• The Silver Bullet | Europe’s Long Way out of QE Infinity

    March 23rd 2017

    “Alice: How long is forever?
    White Rabbit: Sometimes, just one second.”

    — Alice in Wonderland, by L. Carroll

     

    The monetary tide has turned.

    The Fed is now on a clearly-flagged normalisation path, with at least two more hikes to go this year. But if normalisation was difficult to start for Janet Yellen, Mario Draghi faces three policy dilemmas which make a tightrope walk look easy.

    The Eurozone has consistently beaten growth expectations over the past quarters. Yet under the hood there's a two-speed recovery in growth and inflation amongst member countries. Core countries are leading together with Ireland and Spain, who have been early on reforms, while France, Italy and Portugal remain behind. Armed with mostly one-size-fits-all tools, the ECB will need extra skill to withdraw stimulus and keep the Eurozone together at the same time.

    The first dilemma is about timing. Normalising policy early can curb inflation where it is already strong, like in Germany or the Netherlands, but could also choke any recovery elsewhere.

    The second dilemma is the trade-off between higher long-term yields vs keeping government borrowing costs in check. Current 10-year core yields, below 1%, do not compensate for inflation, expected to be around 1.5% over the same horizon. Tapering bond purchases further down from the current €60bn a month can help savers to meet their pension goals and revive banks' profitability, but it can also make it more expensive for governments to borrow, penalising public spending and investment.

    The third dilemma is about short-term rates, currently still negative at -0.4%. While negative rates have kept the euro low and helped to boost exports, they also hinder bank profitability and lending activity even more than low long-term yields. The ECB has been trying to compensate for this collateral damage by paying banks to borrow under its TLTRO loans - the last of which was issued in March - but with scarce results.

    Today, the consensus is for the ECB to follow the same normalisation path as the Fed: tapering bond purchases later this or next year and bringing interest rates back to zero only after that. This sequence worked well in the US. As we recently argued on the FT, we believe Europe needs a different one instead: bringing rates back to zero before the end of tapering.

     

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    The Silver Bullet is Algebris Investments' macro letter.

    Alberto Gallo is Head of Macro Strategies at Algebris (UK) Limited, and is Portfolio Manager for the Algebris Macro Credit Fund (UCITS), joined by macro analysts Tao Pan, Aditya Aney and Pablo Morenes.

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact Investor Relations at algebrisIR@algebris.com or Sarah Finley at +44 (0) 207 851 1741.

  • The Silver Bullet | Don't Fret about Frexit

    March 8th 2017

    Hey now, baby
    Get into my big black car
    Hey now, baby
    Get into my big black car
    I want to just show you
    What my politics are
    – Cream, Politician (1968)

     

    After Brexit and Trump, investors have entered 2017 cautiously and are not willing to take any chances on Europe’s upcoming elections.


    There are indeed reasons to worry. Anti-Euro candidates Marine Le Pen in France and Geert Wilders in the Netherlands have been topping the polls until recently. Meanwhile, the UK is preparing to start its divorce negotiations with the EU. Greece faces a big debt redemption in July, while its debt negotiations have stalled.


    Complexity and political uncertainty are high, but fundamentals are strong and European institutions have untapped ammunition. Hedging eurozone break-up, buying bunds at negative yields and shorting the Euro are popular trades now. But beyond the populist rhetoric, there is often little substance: Europe has been limping along for years without breaking up. Soon investors could find themselves into a positive scenario they’re unprepared for.

     

    Click here to view the full article.

     

    Alberto Gallo is Head of Macro Strategies at Algebris (UK) Limited, and is Portfolio Manager for the Algebris Macro Credit Fund (UCITS), joined by macro analysts Tao Pan and Aditya Aney.

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact Investor Relations at algebrisIR@algebris.com or Sarah Finley at +44 (0) 207 851 1741.

  • The Silver Bullet | Greece: More Melodrachma, No Default

    February 20th 2017

    Negotiations on Greek debt are once again about to take a tortuous turn. Today, the Eurogroup meets to decide on completing its second bailout review. In a tradition perpetuated since the start of the crisis, we believe we are unlikely to get a clean solution.

    At the crux of the problem is a longstanding disagreement among creditors. On the one hand the IMF – after dedicating 18% of its current total credit outstanding to Greece – now wants out. On the other hand are European creditors, split into two fronts. France, Italy and the ESM have expressed readiness to intervene and potentially replace the IMF, while Germany requires its participation. Watching the events unfold is the ECB, which previously flagged the possibility of including Greek debt in QE has recently taken a more neutral stance.

    Greece stands again, alone, at the centre of a large chessboard. If negotiations were only about Greece, a country of 10m people and an economy the size of Milan or Düsseldorf, then these would have already been completed a long time ago. But it is clear to everyone that the approach to dealing with Greece entangles a much wider array of interests than solving the Greek crisis itself – and can be seen as a blueprint for future crises. Understanding the next steps can reveal insights on Europe's next steps towards, or against integration.

     

    Click here to view the full article.

     

    Alberto Gallo is Head of Macro Strategies at Algebris (UK) Limited, and is Portfolio Manager for the Algebris Macro Credit Fund (UCITS), joined by macro analysts Tao Pan and Aditya Aney.

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact Investor Relations at algebrisIR@algebris.com or Sarah Finley at +44 (0) 207 851 1741.

  • The Silver Bullet | Don't Give up on Europe

    February 6th 2017

    Europe is just uninvestable,” a fund manager declares, while carving a slice of roast lamb over dinner in Mayfair. “With Marine Le Pen in France, Brexit and populists all over the place, we prefer to avoid any Eurozone risk.” The other investors in the room nod, in silence.

    The case for investing in the Eurozone assets has never been harder to make. Equipped with sophisticated macro models but sometimes lacking confidence in the EU’s political intricacies, investors often decide to give up on Europe altogether. We have not.

    2017 indeed looks like a political minefield for European investors. Anti-euro candidates are gaining ground in the Netherlands and France, both of which have upcoming elections. The UK is about to start its split from the EU and is threatening to implement aggressive tax-cuts to counter investment uncertainty during the negotiating process. Greece’s Syriza government is again struggling to agree on a deal with creditors. Germany will hold elections too, in September, while Italy’s caretaker government is trying to kick the can down the road. As a result of these worries, Italian and French debt has just reached record high spreads not seen since 2014 and 2012, respectively.

    But beyond the political uncertainty, we believe there are opportunities.

     

    Click here to view the full article.

     

    Alberto Gallo is Head of Macro Strategies at Algebris (UK) Limited, and is Portfolio Manager for the Algebris Macro Credit Fund (UCITS), joined by macro analysts Tao Pan and Aditya Aney.

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact Investor Relations at algebrisIR@algebris.com or Sarah Finley at +44 (0) 207 851 1741.

  • The Silver Bullet | 2017: When Inflation Dreams Become Nightmares

    January 19th 2017

    "We are not in deflation. The macro projections show that inflation will indeed be negative for several months this year but by year-end it will go up again basically because of our monetary policy measures."

    Mario Draghi, ECB President, 10 March 2016

     

    Since the start of quantitative easing, bringing inflation back to normal has been a sacred grail for central bankers. A banking system on its knees, falling money velocity, lack of fiscal stimulus to accompany monetary policy and the structural drivers of secular stagnation – lower demographics and deflationary technology – all made the task look unachievable.

    But we believe the tide is turning in 2017 – not only for the United States, which has long benefited from a quicker recovery, thanks to more flexible capital markets and less reliance on banks. Inflation is making a comeback in Europe too, and this will mean trouble for the European Central Bank and the Bank of England.

     

    Click here to view the full article.

     

    Alberto Gallo is Head of Macro Strategies at Algebris (UK) Limited, and is Portfolio Manager for the Algebris Macro Credit Fund (UCITS), joined by macro analysts Tao Pan and Aditya Aney.

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact Investor Relations at algebrisIR@algebris.com or Sarah Finley at +44 (0) 207 851 1741. 

  • The Silver Bullet | 2017: The Movie

    December 14th 2016

    "Always make the audience suffer as much as possible.

    Alfred Hitchcock

     

    As 2016 draws to a close, the sensation is similar to being spectators of a Hitchcock movie. The curtains of QE stimulus slowly come off, and all of a sudden the political and social tensions that had been building up over the past eight years of crisis come to the fore, all at once. There are three main actors we see playing in 2017:

    The first one is populism. We have been flagging the rise of inequality within developed countries for years, yet only a few investors cared in the past. This year, inequality has provided fertile ground to Trump, Brexit and No votes in the US, UK and Italy. Next year Europe will face four elections – in Italy, the Netherlands, France and Germany. The emergence of protest politics will mean more fiscal stimulus, protectionism (trade tariffs, curbs to migration) and rising geopolitical risks.

    The second actor is fiscal stimulus. The US, UK, Japan and to a lesser extent, the Eurozone are all going to expand their fiscal spending, shifting away from austerity. In some cases, spending plans will boost the economy – like infrastructure spending in the US – which will also help to absorb some of the unemployment left over in the construction and energy sectors. In other cases, stimulus will be less effective, like tax cuts to high-income earners.

    The third actor is monetary policy, whose powers are gradually fading. While central bankers have driven markets over the past eight years, the tide has turned now, as we have highlighted since the summer. For central banks the mantra is now less is more, for two reasons: they have realised that QE infinity is self-defeating in bank-centred financial systems like Europe and Japan, and they are coming under increasing pressure to normalise interest rates from savers, insurers and pension funds.

    We know the cast. How will 2017: The Movie look like?

    1. The Leopard (1963) – the muddle-through scenario. The US is likely to benefit from infrastructure investment and an aligned government-congress. US growth rises to over 2.5%, pushing the Fed to hike up to three times and US Treasury yields up to 3%. The Euro depreciates vs the Dollar to parity, boosting German exports and Eurozone inflation up to 1.6-1.7%. Bunds widen more than Treasuries. Le Pen, Grillo and Geert Wilders come close to winning, but they lose. However, they influence mainstream policies, adding additional spending. The UK gets a staggered Brexit deal and Greece a small debt extension. Everything must change, so that everything stays the same.

    2. Reservoir Dogs (1992) – the worst case scenario. The Trump administration implements not only domestic spending, but also imposes heavy tariffs on Chinese imports and limits migration from Mexico. China retaliates with a sudden depreciation of the Yuan, which falls by over 10%, dragging down other EM currencies with it. This hurts EM sovereigns and corporates, which have heavily relied on hard-currency funding over the past years. Russia-backed Front National and Five Star Movement win elections in France and Italy, reviving Eurozone breakup fears. As a result, the Euro falls below parity with the Dollar, boosting inflation in Germany and putting even more pressure on the ECB to curb its stimulus. The UK is granted a relatively benign Brexit deal. There is lack of agreement on Greece between the IMF and Eurozone creditors. Russia continues to expand, projecting its power further across Eastern Europe. Turkey rejects its deal on migrants, adding to economic pressures in Southern Europe. The ending is not pretty: a less stable, de-globalised world with unsustainable populist policies in place. If you shoot this man, you die next.

    3. The Big Lebowski (1998) – the best case scenario. Mr Trump’s foreign policy implementation comes out to be a lot more balanced than his pre-electoral speeches. Germany wakes up to the threats Europe faces by re-engineering a Juncker plan that is credible and of appropriate size, rather than the current 0.1% of GDP spent. Italy reforms its electoral law, electing a stable government. Le Pen fails in France. The UK reverses course on Brexit, accepting associate membership and agreeing to pay for access to the single market. Greece gets a serious debt restructuring/extension equal to 10% of net present value. There is a happy ending, after thinking you’re entering a world of pain.

    Our base case is a combination of the first two scenarios. However, in all three, bond investors are worse off. Rising populism, fiscal expansion and fading monetary policy stimulus mean higher interest rates and inflation and higher volatility. This calls for more defensive strategies, able to monetise gains from a difficult investment environment.

    In Europe, we expect economic growth to remain resilient. However, the main risk will be political, as France, Italy, the Netherlands and Germany will face rising support for populist parties at elections.  We believe the ECB has set the ground for further tapering next year, especially as higher oil prices push up inflation and a weaker euro boosts German exports. We remain short core rates, and expect further widening in French government spreads as the risk of a Le Pen victory rises ahead of April’s French Presidential elections.

    In the UK, we expect Brexit concerns to intensify again as the government triggers Article 50 in March and enters negotiations with the EU. Our base case is for a hard Brexit, with the UK losing EU single market access and passporting rights. This means structurally weaker Sterling, more import-led inflation and potentially deteriorating sovereign rating or a loss of reserve currency status. Gilts appear the most vulnerable to these risks.

    We expect growth and inflation to accelerate in the US, supported by stronger stimulus under Trump’s administration. The Fed is on track to deliver at least two hikes in 2017, maintaining a dovish outlook. However, there is a risk of falling behind the curve against wage growth and political pressures for higher rates. This means Treasury yields have further room to widen, as inflation rises and markets adjust expectations.

    Emerging Markets may be at the centre of a perfect storm next year. EM credits face a triple-threat. First, growth could decline on trade tariffs imposed by populist DM governments. Second, capital outflows could hurt EM assets on higher than expected Fed rates and a stronger Dollar. Third, hard-currency debt may come under pressure for issuers with local currency revenues. We remain cautious on EM economies that are exposed to three economic vulnerabilities: dependence to US exports, on hard commodities and on trade links with China.

    Until 2016, investors bought equities for yield and bonds for capital gains. We continue to shy away from all ‘low-for-long’ trades and enter 2017 short on rates risk, long on inflation and financial equities and moderately positive on credit risk.

     

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    Alberto Gallo is Head of Macro Strategies and Partner at Algebris Investments (UK) LLP, and is Portfolio Manager for the Algebris Macro Credit Fund (UCITS), joined by macro analysts Tao Pan and Aditya Aney.

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact our Investor Relations Team on algebrisIR@algebris.com or Sarah Finley, Investor Relations, Direct +44 (0) 207 851 1741.

  • 2017 Outlook: Escaping the QE Infinity Trap

    November 30th 2016

    2017 Macro Investment Outlook: Escaping the QE Infinity Trap

     

    We are at the start of a regime shift in monetary policy, fiscal policy and politics. How should investors navigate against this turning tide? Here are our investment views for 2017:

     

    1. Monetary policy has shifted from QE infinity in financial markets to limiting QE and focusing on the transmission mechanism in the real economy.

    2. Governments in the US, UK, Japan and – less strongly – Europe are shifting away from austerity and towards fiscal stimulus.

    3. A global wave of protest politics is spreading. This means trade tariffs, limits on migration and higher minimum wages in a good scenario; trade wars and a reversal of globalisation in a bad scenario.

    4. The combination of less monetary easing, stronger fiscal stimulus and protest politics are breaking the multi-decade bull market in bonds: we expect yields to keep rising. The moves in rates markets will also spread to equities, credit and currencies.

    5. Oil prices should also provide near-term support to inflation, as OPEC may agree to small production cuts. However, the long-term outlook for oil remains fragile, as existing overcapacity and new technologies will cap upside.

    6. In equities, financials are likely to outperform utilities, telecoms and staples, thanks to steeper yield curves, with banks also benefiting from the additional tailwind of a pause in regulation tightening.

    7. Credit spreads should remain anchored by a low default rate environment and ECB/BoE purchases of corporate bonds.

    8. The Dollar will continue to get stronger, as markets price in a faster hiking path for the Federal Reserve.

    9. Emerging markets are vulnerable to higher interest rates in developed markets and a stronger Dollar. China’s slowdown fears will come back as stimulus effects fade. We expect more Yuan depreciation ahead, bringing down other exposed emerging markets currencies. That said, the gyrations in EM currencies and EM debt could unveil potential opportunities.

    10. In Europe, absent a coordinated plan to boost growth and employment, centrifugal forces may re-emerge as France, Germany and the Netherlands go to elections and the UK enters Brexit negotiations.

     

    Click here to read more about our latest macro and investment views.

     

    Alberto Gallo is Head of Macro Strategies and Partner at Algebris Investments and Portfolio Manager for the Algebris Macro Credit Fund (UCITS).

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact our Investor Relations Team on algebrisIR@algebris.com or Sarah Finley, Investor Relations, Direct +44 (0) 207 851 1741.

  • The Silver Bullet | Investing in the Time of Populism

    November 15th 2016

    Since this summer, we have warned investors of a turning tide in global bond markets, due to less dovish monetary policy, upcoming fiscal stimulus and a shift towards populism and protectionism.


    First, central bankers have moved from QE infinity and negative interest rate policy (NIRP) to QE with limits, which is less beneficial to financial markets but more sustainable and better for credit transmission to the real economy (The Silver Bullet | Central bankers: the tide is turning, 7 September 2016). Second, a shift to fiscal stimulus and higher wages has rebalanced the policy mix and reduced deflation fears. Third, rising populist and protectionist pressures will boost inflation further: imposing tariffs on foreign goods, limits on migration, or exiting the EU altogether, mean higher import prices and higher labour costs (The Silver Bullet | Trick or Tantrum?, 31 October 2016).

    Ultimately, the straw that broke the bond markets’ back wasn’t reluctant central bankers or fiscal stimulus, but populism. The protest vote is still alive and spreading, potentially to France and Italy. Inequality and lack of social mobility provide the economic conditions for populism to spread further, as research analysing elections over the past 144 years has shown (Funke, M., Schularick, M., Trebesch, C., 2015).

    We believe we are at a tipping point in markets, policy and geopolitics.

     

    Click here to view the full article.

     

    Alberto Gallo is Head of Macro Strategies and Partner at Algebris Investments and Portfolio Manager for the Algebris Macro Credit Fund (UCITS).

    For more information about Algebris and its products, or to be added to our Silver Bullet distribution list, please contact our Investor Relations Team on algebrisIR@algebris.com or Sarah Finley, Investor Relations, Direct +44 (0) 207 851 1741.