Follow Dr. Andreas Höfert
Andreas Höfert is Chief Economist Wealth Management and Regional Chief Investment Officer Europe.
Spotting an asset price bubble before it bursts is tough. Qualifying the frenzy before a bubble explodes as a "bubble" in hindsight is easy. This is why many central bankers still follow the Greenspan doctrine, which states that it is not the role of monetary policy to "pop" asset bubbles in the making. Instead, central banks are there to mitigate and sweep up damages after a burst.
Besides renewed fears of a Grexit or Graccident and increasing doubts about the strength of US economic growth after a dismal US labor market report for March, another interesting event took place during the Easter week: former Federal Reserve Chairman Ben Bernanke has started a blog (see: http://www.brookings.edu/blogs/ben-bernanke).
The idea of a sovereign wealth fund was discussed when the Swiss franc floor was introduced in the fall of 2011, in anticipation of a swell of foreign exchange (FX) reserves at the Swiss National Bank (SNB). This idea resurged when the floor was lifted on 15 January 2015. What should the SNB do with the SNB’s FX reserves that now amount to more than 80% of Switzerland’s gross domestic product?
Barring a Grexit or “Graccident,” this year could be the one in which the Eurozone finally achieves escape velocity from crisis. The weaker euro, low oil prices, a German growth juggernaut - all should contribute to the needed boost. However, alongside the political and deflationary risks, there are potential blemishes on this rosy picture.
Negative interest rates in the Eurozone, Denmark and Switzerland have lately become the new tool of central banking. This has led to quite bizarre occurrences. At one stage this year, the whole Swiss yield curve from 0-16 years slipped into negative territory. Germany issued a five-year government bond with zero coupons; it was oversubscribed. Some investors are willing to pay the German government for it to keep their money without interest for the next five years.
On 15 January the Swiss National Bank (SNB) abandoned its exchange rate floor against the euro, “the cornerstone of Swiss monetary policy” up to that point. Since this tumultuous event, not a single day has passed without clients asking me what country might be the next victim in the ferocious global currency war, i.e. which central bank could be forced to throw in the towel, unable to resist the mighty market forces?
The negotiating heat is on. Oaths are being spoken. Ultimatums given. Lines drawn. Doors slammed. No one would have expected otherwise. We believe the horse trading taking place between Greece and its Eurozone creditors qualifies at best as a “lose-lose” situation.
It is contradictory to speak of “negative inflation,” but when did that ever stop economists? The phrase oxymoronically but aptly describes the problem confronting an increasing number of countries worldwide. The most obvious reason is the oil price, which has more than halved in US dollar terms over the last two quarters. Therefore, even when inflation is “turning negative” on a global scale, we would still not be in a state of deflation.
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