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The Week in Review April 6th 2019

In this issue :

# The Swiss Franc is the Next Big Short

# Turkey’s Erdogan Destabilized in Elections

# Bitcoins 23 % rise last week : Risk or Opportunity ?

# What to Expect Next Week

# Last Week In Review

Chart of the Week

The Swiss Franc is the next Big Short

Investors are deemed to be rational in making their decisions in search of the best returns, and risk/reward returns. 

As a result, currency rates are always a function of interest rate differentials and interest rates differential expectations. 

In fact, they are a function of REAL INTEREST REAT DIFFERENTIALS, the rate obtained when taking inflation out of nominal rates.

As we have argued many times now since 2008, the US dollar is in a secular bull market that was driven by favorable economic growth momentum and real interst rate differential and we are now in the last stage of that 11 years bull market.

As the following chart shows, the current and final up-leg in the US dollar should take it to a minimum of 103 -104 on the DXY and even possibly as high as 110 before the next secular bear market unfolds.

Our bullishness on the US Dollar comes from a very important evolution in the past few months, which is that for the first time in 10 years, US REAL INTEREST RATES HAVE BECOME POSITIVE

The sharp fall in inflation since September 2018 has created a situation where suddenly US nominal seats have climbed above inflation and are creating a marginally restrictive policy environment.

More importantly, for the first time in 10 years, investors are actually earning positive real returns on their US dollar deposits. 

With inflation at 1.5 % and interest rates at 2.5 %, Investors are now earning 1 % real returns on their dollar deposits

In every other major currency, apart from the Chinese Yuan, this is not the case…

In the European Union, Real interest rates are Negative by -1 %

In Japan, Real rates are negative by -0.12 %

In the UK, Real rates are negative by -0.15 %

This means that the REAL interest rate differential between America and the rest of the world is between + 1.10 and + 2.0 % in favor of the US dollar.

History shows that currency rates follow real interest rate with a lag of about six months and as we see inflation collapsing in the US as soon as Oil prices start going down. – Our Big Deflation scare of the second half – that Gap in real interest rates will increase in favor of the US dollar.

It is not an accident of Donald Trump is already vocal in telling the FED that it should start lowering interest rates.

But NOWHERE More than in Switzerland the Interest rate differential is in favor of the US Dollar.

Switzerland has the most negative interest rates in the world and the longest negative yield curve as well.

As a result, Swiss Negative real rates are now at – 1 % with short term rates at almost -0.8 %

As we expect the US dollar to rise against all currencies apart from the Yuan, the CHF will be the first of fall and the technical configuration is one where the move will be extremely sharp.

The CHF has been in a rising triangle that dates back to 2011.

A Break above 101.50 will trigger massive move up !

When the CHF breaks out of that massive congestion triangle that has been in place since 2011, the move will be sharp with an initial target of 1.20 and most probably an ultimate target at 1.30


The CHF has been amongst the strongest currencies of the world in the past decades as it was used a s a reserve currency and a safe heaven in times of trouble. 

The disappearance of the banking secrecy has lifted a major elect of demand for Swiss francs and its better economic integration in the Eurozone has made the management of the exchange rate vis a vis the EUR – its main export market a priority of the Swiss National Bank.

Switzerland is an export oriented economy and it is one of the very few countries of the world to have experienced a contraction in the 4th quarter of 2018.

In the current environment of global economic slowdown, the SNB will do everything it takes to prevent the Swiss economy from contracting and will fight through exchange rates if the EUR, as we expect starts collapsing. 

EUR – CHF rate

JPY – CHF Rate

We Expect the CHF to underperform ALL Currencies in the coming few months.

Turkey’s Erdogan Destabilized in Last Sunday’s Elections

Despite Turkish President Recep Tayyip Erdoğan’s recent years’ crackdown on dissent, firm grip on media and judiciary, his ruling party has lost control of five of six largest provinces in local elections on March 31.

The governing Justice and Development Party (AKP) suffered defeats in the nation’s capital Ankara and the economic hub Istanbul, the two cities that have been under the control of the party and its political predecessors since 1994.

Last year’s currency crisis may have a lot to do with the weakening of Erdogan’s political stance.

The loss that must have stung Mr Erdogan the most came in Istanbul, where he grew up and made his name as mayor over two decades ago. 

The ruling Justice and Development Party’s (AKP) candidate Binali Yıldırım, a former prime minister and parliamentary speaker, lost the elections despite the support of the pro-government media and his party’s “unstoppable electoral machine.

Sunday’s polls put the main opposition Republican People’s Party (CHP) mayoral candidate Ekrem Imamoğlu, former mayor of a district in Istanbul, ahead of Yıldırım by some 27,000 votes. THE AKP asked for a re-count of the vote.

The opposition’s pick, Ekrem Imamoglu, had the backing of a hapless, squabbling party, a fraction of his opponent’s resources and only a few years of experience as district mayor under his belt. 

Turkey’s March 31 local elections may be the beginning of a sea change in domestic policy.

The ruling Justice and Development Party (AKP), in cooperation with the far-right Nationalist Movement Party (MHP), campaigned on a narrative that Turkey’s survival was at stake because of the support extended by Western countries to the Kurdish cause, especially by the United States. The government bloc thereby demonised the main opposition party for cooperating with the pro-Kurdish party. 

The opposition alliance responded by saying the polls were not a question of the survival of Turkey, but of the ruling party. The results of the elections indicate that the electorate, at least the so-called “white Turks” – the educated elite, urban intellectuals and secularists – did not believe the government narrative. 

An important outcome is that the municipalities of the country’s two largest constituencies – Istanbul and Ankara – changed hands from the ruling party to the main opposition party, pending confirmation by the electoral board. 

Since 1994, these two cities have been governed by political parties linked to President Recep Tayyip Erdoğan. The loss of these two metropolises to the opposition is a major shift. 

The elections in both were won by a relatively small margin, but these big cities will still be governed by a mayor from the main opposition party, if the results are confirmed.

The number of people in the provinces who will be governed by the opposition is close to half of Turkey’s entire population.

Furthermore, more than 70 percent of Turkey’s Gross Domestic Product is produced by these cities. 

One surprise result was the election of Mehmet Maçoğlu, the candidate of almost non-existent Turkish Communist Party, as mayor of Tunceli province. Previously, Maçoğlu was the mayor of the small district of Ovacık in the same province.

The March 31 elections were regarded as a test of whether the electorate would approve Erdoğan’s presidency. The outcome indicates that less than 45 percent of the electorate continues to support Erdoğan. With the backing of the MHP, this support goes up to 51.4 percent. 

But the MHP’s support makes the government a lame duck, because this far-right nationalist party has its own agenda that may not converge on every point with that of the ruling party.

As far as the post-election era is concerned, no other elections are scheduled for the coming four-and-a-half years. Therefore, the government has no excuse if it fails to solve the multitude of problems that engulf the country. 

The economy is the highest priority because an important proportion part of the electorate is more interested in finding its daily bread than in democracy and fundamental rights and freedoms. 

The economy has deep-rooted problems and needs structural reforms and they are not easy to implement. 2018 was a year of reckoning for Erdogan who realized he could not apply his own set of economic rules and where the independence of the central Bank was untouchable. 

Leaving Turkey with 25 % interest rates and 20 % inflation shattered the perception that the ruler had economic skills and the voters in cities are calling for a change.

There are also pressing problems in foreign policy including the purchase of S-400 air defence missile systems from Russia, the U.S. reaction to it, the sale of U.S. F-35 fighter aircraft to Turkey, relations with the European Union, and the Syrian quagmire (Idlib, Manbij, east of the Euphrates and safe zones to be established in the Turkish-Syrian border).

Turkish President Recep Tayyip Erdoğan needs to once again become the face of positive change in Turkey to inspire voters the way he used to, said analyst Soner Çağaptay in the Washington Post on Friday.

According to Çağaptay, a senior fellow at the Washington Institute for Near East Policy, Erdoğan, who once represented change, has lost his magic touch as he now stands for the status quo.

According to Çağaptay, Erdoğan is losing popularity among young voters who hold him responsible for the country’s problems, including renewed conflict with the Kurds and a collapsing economy.

“This is not to say Erdoğan has lost all support among Turks”, said the analyst, adding that Erdoğan until recently had delivered phenomenal economic growth, lifting desperate people, especially his conservative supporters, out of poverty. 

“Erdogan’s dilemma is that he has reached an inflection point in his career where many of the country’s voters, a majority in urban centres, are turning away from him,” said Çağaptay. “If he wants to make a comeback, Erdogan needs to once again become the face of positive change in Turkey.”

Çağaptay said he believed, as a pragmatic leader, Erdoğan would use this opportunity to normalise the country’s political system, by starting first with a concession speech congratulating elected opposition mayors and afterwards by ending the repression of the opposition.

Bitcoins 23 % rise last week : Risk or Opportunity ?

Bitcoins’ 23 % rise last week was a major move and a major break after months of consolidation following the phenomenal 2018 bear market that saw Bitcoin prices collapse 80 %.

As our readers now, we were amongst the few analysts who predicted the fall and we shorted Bitcoins at 19’000 on Dec. 19th 2017, the day the future contract started trading on the CBOE.

Last week’s move raises several questions, the main one being ARE BITCOINS STARTING A NEW RALLY OR IS THIS JUST A NEW OPPORTUNITY TO SHORT ?

As always, analysts are divided on the subject and we highlight below the two thesis.

Veteran trader, Peter Brandt, who called Bitcoin’s $20’000 top,” says it wouldn’t surprise him if Bitcoin price enters a new parabolic phase.

When the guy who wrote the book (and the sequel) on commodity trading with classical chart patterns speaks, you listen. 

If that’s the same guy who called the end of Bitcoin’s last parabolic advance at $20k, predicting an 80%+ decline to under $4000, you listen extra hard.

Brandt suggests that the current chart is a rough analog of the double bottom in 2015. This bottom followed the crash from Bitcoin’s previous parabolic move, which peaked in late 2013.

Now, this does not mean anything in reality ! 

Between the years 2015 and the year 2019 a lot of things have changed and in particular the fact that it takes a generation or more for people who got burnt in a bubble to forget about it ! 

No bubble comes twice and an entire generation of Bitcoin and Blockchain aficionados have lost there shirt in. what proved to be one of the most damaging and unrealistic bubbles of all.

Bitcoins – as most other crypto-currencies are not currencies and will never be.

The blockchain technology – and to be more precise, the distributed ledger concept is definitely the future of technology with widespread disrupting consequences, but the current application to currencies are a failure.

Maybe the other side of the coin is best outlined by Peter Mallouk who warned investors that Bitcoin and other cryptocurrencies remain poor investments, CNBC Make It reports.

“What we’re going to see, most likely, is, we’re going to see cryptocurrencies collapse,” Mallouk told the outlet.

“Is it possible that maybe one or two will work out in the future?” Mallouk asked. “Sure it is…(I)n the meantime…you get no income. It’s not a real investment. It’s speculation.”

Bitcoin and cryptos have been the investment du jour for a certain facet of the finance world in recent, and numerous VCs and crypto holders have been working hard to convince the public of cryptocurrency’s indispensable value.

But a number of detractors have also been working to warn the public about important issues in crypto:

  • that many crypto promoters are talking their books, directly or indirectly 
  • that “blockchain technology” is an undefined and severely overhyped phenomenon 
  • that storing and transmitting cryptos securely can be quite difficult 
  • that crypto’s primary use case is “uncensorable money,” which in practical terms has often boiled down to criminal use 
  • that crypto networks like Bitcoin are “negative sum games,” meaning that, “miners tax the network,” and, invariably, for one trader to profit, another must lose, as in a Ponzi scheme

Others commentators have also likened crypto investing to gambling, including CNBC’sJim Kramer, who, in 2017 called Bitcoin, “kind of like Monopoly money. Obviously, there’s people who use it. If you ever say anything bad about it, there’s like this bitcoin mafia that comes after you. But it is an oddity that has nothing to do with us.”

Kramer added, “It’s just pure gambling at this point…I mean, if you want to gamble, go to Vegas. Vegas is fabulous.”

According to Mallouk, who is President of wealth management firm Creative Planning and author of The 5 Mistakes Every Investor Makes and How to Avoid Them,investors should buy, “things that are going to pay you to own them…Own real estate, where you’re collecting rent. Own stocks, where you’re collecting dividends. Own bonds, where you’re collecting yield.”

People enamoured with “blockchain” should seek exposure by buying stocks of established companies getting their feet wet in that area, says Mallouk:

“There are companies that are very heavily investing in blockchain and you can buy those companies — companies like IBM and Accenture…(C)ompanies like Walmart are using it to develop ways to run their inventory…That’s the way to play blockchain technology — not by trying to buy cryptocurrency.”

As we argued all along, currencies need the credibility of a tax-levying power monopoly to BE currencies. They are first and foremost backed by this unique asset whereby you know they will never default because they can collect taxes….

Bitcoins and other currencies are just a piece of code – clever indeed – embedded in a Ponzi scheme whereby the only rationale for prices to go up is the scarcity of a fixed amount at issuance.

And this is where the reality meets its limitations : Currencies are NOT supposed to fluctuate, the need to be stable to function as a mean of payment, AND they are not Scarce by definition. Money supply HAS to grow if it is to fulfill its role as a mean of payment and storage of value.

Surely, one could be noticed to buy the technical story of an asset that had exhausted its selling pressure and is ripe for a new wave of buying – and that could ell be the case -, but we see last weeks sheet squeeze much more as. dead cat bounce than anything else.

Our bet is that it will be met by selling from the people who thought they had lost all their money – or a big chunk of it – a d who take advantage of the bounce to cash in and limit their losses.

We may acid to cut our short position and take our loss…. But that will be in the know that we will be shorting again at some point….

What to Expect Next Week

In the US

As the U.S. yield curve makes up its mind whether to invert or not, investors seeking reassurance that we are in a Goldilocks era of non-inflationary growth will get to scour two monthly price gauges this week. 

On Wednesday, the Labor Department is expected to report that its March Consumer Price Index rose 0.3 percent on the month and 1.8 percent over the year – a reading that would reinforce subdued underlying inflation and validate the Fed’s about-face after four hikes last year. 

The CPI rose 1.5 percent year to February, the smallest increase since September 2016. The latest reading of the Fed’s favorite inflation measure rose 1.8 percent in the year to January, below its 2 percent target. 

Fed officials have started alluding to a new economic reality of slowish growth and little upward price pressure. Minutes of the March Fed policy meeting, to be released on Wednesday, will be cross checked for references to the new “patient” approach and “muted” inflation. The March producer price index, a glimpse of pipeline price pressures, is scheduled for Thursday. 

In Europe

Just a month since the European Central Bank put plans to normalize policy on hold and delayed a rate hike into 2020, further signs of weakness in the economy and a whiff of panic among investors puts the spotlight back on the central bank. 

A woeful set of German industrial orders data this week pushed German Bund yields back into negative territory and though a U.S.-China trade deal could be in sight, it looks like difficult times ahead for Europe. 

No policy changes are expected at Wednesday’s ECB meeting, especially since some board members are traveling to Washington for the International Monetary Fund’s spring meetings. 

Investors will also keep an eye out for further details on cheap loans known as the targeted long-term refinancing operations (TLTROs) — one of the few policy tools left in the kit after the end of QE — and what the ECB will do to incentivize banks to take it up. 

In China 

A recovery in China factory activity surveys confirmed our views that the stimulus injected in one of the world’s major growth engines is starting to yield results. 

Trade data due out on Friday could provide the next clue that could help investors regain confidence as they gauge whether the slowdown is bottoming out. 

Markets took some hope from an announcement by U.S. President Donald Trump on Thursday that Washington and Beijing could announce a trade deal within four weeks while Chinese President Xi Jinping was reported as saying progress was being made. 

The Chinese economy still needs more stimulus in any case and many of the measures taken over the past three months will start showing results in the coming weeks. Looking at the pattern of past decisions by the People’s Bank of China, a decision to cut bank reserve requirements may be announced by mid-April.

The Last Mile for BREXIT

After British Prime Minister Theresa May’s request to the European Council to delay Brexit until up to June 30, focus now shifts to a meeting next week where EU leaders will discuss a proposal to offer Britain a flexible extension of up to a year. 

After the British parliament failed to approve a withdrawal agreement, May started talks this week with Labour leader Jeremy Corbyn in the hope of breaking the Brexit deadlock, but markets are not getting too excited about it. 

While one-month risk reversals for the pound, a gauge of demand for the British currency in the derivatives market, have rebounded from a 2-1/2 year low hit last month, they still remained far below levels seen earlier this year, indicating overall sentiment remains bearish. 

IMF Spring Meeting 

It is that time of year, when central bank governors, finance ministers, policy makers and investors from around the globe gather in Washington for the spring meeting of the International Monetary Fund and World Bank. A Group of 20 central bankers and finance ministers meeting takes place on the sidelines. 

There is no shortage of topics to talk about. Concerns over the health of the global economy amid trade wars and other political uncertainties such as Brexit have sent jitters through markets. 

Major central banks’ efforts to navigate their way back to normal after years of low interest rates and easy money following the 2008 financial crisis have not been without bumps. Central bank independence has been questioned in many countries. 

Speaking in the run up to the gathering of the great and good of policy making and finance, IMF chief Christine Lagarde has called the outlook for growth “precarious” and warned that years of high public debt and low interest rates over the past decade have left many countries with limited room to act when the next downturn arrives.

Last Week in Review April 6th, 2019




Even as the S&P 500 index trades at a fresh 100-day high and flirts with its previous all-the high, the ratio of the S&P 500 Momentum Index to the S&P itself is struggling, and just hit a 30-day low. 

This divergence is like what happened last August. Longer-term, failing momentum wasn’t a consistent negative, but three of the last four signals did lead to a decline in stocks.

Some momentum stocks might be faltering, but the price behavior of the major indexes has been pristine. The most benchmarked index in the world has now gone 70 days from its low, and based on similar rallies, it’s due to hit a new high any day now.

However, we feel that out will be difficult for the SP 500 to break its previous record high in one go and a short and small correction is likely next week or the one after.

Chinese domestic stock recorded an 8 % rise last week, a strong move in every respect and another testimony that foreign investors may be left behind. This Chinese equity rally has legs… strong legs and the second phase of the advance may have started.

Europe is also gaining strength ! Strongly outperforming the USA with Germany , Sweden and Greece leading the pack. 

Interestingly enough, Dubai is also outperforming strongly, adding in excess of 5 % last week.