PGM Capital – Blog
24Jan/150

The ECB Bazooka of January 22nd, 2015

By Eric Panneflek

Dear PGM Capital Blog readers,
On Thursday, January 22nd, the "European Central Bank" (ECB) ‘took out the bazooka’ with bigger than expected QE stimulus package.

The ECB chairman, Mr. Draghi, said the ECB would buy a total of €60 billion a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds.

The purchases of government bonds and those issued by European institutions such as the European Investment Bank will start in March and are intended to run through to September 2016. Mr. Draghi signaled the purchases could extend further if the ECB isn’t meeting its inflation target of just below 2%.

As can be seen from below 5-day chart, the Euro fell on the news against most world currencies; like the US-Dollar, Swiss Frank and British pound.

Euro - USD 5-day chart -Week January 19 - 23, 2015-

Euro - CHF 5-day chart -Week January 19 - 23, 2015-

Euro - GBP 5-day chart -Week January 19 - 23, 2015-

 

MARKETS REACTION:
The ECB decision roiled markets around the world.

Greek shares led European stock markets higher ahead of Sunday’s elections, while the euro slid to an 11-year low against the dollar, in the wake of the European Central Bank’s decision to unleash a huge bond-buying program.

Stock and bond markets around the world were given a shot in the arm by the ECB’s bigger than expected €1.1tn quantitative easing round to fight deflation and revive the ailing euro zone economy.

European shares are heading for their best week in three years.

As can seen in below chart, the German DAX and Dutch AEX, respectively the world's second and fourth biggest exporters, rose sharply on the news for which the German DAX rose for the week with 436 points or 4.27 percent to an all time high of 10,649.58 points.

Dutch AEX: 5-day chart -Week January 19 - 23, 2015-

German DAX: 5-day chart -Week January 19 - 23, 2015-

PRECIOUS METALS REACTION:
Gold and silver which are the ultimate hedge against inflation rose sharply on the news.

Spot gold, rose after Draghi's announcement, to the highest since Aug. 15 at US$1,306.20 an ounce. At 2:54 p.m. EST (1954 GMT) it was up 0.8 percent at $1,303.50.

Priced in Euros, the price of Gold has risen with approx. 18 percent since January 1st this year as can be seen from below 30-day chart.

Silver, nicknamed as poor-man's gold, did even better! Priced in Euros, the price of Silver has risen with approx. 20 percent since the beginning of this year, as can be seen from below chart.

Measured in US-Dollars, Gold and Silver appreciated in the first 3 weeks of January 2015, with respectively 9.5% and 17% as can be seen from below charts.

PGM CAPITAL COMMENTS:
With Thursday’s move, which was more aggressive than financial markets had expected, Mr. Draghi passed the baton to governments to take the lead in restoring prosperity to the region’s economy.

Some business leaders shared the ECB chief’s assessment. “We have seen QE in the U.S. and Japan, but the key is structural reform. Without that it may not work and I see little sign (of structural reform) in key countries like France and Italy,” said Sir Martin Sorrell, chief executive of multinational advertising firm WPP.

The ECB’s move “was positive and it was needed,” said Francisco González, chairman of Spanish bank BBVA. He praised the slightly-larger-than-expected size of the ECB’s announced operation. “Having said that, governments have to keep with reforms for the plan to meet its purpose,” he said.

In a nod to concerns in healthier euro countries over the prospect of assuming risks tied to their neighbours’ debts, the ECB said government bonds will be mostly purchased by national central banks and excluded from potential loss sharing. Credit risks associated with the bonds of European Union institutions will be shared, however, “We are not in a one-country setup,” Mr. Draghi said.

Based on this statement and below table we can conclude that purchases of German, French and Italian debts will make up most of the announced ECB QE program as announced last Thursday January 22nd 2015.

The above table shows that the ECB plan is complicating 19 nation bond markets, with varying degrees of risks.

The lessons we should have learned from the SWISS Bazooka of last week and the ECB Bazooka of this week are the following;

In a world dominated by currency war, Stimulus and Quantitative Easing programs by Central banks:

  • Gold Silver and other precious metals are the ultimate safe haven, which means that every portfolio must have at least 30 percent of physical Gold as a hedge against the current currency war and subsequent dilution of purchasing power of the FIAT currency.
    -The appreciation of Gold & Silver with approx. 20 percent in Euros, in the first 3 weeks of 2015, is a loud and clear message for investors who, have ever doubt the role of Gold and silver as a Hedge against inflation-
  • Contradictory for what we have learned in school, when bush comes to shove, securities related to hard assets rise more value when the currency in which they are notated as decreased in value.
    -The fact that Quality European stocks have risen during the week more, than the Euro have depreciated, clearly proves that in the era of zero to negative interest rates, having Quality stocks in a portfolio is less risky than holding cash.

The Ministry of Finance of Japan reported that the country bought JPY 657 billion (over 5.6 billion US Dollars) of foreign stocks in the week of January 12th. That is the biggest weekly purchase of foreign equities since records began in 2001. The huge size of the purchases- more than double the average size of recent weekly purchases - appears to have been 'spent' on European stocks as can be seen on below chart

Bank of Japan Foreign Stocks Purchase in the week of January 12, 2015

The above mentioned trade of The Bank of Japan's (BoJ) can be seen as a front-running act, of  dumping Cash, selling  US Stocks and buying High Quality European Stocks in order to profit the most of, Mr. Draghi's QE program of last Thursday.

Last but not least keep in mind that the market can remain irrational longer, than you can remain solvent.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Securities as well as the one of precious metals, as well the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

18Jan/150

The Swiss Bazooka of January 15, 2014

By Eric Panneflek

SNB

Dear PGM Capital Blog readers,
On Thursday, January 15, the Swiss National Bank (SNB) roiled markets worldwide with its unexpected decision to abandon the Swiss franc's cap against the Euro. The news of the repeal of the minimum Euro exchange rate against the Swiss franc hit the financial markets like a bomb.

As can be seen from below chart, the Euro fell almost 19 percent against the Swiss franc in a chaotic trade after the central bank abandoned the cap on the currency's value against the euro.

EURCHF 5-day

Following the SNB move the euro went from buying 1.20 francs to buying just 0.805, to close the week at 0.9927 as can be seen from above chart.

In a statement the Swiss National Bank (SNB) said the cap, introduced in September 2011, was no longer justified.

It also cut a key interest rate from -0.25% to -0.75%, raising the amount investors pay to hold Swiss deposits.

The International Monetary Fund's head, Christine Lagarde, called the move "a bit of a surprise".

She said she was also surprised that the governor of the Swiss National Bank had not contacted her, and said she hoped he had communicated the plan to his fellow central bank governors.

MARKETS REACTION:
The SNB decision roiled markets around the world. U.S. 10-year Treasuries erased declines, pushing yields down as much as 16 basis points, or 0.16 percentage point, to 1.7 percent. The yield on German two-year notes dropped to a record minus 0.154 percent.

SMI 5-day

As can be seen from above chart, the Swiss SMI, closed the week at 7,899.94 a loss of 1,350.06 points or 14.595 percent for the week, its biggest weekly decline since 1988.

As a reaction to the news, stock markets in Europe initially fell but then rallied, with the Euro Stoxx index rising 2.2 per cent. On the other hand stocks in the USA were down, on Thursday, January 15, USA stocks rallied on Friday but ended the week in the red.

Gold, Silver proved themselves again as the ultimate safe haven in times of turmoil.

As can be seen from below chart, Gold soared from US$ 1225.00 per Troy Ounce before the SNB announcement to close the week on Friday January 16 at US$ 1,279.34, an increase of US$ 54.34 or 4.435 percent.

Silver did it even better, poor man's gold went from US$ 16.70 an oz, on Thursday, January 15 at approx. 10:o0 am to close the week on Friday, January 16, at US$ 17.77, an appreciation of US$ 1.07 or 6.4 percent as can be seen from below chart.

As can be seen from below charts as a consequence the Swiss Franc appreciated for the week, with respectively  20.93 percent against the Euro and 18.52 percent to close the week at respectively Euro 1.0074 and US$ 1.1646 for one Swiss Franc (CHF), its highest level since August 2011.

CHF/EUR

CHF/USD

Based on the above, it means that measured in Euro's as well as in US-Dollars, the Swiss Stockmarket (SIX) -which is measured in Swiss Francs - has appreciated with respectively 6.33 percent and 3.93 percent since the announcement of SNB of last Thursday, January 15, 2015.

WHY DID THE SWISS UNCAP THE FRANC:
The SNB introduced a cap on the Swiss franc against the euro in September 2011, to insulate the country, a traditional financial safe-haven, from the euro zone’s sovereign-debt crisis. It wanted to prevent the franc from appreciating too strongly against the euro, which would have hampered exports and contributed to deflation.

Thomas J. Jordan, Chairman of the Governing Board, SNB

Strong demand for the franc as a safe-haven has persisted due to the possibility that Greece could exit the euro zone. To cap the franc, the SNB accumulated large foreign currency reserves amounting to approximately 70% of Swiss GDP (about CHF 500 billion) – 45% of which was denominated in euros.

The central bank invested their euro purchases thereafter in bonds and equities, and spread these systems over other currencies. Consequently, it earned with its gigantic foreign exchange reserves last year alone, a record sum of 38 billion francs.

PGM CAPITAL COMMENTS:
The announcement of the SNB of last Thursday, came in response to possible new stimulus measures by the European Central Bank (ECB). The ECB could decide to start buying government bonds (i.e., quantitative easing) during their meeting of coming Thursday January 22nd, to help bolster faltering euro zone economies. This move by the ECB, consistent with the broader goal of expanding its balance sheet by about 1 trillion Euros, would add further downward pressure on the euro, exposing the SNB to potentially large valuation losses on its euro-denominated reserves.

Maintaining a cap on the franc would have required the SNB to continue buying euros, further increasing its exposure to potential losses.

Below figure shows the effects of the cap on the Swiss Economy.

Due to the announcement of the SNB, one of the world's safest investments, the Swiss franc, swung wildly last week. Holders of Swiss francs profited handsomely, but many investors and brokerage firms with a short position on the Swiss franc were pounded with huge losses, for which two brokerage firms in London and New Zealand announced that they would have to close.

Most investors will be asking themselves if the removal of the cap on Swiss franc, of last Thursday has caused such a turmoil in the markets, what might the consequences be if China stopped pegging the Yuan to the US-Dollar.

As a consequence of the pegging and to ensure the relative value, there is heavy buying by China of the US-Dollar, which may also been seen as debt financing for the US. This is giving the USA a major immediate respite from their tricky financial condition and allowing the economy to run without taking too many hard decisions.

After unpegging the Yuan from the US-Dollar, prices of both Chinese as well domestically in the USA produced goods, will rise, which means that unpegging from the dollar might not have a negative impact on Chinese exports to the USA. On the other hand, after unpegging, the need for China to maintain large dollar reserves would end, leading to lower demand for dollar. With decreased demand of the dollar, prices and interest rates in USA would increase. This will lead to a reduced borrowing and lower flow of credit into USA, leading to a possible severe credit crunch.

So if the Swiss Bazooka, has such dramatic consequences for the markets, beware of the Chinese Bazooka.

We believe that it isn't IF, but just a question of TIME before China, currently world's second biggest economy, also demands a bigger role for their Yuan in the World and when that happens it might be the end of the US-Dollar.

The lessons investors should have learned from last Thursday January 15th is, that Gold, Silver and other precious metals are the ultimate safe haven in time of uncertainties.

Due to this we believe that the smart money will continue to accumulate Gold as an insurance.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

11Jan/150

The USA Jobs Report of January 9 2015.

By Eric Panneflek

Jobs

Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you the USA September jobs report, which came out on Friday, January 9, 2015.

On Friday January 9 at 8:30 am EST, the USA Bureau of statistics (BLS) reported that USA Economy had created 252,000 non-farm jobs in September 2014, which beats analysts' expectations of 236,000, and that the unemployment rate fell to 5.6 percent, from 5.8 percent in November.

More than 2.95 million jobs were created 2014, according to the latest figures from the Department of Labor. See below charts for details.

While job growth continues to pick up steam, wages have not. The government said average hourly earnings fell slightly in December from the previous month. Wages were up 1.7% over the past year, but that's barely ahead of the pace of inflation -- meaning workers really aren't better off.

Also, the number of long-term unemployed, those jobless for 27 weeks or longer, was unchanged at 2.8 million. That figure has declined by 1.1 million over the past year, but is still much higher than normal.

As can be seen from below 10-year chart of the USA BLS of January 9, 2015, the labor force participation rate declined to a new 10-year low of 62.7 percent.

Regarding the US labor force participation rate, another even more important shift is taking place; young (those workers in their prime age, under 54) versus older workers (those 55 and over). It is a shift which is critical as it confirms that the labor participation rate collapse is not due to demographics but due to secular economic reasons.

Below chart shows the sliding participation rate for workers 25-54 vs the steady participation rate for older workers.

Another interesting point is, that December marks the fourth straight month during which a majority of the newly created jobs were low-quality positions, existing below the median wage level.

The lowest wage category alone accounted for over 30% of the new additions listed in the latest jobs report.

As can be seen from below chart, the lowest wage category alone accounted for over 30% of the new jobs in December and that 51% of the jobs added in December fell below the median wage level of US$ 23.85 per hour.

PGM CAPITAL COMMENTS:
The above breakdown shows that the USA December employment numbers are nothing to call home about, the opposite is true.

The fact that the US-Dollar and subsequent USD-Index are near 12-year high will hurt USA export, which will be a head wind for the USA, the US-Dollar and the USA capital markets.

The surge of people in their golden years, who should be enjoying their retirement, are now searching for a job and are taking away jobs of the younger generation.

It is a warning sign when the number of people in the age group of 55 years and over that are currently back in the labor force hit an all-time record of 32.9 million jobs in December, up 1.3 million from a year ago, as can be seen from below chart.

Below Chart shows a breakdown of job gains by all age groups since the start of the depression in December 2007:  5.8 million jobs "gained" in the 55-69 age group, while on the other hand the core, of 25-54 demographics has experienced a decrease of approx. 2 million people.

By no means can we call it a healthy recovery when the labor participation rate of US-citizens in their golden years,  - who should be enjoying their retirement - currently is at an all-time high, while that of the people in the 25-54 age bracket - the core demography - are struggling to find a job, as can be seen from below chart.

The above mentioned demographic development in the USA labor market can be seen as deflationary and shows that we cannot speak at all of an improvement of the job data in the USA, and that any rate increase will worsen the situation and send the country straight back into an even harder recession than the one of 2007-2009.

Raising rates will have an upwards pressure on the US-Dollar, which will make USA goods abroad more expensive and will also make the USA less competitive as a tourist destination, which will lead to decreasing economic activities and loss of jobs in the country.

We therefore believe that due to the real state of the USA Economy it will be very difficult for the USA FED to raise rates in the near future and that the FED will most probably continue to stimulate the Economy directly or indirectly.

Investors were also discouraged by the January 9, jobs report.

  • The Standard & Poor's 500 index shed 17.33 points, or 0.8 percent, to 2,044.81. The index is now down 0.7 percent for the year.
  • The Dow Jones industrial average slid 170.50 points, or about 1 percent, to 17,737.37. The Dow has fallen 0.5 percent this year.
  • The Nasdaq composite lost 32.12 points, or 0.7 percent, to 4,704.07. It's down 0.7 percent this year.
  • The US-Dollar index fell 0.40 points or 0.43 percent.

On the other hand, Gold futures rebounded Friday following the monthly jobs report as a sell-off in both equities and the Greenback propelled Gold to a significant gain on Friday to post a sizable gain for the first full trading week of 2015.

Simply put, gold has traded in the exact opposite directions of the stock market this week remaining resilient in recent weeks forming a rounded bottom on the charts.

Also aiding Gold’s cause is a dovish Fed, where recent comments from Fed Governors Fisher and Rosengren have all but eschewed any hawkish stances towards any near term interest rate increases.

With global economies namely the European Union, Japan, and China executing or anticipating the execution of dovish monetary policies, smart money will continue to be used to buy Gold and other precious metals on any dip.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek