Markus Zydra and published on 2 November 2016.

...

So it can't be ruled out that there might be another financial crisis of the kind we saw in 2008?

A financial crisis can never be ruled out entirely. But much has been done since 2008 to make the banking system more stable and to give us greater scope for action. Banks now have greater capital and liquidity reserves and better risk management than in 2008.

So no need to worry?

Banks are now much more resilient, and we as supervisors are able to take more far-reaching action in dangerous situations now that we have more instruments at our disposal.

The IMF recently described Deutsche Bank as the most dangerous bank in the world. As the responsible supervisory authority, you surely can't stand for that, can you?

You'd have to ask the IMF what criteria they applied in coming to this conclusion. The IMF also put it differently.

It said that Deutsche Bank appeared to be the most important contributor to systemic risks.

You see, that means something different from saying that it's the "most dangerous" bank in the world. The Financial Stability Board has published a ranking of the large, globally active banks according to their systemic relevance - that serves as a good guide.

This obstinacy is not popular with the banks, and many politicians also fear that banks will no longer be able to lend sufficient volumes as a result of all the regulation. What political pressure do you face?

As supervisors, we want to have banks that are able to finance the real economy not just in the short term, but also in the medium and long term. Some see a contradiction between banks granting loans and at the same time meeting tough regulatory requirements, but I don't see a contradiction here. Quite the opposite: a bank that has to fulfil strict supervisory conditions will be able to service the economy not just for the next few years, but also in the longer term.

The current business strategy of most banks mainly involves raising fees. Doesn't that mean that consumers are also paying for the ECB's zero interest rate policy in this way?

I have a question for you: would you like to give away your newspaper for free?

Not really...

Quite! But you would like your bank to manage your account, say, for nothing? I think that we need fair prices for services in the banking sector just like in any other sector. Everything cannot always be free. And that has nothing to do with low interest rates, it is a general truth.

Are you saying that the low interest rates are not a problem for the banks?

In the long term, the low interest rate environment can represent a considerable challenge, in particular for banks in the traditional lending business. But I would like to point out two things. First, the low interest rates are the result of persistently weak growth and structural factors such as demographic change. So many factors, both national and global, play a role here, not just the central bank's key interest rate. And second, the period of low interest rates also has benefits for the banks. They can obtain refinancing at better rates, and expansionary monetary policy also supports the economic recovery, which is also beneficial for banks.

Yet banks now even have to pay a penalty rate if they deposit money with the central bank. Is the ECB not putting the stability of banks at risk in this way?

It isn't easy at present, but banks have to find a way of dealing with the economic environment in which they find themselves. The banking business means constant adjustment. And a large number of the banks that have clear weaknesses in their business models had income that was too low and costs that were too high even before interest rates were low.

Article published on the BIS Web site on November 6th, 2016.

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  • ETFs combining multiple investment themes are next big thing ?
  • Billed as a core holding, will investors buy and hold?

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For its next act, the $3.5 trillion ETF industry wants to sell you the steady income of a dividend, the upside of a small cap and the good night’s sleep of a low-volatility stock. All at once.

And they really hope you buy it. Just about every big fund provider, from Goldman Sachs Group Inc. to BlackRock Inc. and Franklin Templeton Investments, is pinning the next leg of growth on the idea. (27.10.16)

There is no translation available.

Croissance PIB US depuis janvier 2015

Croissance du PIB américain depuis janvier 2015, en décélération. 

Question : va-t-on vers une récession aux Etats-Unis en 2017 ? 

                

There is no translation available.

 

Swiss ProfilInvest has decided to publish articles time to time in an effort to develop new way of thinking, of discussions with clients.

Stephen Roach was the Chief Strategist of Morgan Stanley until the late 90's. In the folowing article, he describes the main challenges of current central banks monetary policies. Though we might not agree with him, the arguments are interesting in order to understand history and to appreciate current situation.

By Stephen S. Roach
Project Syndicate, Sept. 26, 2016

NEW HAVEN – The final day of the summer marked the start of yet another season of futile policymaking by two of the world’s major central banks – the US Federal Reserve and the Bank of Japan. The Fed did nothing, which is precisely the problem. And the alchemists at the BOJ unveiled yet another feeble unconventional policy gambit.

Both the Fed and the BOJ are pursuing strategies that are woefully disconnected from the economies they have been entrusted to manage. Moreover, their latest actions reinforce a deepening commitment to an increasingly insidious transmission mechanism between monetary policy, financial markets, and asset-dependent economies. This approach led to the meltdown of 2008-2009, and it could well sow the seeds of another crisis in the years ahead.

Lost in the debate over the efficacy of the new and powerful tools that central bankers have added to their arsenal is the harsh reality of anemic economic growth. Japan is an obvious case in point. Stuck in what has been essentially a 1% growth trajectory for the last quarter-century, its economy has failed to respond to repeated efforts at extraordinary monetary stimulus.

Whatever the acronym – first, ZIRP (the zero interest-rate policy of the late 1990s), then QQE (the qualitative and quantitative easing launched by BOJ Governor Haruhiko Kuroda in 2013), and now NIRP (the recent move to a negative interest-rate policy) – the BOJ has over-promised and under-delivered. In fact, with Japan’s real annual GDP growth slipping to 0.6% since Shinzo Abe was elected Prime Minister in late 2012 – one-third slower than the sluggish 0.9% average annual rate over the preceding 22 lost years (1991 to 2012) – the so-called maximum stimulus of “Abenomics” has been an abject failure.

The Fed hasn’t fared much better. Real GDP growth in the US has averaged only 2.1% in the 28 quarters since the Great Recession ended in the third quarter of 2009 – barely half the 4% average pace in comparable periods of earlier upturns.

As in Japan, America’s subpar recovery has been largely unresponsive to the Fed’s aggressive strain of unconventional stimulus – zero interest rates, three doses of balance-sheet expansion (QE1, QE2, and QE3), and a yield curve twist operation that seems to be the antecedent of the BOJ’s latest move. (The BOJ has just announced that it is targeting zero interest rates for ten-year Japanese government bonds.)

Notwithstanding the persistent growth shortfall, central bankers remain steadfast that their approach is working, by delivering what they call “mandate-compliant” outcomes. The Fed points to the sharp reduction of the US unemployment rate – from 10% in October 2009 to 4.9% today – as prima facie evidence of an economy that is nearing one of the targets of the Fed’s so-called dual mandate.

But when seemingly solid employment growth is juxtaposed against weak output, the story unravels, revealing a major productivity slowdown that raises serious questions about America’s long-term growth potential and an eventual buildup of cost and inflationary pressures. The Fed can’t be faulted for trying, argue the counter-factualists who insist that only unconventional monetary policies stood between the Great Recession and another Great Depression. That, however, is more an assertion than a verifiable conclusion.

While policy traction has been notably absent in the real economies of both Japan and the US, asset markets are a different story. Equities and bonds have soared on the back of monetary policies that have led to rock-bottom interest rates and massive liquidity injections.

The new unconventional monetary policies in both countries are obviously missing the disconnect between asset markets and real economic activity. This reflects the aftermath of wrenching balance-sheet recessions, in which aggregate demand, artificially propped up by asset-price bubbles, collapsed when the bubbles burst, leading to chronic impairment of overleveraged, asset-dependent consumers (America) and businesses (Japan). Under such circumstances, the lack of response at the zero bound of policy interest rates is hardly surprising. In fact, it is strikingly reminiscent of the so-called liquidity trap of the 1930s, when central banks were also “pushing on a string.”

What is particularly disconcerting is that central bankers remain largely in denial in the face of this painful reality check. As the BOJ’s latest actions indicate, the penchant for financial engineering remains unabated. And as the Fed has shown once again, the ever-elusive normalization of policy interest rates continues to be put off for yet another day. Having depleted their traditional arsenal long ago, central bankers remain myopically focused on devising new tools, rather than owning up to the destructive role their old tools played in sparking the crisis.

While financial markets love any form of monetary accommodation, there can be no mistaking its dark side. Asset prices are being manipulated across the board – stocks and bonds, long- and short-duration assets, as well as currencies. As a result, savers are being punished, the cost of capital is repressed, and reckless risk taking is being encouraged in an income-constrained climate. This is especially treacherous terrain for economies desperately in need of productivity-enhancing investment. And it is not dissimilar to the environment of asset-based excess that incubated the 2008-2009 global financial crisis.

Moreover, frothy asset markets in an era of extreme monetary accommodation take the pressure off fiscal authorities to act. Failing to heed one of the most powerful (yes, Keynesian) lessons of the 1930s – that fiscal policy is the only way out of a liquidity trap – could be the greatest tragedy of all. Central bankers desperately want the public to believe that they know what they are doing. Nothing could be further from the truth.

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