Les stratégistes de JPMorgan ont profité d’une semaine sans événements notables pour passer en revue une série de questions de fond sur différentes classes d’actifs. Intéressant…

« Why has neither Greece nor Germany left EMU, yet? Or even, why did they ever get in? The crisis has revealed the cost of giving up one’s currency. Resolution requires massive deflation in the periphery and massive funding from the core. The reason countries joined into EMU and have not (yet) left is that monetary union was planned as the first step towards a political union –– a US of E. The cost of abandoning EMU is not merely related to capital flight and creation of a new currency, but is paramount to ditching European integration, and moving back to the bad old days of a divided and quarrelsome Europe. EMU members will likely do everything they can to keep the union together, even as they will need more crises to push them that way.

Why has the euro not collapsed, yet, given a recession and EMU break-up risk? The EMU periphery cannot devalue against the core, but would greatly benefit from a drop in the euro. The answer is likely that currencies are relative prices, and the fiscal situation in the US, UK, and Japan is as bad as in the Euro area, even as the latter has problems with internal funding. Each of these four currencies has fallen dramatically against the smaller G10 countries that are in better shape (CAD, CHF, AUD, NOK). The Euro area also has no external deficit, and funding problems may have led to capital repatriation, supporting the euro.

Why are US HG credit spreads still near recession levels? US HG remains about 200bp above USTs, a spread level that before Lehman was only seen risk elevated.

Who do some many investors pile into safe assets that offer no real return after taxes and inflation? The average yield on all global bonds now stands at 2.4%. Managers tell us that the end investors care most about capital preservation. If so, they are forgetting about taxes and inflation –– global headline CPI was +3.8% oya in 2011. Two explanations come to mind. Institutional investors are steered away from equities, as regulators are forcing them to judge the risk on equities, which are long-term investments, on the basis of short-term volatility (1-year), despite equities being long term assets. G4 insurers and pension funds have been buying $6 of bonds for every $1 of equity over the past 6 years. The puzzle is greater for unregulated end investors, in particular retail. YTD, funds and ETFs have seen the same 6-for-1 bonds to equity inflows. Widespread fear and persistent uncertainty are likely behind this puzzle.

Why no deflation, given global slack, nor rise in inflation expectations given debt demonetization? Simple output gap models would indeed have suggested a dramatic drop in global inflation, if not outright deflation. We did not get this, showing there is clear downward rigidity to nominal wages, and also less useable slack than we thought. These give this puzzle a name but are not an explanation. A better explanation could be ultra easy monetary policy that killed deflation fears. But why have these not turned into inflation fears? Part of the explanation is that central bankers have done a tremendously good job in convincing us they are only combating deflation and will react decisively when inflation emerges. And the world wants them to be right.

Why are commodities up 65% since the recession, while the world economy is growing below capacity? The answer is likely an application of the hog cycle. During the recession, commodity prices cratered and project financing evaporated. Commodity producers cancelled investment projects, greatly restraining future supply growth. Demand growth since the recession has outstripped weak supply growth, pushing up commodity prices. But with much higher commodity prices and easier funding, producers are investing and capacity is increasing. The hog cycle is not dead.

Why do Japanese investors keep buying their own public sector debt, which is racing to 250% of GDP by 2015, twice the level that got Greece in trouble? Part of the explanation is what we call financial repression, where the government puts pressure on domestic institutional investors, frequently through regulations. But much of the explanation is likely deflation, which creates acceptable real return to bonds, that are not taxed. The eventual JGB crisis must await 2015 or later, when demographics drive the country into an external balance that requires foreign borrowing, something that will not be possible at current yields. »