EMR September 2021

Causes, Effects and History

A look at the following chart of the Dow Jones Industrial Average (DJIA) and the Consumer Price Index (CPI, referred to here as Pdot) raises some questions, doesn’t it?

The chart says that volatility is significantly higher for the DJIA than for INFLATION. Are there reasons for the disparities?

Why the focus on inflation?

The latest data point to a pickup in inflation. For example, inflation as measured by the Swiss national consumer price index stood at 0.7% in July 2021, while it rose by an average of 2% in the Euro Area and by 5.4% in the U.S.A., representing at this time the highest level in 13 years. In this EMR issue, we are interested in the causes of the feared/expected rise in the inflation rate. In the past, developments comparable to those of the current economic policy developments were known as “the power to tax is the power to destroy.” Surely, a valid reason to inquire into the whereabouts of inflation.

Known causes of inflation

History tells us that there are several reasons why prices rise and fall, thus implying that there are many causes of inflation. At present ii is widely assumed that prices are rising as a result of a strongly expanding money supply. In other words, it is stated that there is too much money chasing too few goods and services. In the economic literature, this approach is referred to as “Demand pull inflation”.

Demand pull inflation occurs also when supply falls while demand remains constant. A well-known example is the rise in OPEC prices in the late 1960s, early 1970s. The historic development on Crude oil price and CPI inflation are portrayed in the following chart.

The graph points to a much higher VOLATILITY in the crude oil price than in the consumer price index. The disparate developments hardly make forecasting any easier, do they?

If labor costs are arbitrarily increased, the affected producer will have to pay the price and/or suffer profit losses or even go out of business. This is certainly the case if the entrepreneur cannot improve productivity or reduce other costs. These are developments known as “Cost push inflation”.

When the government of a country – which issues its own currency – spends more than it takes in, prices will tend to rise. This approach is known as monetary debasement, which most governments have resorted to as a result of the Covid 19 pandemic. In earlier times this political refuge was also known as printing press inflation.

In recent weeks, governments have begun to focus on avoiding tax increases by taxing certain companies (see: Global minimum tax deal in our August 2021 EMR) and telling the public that their government will not raise taxes because they argue that certain companies will bear the cost. Not only economists, but also more and more people know that companies will treat taxes like other costs. If the costs cannot be passed on to consumers or other businesses, corporate profits and thus overall productivity will fall and/or there will even be wage cuts or even job losses. There is also a risk that certain companies will give up because they have difficulty raising capital. This means nothing else than Taxation decreases disposable income.

The chart of the US long-term inflation trends is telling indeed. Volatility has been highest from 1913 to the early 1950’s. The index rose dramatically, without great corrections since end 1960’s. Contextually, the question to be answered is: why the differences? Any suggestion concerning the near future? Does the chart say something about productivity?

The chart portrays the significant disparity of the trend of the CPI Index vs. its monthly rate of change. Striking indeed!

Before assessing the current situation let us examine the developments of interest rates. In the following chart we find a significant correlation between the 3-months rate and the 10-year bond yields.

The chart speaks for itself. It does not look very telling for the near-to-mid-term outlook, doesn’t it?

“Assessment through the looking glass”

Although the focus in this EMR is on inflation, we would argue that the outlook for productivity is the most crucial determinant for overall economic activity, interest rates, inflation and foreign trade. We argue that expanding and contracting credit demand has a much larger impact on short- and long-term interest rates than anything else.

We will therefore try to present a possible outcome in order to be able to define a promising investment strategy. The focus of our consideration is on the “power to tax”, which could end up as the “power to destroy”. In a capitalist environment, companies should not be excessively taxed to discourage the employment level of highly productive units that end up paying the price for policy missteps.

Pervasive socio-economic change

There is no doubt that we are faced with a new set of arguments primarily due to pervasive socio-economic change, a tendency to socialism and the implications of Covid-19. Economies in the developed world are driven in the short term by the multiple responses to the Covid-19 pandemic, while in the medium-to-long term they remain a function of technological advantage. It must be reckoned that the commonly used definition of productivity is output per man hour. Currently it is progressively determined by energy productivity and even more so by capital productivity.

The widespread, politically motivated assumption is that certain business owners should absorb these higher labor costs by cutting profits. However, since management and investors are usually not enthusiastic about this alternative, they will either try to raise prices to compensate for the increased costs or reduce employment, which will contribute to lower income growth. Neither option seems to make much sense at a time of “competitive disruption”, i.e. declining imports from low-wage countries. Nor does switching to cheaper substitutes seem to be a viable alternative. This seems to indicate that the fear of cost-driving inflation exists but is not as sustainable as generally expected. The switch to cheaper substitutes does not seem a feasible alternative either. What this seems to suggest is that fears of cost-push inflation exists but somehow not as sustained as widely feared or even expected.

In addition, based on the considerations outlined above, we believe that the decisive factor is and will remain the return to local production relationships! The struggle between the USA, Europe and China is obvious. Dependence on a producer with a ‘slightly’ different attitude than we are used to do business can no longer be accepted. Currently the outlook is also driven by the impact of Covid-19. It is a fact that labor productivity in the USA increased rapidly during the pandemic compared with the previous decade. However, it is unlikely that this rapid pace will continue. Similar to the Great Recession, the main reasons for the strong productivity growth now are cyclical effects that are likely to dissipate as the economy continues to recover. For example, as the number of workers has fallen, capital per worker has increased, raising “labor productivity” , i.e. including energy productivity and capital productivity. How the pandemic itself will impact productivity remains to be seen.

Our approach to economic growth makes it clear that the extraordinary recent rise in productivity is primarily due to cyclical effects that are unlikely to last and could even reverse. While there is much speculation about how the pandemic itself will affect productivity, it is too early to reliably assess how strong these effects will be in the long run.

The growth accounting shows that the main causes of the recent increase in productivity are cyclical and unlikely to last. In particular, the decline in employment has boosted capital deepening; the post-Great Recession experience suggests that this temporary boost is likely to reverse. Moreover, because the employment decline was more pronounced among workers with less education and experience, the average job quality of those who kept their jobs rose. This effect has already begun to reverse and may reverse further as less skilled workers return to work.

Conclusions for investors

The chart of the selected exchange rates on a monthly rate since 1971 does not yet points to an imminent change. Does the spending spree of the new US Administration tell us something, that we don`t know yet?

Our conclusions, are to be seen as a specific consequence of an extraordinary shift towards technological innovation away from traditional “output per man-hour”.

It also implies that even if inflation would narrowly fluctuate around 2%, historically seen, equities would continue to outperform fixed income securities and money market instruments.

Consequently, the USD is expected to rise vs. EUR, YEN, and GBP.

Keeping in mind that versus the USD, the CHF, the EUR and the JPY have fluctuated withing rather narrow bands, at this juncture we see no impending dangerous clouds in the currency sky.

Any suggestion is highly welcome.


IMPACTS of the Global minimum tax deal?

EMR August 2021

FOKUS of this EMR

  • The introduction of a global minimum tax for companies is being hotly debated in OECD circles.
  • Which influences will it have on production, consumption and international trade?
  • Will inflation be driven by this tax?
  • What does a cyclical comparison say about this?
  • What effects can be expected for large and small countries?
  • Which asset classes are promising?


From the historic point of view, it is not surprising to understand why most commentators view as obvious immediate effects of tariffs or quotas to determine the tendency of prices to equilibrate among trading partners. With trade barriers, relative goods prices are no longer expected to be equal in the various countries. The aim of this EMR is to quantify as much as possible the impact of the global minimum tax of at least 15% now being publicly discussed. As we understand it, the proposals are to make the world`s biggest companies pay taxes in countries where they have significant sales but no physical headquarters. So far, we have not come across quantified expectations on the repercussions on equity prices.

Impacts on demand and supply

The real question is what are the repercussions of the agreement of a large number of nations to support the U.S. proposal (of Treasury Secretary Janet Yellen) to a global minimum tax of corporations? No doubt such an agreement represents a turnaround in the international tax competition. Expectations are that such a tax ought to determine or alter the relative price of the impacted goods. Respective impacts are expected regarding production, consumption and international trade. Theoretically it is rather easy to point to the respective impacts on the demand and supply curves, while empirically it remains a tricky attempt. Assuming that theoretically the amount of the “specific” good exported or imported at a given price (before the leaving of the new tax) is determined by the difference between demand and supply, what will be the impact of the 15% minimum tax deal? The available information depends on a working assumption that the demand curve either lies to the right of the supply curve (pointing to excess demand), at a given price, implying the availability of exports. On the other side if the demand curve lies to the left of the supply curve, at a given price, more of the taxed good is produced domestically than consumed, pointing to the availability of exports.

One of the major difficulties regarding the impact of the global minimum tax deal refers to disparities of the differential data basis on which the percent tax is levied. What effect will the tax have on the various countries? The immediate effect of the global deal tax is to create separate prices from country to country. The impacts are on the one hand differentiated expectations concerning the rate of inflation and on the other hand alter the trade relations. The exact change in the relative price and the level of trade depends on the slopes of the supply and demand curves, defining the marginal rates of transformation in production in the respective countries. The slope of the supply curve corresponds to the change in price necessary to induce a change in the quantity supplied. Similarly, the slope of the demand curve corresponds to the community indifference curves. These my summary comments are sufficient to explain the dichotomous interpretations available regarding the potential effects on inflation, economic activity and exchange rates. An environment speaking of sizeable volatility on the financial markets.

What are the costs of the mimnimu tax for a small country?

No doubt the proposed tax increase will change the relative price of the good on which the tax is levied. The outcome will preponderantly concern the relative price of production as well as the domestic relative price in consumption. Given that a small country has only a very limited power to affect the terms of trade the tax is expected to create a wedge between the domestic relative price in production and consumption. The result ought to be a reduction of production as well as consumption. Taxing exports raises the price of the county buying the respective good causing the relative price to be altered. A possibility that the country imposing the tax calls for an increment of the wedge for the receiving country. The wedge favors the exporting country to the detriment of the importing country. The impact of a tax is highly difficult to quantify when income, tastes and technology changes frequently, as is currently the case. A surge or decline in domestic demand must be relieved through domestic price and quantity adjustments. Domestic price fluctuations therefore must not always coincide with world price fluctuations.

Inflation differences*

The below shown charts on the monthly CPI inflation for the USA and Switzerland for the period since 1950, and the respective percent changes on a yearly basis, point to known disparities. The trend graph for Switzerland points to similar interpretative difficulties. We assume that these differences from country to country are unlikely to be significantly changed by the announced global minimum tax. This primarily due to production and consumer differences and implicit inefficiencies. It seems highly advisable to us to examine the inflation charts in greater detail. The disparities have always been sizeable not only between the USA and Switzerland but also regarding many other nations.

Examining past events, we find sizeable differences of recent developments as compared, e.g. to the late 1970´s – early 1980`s and for the years 2008 – 2009. Of forecasting importance is that the trend growth of the indexes do not point to the changes in the monthly data! In addition there are sizeable cyclical differences. 1970 and 1975 have been scary indeed. Given the above-mentioned uncertainties regarding the expected reactions of producers and consumers to the global minimum tax deal, we come to the conclusion that the outlook is somehow uncertain but not catastrophic as widely assumed.

Conclusions for investors

Our conclusions, are to be seen as a specific consequence both of a production and consumption distortion. An international trade intervention, like the global minimum tax deal, is meant to solve both distortions. The main aim is to reduce the dependence form imports from low-cost producers, mainly from China. What we know is that it will take more time than assumed by the responsible politicians, and this due to the fact that increasing domestic production will take time. Today´s setting is significantly more complex than e.g. it has been in the case of steel imports in 1977. In addition, we assume that the global minimum tax deal may not be the best way to eliminate the inequalities, given that the tax deal may reduce world welfare by reducing the level of satisfaction of foreign countries more than the satisfaction gain to the domestic country.

In terms of the investment strategy, we believe that the “political induced approach” simply calls for a prolongation of the period of uncertainty and volatility. Why, you may ask? Well, the proposed policy does not address the DISTORTIONS mentioned above. The primary purpose of levying taxes is to finance government deficits, without significantly improving output and productivity and/or to increase consumption and employment in a timely manner. Consequently, we continue to see potential in the stock markets compared to fixed income and money market investments. Currency hedging will have to be considered in the international portfolio diversification approach.

Any suggestion is highly welcome.

* Environmental influences such as heat waves, depletion of water resources and fires, or floods and storms are not taken into account.


Types of distortions

EMR July 2021


Not only as a result of the COVID 19 pandemic, investors and also the public at large, are experiencing a trend reversal, away from free trade via the introduction of a new global minimum tax rate of 15%, with the aim of generating even higher revenues for the government.

At stake are the benefits of free trade through the institution of politically induced changes in relative prices.

Policy interventions to correct distorted distortions

TYPES OF DISTORTIONS: In this issue all price ratios are referred as terms of trade, although with specific qualifications.

We define the rate at which goods may be exchanges domestically in production as the marginal rate of transformation in production (TTP).

The rate at which goods may be exchanged domestically in consumption is defined as the marginal rate of substitution in consumption (TTC).

The rate at which goods may be exchanged through international trade relations is referred to as the foreign terms of trade (FTT).

What says the economic theory hereabout?

The argument put forward by various political entities calls for corporations around the world to pay at least a 15% tax on their earnings. The final rate could go even higher than that, as here and there the 15% is meant as a “floor”. Such a policy e.g., in the case of the USA, is a dramatic and dangerous policy reversal as compared to the policy advanced by the previous Administration. This “political jargonizing” is meant to discourage companies from relocation domiciles to foreign countries.

This “political approach” could have far-reaching economic effects, as not all countries will participate and thus trade conditions could be distorted. In addition, we see important implications for the domestic side of the economy as well as the international side.

Let us thus return to the implications on TTP, TTC and FTT. Following Bhagwati et al.[1] in the sixties and early seventies one can summarize the dangerous distortions as into the following three categories: production, consumption and foreign trade distortions.

The current discussion has not yet focused on the real implications of this political exercise. A production distortion results when the marginal cost to a business of a specific good differs from the cost to society (domestic and international). In terms of the above quoted abbreviations the result of the proposed tax may be defined as TTP ≠ FTT = TTC. At this stage it is impossible to quantify the cost of the singly enterprise vs. those of each country. In other words which are the marginal costs for an enterprise point of view vs the marginal costs from the society`s point of view?

A further distortion can be seen in the context of the marginal rate of substitution in consumption i.e., TTC ≠ FTT = TTP. Assuming that the envisaged policy distorts consumption to the community vs. the goods that can be exchanged in the world markets, one can assume that the price ratio facing the local community would undoubtedly differ from the relative value to individuals.

Surely enough there will also be trade distortions. In the above context we portray the trade distortion as FTT ≠ TTP = TTC.

Summarizing, we ask the following question: What is the result of the proposed tax increase if either a production or consumption (or in the worst case both) distortion(s) exist? No doubt the nature of the distortion must be determined. At least over the short to medium term we thus remain confronted with sizeable market volatility. In addition, we must recon with differential repercussions in the case that a country has market power or hasn`t enough market power, because market power allows a country to render its exports of goods. The argument speaks either of technical advantage or disadvantages. A recent example is the development of electronic semiconductors.

Disturbing at this crossing is what Treasury Secretary Janet Yellen said “that the international tax architecture must be stabilized, that the global playing field must be fair, and that we must create an environment in which countries work together to maintain our tax bases and ensure the global tax system is equitable and equipped to meet the needs of for the 21st century global economy.”

Nice words, but who will and can accept simply to follow the interest of large entities like the USA, China, and the EU. Is there enough room for countries like Switzerland to follow their own needs and requirements? The news came following meetings with a steering group within the Organization for Economic Cooperation and Development that the Treasury said featured “earnest” talks of a global tax? Somehow, we doubt it.

Nature of the recent distortions

Notably the distortions are both domestic as well international. Domestically they concern consumer and production inefficiencies, while internationally we see it in the growing discrepancies between exports and imports growth putting pressure on the negative and still growing international trade imbalances. In this context we ask ourselves if the proposed tax increase of 15% is the necessary and sufficient policy to cure the distortions? We believe that the nature of the distortion lies mainly in the international trade imbalances, although their impact is concentrated mainly on production and productivity. In the context of the “low-cost producer”, China, it should be remembered that it does not have to abide by international rules and regulations. At the top of the list is a production distortion of which there is no equal history. The price of imports from low-cost countries hinders, in due turn, the production lines of the industrialized world. The result is undoubtedly a currency readjustment. In the midst of the recent developments governmental indebtedness has skyrocketed. In other words, public and entrepreneurial indebtedness cannot be solved with a unilateral 15% tax increase.

In. Table 1.1. Intl. Trade

It is worth noticing that the major distortion in the US Foreign Trade data concern primarily the balance of goods. The US are undoubtedly the importer of last resort.

In 2021 Zinsdifferenzen

Conclusions for investors

Our conclusions are to be seen as a specific consequence of an extraordinary accumulation of governmental indebtedness and the “Covid-19 opening”. We are not aware of any comparable past period, thus have difficulties in being specific about future developments. Economic challenges are not easy to quantify either in the short or medium to long term. Consequently, we will focus our attention to the short-term. No doubt, the financial sector remains crucial for a smooth functioning of the world economy. Consequently, we assume – as a working hypothesis – that the measures ought to have an impact on inflation preponderantly over a longer period of time. In our investment outlook we also focus on the change in international trade flows, as we must reckon with a new fact, i.e. that the U.S. will increasingly cease to be the “buyer (i.e. the importer) of last resort”. In our scenario domestic economic growth gains in importance as an indicator for the financial markets’ whereabouts.

Consequently, we do not expect a sharp longer-term increase in inflation, as it cannot simply be passed on, neither domestically nor to foreign countries. As a working consequence we continue to see potential in the stock markets compared to fixed income and money market investments. Currency hedging will have to be considered in the international portfolio diversification approach.

Overall, we fear that the current “political induced approach” simply calls for a prolongation of the period of uncertainty and volatility. Why, you may ask? Well, the proposed policy does not address the DISTORTIONS mentioned above. The primary purpose of levying taxes is to finance government deficits without significantly improving output and productivity and/or to increase consumption and employment in a timely manner.

Any suggestion is highly welcome.

1 Jagdish Bhagwati. The Generalized Theory of Distortions and Welfare, 1969 (


Real GDP and Inflation?

EMR June 2021

En Vogue

The economy is expected to rise as the Covid-Pandemic measures are increasingly relaxed. Inflation is feared to rise significantly. Who will play the “revitalizer of last resort”?

Difficult to compare cycles

Argument 1: Whenever economic demand, however measured, rises significantly so do inflation expectations. Concomitantly it is also argued that in such a case monetary policy is tightened, i.e. interest rates are pushed higher.

Argument 2: Differential interpretations complicate Argument 1. Does growth rise, due to domestic activity or is it due to a significant reduction of imports of goods and services?

Argument 3: What about fiscal expansion i.e., extreme intervention by the Administration e.g., in the USA?

What can be inferred from past developments?

On real output: Examining the developments of the leading economy over business cycles since 1949 is indeed intriguing. The trend in real GDP, from each cyclical low, indexed to 1, is an indicator of considerable vulnerability, which in turn complicates the comparability effort. After the second year of economic recovery, discrepancies, from cycle to cycle, begin to grow ever larger. Currently, we assume that growth will be significantly more front-loaded than in most previous upswings. This due to the reduction of the Covid restrictions as well as the extreme expansionary monetary and fiscal measures. We believe that this phase will not last for long. Rising demand speaks also for significant demand for cheaper imports. At this juncture one must take into account that each country’s growth expectations ought not to be synchronous, given the specificities of each country, regarding the domestic as well as the foreign trade actions and reactions.

On inflation: Charting the US CPI (Consumer Price index) on a monthly basis, but coherently with the respective quarter of Output (see Chart on CPI from the Trough = 1) we find significant differences.

The period before the rate of growth of inflation starts to rise significantly is somehow longer than for real GDP, even taking into account that the data of real GDP are on quarterly basis, while the CPI data are on a monthly basis. This implies that the cyclical correlation of Output and CPI isn’t as close as often and regularly reported in the media. This is particularly evident in the three growth cycles in 1975, 1970 and 1980!

Examining the chart on the level of inflation and the corresponding yearly percent change for the USA and Switzerland we face a dilemma of “comparability”. The US CPI Index rose form 24.01 on January 1949 to 266.83 in April 2021. This shows an increase of 1011.3%. Over the same period, the Swiss CPI rose from 21.73 to 100.58 for an increase of only 362,9%. What do these figures imply? Well, they simply imply that the economic, social and political dissimilarities must be taken seriously into consideration, while pinpointing the coming quarters and years. Specific new determinants of the current outlook, as compared to the historic reality (see charts) is, that the USA are now an important producer of crude oil. A further determining aspect is that the technological developments remain considerably differentiated from country to country. Thus, we ought to pay attention to the possible differential repercussions on production, prices and expectations in general. At this juncture the question remains which are the sources of the rising pessimism?

At this juncture we expect the economy to react strongly to the monetary and fiscal policy measures and thus, anticipate that the feared effects will – for some time – cause unease among consumers and producers. The consumer`s contribution is not expected to be strongly positive, and this for the following reasons. Firstly, reserves will have to be rebuilt, i.e. debt will have to be significantly reduced. In addition, we expect consumers to switch to cheaper imports, which will further exacerbate the trade imbalances, e.g. in the case of the USA. In addition, we are concerned that the impact on domestic production may not provide the support necessary for political leadership to calm market volatility and uncertainty.

From an analytical point of view, political upheavals, possibly leading to even greater uncertainty, look highly problematic to us. It is to be feared that, in the event of higher taxation, producers will not expand production domestically but in “lower-cost” foreign countries, a move that would not help to reduce foreign trade imbalances.

On interest rates: While the trend in 10-year bond rates is approaching a low point, the interest rate differentials in 3-month rates remain quite stable. Is this a necessary and sufficient reason why many analysts have now switched to inflation expectations as the most promising determinant? It is to be expected that monetary and fiscal policy measures will promote liquidity in the system. We wonder however, whether it is sufficient to rely only on the supply side as an explanatory motive, ignoring the effects on the demand side. The argument implies that one can led the horse to the well, while it remains an open question whether the horse will drink.

Implications: What we are suggesting is nothing more than how consumers and producers will react to the increase in liquidity? We doubt that consumers will increase their spending without paying attention to prices. In other words, we continue to assume that consumers will remain “price-conscious”, especially regarding cheaper imports! This “leaves” economic growth as the potential “inflation driver”. Here however, we have to reckon with a lag that is still very difficult to quantify at this juncture.

Conclusions for investors

Our conclusions are to be seen as a specific consequence of an extraordinary accumulation of governmental indebtedness. We are not aware of any comparable past period, thus have difficulties in being specific about future developments. Our view is that we remain confronted with a highly difficult to quantify financial landscape. No doubt, the financial sector remains crucial for a smooth functioning of the world economy. Consequently, we assume – as a working proposition – that the measures ought to have an impact on inflation preponderantly over a longer period of time. In our investment outlook we also focus on the change in international trade flows, as we must reckon with a new fact, i.e. that the U.S. will increasingly cease to be the “buyer of last resort” (i.e. the importer). In our scenario domestic economic growth gains in importance as an indicator for the financial markets’ whereabouts.

Consequently, we do not expect a sharp increase in inflation, as it cannot simply be passed on, neither domestically nor to foreign countries. As a working consequence we continue to see potential in the stock markets compared to fixed income and money market investments. Currency hedging will have to be considered in the international portfolio diversification approach.

Any suggestion is highly welcome.


Will interest rates go up?

EMR Mai 2021

The high level of monetary and fiscal policy interventions by the USA and also by European countries are the cause of rising inflation and interest rate expectations. They cloud the prospects for the long-awaited economic recovery. The corona pandemic also unsettles market participants and the state. Many analysts therefore believe that both inflation and interest rates will rise, which in turn will darken the stock market outlook. In contrast, we do not expect any significant increases in inflation and interest rates. There is therefore still potential on the stock exchanges. We explain why in this issue of the EMR.

What’s behind it?

Fiscal policy measures are intended to inject liquidity into the economy and to bring the economy back on track for growth by stimulating consumption. On the one hand, it is assumed that the manufacturing sector will benefit greatly from the easing of fiscal policy. On the other hand, announced tax increases are hampering local investment activity. We analyze expectations and possible or feared shocks.

The general assumption is that the economy reacts strongly to monetary and fiscal policy measures. In our case, however, it can be assumed that the effects of the government measures will tend to cause unrest among consumers and producers. A contribution to growth from consumption is hardly to be expected, since debts have to be reduced first. In addition, we expect that consumers will initially turn to cheaper imported goods. In the case of the US, this would further worsen the trade imbalance. This has an impact on domestic production and this in turn will unsettle the political leadership. The longed-for reassurance will not materialize. Political upheavals can lead to even greater uncertainty and, with higher taxation, cause companies to increase their production not domestically but in cheaper foreign countries.

What do we learn from the development so far?

While the interest rate trend for 10-year bonds is approaching its lowest point, the interest rate differential for 3-month rates has remained relatively stable since the 2008 financial crisis. Is this one reason why many analysts predict rising inflation and interest rates? Monetary and fiscal policy measures will further increase liquidity in the economic system. As is well known, however, you can lead the horses to the well, they have to drink themselves. So it is not enough just to look at the supply side. The question is, will both consumers and producers react to the increase in liquidity? We doubt that consumers will increase their spending without paying attention to prices. We assume that consumers will remain price-conscious and buy cheaper imported goods. That leaves entrepreneurs as a potential driver of inflation. Here, however, a delay that is difficult to determine must be expected.

A comparison of the development of consumer prices in Switzerland and the USA shows that it is difficult to derive future inflation developments from this. The difference between the development of the consumer price indices and the inflation rate is obvious. It is striking that the inflation rate has tended to decrease since the 1990s!

The inflation rate in Switzerland has been slightly negative since November 1919 (average -0.57%) while it has remained positive in the USA (average 1.49%) and was 2.64% last March. At this point in time, one could well imagine that the US inflation rate will continue to rise in the same way as in 2007-2008 and could rise to over 5%. Such an increase would, however, have a strong negative impact on economic development. But that cannot be assumed given the currently extremely expansive monetary and fiscal policy. In such a situation, a dramatic currency adjustment would probably be expected, which would result in strong reactions not only in terms of economic policy but also in terms of investment policy.

What does this mean for investors?

In our context, the enormous increase in national debt should also be mentioned. In Europe as in the USA, the debt ratio is rising steadily. In the USA, it rose from 63% at the end of 2007 to 105% at the end of 2019, only to skyrocket to 131% at the end of 2020, mainly due to Corona measures. We are not aware of any similar period. We therefore assume that the measures will only really come into play over a longer period of time. We focus on changing international trade flows. The USA will increasingly no longer play the role of the buyer “of last resort”. Thus, domestic demand growth should gain in importance for the financial markets.

Based on the considerations mentioned above, we expect that inflation will not really pick up and that the financial markets will not be subject to any major changes. We therefore continue to see potential on the stock exchanges compared to fixed-income and money market investments.


Implications of Economic Data

EMR April 2021

In today’s context, economic forecasting is an attempt to predict the whereabouts of the investment environment. Every analyst uses a combination of important and widely followed indicators. In this EMR, we set the focus on real GDP and its major components using them as a guide to find out what the most promising investment strategy might be!


Dear Reader

The focus of this EMR is on the historic development of Swiss and US GDP and the respective subcomponents,  i.e. deterministic variables such as currencies, inflation and interest rates. In our analysis we point out possible discrepancies between widespread expectations and the facts. 

Given the longstanding differences in the development of exports and imports of goods and services, factual, differentiated outlooks can be derived for economic growth, inflation and interest rates.

To be precise we do not find evidence of an outcome, saying that inflation will rise and interest rates will be pushed significantly higher. Taking the flows of imports and exports of goods and services as a primary deterministic factor we arrive at a less pessimistic outlook.

Adriano G.E. Zanoni, Ph.D.

GDP Comparison

Given that GDP in each country is measured in its country´s currency, in order to compare the differential performance, we ought to convert the data with the appropriate exchange rate. Given our interest in the developments of each country vs. another, independently from all factors included, we prefer to use percentage changes of GDP and its respective main components. We then set the starting point to 1 for each variable: GDP = Gross Domestic Product; C = Personal consumption spending, IFIX = Gross private domestic investment, X = Exports, M = Imports and Gov = Government consumption.

It is often claimed that different countries are led by changes and reactions of a “leader country”, mostly assumed to be the USA. Here we specifically examine the connections between the economic whereabouts of Switzerland and the U.S. In the charts, for sake of comparison, we use the exact same scale. We want to know what can we inferred from the following two charts regarding their mutual interdependencies?

Well, a first indication, is that Swiss growth rates differ significantly from those of the USA. Examining the charts, would you argue that the USA has been an important growth factor for Switzerland? The available data for GDP growth, for the period since Q1 1980, sum to 3.735 for Swiss GDP and 2.747 times for the US. The Swiss outperformance sums to 0.998.

Another issue is visible in the differential growth rates of US exports and imports, as compared to the Swiss counterparts. In the US case, net exports have a significant negative impact on US growth, while the Swiss exports have a positive impact on Swiss growth. Swiss net exports contributed to Swiss economic growth, while US net exports have been (and continue to be) a significant deterrent to US economic activity. Statistically spoken, the USA has incurred a sizeable net exports deficit of -77’300.1 Billion of chained (2012 dollars); seasonally adjusted at annual rates!

Influencing Factors

There is no doubt that the depreciation of the USD is not primarily due to political manipulation, but rather as a reaction to economic circumstances, be they of fiscal or monetary nature, or on the part of the business community. The US goods and services trade deficit can and should not continue to increase for too long. Why, you may ask? The hard reality implies that imports of goods and services have for years been higher and growing in comparison to US exports. These developments have been deterministic for the tendential USD devaluation. If the USD falls further, as foretold by vocal analysts, then we may ask: who will play as the lender of last resort? We sense that it cannot be another single country or any international organization in open contrast to a system of “free enterprise”, wouldn´t it?

A further significant influencing factor of economic activity, which currently does not get the due attention, is that a significant, further drop of USD prices of goods and services exported and imported from and to the U.S. would imply a disproportionate and mostly unsustainable change in the economic environment. Who would stand to profit from such a trend-reversal? Opinions hereupon vary significantly, mostly as a function of political points of view, instead of economic reality. The answer, as we see it, must quantify how fast and how much production and employment can be repatriated to the USA?

A further significant USD-drop, as forecasted by many an analyst, would be expected to push prices of goods and services (sold to the US) higher, which would help American industry in its effort to repatriate production. As import prices would be expected to rise, a drop of goods and services imports ought to be factored in. A significant drop in imports will, ceteris paribus, yield support to US economic growth, while e.g. China, Europe and other countries would lose, while US exporters would be the winners.

Assuming that, in such a setting, exporters (to the US) would cut prices of goods and services, would call for lower rates of inflation as compared to the generally forecast increase. Let us state that so far, we haven´t heard anybody talking about such a “positive” outlook. Should our scenario stand a chance, we should expect no significant increase in interest rates. A theme that, despite the recent mild increase (while an outbreak from the longterm down sloping trend is not yet visible) would imply that the “revitalization” process of the Biden Administration (1900 billion USD investment program) would favor investment in the US and thus require significantly less need to push prices and also interest rates higher.

Assuming that over the short term, the policy focus ought preponderantly to remain focused on resolving the Covid-19 pandemic, we find it tremendously difficult to forecast a dramatic interest rate increase. The accompanying charts remain difficult to interpret, aren`t they?

Available data do not really facilitate a clear-cut forecast of the major determinants of financial markets´ expectations. Economic forecasting remains problematic indeed and, in some cases, it will remain highly contradictory for some time to come.

Our assessment is primarily driven by the feasibility of a rapid and sustained revival not only of U.S. economic activity through the “reopening” of most vital sectors of the economy. The fact is that the negative economic consequences of Covid-19 have been disproportionately severe and, oddly enough, will remain so for some more time. The corresponding quantitative interactions are foreseeable, and this surely not just for low-wage workers. The interplay of these, rather contradictory viewpoints, should by no means be underestimated while defining the appropriate investment strategy. Coherently, we foresee a period of persistent uncertainty and volatility.

Asset Allocation

Mostly due to the vaccine rollout now on the way, together with the huge US stimulus package, promise a return to economic growth before long. Even if we assume a short-term increase in interest rates, we are confident that “there continues to be no alternative to equities”.

A fact we haven´t taken into specific consideration will continue to be visible in the repercussion of the green-evolution, on inflation and currencies. Prices of fossil fuel ought to be an excellent indicator for short-term inflation expectations, ensuing actions/reactions the Central Banks.


Static state?

EMR March 2021

A specific assessment of the economic whereabouts is known as static state: in other words, it implies slow growth and slow decline. What we would like to point out in this specific context is that history repeats itself, and this as a function of the political, economic and social constellation.

The hard question we would like to answer as realistically as possible refers to: the mutual determination between Government spending and foreign trade high – and growing -imbalances. Does this intricate constellation help the world economy to escape from a recession?


Liebe Leserin, lieber Leser

In diesem EMR gehen wir der Frage nach, in wieweit es möglich und signifikant die entgegengesetzten Entwicklungen der staatlichen Ausgabenpolitik und den jeweiligen Handelsungleichgewichten zu quantifizieren. Bekanntlich liegt der primäre Fokus der Ausgabenpakete auf die Ankurbelung der privaten Konsumausgaben jedoch ohne genügende Berücksichtigung der gegenläufigen Auswirkungen des internationalen Handels. Die Geldpolitik scheint sich nicht sonderlich, um die Möglichkeit einer signifikanten Zunahme der Inflation zu kümmern. Darüber hinaus sind die Behörden weiterhin mit den negativen Wachstumsauswirkungen der verschiedenen Arten von temporären Lockdowns konfrontiert. Dies sind wichtige Bestimmungsfaktoren für die kurz-, mittel- und langfristige Wirtschaftsaktivität, Entscheidend, wenn auch sehr schwer quantifizierbar sind die Auswirkungen der Fiskalpakete auf Investitionen in Infrastrukturprojekte. Hierüber wird wenig geschrieben, obwohl es um den Fiskalmultiplikator geht, der für eine starke Stimulierung der Wirtschaft über "1" liegen müsste. Anzunehmen ist, dass der Multiplikator deutlich größer wäre, wenn die Staatsausgaben auf die Förderung von Investitionen in die Infrastruktur ausgerichtet wären anstatt auf Konsumausgaben.  In diesem EMR liegt der Fokus auf der USA und der Schweiz.

Freundliche Grüsse,
Adriano G.E. Zanoni, Ph.D. Chairman

Political setting

In the short term, the policy focus will remain on resolving the pandemic caused by Covid-19. The daily data available on the impact on the economy remains difficult to quantify, making serious economic forecasting problematic indeed and, in some cases, highly contradictory. Our assessment is primarily driven by the feasibility of a rapid and sustained revival of economic activity through the “reopening” of most vital sectors of the economy. But there is no doubt that the negative economic consequences of Covid-19 have been disproportionately severe and, and, strangely enough, they could remain prevalent for some time. The corresponding quantitative inter-actions are foreseeable, and not just for low-wage workers. The interplay of these rather contradictory viewpoints should by no means be underestimated. Coherently, we assume a period of persistent uncertainty and volatility.


The graphs of the corresponding components of real GDP for the U.S.A. and Switzerland are revealing indeed. This is not only true with regard to the different periods of the respective business cycles.

One major difference relates to foreign trade. The ratio of exports to imports is not only negative for the USA compared with Switzerland, it is also one of the most important determinants of the overall economic growth rate. In context, we sense a growing unease among policymakers and the public. This is due to the fact that trade deficits are undesirable as they crowd out domestic production and are certainly detrimental to jobs and workers. One of the most deterministic effects of trade imbalances is their influence on the productive sectors of the economy. It is well known that goods markets are competitive, while international trade is subject to trade costs that are a sensitive decision factor in terms of future economic and employment growth. A further important difference is the weakness of the domestic growth contribution of consumer spending, business fixed investment and government spending as compared to the losses due to trade imbalance.

in: 2021 GDP indexed

The two above shown charts speak of dramatic environmental changes over the past 20-30 years, depending on the component. They clearly imply the significant counterproductive developments of the trade imbalance.

Possible adjustments

Now, we know that the American voters did not appreciate the policy of the previous Administration to significantly contain imports growth and at the same time to boost domestic production in order to increase employment.

The fact is that the ratio of US consumer spending to GDP has been relatively stable since 1947: fluctuating between a low of 0,927 (in Q1 1952) and a high of 1,108 (in Q3, 2019) showing an increase of 19%). Imports on the other hand rose from a low of 0.908 (in Q3 1947) to a high of 6,247 (in Q4, 2018) representing an increase of 588%! What these numbers undoubtedly imply is that the focus of the Biden Administration on busting consumer spending does not promise neither a fast nor a sustainable support to the much a promised rebalancing of the above shown imbalances. We fear that “helicopter money” will boost imports from low-cost countries such as China and other low-cost producers, fueling the imbalance to even higher, unsustainable levels. Before long, the new US-Administration will have to address the negatively skewed situation. In the Swiss case, one can assume that the much-hoped increase in economic activity will further boost Swiss exports growth. Such a scenario speaks for improving employment while lowering the unemployment rate in Switzerland.

Should the implicitly above assumed scenario materialize, it would undoubtedly require active currency management, as so disparate economic growth rates together with the enormous amount of “helicopter money” would imply significant interest rate adjustments. This scenario, if it materializes, would be a deterministic factor of a promising asset allocation process. What would it mean for currency adjustments? The following chart suggests that we should start thinking about a currency reversal. Focusing, as implicitly summarized in our (above) overall assessment, we feal that whit the endogenization of the huge trade imbalances, we ought to assess its impact on the labor market.

Deterministic will also be the assumption of shifts between sectors; important for quantifying expected discounted profits. What should not be underestimated is that goods markets are perfectly competitive, while international trade involves specific trade costs. A relevant indicator of these developments will be visible in the relocation of relevant manufacturing jobs. Although the environment remains positive, thanks to the loose central bank policy and the strong fiscal stimulus, we expect that on the one hand assets can benefit from the economic acceleration and higher (?) inflation, while on the other hand market participants increasingly fear an equity price correction.

Asset allocation

While the focus of financial investors is on “reflation,” we remain somewhat less optimistic due to the conflicting effects of loose fiscal and monetary policy vs. the impact of increased imports. We assume that both consumers and entrepreneurs will focus on cheaper imports of goods and services. Foreign trade is expected to significantly reduce the effect of the Biden spending plan. In addition, we must assume that the cost of unemployment will cause considerable volatility.

The macroeconomic shift in international trade and developments in vaccines, along with the recent historic rise in equity prices, ask the question of what comes next? Well, short-term active management and increased attention to currency fluctuations do indeed seem promising. Interest rates and currency adjustments are in the driver’s seat of a promising investment strategy; both domestically and internationally. With interest rates expected to rise significantly over the next 6-12 months, they are likely to curb the attractiveness of fixed income instruments. Our regional focus remains locally skewed as the CHF is expected to strengthen against USD, EUR, GBP and JPY. Gold is somehow viewed as a potential hedge vehicle, at least until it become clear what policy the Biden administration will actually embark on.