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KIT JUCKES, GLOBAL HEAD OF FOREIGN EXCHANGE STRATEGY AT SOCIETE GENERALE, TALKS ABOUT DISPARITY OF ECONOMIC FORTUNES IN EUROPE ON BLOOMBERG SURVEILLANCE
AUGUST 25, 2010
SPEAKERS: KIT JUCKES, GLOBAL HEAD OF FOREIGN EXCHANGE STRATEGY, SOCIETE GENERALE
TOM KEENE, HOST, 'BLOOMBERG SURVEILLANCE'
KEN PREWITT, HOST, 'BLOOMBERG SURVEILLANCE'
08:06
TOM KEENE, HOST, 'BLOOMBERG SURVEILLANCE': And now joining us from Societe Generale, Kit Juckes.
Kit, good morning.
KIT JUCKES, GLOBAL HEAD OF FOREIGN EXCHANGE STRATEGY, SOCIETE GENERALE: Good morning to you.
KEENE: We have a most interesting conundrum in Europe. We've got good economic data, good IFO today out of Germany. We've got some countries doing very well, and boy, the others away from the gloom in America. Things have really worsened in Ireland and, in the Greece spreads, a two-year yield, 11 percent or so.
How can Europe co-exist with some nations doing well and some others doing less than good?
JUCKES: In the long term, you kind of tend to feel that some of these other nations would do a lot better if they could restructure or deal with the massive interest burden or repayment burden on the debt that they have. They need some help to be able to start again.
The old solution from the IMF of devalue your currency and then have really tight fiscal policy doesn't work in Europe, as we know. So this debt has a stranglehold around these economies that doesn't look as if it's going to go away on its own.
KEN PREWITT, HOST, 'BLOOMBERG SURVEILLANCE': Can you explain - Germany has experienced the strongest growth since before the East and West were reunited a couple of decades ago. What's behind it? Is it just exports driven by a lower euro, or is there more to it than that?
JUCKES: Well, if you go on vacation in Europe, the cheap place is Germany. So they've become very competitive within Europe, as well as to the rest of the world, as a result of the fact that they've had lower wage growth in other places, so that helps. And, of course, we've all made jokes about how much the Germans save and don't spend, so they don't have the same debt burden at the household level in particular that we have.
And then the global story, the success story for the global economy, has been how fast global trade has recovered. So global trade was very weak 18 months ago, but it bounced really dramatically, and boy did Germany benefit.
So they're benefiting from that. They've continued to benefit. You know, you've seen good growth in countries like Poland, that's come back very strongly as well, so there's something happening in that northeastern part of Europe that's better than it's happening, I don't know, the southwestern corner, but it is mostly exports.
KEENE: Yes. And Kit, another headline here off of Bloomberg which indicates this global slowdown feel. New York natural gas drops below $4 for the first time. Granted, it's only in the last three months. Oil, $71.55 a barrel.
Are we going to see global growth markdowns at the IMF?
JUCKES: I wouldn't be surprised. You know, there's clearly a slower trend to growth in the United States for starters, but across the G-7 in general than a lot of people had assumed. And trend growth in the United States is more likely to be 2 percent over the next decade than 2.5 percent, as we see people reluctant to put leverage back on into their lives. So, although that can be compensated by what's happening elsewhere, you can't fully offset it.
And right now the wheels are spinning on the big economies. The U.S. is obviously the best example. Monetary policy is not working to stabilize the housing market, which is suffering terribly from the end of tax help.
KEENE: I'm glad you bring up the housing. You highlighted in your morning note the essay by Bill Gross off of PIMCO, his monthly essay. Mr. Gross goes to Washington, and Bill comes out with some very, very strong language on how to clear the housing market.
Help us here, Kit Juckes. What's the view from Europe on how the U.S. should clear the housing market?
JUCKES: Well, I think the first thing that needs to happen for the housing market and to help the economy is you need to get more refinancing so that you reduce foreclosures and so that you reduce monthly mortgage payments and put money in people's pockets. When you have a huge amount of excess housing that's sitting over the economy, you can't just expect lots of people to go out and re-mortgage to buy a new house, and new more expensive houses immediately, and to move up after the experience that we've had.
So housing purchases are going to be much more a function of demographics and unemployment growth over the next several years than they have been going back. But the importance piece is to make sure that paying the mortgage doesn't bankrupt more people than it has to, and that the negative equity isn't too much of a killer for people. And that's where I thought the right point was that is going to require government help, policy help, because if you go back to a private sector solution for mortgages, they'll be too expensive and we'll have massive pain.
We don't need to do that. We need to get money into Americans' pockets.
KEENE: And we see movement in the bond market here.
Kit Juckes, driving the bond market lower yield on the 10-year 2.4597 percent, a real spike down here to a new lower 10-year yield.
PREWITT: We have been talking - it was yesterday that we saw yields right around the lowest they've ever been, U.S. government securities. Do they go lower still? Is there a floor here somewhere?
JUCKES: There's not much of a floor in the sense that we're still in a world where U.S. policy is QE, or more QE, or even more QE, or another way of easing monetary policy that gets yields down. So money gets into the system, but it goes back to the bond market. And there's massive foreign demand for U.S. treasuries, because as low as U.S. yields are, the U.S. yield code is a lot steeper than the curve in Japan, so Japanese people who look at the rates they have for short-term money, they get way less than 1 percent for 10-year money. And so the U.S. looks very attractive from over there.
So I think this can go further. What we're doing at the moment, the acceleration in the summer, is a lot of people who simply had bet that this wouldn't happen, that yields had to go up, are scrambling to get themselves out of the trading positions that they had, or people who were underinvested in treasuries are running to buy the market. That that's accelerated it and this can go further.
KEENE: Well, this is a very important point. Is the new lower yield regime that we're seeing the covering of wrong bets, or is it weighted towards people actually pushing up prices and seeing yields go lower?
JUCKES: Well, I think this acceleration in the last few weeks feels to me - and I wouldn't know for sure, but feels to me like people covering up wrong bets or covering up asset allocation decisions that aren't working. They have too much money invested in other things relative to treasuries. I think that feels more like it, but this is sustainable.
Look, we're told almost every day that we're more afraid of deflation than inflation, that interest rates are staying on hold for a very long period of time, and that if in doubt, if we have a problem, the Central Bank's going to buy more government bonds. None of that is a recipe for yields to go up.
KEENE: We're going to come back with Kit Juckes. I want to talk about the pressures on the Bank of Japan and the Swiss National Bank.
08:13
(BREAK)
08:21
KEENE: Kit Juckes with us from SocGen as we look at turmoil in the markets. The markets are moving.
Let's talk Swiss National Bank, Kit. This will roil the system. Anybody in a trade will be adjusted when they intervene.
Do we just assume they're going to intervene?
JUCKES: I guess, you know, it's a bit the same as quantitative easing, or easing of monetary policy in the United States. It hasn't worked, but they haven't got a better idea. So they'll do it again in due course. So there's some assumption that as the Swiss franc gets stronger and stronger, that they will at some point come back in and try it.
I think the market assumes they'll intervene, and the market probably assumes it won't work, and they'll get a lot of criticism in the press for the way they've gone about this. But I'm not sure what else they can do.
KEENE: Within the last four days of trading and the comovement here, the correlation, the tightness of everything moving together, I'm sorry, Kit. It's got a little bit of a memory of 1998 to it. And I don't mean to compare what we're going through now versus Russia or LTCM or that. Everything is sort of sludging together.
Do you agree with that?
JUCKES: Yes, although, you know, when you've got so much liquidity in the system trying to prop up growth, and rates so low, but not succeeding to get economic traction, the danger is that all asset markets will correlate. And so, as investors look for a return anywhere they can, so they're either investing in anything with yield or hiding their money under a mattress, there's nothing much in between the two.
So these correlations, I think it's something we're going to get used to as long as we have these low rates. But it is - you know, you do every day come in with a pretty scared feeling.
PREWITT: Well, you know - I'm sorry - talking a few minutes ago that the 30-year U.S. treasury is what, right around 3.5, right?
KEENE: 3.5107, the four-digits.
PREWITT: And we see more and more talk about 100-year bonds.
Kit, are we going to look back at this and say yes, that was the sign that things were about to ease up?
JUCKES: It might be - you know, if you look back from a sufficiently long time scale, then quite possibly we will. But when you get up close to it, it makes a difference whether the turning point is today, at these yields, or in three months' time, 50 basis points lower. That won't look like a big deal (ph) when I look at it 20 years down the road, if I'm around to do that. But it will be pretty relevant in our lives for the next few months.
I don't think this is the low in yields. I don't think this is - to the point - is the end of this crisis. It's going to need more help than this to get us through it.
I do think that unlike the Russian crisis and the Asian crisis at the end of the 1990s, that we can get through this with a concerted attempt at getting growth back. And we don't have to tip back into a fresh recession, because we've already taken so much of the leverage and excess out of the system. We're more likely to see growth trudge along.
What's driving this asset volatility is that we'd like to have more growth, particularly in the United States, and as an offset, the U.S. economy grows at 2. We need 2.5 to get jobs created. That's difficult.
KEENE: Kit Juckes, thank you so much, with SocGen, a strategist with Societe Generale.
08:24
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