“Germany is not on the spot” Tesla production has been at a standstill for a long time after the attack – this is how politicians respond

“How high can the markets go?” the “Economist” recently asked, probably against the nerves of the times. What do you think?
Last year inflation was the driving force behind profits, now growth has taken over that role. The economy is growing, and so are corporate profits. Voila.

Amazingly, the growth is visible everywhere. Stock markets, gold, bitcoins. Normally this synchronicity does not exist. What has changed?
Let’s start with stocks: most companies – especially the big ones – surprised us with higher-than-expected profits. Seen in this light, the stock boom is no surprise.

However, most economists’ annual forecasts were generally cautious.
Our economics textbooks are outdated. They say that higher policy rates lead to weaker growth and therefore to falling corporate profits. Last year the exact opposite happened. Despite higher interest rates, the economy has developed very well.

Why?
The state has spent a lot. In the US, for example, the government deficit last year was about eight percent of gross domestic product (GDP). That is more than during the 2008 crisis.

In other words, is the boom due to a shortage?
Yes, and thanks to this shortage, consumption has not collapsed either.

This is especially true for the American economy. The recession predicted by almost all economists did not materialize. On the contrary: GDP has grown by around five percent in some cases. The generous relief packages during Covid are one explanation for this. Another is: record high immigration stimulates the economy. Do you share this assessment?
It’s a combination of the two. The aid packages ensured that consumption did not collapse and new jobs were created. Immigration has ensured that there are workers for these jobs. Moreover, wages in the US are rising – especially those at the lower end – which in turn stimulates consumption. That is why the situation in America is completely different than in Europe.

Let’s stay abroad. The US surprised everyone positively, but China seems to have serious problems. Why isn’t the global economy suffering more?
China’s weakness also has a positive side: because it dampens global demand, raw materials remain cheap. What is currently happening in China is strongly reminiscent of Japanese development over the past thirty years. A real estate bubble bursts, deflation and over-indebtedness.

Speaking of Japan, everyone has basically written it off as the economy and stock markets are booming. Did that surprise you?
Well, it took Japan thirty years to get back on its feet. The Bank of Japan has helped significantly with three quantitative easing programs. I’m also not yet convinced whether Japan’s rebirth will be sustainable.

India is currently seen as the country of the future. People are talking about a new China. Do you share this assessment?
We believe that the country still has a lot of potential for improvement. Moreover, a lot of capital is currently flowing into India. This allows the government to expand the infrastructure, but also the education system. If this trend continues, India will indeed become the new China.

Let’s finally go to Europe. Germany, the traditional economic engine, is not doing so well. Is that why the mood in Europe is also in the basement?
I see three reasons for the current weakness of the German economy: the source of the energy, the product and the customers. The Germans have benefited from cheap gas from Russia for a long time, but that is over. The automotive industry is the heart of the economy and its main customer so far is China.

There are currently problems on all three fronts.
And how! Therefore, to me it is nothing short of a miracle that German GDP fell by only 0.3 percentage points. I expected it to be ten times worse. Germany is not in ruins, as is claimed in many places. Considering the triple shock it holds up very well.

It is said that Chinese electric cars are not only much cheaper, but also much better. Can German industry handle this?
Yes, if it becomes more diversified. Closer cooperation with other European countries would also help. But right now Germany is very busy with itself and the turnaround of its economy. But that will happen very soon.

Cynically asked: will the rebirth of the arms industry help with this turnaround?
At Lombard Odier we do not comment on the arms industry.

How do you assess the Swiss economy?
I would say “okay-ish”. The Swiss economy is very export-oriented. China has become an important market, just like Germany of course. Both are in trouble, so the sky isn’t bright blue right now. Things are looking good in the US. Overall, global economic growth appears to be accelerating slightly. Moreover, the franc could weaken somewhat. This would improve the situation of the export economy.

Let’s switch back from the real economy to the financial economy. Are technology stocks in particular benefiting from the current boom?
Not only. The dividing line is currently mainly between large and small companies, and it is the large companies that have benefited above average.

There are rational explanations for this, as you noted. But how do you explain the rise of Bitcoins?
This increase can also be rationally justified.

Real? I’m curious how.
Bitcoins are related to the story of artificial intelligence (AI). Nvidia and Bitcoin are thrown into the same pot. Technology is becoming increasingly important in our lives. Ergo, Bitcoin is also benefiting from the technological boom. Secondly, Bitcoins are a currency.

This is disputed, but move on.
Bitcoins are a currency that moves in the opposite direction of the dollar. If the US Federal Reserve raises interest rates, the dollar will become stronger and Bitcoins weaker. When the Fed raised rates due to inflation, the Bitcoin price collapsed. Currently everyone expects the Fed to cut interest rates. That is why the dollar falls and the price of Bitcoins rises. The same thing happens with gold.

A well-known saying by stock market professionals once said: When the taxi driver gives you stock tips, it’s time to leave. Today the taxi driver gives tips on which cryptos you should buy. Isn’t that a warning sign?
Speculation is certainly a major driver of the current Bitcoin boom. But as mentioned, this speculation is closely related to AI and the future role of technology in our society.

We have not yet answered the question of how high the markets can rise. Will the boom continue?
That depends on how inflation and economic growth develop. Shares of large companies are a very good hedge against inflation, but inflation seems more or less defeated. A “soft landing” for the economy is generally expected. Historically, smaller company stocks will now benefit, and more importantly, emerging market stocks. We therefore do not expect the stock markets to continue to rise, but rather to expand. The latecomers of late will now be catching up.

So a similarity with the situation in the late 1990s, when the Internet bubble burst, is inappropriate?
Absolute. Many companies from this time were never in the black. Nowadays they make big profits. For example, profits at Nvidia have exploded.

However, many people are currently afraid of the development of geopolitics. Ukraine, Gaza, the threat of a third world war, why does this leave the financial markets seemingly unaffected?
Risk in the financial markets is measured by volatility. Volatility in the bond markets is currently very high, about twice as high as normal.

However, the bond market is mainly for professional investors. The stock markets are booming, just as they were booming at the start of the First World War. Isn’t that a little scary?
The answer is simple: wins, wins, wins. As long as companies make profits, the stock markets will prosper. And that is completely rational.