Rewarding Risk

An Interview with Ari Bergmann

Next -- and I am not going by order of importance here -- is something very real, the shift in U.S. monetary policy. I think the U.S. is going to shift its monetary policy. Our economy is doing much better. Zero rates are not appropriate. The Federal Reserve will take a stance on that. No matter when they do, we are in the process of needing to change that. I think that this upcoming shift in monetary policy is something very new. We have not seen this for many, many, many years, and a lot of people have never seen that, period. I think that this is a problem -- a new volatility. I think that this process will continue, and not only now -- it will continue until the final unwinding of the monetary policy of the past years has taken place.

OR: So as we gear up for another wait-and-see session with the Fed, do you see central banks beginning to unwind monetary policy in Europe and Japan?

Bergmann: I think that Japan probably, unless something changes, is going to wait until increasing their easing. I think they're still in the process of easing. I think the ECB will be much more aggressive in easing. I think that this migration issue creates a deflationary pressure, one that's going to exacerbate the European problem and actually encourage the ECB do more. I think that Europe and Japan are actually easing monetary policy because they are in a different stage of growth. The U.S. is actually taking it down. They are already moving it.

OR: Does that make you bullish on the dollar and bearish on the euro and yen?

Bergmann: Again, that’s a question of timeframe. I think the euro is straining. I think the U.S. dollar is a buy against the euro. Against the yen it’s debatable, because the yen is still a bastion of safety. These questions are a reflection of risks. The risks go higher, the yen appreciates against the dollar. If the market is a risk in the yen’s home environment, Japan could change out its policy. In that case, the yen can actually depreciate. I think the big depreciation risk is the euro. I think the euro has room to go.

OR: Would it be fair to say you're negative on commodities, and negative on Asian currencies and commodity currencies?

Bergmann: That, again, is a question of timeframe. Regarding the commodities glut, people think that we have come to a bottom. I don't think that we are at the bottom, but I think we'll be low for a while. I think that the shift in economic paradigm in China is a real shift. Let's take oil, for example: a true political commodity. The Arab nations can produce it very cheaply, yes, but they have to have strong export markets because their governments have to spend a lot of money on social programs. It’s very expensive for them. They have, basically, fixed costs: the cost of keeping the population happy and themselves in power is high. They need to go ahead and start pumping more oil; if they start pumping more oil, it becomes an issue of supply.

Now we have Iran coming into the game. Iran and the Saudis are not, to put it mildly, friends. They don't see eye to eye, so clearly there will be mistrust and consequently there will be a supply problem. They have loans, and the loans have to be revised, and the revision of the loans will force them to hedge -- so now you have additional supply. I think there is growth, really serious growth, of supply, growth that’s proving very inelastic, and the demand has shrunk because it was based on a model that's not there anymore. I think oil risks trading below $30, and that could be a very big risk to a lot of people.

OR: What do you think the ramifications of all this liquidity coming out of the market are? If the Fed begins to raise rates, do you think that the stock market is very vulnerable here? How much do you think it's been propped up by liquidity alone?

Bergmann: I think that if the Fed tightens and the market can stand it, the market can have a rally on that, because I think a lot of people are thinking in the way you just outlined -- that the market has no footing of its own, it’s a liquidity-driven market. I think the Fed actually needs to tighten to prove otherwise. I think that if the Fed does benign tightening at the beginning of the process, this would not be terrible in the markets. I feel the markets could actually rally on that.

OR: Where do you see rates going in the intermediate term?

Bergmann: I think short-term rates are higher, but long-term rates are actually lower. I think the curve flattens. Which in this case is not terrible for equities. I think that equities can actually have a decent run here.

OR: You don't see a risk of long-term rates backing up?

Bergmann: Unless the economy really takes off, I don't see inflation being a problem right now. Again, it's a question of supply and demand, and I don't see it going out of control.

OR: Do you think the presidential election is a risk at all?

Bergmann: I think that depends on who the final candidates are, but I don't see that as a major risk right now, no.

OR: Do you think they'll move the peg on the Hong Kong dollar?

Bergmann: No, I don't see that as a risk right now. I think that they need the stability. I think they have the ability to withstand headwinds, and I think they have much to gain. I think that there's a psychological value to keep that peg on as a safety valve for China. I don't see much of a reason for them to do that right now.

OR: Why do you think the market had such a bad reaction to the Chinese currency depreciation?