French economist and financier Charles Gave is the founder of a research and financial consulting company GaveKal and the Liberty Institute.
What is your analysis of the evolution of the financial markets?
There are times when you have to make money and times when you mustn’t lose money in the financial sector. According to our studies, we are in a transition period from the first to the second stage.
What elements do you base on?
In economics if inflation goes down and growth goes up it is because you’re in the presence of a boom market.
On the other hand when inflation starts to rise and growth stagnates then the situation becomes more difficult.
In a number of countries however inflation is picking up and growth is slowing. Similar position example is in Germany. This is a warning sign of economic problems. In addition it’s difficult to make money when the price of a barrel of oil doubles in less than twelve months. The rise in the price of oil is nothing more than an increase in taxes; it takes away purchasing power from households and organizes financial transfers to the Middle East countries which often manage them very badly.
What’s your opinion on the Fed’s monetary policy and its impact on the markets?
A joke is well known in trading rooms: “You have to know if there is more money than idiots in the business… or more idiots than money. The Fed is reducing the amount of money available and the number of idiots remains the same. This drop in the amount of money available will affect prices.
So should US stocks be sold?
Not necessarily. You can’t sell an asset because it’s expensive. The US equity market has been overvalued for three years now and has doubled. For the moment this hasn’t importance. It will perhaps double, before its next decline. My experience is that when a financial market goes down you never really know why it’s going down and you can explain it is often too late.
Other factors that could impact the financial markets?
There is a desire on the part of the Chinese to desolate the whole of Asia at the international level. They try by buying in Yuan or gold to dedicate the world oil market. There are around 1,500 billion USD worldwide in the balance sheets of oil companies or international trade. These Dollars are only there to be used for trading in oil. The USD 1.5 trillion useless in the long term could “flow back” to the US most likely leading to a serious decline in the value of the greenback. If this event were to occur you would, in fact, no longer need dollars to buy oil. Unnecessary dollars will be found everywhere – in both the private and the public domain. If all these players in the economy sell the dollar may weaken!
What is with consequences?
For the US it wouldn’t change anything since a dollar remains a dollar (oil, they have it at home and the US for that matter don’t export more than that!). On the other hand they will record a fall in their standard of living due to the rise in prices of imported products. At the same time they will be able to reindustrialize their economy. This is Donald Trump’s policy: to reindustrialize and bring down the value of the US dollar.
Towards a collapse of the value of the US dollar?
I don’t believe in a collapse of the dollar at all. If you are rich in Asia or South America and the value of the US dollar starts to fall it will lead to lower asset values in the US – Florida home prices will fall. This will result in repatriation of capital. The legal security of the United States and its attractiveness will prevent the dollar from falling too much. With respect to US bond rates I’m not sure they will rise.
Regarding the rest of the world and especially Europe?
The likely decline of the greenback will have a definite impact on the European economies: purchasing power parity calculations show that the German economy can remain competitive with a US dollar at 1.50 for one Euro. On the other hand the Italians above 1.20 will be very badly in point.
The fact that China is trying to desolate Asia will lead to a fall in the US dollar and will de facto affect the Euro zone.