Lagarde “Superstar” is going to give a lot of play

Lagarde “Superstar” is going to give a lot of play

Christine Lagarde, President of the ECB.

I don’t know if voluntarily or accidentally -probably the former-, but Christina lagarde it could become the protagonist of the markets. Your past, present and future decisions will generate many investment opportunities from both the buying and selling sides.

If you have been wrong in your forecast – that inflation will return to where it was before the pandemic – the clearest opportunity is “sell” the income funds as soon as possible make sure you have one in your portfolio. Currently, the ECB is almost the only buyer of European bonds left in the market, especially bonds from southern Europe.

If Lagarde is wrong, the ECB will have to stop buying. And very few investors, individuals or institutions, are going to want to buy European bonds with “zero point” or negative yields if inflation clearly exceeds 2% when it stabilizes. They will buy, yes, but cheaper. The fall of approximately 6% on average that these products have had so far this year will seem little.

The other selling opportunity seems more for an experienced and risky investor, but at its heart it is simple and not so risky. It is the next logical step if it is confirmed that inflation will not return to where it was and that the price of bonds will have to find their equilibrium point lower. Is about bet on the fall in the price of European bonds.

The first step was to sell the medium and long term fixed income funds. The second is to buy a fund or ETF that benefits from falling bond prices. What is technically known as “going short” is today as easy as buying any other fund or ETF. You just have to know which is the right product.

If the ECB were to stop buying sharply, the drop in bonds would be significant

If Mrs Lagarde is wrong, riskier investors will have additional opportunities. We are already seeing how several currencies are appreciating against the euro. Well, the more you make mistakes, the more they will be revalued.

Interest rates are the price of money and if interest rates rise in other countries before the Eurozone, the huge masses of money that move around the world intraday will go to those currencies. The market usually anticipates these movements, so there is no need to wait for them to occur. And buying money market funds that invest in these currencies is as easy as buying the most normal Spanish money market fund.

But be warned: in this case the so-called currency risk is real. If Lagarde suddenly realizes that putting the financing of southern European countries first and forgetting about inflation could end up costing him his job, he will back down, and in that case the euro would recover.

This could happen if Christine Lagarde realizes that injecting liquidity equivalent to 80% of the European Union’s GDP, thereby increasing the Eurozone’s money supply to levels never seen before, affects inflation. And if, in addition, she realizes that the level of economic stimulus that is coming is historic and that it influences demand and therefore inflation, all the more reason for her to decide to reflect. If he reflected and corrected himself, the euro would stop its fall against other currencies.

For its part, in that case the bonds would fall much more. By not having prepared the market as the Federal Reserve from United States, if the ECB had to stop buying sharply, the drop in bonds would be important. And there would probably be a correction in European stocks.

The US stock market took the official announcement of the “tapering” very well, because the previous communication had been excellent. But as investors “smell” that Lagarde abruptly reverses her hyper-optimistic view on inflation, we will see a “last fool” (the last one to sell their European bonds with their negative or insignificant coupons).

So, we financial advisers are going to have to be aware of everything that is said or commented not only by Christine Lagarde but also by the person who, in my opinion, is acting as a trial balloon launcher, Mr. of sour cherries. Which, by the way, I think she would have done a much better job of running the ECB than the current tenant.

Mrs. Lagarde must be given the benefit of the doubt. And it is not little, because you have to be very generous to think that with inflation above 4% and with underlying inflation exceeding 2%, she is right that she will return to where she was. Just in case, we have been recommending our clients for a long time -and in these pages- to avoid all types of medium and long-term fixed income funds. And to the most adventurous we recommend that you bet against the price of the bonds.

With very good results indeed. We maintain both recommendations, because we think that sooner or later Christine Lagarde will have to stop buying bonds and the market will lose hers, by far the biggest buyer of hers.

*** Víctor Alvargonzález is an independent financial advisor and founding partner of Nextep Finance.

Christine Lagarde, President of the ECB.


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