Category: EMR

EMR March 2025

Dear Reader

In addition to the frightening Russian aggression against Ukraine, President Trump issued three executive orders on 1 February 2025. With these, he instructed the United States to impose new tariffs on imports, all of which are due to come into force on 4 February 2025:

• Canada (25%), to combat the flow of illegal drugs and illegal migrants across the northern border.
• Mexico (25%) to tackle a similar flow of illegal drugs and illegal migrants across the southern border, and
• China (10%), um gegen die Lieferkette für synthetische Opioide in der Volksrepublik China vorzugehen.

One exception is that Canada’s tariffs will be capped at 10% on fossil fuels. The orders provide that the President may raise tariffs further if Canada, Mexico and China retaliate. The resulting tariffs will affect energy, metals, chips and pharmaceuticals. The threat has been made to impose tariffs on other countries as well. This policy represents a very peculiar, unprecedented international ‘trade war’.

The repercussions on politics and the worldwide economy were not long in coming. An increasing number of analysts is aware that a prolonged trade war will have negative consequences, not solely for the addressed countries, but also other countries as well. What can be affirmed at this point in time is that the imposition of tariffs will potentially lead to higher costs, disrupted supply chains and a rather unquantifiable loss of jobs, both in the affected countries as well as in the imposing country, the USA. Based on our long-standing experience, we must assume that tariffs of this magnitude will, in due course, make both imports and domestically produced goods more expensive. The inflationary process continues! It is indeed surprising that President Trump himself acknowledged that his policy could have negative consequences for American consumers. Wow! We can ask the pertinent question: why did he do it anyway?

Fact is, that shortly after Trump´s announcement Canada announced retaliatory 25% tariffs on US goods. This reaction confirms the assumption that imposing tariffs on most important trading partners calls for retaliation. In the meantime, most analysts as well as the large public have started to argue that tariffs will, in due time lead to potentially much higher costs, disrupted supply chains and the loss of jobs. One may ask: Should this be the main goal of the leader of the world’s largest economy? This setting does not speak well for national and international investments. Fact is that the impending changes in the economic, social and political environment speak for lower economic growth, calling into action Central Bankers. Since the presidential announcements on the imposition of tariffs they face a dilemma between fighting inflation or propelling economic activity. In our previous EMRs we have argued that this is a tricky decisional context, we have never experienced before i.e. either fighting inflation independent from the outcome of economic activity or reducing the cost of investments in order to propel economic activity. This setting is highly difficult to quantify in terms of a promising investment attitude.

As investors, we are faced with a scenario contradicting the longstanding attitude of central bankers, i.e. to keep inflation low and stable. Now, the outlook requires taking into account higher costs, representing a reversal of the policy in place since World War II, when a specific goal of the monetary authorities was a sustained attempt to reduce trade barriers – between trading partners – in order to promote growth and prosperity. Recent developments speak of a dramatic reversal, the consequences of which are, at present, difficult to quantify with acceptable certainty.

DETERMINISTIC ENVIRONMENT

At this crossing, let us repeat that the current outlook is rather difficult and tricky to quantify with sufficient accuracy, and this preponderantly due to the attitude of President Trump´s “America First” policy. What has to be congruently taken into serious consideration is the possible retaliation from Canada, Mexico or China and other nations. They will likely result in even higher tariffs. At the same time, even the promoter of higher costs will, in due time, experience adverse consequences for their consumers! Let us recall that “Ever since World War II, the key development in trade policy has been the very gradual but persistent reduction in trade barriers, interrupted only by brief spats among major trading partners”. But with Trump’s inauguration, the largest economy in the world is slated to start imposing large tariffs on its most important trading partners, a policy decision that has begun to lead to reprisals promoting a surge in trade protectionism around the world. This new setting points clearly to negative repercussions on consumer and investment spending as well as international trade. In economics it is generally accepted that tariffs make both imports and domestically produced goods more expensive. In due course import prices must be expected to increase the rate of inflation both as a consequence of rising imports as well, in due course of domestically produced goods.

The expected rise of inflation calls for Central Banks action and reaction. At this juncture, as investors, we have to ask ourselves which steps will e.g. the FED take to mitigate the negative impacts both on the domestic as well as the foreign trade prospects.

PERTINENT ASSESSMENT FOR 2025

In line with the scenario outlined above, we expect higher inflation rates at least in the short to medium term, both in the US and in most advanced economies. A tricky and congruent deterministic effect will concern the respective actions/reactions of the respective monetary authorities.

Assuming, as most analysts do, that Central Bankers might continue to fight inflation through interest rate adjustments, we all will be confronted with sizeable repercussions on the respective currencies. Deterministic factors, not easily and adequately quantifiable with sufficient precision, refer to the impacts of Trump’s tariff impositions and the corresponding actions and reactions of “supplier countries.” In context, let us emphasize that in a contextual commentary, the Wall Street Journal called the aggressive tariff policy “the stupidest trade war in history”.

Fact is that supplier countries, targeted by the Trumpian tariffs must (a) either try to keep their export prices unchanged, i.e., accept a reduction in consistent profits, or (b) defend their share of exported volumes by accepting both reduced prices and reduced unit profit margins.

No sooner did the threat of worldwide tariffs sink in – in normal Trumpian negotiation style – than President Trump announced that the US government will match any tariffs charged by countries for American imports, with the promise that, if the counties concerned reduced the tariff on American import goods to zero, the United States would abolish their tariffs, also. This offers the prospect of tariff-free world, apart from China, Canada and Mexico. If those three countries complied with the demands against illicit drug importation and stemming the flow of illegal migrants there is implied the prospect of tariff relief thee, also.

CURRENT EXPECATIONS

What can be inferred from the above assessment speaks of unprecedented forecasting difficulties, due to the perception of an ongoing economic i.e. trade e monetary determined environment, be it due to the continuing Russian war against Ukraine as well as the Trumpian tariffs war. Investors face a difficult environment speaking of limited possibilities of diversification between countries as well as currencies.

As Swiss investors, we tend to take the following approach:

Maintain a greater exposure to the domestic market. In other words, we fear the potential for large currency losses.

Maintaining a high level of exposure to sectors such as technology and the financial industry, where we enjoy a certain advantage, regardless of “foreign” political influences. Certainly, at this crossroads we cannot quantify with sufficient certainty what the new US administration will de facto undertake, due to its focus of its “America First” policy.

In the current environment we focalize our currency exposure on the CHF, as we are not able to anticipate the actions and reactions of the current U.S. administration, as well as the reaction of Japan and European economies. The European Central Bank’s policy also remains difficult to assess.

Suggestions are welcome.

EMR February 2025

Dear Reader

To some extent, we are all aware of the impact of election years, not only in relation to the United States, but also in European markets and Japan. Consequently, we consider the current environment to be particularly challenging in terms of the short to medium-term outlook for equity markets.

The past two rounds of the U.S. presidential election have been truly surprising. Donald Trump played and continues to play a decisive role, not only for the US stock market, but also for other stock markets.

In the present EMR, we will focus on the performance of stock indices that we consider particularly important. In the chart below the respective indices are indexed to January 3, 2020, to make comparability clear and understandable.

The graphical representation of the selected share indices displays two similar developments:

• The first rises from the beginning of January 2020 to around the end of 2021 / beginning of 2022 while
• The second rises from late 2022 / early 2023 to late 2024 / early 2025.
• The specific periods of growth/correction require special attention, as the corresponding rates of change vary greatly from index to index.

Contextually we can ask ourselves how the indices might behave in 2025. From a trend perspective, the performance of the individual indices – in the respective reference currency – is quite similar. The commitment to technology is really remarkable. It is noticeable that both the uptrends and the short-term corrections correspond relatively well. The respective shares of technology content vary considerably over time. The worst performing indices are the FTSE100 and the SPI. Overall, the performance of the European indices is the worst. A consistent comparison should also focus on the respective currency fluctuations, as the rises and falls are considerable in each case.

At this point in time we believe that the economic performance of individual countries is difficult to assess with significant precision, when compared to the outlook concerning the United States. Particularly tricky and difficult to assess – is and will be – the impact of highly deterministic tech stocks in relation to business fixed investment and consumer spending.

One specific and deterministic impact, which goes mostly unnoticed, concerns the trend change in productivity. An almost unnoticed “fact” is that U.S. entrepreneurs invest more in the future than European and/or Asian entrepreneurs. What does this attitude imply about investment allocation? As Swiss investors, we continue to prefer CHF investments over EUR and USD investments. However, a thorny issue concerns the Trump administration’s “heralded” America First policy, which calls for increasing and maintaining investments in the United States. Why, one must ask? Well, the repatriation of production lines is already visible in imports of goods and services, for example, from China.

We have been told time and again, that Central Banks should further cut interest rates in order to stimulate economic activity. In our most recent economic reports, we somewhat disagreed with these requests and expectations. Our assumption has been, and continues to assume, that the measures taken by central banks will help determine the direction of the economy and consequently to some extend also the performance of the stock markets. At this juncture, we kindly ask the reader to take a closer look at the chart above. What we are after is why are the reactions, e.g. of the indices expressed in EUR, so significant different over the both examined periods of growth and contraction? Contextually we ask ourselves also in connection with this, we also ask what we can expect for the year 2025 with regard to the DAX, the CAC40 and the FTSE100 compared to the American and Swiss indices.

At the same time, we are asking ourselves how the central banks’ interest rate measures are curbing inflation. However, the impact of inflation on wages is a constant puzzle. We fondly remember the great economist Milton Friedman’s statement of so many years ago that wages always follow inflation. The data for the period from 2021 to today speaks the language of Friedman, doesn’t it?

SUMMING UP. WHAT DO WE EXPECT FOR 2025

Given the political, economic and social environment, the outlook for 2025 looks like a “very complicated and rather difficult task,” does it not? Are we still of the opinion that inflation is the main enemy of policymakers and/or investors and therefore should be eliminated or at least contained, or do we begin to look at which economic sectors promise better results?

In the event that the authorities remain focused on fighting inflation through interest rate management, the outlook for returns remains rather subdued. Why, one may ask? In times of war, the continuing Russian invasion of Ukraine, and similarly absurd developments in the Middle East, one might wonder how changes in interest rates might reduce the price of crude oil, especially in Europe? We should not forget that two of Europe’s largest economies (France and Germany) are going through a very tangled political situation, namely a serious lack of economic, social and political leadership. We view this context as quite problematic, if not dangerous.

Should investors start focusing on sectors such as technology, and financial industries, as has been and should continue to be the case in the US, then the outlook might significantly “brighten”. Certainly, at this crossroads we cannot predict what the new US administration will really undertake, as the possibility of an America First policy is at the forefront.

Despite all the forecasting difficulties in timing, as Swiss franc investors. we prefer our home market, primarily for currency reasons. We assume that the CHF will continue to be in high demand.

International diversification speaks, in line with the technological developments once again for investment in the USA.

Regarding the EUR and GBP exposures, we persist in being somewhat concerned about the political uncertainties especially in France and Germany.

Suggestions are welcome.

EMR January 2025

Dear Reader,

WHAT HAVE WE LEARNED FROM 2024?

As most of us might recall, in 2024 we stressed the importance of the country and the currency selection. Let us recall the repetition of stock allocation and the respective focus on currencies as primary determinant.

DETAILS MATTER

As our readers may recall, throughout 2024 we repeatedly pointed out that neither the jargoning of Central Banks on the necessity of interest rate intervention nor coherent inflation fears have been the main cause of the ups and downs of the equity universe, but rather the significant technology gap between the US and the rest of the investment universe. Recently, we came across a surprisingly clear and highly provocative account of the whereabouts of the equity universe. In the article ´The EU faces a huge innovation gap’ Andrew McAfee from MIT pinpoints a huge gap. The following graphic clearly shows what we meant. Andrew McAfee has visualized it excellently. Let us therefore follow in his footsteps to find a solution for the future development of the stock market. The graphical presentation shows the following:

Examining the chart, we are faced with a very curious dilemma. Throughout 2024, we have contradicted the official and widely held assumption that the central banks’ focus on interest rate management would solve both the inflation and growth dilemmas as the primary determinant of the investment universe.

Examining closely the Andrew McAfee’s chart shown above, we note with great pleasure that neither the Central bankers’ primary focus on interest rate adjustments nor coherent inflation fears are the main and decisive cause of the ups and downs of the stock markets, but rather the considerable technological gap between the US and the rest of the investment universe.

Let us therefore follow his analysis with the aim of finding a clue to the possible developments on the stock market. Here is our summary:

1. Recently five stocks have made astonishing gains, in US dollars, in terms of size and performance:

– Apple: 3’751
– Microsoft: 3’268
– Nvidia: 3’208
– Amazon: 2’363
– Google: 2’347

2. Other stocks follow with slightly lower growth rates, but still sizeable ones.

3. What the article describes is not simply the huge gap between the US and Europe, but rather that the European Market has little chance of becoming the next giant compared to the US.

4. Regarding our exposure to the EUR, we are quite concerned about the political uncertainties in both France and Germany.

Contextually we have a hard time to understand why the above-mentioned disparities are not taken more seriously, as compared to the focus on trying to control inflation by means of interest rate adjustments.

OUTLOOK 2025

Given the economic, political and social environment described above, the outlook for 2025 looks like a “very complicated and rather difficult task,” does it not? Are we still of the view that inflation should be the main enemy of policymakers and/or investors and therefore should be eliminated or at least contained, or do we begin to look at which economic sectors promise better results?

In the event that the authorities remain focused on fighting inflation through interest rate management, the outlook for returns remains rather subdued.

Why, one may ask? In times of war, the continuing Russian invasion of Ukraine, and similarly absurd developments in the Middle East, one might wonder how changes in interest rates might reduce the price of crude oil, especially in Europe? We should not forget that two of Europe’s largest economies (Franca and Germany) are going through a very tangled political situation, namely a serious lack of economic, social and political leadership. We think this context is quite problematic, if not dangerous.

If investors will start focusing on sectors such as technology, as has been and should continue to be the case in the US, the outlook might significantly “brighten”. Certainly. at this crossroads we cannot predict what the new US administration will do, as the possibility of an America First policy is at the forefront.

SUMMING UP

Despite all the forecasting difficulties in timing, as Swiss franc investors we prefer our home market, primarily for currency reasons. We assume that the CHF will continue to be in high demand.

International diversification speaks, in line with the technological developments once again for investment in the USA.

As far as EUR exposure is concerned, we are somewhat concerned about the political uncertainties in France and Germany.

HAPPY & PROSPEROUS NEW YEAR 2025

Suggestions welcome.

EMR December 2024

Dear Reader,

HISTORICAL HINTS

By way of introduction, we will look at the performance of the S&P500 and the NASDAQ equity index since 1980 following the respective presidential elections. The aim is to remind investors that they should be prepared for short to medium-term fluctuations. To do this, we use the data from Christopher Hayes and Alex Harring, which is as follows:

STOCK MARKET & US ELECTIONS?

Looking at the performance of the historical averages of the S&P500 and NASDAQ indices (as shown above), it seems reasonable to remember that past results do not always and necessarily help to determine the most likely future performance. For example, if one examines the “percentage annual change” of the S&P500 and NASDAQ indices, respectively, one finds that there have been more positive than negative monthly than annual changes; 7 for the S&P500 and 8 for the NASDAQ. In other words, the odds are slightly more in favor of a positive outcome in 2025 than a negative outcome.

Christopher Hayes and Alex Harring’s data explain that there have been 23 elections since the S&P 500 Index began and that in 19 of the 23 years (83%) there has been positive performance. They also remind us that in the years when a Democrat was in office and a new Democrat was elected, the total return for the year averaged 11%, while in the years when a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%.

It should be borne in mind that the story does not follow a specific pattern and is not easy to judge, as the decisive events and factors are very specific. What comes next remains a difficult undertaking. Environments cannot always be extrapolated unless one can pinpoint the determining factor(s). At this crossroads, credibility is needed, particularly with regard to the whereabouts of the big tech giants relative to economic activity. It is worth noting that the 10 tech stocks have recently accounted for 35.1% of the gains in the S&P500 index, for example. Recall that in 2015, the list was dominated by 10 tech giants that accounted for only 20% of the total weight.

In order to estimate the most likely outcome for the year 2025, we would first like to point out the most important key determinants, which we consider to be very deterministic, but which are also very difficult to assess with sufficient credibility and precision.

1. State of vulnerability. At present, the economic environment is considered to be very fragile, primarily due to the outcome of the US elections. An environment that is difficult to quantify with a high degree of acceptance.
2. The two leading European economies, Germany and France, are facing particular problems. Germany, the world export champion, is in danger of falling into recession. Many companies in the DAX index are struggling with high energy costs, falling demand and shrinking profitability.
3. France, the proud ‘Grande Nation’, is becoming a weak link in the eurozone. Even in France, there are dangerous signs of an impending recession.
4. Other markets have not had much to say in recent quarters. In general, analysts have focused on political events, which has led to a great deal of uncertainty about the imminent future of the stock markets.
5. Against this consistent backdrop, the dollar should remain strong against both the euro and the Swiss franc, and the Swiss franc should appreciate against the euro.
6. In addition, the environment continues to be burdened by the Russian war against Ukraine. Technological interdependencies (West-East) and, in particular, the localization and re-localization of technological innovations are causing continued volatility. All developments point to an increasingly divided economic environment. The dependence of Western economies on fuel imports from politically unstable countries does not promise rapid change in the short or medium term. In addition, the political disputes in the industrialized countries (see e.g. Germany and France) do not bode well for inflation and the expected reaction of the monetary authorities.

OUTLOOK 2025

What might the economic, political and social environment look like in 2025 is the difficult question that many are asking themselves at this point in time. Traditionally, investors tend to extrapolate the recent past. We believe that such an intention does not seem very promising at present. We will therefore try to define a slightly more promising perspective, which may force us to review the state of play in due course.

Let’s start with the country allocation. As Swiss investors, we are still “over-exposed” to our home market, both from an equity market and currency perspective. Traditionally, the CHF has outperformed most other currencies in a very contrarian environment, so we expect this to be the case again in the near future

Most people we speak to are asking the same question: What will President Trump’s policies really achieve? A “closed store”, i.e. an extreme focus on the domestic market, or a slow but steady return to an open environment? Do you have a suggestion?

We believe that the Russian war against Ukraine as well as the war in the Middle East are immense unworthy tragedies that will not help anyone economically or socially. Furthermore, we find the current focus of various governments on further interest rate cuts astonishing indeed, especially considering the risk of recession, especially in the European context.

The two sectors that continue to attract our attention are likely to remain technology and financials, while current expectations point to further rate cuts. As expected, the Fed cut the key interest rate further at its latest meeting. This means a full percentage point for 2024! To avoid an inflationary spike in 2025, further rate cuts should be expected. We wonder why most analysts do not examine the impact on economic growth, inflation differentials and other countries’ currencies and thus on the announced drastic change in policy, and not only in the United States. Do you have any suggestions?

The graphical representation of the performance of the various share indices for the period since April 12, 2022 and in particular since December 10, 2023 speaks volumes. The outperformers include the NDX (+95.99 %), the S&P500 (+57.65 %), the NASDAQ (+90.01 %) and the NIKKEI (+50.07 %). The worst performers in local currency terms were the FTSE (+21.15%) and the SPI (+19.01%). The CAC40 and the SX5P index performed slightly better than the SPI and the FTSE index. At this point, the question arises: what can be deduced from these major differences?

First of all, the most profitable investments in the reporting period were in the technology sector. Economic developments in the individual European countries were also a determining factor. Another aspect of considerable influence was and is the whereabouts of the respective currencies, even more so than the much-vaunted fine-tuning of interest rates. The reactions of the share indices to the record interventions on the currency markets since 30.09.2020 were of deterministic relevance. See the chart.

SUMMING UP

The political, economic and social environment remains characterized by opacity and volatility. The US elections have not brought any substantial certainty either. The tone is different, but the facts will have to wait.

Accordingly, we will maintain a rather restrictive country allocation based on technological innovations, financial management and currency expectations. Provided that the East-West constellation does not deteriorate, we, as Swiss investors, will continue to focus on our own domestic market, particularly in connection with currency developments. From a technical perspective, we continue to favor the US equity market over the European markets.

MERRY CHRISTMAS AND A HAPPY NEW YEAR 2025

Suggestions are welcome.

EMR November 2024

Dear reader

WHICH WORLDVIEW WILL PERSIST?

The US election campaign ended with the victory of Mr. Donald Trump. At this first viewing we assume that the new Administration might be focusing mainly on US domestic advancement i.e. issues that will be decisive in transforming the US economic setting. Foreign policy will also continue to play an important role. It should not be forgotten that the recent US election campaign and election took place in concomitance with two ongoing wars, and, particularly also, in a context of radical redefinition of the national powers. In other words, representing the redefining of international power, which might continue to be promoted by the “revisionist” coalition, i.e. of China, Russia, Iran and North Korea, as well as a “global South” (Brazil and India). In addition, we see that the European developments are hardly reassuring. The positioning of the President elect, Donald Trump, stems from the well-known division between the isolationist and internationalist orientations of the foreign policy of the USA. In addition, we ought to keep in mind that the president elect, Donald Trump, is a neo-isolationist with a strongly unilateral instinct.

At this crossroads, one might assume that the United States is focusing on the pursuit of political hegemony by equipping itself with unprecedented military strength; somehow independent of its own democratic values. Donald Trump’s orientations go back to the well-known split between isolationist and internationalist orientations in foreign policy, and this not only in the USA. In the post-Cold War era, the internationalist vision triumphed despite the defeats in Afghanistan and Iraq in response to the terrorist attack of September 11, 2001. Nevertheless, the internationalist vision continues to dominate.

In the current post-election period – especially for the US – it will be imperative to build a new alliance system without abandoning the international role of the United States. The confrontation with the new presidency will be, on the one side, about the management of the Russian invasion of Ukraine and, on the other hand, about the inability to “contain” the key players in the Middle East. Lurking in the background will be attempts to contain expansion of China`s influence in the third World and the immediate threat to Taiwan. Furthermore, we will have to seriously consider the actions and reactions to the influx of legal and illegal people in search of a job, as well as liberty.

In the aftermath of Donald Trump’s victory, the global community will probably expect even less, than it did from the Biden administration, and this on the basis of an even stronger isolationist instinct, as already demonstrated by the first Trump administration.

SHORT – TO MEDIUM – TERM ASSESSMENT

Currently, due primarily to the US election outcome, the economic setting is in a state of high vulnerability, which makes any quantification difficult. In addition, the environment continues to be burdened by the Russian war against Ukraine, technological interdependencies (West-East) and especially the localization and re-localization of technological innovation. All developments pointing to an increasingly divided economic setting. The dependence of Western economies on fuel imports from politically unstable countries does not promise rapid change, neither in the short nor the medium term. Furthermore, political struggles in industrialized economies (see, for example, Germany) do not bode well for inflation and the expected reaction of monetary authorities. A new factor, rather difficult to assess at this time, will be the President-elect Trump’s focus on “America first.” From various available political comments, there seems to be no doubt at all, that changes in international trade flows could be significant in both the short and the medium term. At present, we believe that an increase in inflation differentials should also be taken into serious consideration.

Tricky questions at this time:

Technology: The announced relocation of technology production lines to the United States will undoubtedly change the international flow of goods and services as well as of pertinent prices. The effects will primarily be felt by “low-cost producers” such as China and the Far East in general. A further impact is perceived in the feared increased “repatriation” of skilled workers to the USA. The effects on employment, wages and overall inflation cannot yet be predicted with sufficient accuracy. They seem to point to short-term volatility in both employment and inflation. How this “reorientation” could affect the national and global economy is currently the real question.

Current expectations for 2025 indicate further interest rate cuts. The Fed is expected to cut the benchmark rate at the December 2024 meeting. This would imply a full percentage point for 2024! To avoid a surge in inflation in 2025, further interest rate cuts should be expected. We wonder what the implications will be on economic growth, inflation differentials, and other countries’ currencies, in conjunction with the heralded drastic change in policy not only by the United States. Any suggestions?

The graphical representation of the price performance of various share indices, for the period since 30 September 2020, speaks volumes. Outperformers are the NDX index with +84.8%, the S&P500 (+78%); the NASDAQ (+72,2%) and the NIKKEI (+67%). The worst performers – in local currencies – are the FTSE (+36,9%) and the SPI (+ 22,5%) Indexes. The CAC40 and the SX5P indexes performed marginally better than the SPI and the FTSE indexes. At this point, the question arises: What can be deduced from these major differences?

First of all, for the period under review, the most profitable engagements were due to the exposure to technology. Determining have also been the economic developments in the single European countries. A further aspect of significant influence has been and will continue to be the whereabouts of the respective currencies.

Of deterministic relevance have been the reactions of equity indexes to the record intervention in the foreign exchange markets, since 30.09.2020. See following chart.

Setting the focus on the data in the table and chart, we sense a differential impact of inflation management on the individual stock indices. In this context, the performance of the NIKKEI index is puzzling compared to all other indices except the NDX. There is no doubt that the trends observed point to a greater impact of technologically advanced products.

What is not obvious is the impact of and on currencies and consequently on country allocation, as shown by the rather low growth of the SMI (Swiss Market Index) compared to all other indices in their respective currencies. We therefore maintain a rather restrictive country allocation based on technological innovation and financial management.

We assume that the outcome of the US elections will have a significant impact on investment policy in the coming months and quarters and years. This means that more attention needs to be paid to volatility, economic expectations, and the management of interest rates by monetary authorities.

Accordingly, we maintain a rather restrictive country allocation based on technological innovation and financial management capabilities. This means that more attention will need to be paid to volatility, economic expectations, and interest rate management by the monetary authorities.

Suggestions are welcome.

EMR October 2024

Dear Reader

CURRENT SETTING

We have no doubt that in recent years/quarters/months the economic discourse has undeniably focused on managing interest rates to combat inflation and, in particular to counter inflationary fears and pressures.

Indeed, fears of an imminent economic slowdown, due to a short-term reduction in consumption and investment, coupled with fears of rising interest rates as a result of central bank action, speak volumes. However, it is the strength of economic activity that, in our view, will limit the policy increase in interest rates. In this EMR we will focus on recent developments in equity indices to obtain factual information regarding deterministic factors. The following table and related graph of changes in equity indices – on an average annual basis – speak volumes about the ‘deterministic’ factors, which in our opinion have not and do not receive due attention.

Changes in equity indices (average annual basis)

At this point, we will try to understand what the latest developments have been and what they say about promising investment prospects.

Both the table and the chart show that the highest average performance in recent years was achieved by the Nasdaq (+18%), followed by the S&P500 (+13.52%) and the Nikkei (+12.66%). The worst performers were the FTSE100 with 2.42% and the SMI with 4.06%. It should be noted that the data is expressed in the respective currencies. It should be borne in mind that inflation and thus the controversial fine-tuning of interest rates by the respective central banks played a decisive role. In our view, real events require a rather differentiated action/reaction function. Furthermore, the highs and lows of the respective currencies relative to the reference currency should be taken into account when defining the “de facto” profit/loss differential. In our opinion, this is a fact that is of considerable importance in the context of an effective international comparison.

SHORT TO MEDIUM-TERM ASSESSMENT

We believe that the economic shocks of the past few years (Russian war against Ukraine, Covid pandemic, and climate change) have left the global economic system in a state of unexpected vulnerability as they have spared no one. Russia’s war against Ukraine underscores the “unexpected” dependence of the free world on energy imports, pushing inflation ever higher, with unexpected implications for monetary policy, expected economic growth and so on as primary determinants of inflation flow. The difficulty we encounter in this transition is the quantification of the impact on overall economic growth, inflation and interest rates. The authorities’ “one-sided” focus on adjusting interest rates to dominate inflation is difficult to explain with sufficient precision.

The U.S. presidential election is another tricky question mark. Both in regard to who will be elected to the presidency for the next 4 years as well as which policy he/she will try to implement, representing a “new” deterministic factor that is very difficult to quantify with sufficient precision in the short- as well as the medium term. We ask ourselves:

• What political measures could the person that wins the election take, and
• What impact could this have on the national and global economy?

If we focus on the data in the table and chart shown above, we should consider the different impact of inflation management on each stock index. In this context, the performance of the NIKKEI index is puzzling compared to all other indices except the NDX. There is no doubt that the trend shown points to a stronger “retracement” of technologically advanced products.

What is not obvious are the impacts of and on the currencies and thus on the country allocation, as shown by the rather low growth of the SMI (Swiss Market Index) compared to all other indices in their respective currencies.

Accordingly, we maintain a rather restrictive country allocation based on technological innovation and financial management capabilities.

We believe that the outcome of the US elections will have an impact on investment policy in the coming months and quarters. This means that greater attention will need to be paid to volatility, economic expectations and interest rate management by monetary authorities.

Suggestions are welcome.

EMR September 2024

Dear Reader,

CURRENT SETTING

We have no doubt that the economic discourse in recent years/quarters/months has undeniably focused on managing interest rates to fight inflation and, in particular, to counter inflationary fears and pressures.

Indeed, fears of an imminent economic slowdown due to a short-term reduction in consumption and investment, coupled with fears of rising interest rates as a result of central bank action, did indeed argue in favor of a rate cut. However, it is the strength of economic activity that we believe will limit interest rate rises.

SHORT-TERM ASSESSMENT

We believe that the economic shocks of recent years have left the global economic system in a state of unexpected vulnerability. Recall that climate change and the pandemic have not spared anyone. Russia’s war against Ukraine underlines the free world’s “unexpected” dependence on energy imports, with unexpected implications for inflation, monetary policy and so on.

So, what now? Recently, the media have pointed out that China’s economy is slowing down. The difficulty at this stage is the speed and strength of the Chinese slowdown. What seems certain is that the Chinese economy is slowing, while the impact on overall economic growth, inflation and interest rates remains difficult to quantify with sufficient precision.

MEDIUM-TERM ASSESSMENT

Among the recent domestic and global economic shocks, the upcoming US election is a “new” factor that is difficult to quantify in the short and medium term. What policies might be implemented by whoever wins the election, and what might be the impact on the domestic and global economy?

Both the US presidential election (in November) and the feared slowdown in the Chinese economy are therefore likely to play a key role in the short and medium term.

ECONOMIC GROWTH

In this context, we consider two factors that are highly deterministic and difficult to assess with sufficient precision. The first is the contribution of the domestic economy, i.e. consumer spending, fixed investment and government spending. The focus is mainly on factors that can be determined at the national level. The second concerns the impact of decisions and actions taken by foreign entities. Let us now look at some details.

CONSUMER SPENDING

Consumers are increasingly expected to focus on goods and services from domestic producers for as long as possible. This is an early promise of sustained economic activity. In terms of asset allocation, there may be a discrepancy from country to country, depending on their degree of autonomy.

Going forward, we believe the degree of energy independence will play a key role in inflation and monetary fine-tuning.

BUSINESS FIXED INVESTMENT

Somehow, investors have learned that the availability of certain inputs is far more important than short-term “price advantages”. The economic environment has become more complex and, above all, influenced by unfair political practices rather than free market competition.

Investors should view recent developments as a possible dramatic reversal in investment activity: abandoning a strategy of short-term profit, investing and producing abroad to take advantage of lower production costs, possibly losing financially attractive customers in the long term.

GOVERNMENT SPENDING

In recent times, governments in the ‘free world’ have played a complex role in managing domestic and foreign investment. Perhaps we have all taken it for granted that politicians in other countries think like we do in the free world, that is, with an outlook based on market economics and free trade. Unfortunately, both Russia and China have taught us and continue to teach us that this is not the case for the whole world. Today, it is important to recall that the “free market” has taken on very different political connotations from those that have dominated the world market for years.

FOREIGN TRADE

We have no doubt that a significant shift is taking place. On the producer side, the battle is over the supply of raw materials from dirigiste countries (e.g. crude oil from Russia and Middle Eastern suppliers). The main objective of the producing countries is to maximize profits. Importing countries, on the other hand, are more concerned with sustainability than cost minimization. Developed countries, led by the United States, are forcing the “repatriation” of technological tools in order to reduce their dependence on foreign countries such as China or Russia.

The difficult question to answer at this stage is: who will be the winners and who will be the losers? From a contextual point of view, we have no doubt that there will be a significant impact, primarily on domestic economic growth and new product development, which will in due course determine the position of inflation, interest rates and currencies.

ON MONETARY POLICY

Monetary policy should be increasingly geared towards promoting investment that fosters technological innovation. In this context, the differences between nations are significant and represent an immanent and highly deterministic contextual key to international trade and even currency diversification.

ON INFLATION

Reading the press, watching television or listening to the radio, we are and will continue to be confronted with the whereabouts of inflation. It is not only central bankers and/or economists who face a number of daunting challenges, which will not end primarily with interest rate adjustments. They also require greater coordination in the context of productivity and new economic developments. The availability of crude oil remains crucial to containing rising inflation in conjunction with monetary and innovation adjustments.

BOND MARKETS

On the back of expectations of a further reduction in interest rates, investors are becoming more and more interested in bond investments, particularly in the United States. Total bond capitalization is approaching $70 trillion, according to the “Bloomberg global aggregate index”. As reported in the media, capitalization has increased by $6 trillion since the beginning of 2023 and by a further $12 trillion since the beginning of 2024. However, futures market discounts are confidently predicting that interest rates will continue to fall. These developments should (and will) be examined in the context of macroeconomic developments. If expectations prove to be relevant, they will help us to quantify the future disinflation process.

ON CURRENCIES

The scenario described above requires an accurate and diversified currency allocation. We do not doubt that extrapolating long-term historical developments is no longer sufficient. Productivity and innovation must be stimulated along with technological developments. Investors will increasingly have to consider the availability of the necessary venture capital to support innovation, which is not available everywhere, in comparable quantities and at acceptable prices. Red equals new.

EQUITY MARKETS

Forecasting has always been a tricky business. The chart showing the reaction of stock indices and the price of gold after the Russian invasion of Ukraine on 24 February 2022 speaks volumes. It is quite surprising that the Nikkei is the best performer. Do you think other factors were and are at play?

A difficult issue to assess is the availability and cost of energy, which is clearly visible in the rise in crude oil prices. If we look at the performance of the indices shown since the end of 2022, we see that the impact of inflationary fears varies considerably from index to index. In this context, the performance of the NIKKEI index relative to all other indices, except the NDX (NASDAQ), is puzzling. There is no doubt that the trend shown is indicative of a greater “repatriation” of technologically advanced products.

What is not obvious is the impact on currencies, or even country allocation, as evidenced by the rather low growth of the SMI (Swiss Market Index) compared to all other indices expressed in their respective currencies. As a result, we have adopted a rather restrictive country allocation based on technological innovation. The US elections are likely to have an impact on investment policy in the coming months and quarters. Economic activity and interest rates are likely to fuel volatility.

Suggestions are welcome.

EMR August 2024

Dear Reader,

FORECASTING DILEMMAS

Due to weak economic growth expectations in the US in early August 2024, stock markets worldwide have been experiencing both great nervousness a well as sharp negative correction. So far in 2024 the correction concerns the US tech giants but not only. According to the news the driver has to be found in economic expectations, and the corresponding policy actions and reactions of the recent past. Why are most analysts worried by negative expectations? Recalling that into July 2024, the underlying focus concerned interest rate cut, in order to propel economic activity. A specific fear was seen in the possibility that the FED would announce interest rate cuts in September, and that it would come too late in order to avoid the feared recessionary phase. A further argument put forward to explain the correction has been the recent US job report. How can this dramatic turnaround be analysed properly?

As an economist with many years of experience, I would like to emphasize that the current scenario is not new to us. We know that the monetary authorities, and a vast majority of analysts continues to emphasize the demand side to the detriment of the supply side. It is a fact that the overwhelming majority are betting on further interest rate cuts to boost consumer growth. Why is pessimism so widespread while economic growth has been quite strong over the last three months? Rising prices are one aspect that might help boost the economic well-being. In any case, the number of redundancies remains rather low.

The reactions of technology driven companies (Apple, Microsoft, NVIDIA, Alphabet (Google), Amazon, Meta Platforms (Facebook), Tesla, Oracle, Samsung and many others) have sizeable gone through a correction phase.

At this juncture we ask ourselves, why does the current scrutiny not focus significantly more on the supply side, as the current main destabilizations setting. Let us ask why, at present, most analysts omit to consider the supply side as a deterministic factor? The difficult, contextual question is how it is possible to reduce inflation by primarily acting on interest rates while crude oil from Russia and other countries is driving up prices? Especially Russia is interested in destabilizing the European and Western economies, while forcing the price of crude oil up and up. The pertinent question refers to the efficiency of interest rate increases to control price increases? The response of industrial products might not be as fast and concrete in terms of substitutes. Thus, the immediate repercussion may be relatively small and difficult to quantify. The problem of understanding and measuring the elasticity of demand to a change in price of a “production good”, like crude oil, is even harder when the product is not a consumer good which is desired for itself, but is a major input for other consumer and/or industrial goods!

Reducing interest rates may, in due course, have the effect of reducing the price of a consumer good, but not the effect of offsetting or increasing the demand for consumer and investment goods. What we are trying to argue is, that interest rate cuts by the Central Banks authorities might produce an inverse effect i.e. a decrease in final demand. Only when the reduction in the prices of equipment causes a reduction in the price of consumer goods, will inflation correct as well.

Even if the actual causes of the recent stock market quake are not entirely clear, it is certain that major investors have speculated e.g. on the yen on a grand scale. How can it be that such a panic-like reaction could and did occur almost out of nowhere? Various explanations are circulating in the press. One of these explanations, which we also consider to be “decisive”, can somehow be explained by the preceding, indeed exaggerated boom in the technology sector and the feared recession possibility in the USA, in conjunction with a further escalation of war in the Middle East. What we fear is that many market participants and commentators have “blindly” followed the temptation of the currency carry trade. This type of trading makes use of interest rate differentials between different currencies to achieve greater profits. Large institutional investors, who move large sums of money, take out loans in a currency with lower interest rates and invest the “borrowed” money in a currency with higher interest rates. This approach has nothing to do with “fundamentally-based” action. What this means for forecasters is nothing other than that the “orchestrated” interest rate adjustments are neither conducive to economic growth nor to combating inflation.

This speculative fuss is problematic when the relationship between currencies changes massively within a short period of time. The question that arises here is: What is the purpose of the central banks’ interest rate adjustments?

SHORT-TERM ASSESSMENT

In light of recent socio-economic trends, we believe that the near-term outlook remains difficult to quantify, both politically and economically, domestically and internationally. We believe that economic growth will remain relatively weak. The extent of the necessary reduction in energy costs remains difficult to predict with the necessary certainty and precision.

The delay or termination of the Russian invasion of Ukraine does not mean that energy prices (the most important determinant of inflation) will fall any time soon, on the contrary, they could even rise for an indeterminable period of time, that cannot be quantified with the necessary temporal and quantitative precision. Interaction with other energy producers could perpetuate fears of persistently high inflation. Related fears could be a challenge for central banks in the context of their interest rate policy decisions. In any case, it should not be forgotten that the predictions of various speculators have not materialized. In other words, we do not expect dramatic changes in the rates of inflation.

MEDIUM TERM

The Presidential election in the United States (on November 5) ought to play a deterministic role. Accordingly, they will somehow determine the economic growth path of the United States, as well as the European and world growth paths. Both candidates do not promise too well. The situation does not speak for a dramatic financial market`s improvement.

It is well known that the U.S. elections are the only national elections that have or can have serious global consequences. In our view, what will matter will be the public acceptance of the preannounced interest rate cuts, which, in due course, may have the effect of reducing the price of consumer goods, but not the effect of offsetting or increasing demand for consumer and investment goods.

An intriguing aspect is going to be the role of the Vice-presidential candidates. At this crossing let us point to the differential focus of the two candidate’s teams. The Trump´s team seems to be primarily focused on the past; while the Kamala Harris´ team is preponderantly interested on the future. Both, the former president and his vice speak the language of disdain for their respective contractors, focusing, for now, on “U.S. nationalism,” while the Harris´ Democratic team focuses primordially on globalism, thus being much more in conformity with the rest of the world, taking into account both American strength in an increasingly globalized world, and other countries on a global scale.

At this juncture we would like to recall Mark Twain saying that “history never repeats itself but it rhymes”. Its meaning is that while historical events may not recur in exactly the same manner there are often similar patterns, themes, and dynamics that can be observed across different eras. The contextual historic lessons we have learned can be summarized as:

1. Do not sell when markets are down.
2. Be ready to buy assets at a discount.
3. Be a knowledgeable investor, tolerate risk.
4. It’s not true that this time will be different, and
5. Consider that the market has been more volatile in recent months.

Accordingly, we suggest to quantify the impacts on short-to-medium-term economic activity, focalizing also on the domestic currency and the developments of interest rates.

Suggestions are welcome.

EMR July 2024

Dear Reader

ATTITUDES OF CENTRAL BANKS

The latest actions by central banks are indeed astonishing. On 8 June 2024, the Neue Zürcher Zeitung wrote: “It rarely happens, for once the Europeans are ahead of the Americans”, citing the interest rate cuts by the Swiss National Bank and the European Central Bank. To make the connection clearer, it was the Swiss National Bank that was the first major central bank to announce an imminent turnaround, on 21 March 2024. The cut in the key interest rate by 25 basis points to 1.5% initially led to a depreciation of the CHF by 1% against the EUR. In the same period, the CHF fell by 1.2% against the USD, while the SMI rose by 0.9%. At the same time, the yield on 1-year Swiss government bonds fell by more than 20 basis points, from 1.22% to 0.99%. On 21 June 2024, the SNB confirmed the “interest rate turnaround” by lowering the interest rate again by 0.5 percentage points to 1.25%. This step confirms our assessment – for Switzerland – of how important currency changes are and can be.

On 8 June 2024, the European Central Bank (ECB) decided to change course, i.e. cut interest rates. The key interest rate was lowered by 0.25 percentage points to 4.25%. The ECB is thus following the example of the central banks in Canada, Switzerland and Sweden, which had lowered interest rates. The US Federal Reserve Board, on the other hand, decided on 12 June 2024 to postpone a reduction in the key interest rate. Chairman Powell announced that the Federal Reserve would maintain interest rates in their current range of 5.25% to 5.5%. At the same time, the forecast for interest rate cuts was revised to just one in 2024. The central bank’s policymakers noted that there had been “modest further progress” towards its 2% in-flation target. The chairman of the Federal Reserve stated during the press conference that the central bank did not yet have the confidence to cut interest rates even if inflation came back from its peak.

What do the developments of share indices indicate for the period since the end of 2021? The following chart points to two quite similar developments. The first refers to the period of the Covid pandemic, which peaked in late 2021 to early 2022, followed by a significant correction phase until the end of 2022. The second phase, which is similar to the first and extends from the end of 2022 to 2024, shows a fairly similar development. However, the growth rate of the equity indices, particularly the NDX, NASDAQ, NIKKEI and S&P500 compared to all other indi-ces, is revealing in the second phase. What conclusions can be drawn from these develop-ments is the real question at this point. Do you have any suggestions?

As the chart implicitly shows, it is impossible to explain why inflation can be contained pri-marily through interest rate cuts. What caused the correction in 2022 and the subsequent re-covery since the beginning of 2023 is the difficult contextual question?

Despite the rampant economic pessimism, share indices have recently reached new highs again. At this point, we would like to call the reader’s attention to a rather positive effect – the so-called “quantitative tightening” – a little-noticed approach, that is increasingly playing a decisive role on stock markets. This process is referred to as “buybacks”. Companies are increasingly buying up their own shares on the market. One might ask what effects these measures have or could have? A first answer that comes to mind, is undoubtedly the rise in share prices. Buying treasury shares on the market is reflected in higher earnings per share (EPS). These actions clearly point to high returns and prompt other market participants to take coherent action. It is indeed instructive to know how these developments play out. When the number of shares on the market is reduced, earnings per share increase, regardless of economic expectations. “Scarcer shares are the order of the day”.

As we know, there is another advantage: Buybacks are de facto an indirect form of remuner-ation for shareholders. The taxes due are delayed until the time the corresponding capital gain is realized, at a lower tax rate than dividends and at a time of the shareholder´s choos-ing.

Another important message relates to the prospect of a future, beyond the rampant negati-vism regarding inflation and lower expectations for economic activity. In this context, the question arises as to whether this attitude is not also relevant for the valuation of most major technology stocks. Let’s define this context as “corporate quantitative easing”! At this point, we wonder what the difference is between corporate quantitative easing and central bank quantitative tightening is – or ought to be. In other words, we ask ourselves which are the causes of the sharp rise in most technology stocks? Can we speak of technology-driven quan-titative easing? In the current environment, investors need to take a clear stance, because the quantitative tightening of central banks contrasts with the increase in liquidity available to shareholders in the market. In other words: Will politics prevail in the financial markets over increased liquidity? In this context, there is an interesting answer: The amounts that central banks withdraw from their own balance sheets flow into the financial markets through the windows of the buyback programs!

SHORT-TERM ASSESSMENT

As we write the July EMR, a so-called “tariff war” is imminent at a global level. When as-sessing the possible consequences of current events, we are reminded of the so-called tariff war that has raged at a global level in the past. In addition, recently, the press reports that the USA, Japan and South Korea are exerting increasing pressure on China to control exports of semiconductor technology and to co-operate in key sectors. What consequences this be-havior may have for the economy remains a difficult question.

An initial impact concerns the increase in prices for electric vehicles from China. As a result of the recently announced change, tariffs in Europe have risen by 38%, in addition to the 10% already in force. The increase in the United States is reported to be 102.5%. This politi-cal stance is currently being labelled as “economic self-destruction”. Let’s not forget that the International Monetary Fund found in 2019, based on data from 151 countries in the period from 1963 to 2014, that the introduction of measures to increase tariffs leads to negative effects on production volumes and productivity!

Given the ambivalent outlook, the conflicting expectations on the political front do not bode well. At this point, we could argue that Swiss investors could benefit from a significant home bias, mainly driven by a strong currency.

Suggestions are welcome.

EMR June 2024

Dear Reader

TRICKY EXERCISE IN AN ELECTION YEAR?

With regard to short- and medium-term expectations, most forecasts can be described as rather pessimistic. We believe that they can neither be considered promising nor relatively coherent. In this EMR, we will focus on the average developments of various stock indices in order to derive a likely, realistic outlook.

The following graphical representation of selected share indices speaks for itself. The changes in the shown indices indicate a clear dichotomy between the US indices, as well as partly also for Japan and all other indices. One specific and relevant conclusion that can be drown from the graph, for the current year 2024, relates to the most obvious disparities. In our opinion, there is little doubt that technological differences and currency changes have played – and will continue to play, a significant role in country allocation.

The annual growth rates differ considerably from index to index. One may wonder whether this is not a deterministic indication of the effects of the respective explanatory variables. The particular determinants should indeed be analyzed in detail and specifically as they do not have the same, coherent impacts. In terms of forecasting, we believe that this approach is indeed crucial. We assume that the result of the upcoming US presidential elections could pose particular problems of interpretation.

At this stage, we assume that the upcoming US presidential elections will once again play a decisive role. When interpreting the chart of the DJIA over a fairly long period of time, two quite different deterministic developments stand out. The first one ranging from 1945 to the end of the 1980s. In this period the trend has been relatively stable and somewhat monotonic in terms of the relevant definitions: “year start”, “year high” and “year close”. On the other hand, the divergence since the beginning of the 1990s is indeed astonishing and very revealing, isn’t it? The long-term, historical comparison remains a very delicate matter. One may ask him/her whether the slogan “as the US market goes, so go most industrial markets” is still valid and deterministic? If you answer yes (or no) to our question, we would appreciate it if you could tell us why so?

WALLSTREET IN THE ELECTION YEAR

When analyzing the available data on US election years since the early 1980s, one comes across a rather surprising piece of information. One may wonder whether the US presidential election in 2024 could prove to be a significant market-moving catalyst, as it has in previous periods, or whether it will go almost unnoticed, despite the media’s loud jargon. Barring an extraordinary development, this year’s presidential race looks like a repeat of the 2020 election except that the White House, Senate and House of Representatives may each flip to the other party with no “clear sweep” that would give either party unbridled power. At the moment, one may ask, what have been the real determinants to focus on in order to make a credible prediction?

First of all, they point to rather subdued economic growth in the first six months of the year, hopefully followed by an upswing, depending on the outcome, i.e. the majority of the winning party. Since the first US president, George Washington, was elected in 1789, there have been 59 elections. In the context of investments, investor preferences must be taken into account, which should hardly be easy! Will the result be similar to that of the 2020 election, i.e. simply a reversal from Biden to Trump, or will Biden follow Biden, remains the difficult question. At this point, it should not be underestimated that the respective market developments under the Trump and the Biden administration have not been as different as is widely assumed, possible because the Republican party retained the House of Representatives where all money bills must originate.

SHORT-TERM ASSESSMENT

Recently, many equity indexes have reached new all-time highs, while the macroeconomic outlook has remained subdued. This scenario is indeed surprising, especially when looking at the evolution of central banks’ balance sheets, which continue to focus on quantitative easing to reduce market liquidity and finally (or hopefully) to bring inflation under control! The main aim of the current policy is to “reduce securities liquidity” in order to bring inflation under control. Initially US banks, but increasingly also European banks, have started to buy their own shares on the market. It should be emphasized that not many analysts are talking or writing about this policy course. At this point, the question arises as to the purpose or objective of this policy and what impact it could have on market activity.

The purchase and repurchase of “treasury” shares support shareholders through deferred taxation, i.e. at the time of realization of returns they are treated to long term for tax purposes at a rate substantially lower than ordinary income rates. The alternative, paying out surplus earnings in dividends, results in a higher taxation rate. The positive impact on earnings per share (EPS) should also be taken into account, as it shrinks the available shares to the public. These factors help to explain the recent growth of most equity indices, don’t they?

Given the above factors, one would expect that what central banks take off their balance sheets will flow back into the financial markets in one way or another.

Suggestions welcome.