With the effective fed funds rate at 5.08% and core inflation at 5.3 . . . the short term real rates are still in negative territory.
Swiss inflation doesnât yet show the rental increases coming due this fall. I got my letter yesterday, +5%⊠so for the foreseeable future, Swiss short term real rates are also negative.
And thatâs before talking about the Eurozone, where inflation has been in the high single to mid double digits (8-22%) recently.
It will take a long time here to actually reach positive real rates, and I donât think weâve even began to see anything reprice for that.
They can fool themselves as much as they want. In CHF terms, which is much closer to the inflation adjusted numbers than the number in EUR, current DAX level is 8.1% below the ATH in August 2021. (TradingView).
With the rapid decline of inflation experienced, (having more than halved from about 12% to below 6%, and it looks more pronounced if you zoom out a little) I doubt there was a shortage of people to whom the path seemed very clear at the end of 1976.
But nothing interesting until very recently we had got a new high after the 30.09.2022 bottom:
13.6.2023: 1727.88 CHF, -11.3% from ATH, +13.5% from the 30.09.2022 bottom, 9.9% YTD.
Yesterdayâs value is already 2% lower. I expect the markets to pull back next 2-3 weeks and end up 5-6% below the last high (lower limit of the Bollinger bands of VT in CHF, TradingView).
It did. Major indices in USD are making new 1 year highs, but not in CHF terms.
ist der Dollar am Vortag in Reaktion auf die US-Inflationsdaten deutlich unter die Marke von 0,8750 Franken abgerutscht. Sollte es nicht rasch zu einer Erholung ĂŒber diese Marke kommen, sei mittelfristig mit Tests der beiden letzten Tiefpunkte von 0,74 Franken (Aufgabe der Mindestkursgrenze 2015) und 0,70 Franken (US-Schuldenstreit 2011) zu rechnen. Die UBS sieht die US-Devise Ende Jahr bei 0,85 Franken und im Juni 2024 bei 0,83 Franken. Bis zum Jahr 2030 könnte der US-Dollar laut den Auguren der Grossbank gar auf 60 bis 70 Rappen sinken.
However
I was thinking a bit about the devaluation of other currencies with respect to CHF. We see that long term all currencies are losing value in CHF terms. But, and this is a big but! I think these charts are misleading because they donât take into account compounded interest earned by cash deposited at short term market rates, money market type. The effective market hypothesis would imply that no matter which currency you are depositing at short term market rates, long term you are coming to the same result, otherwise there is an arbitrage opportunity. Say, in 10 years USD is falling from 1.00 CHF to 0.9 CHF, which we see as a devaluation. But in the same period, 100 chf are growing to 105 CHF, and 100 USD are growing to 166.67 USD, which results in the same amount in CHF.
Now, if we take into account the fact that our net income after taxes is reduced by taxes on nominal yield, the stack of currency with a lower yield and lower depreciation is going to worth more than the stack of currency with higher nominal yield and higher depreciation. That leads me to two conclusions:
According to the effective market hypothesis, by investing in currencies with higher nominal yield we, Swiss investors, are expected to lose in comparison with staying in CHF. And this is even before considering FX fluctuations risk.
The negative CHF rates period, where a zero interest account would earn rates well above the risk-free rate, should have significantly boosted the value of our CHF deposits vs. any other currency that was giving positive rates.
Say you have VT, which in 10 years goes from 100$ to 200$, when usd goes from 1 chf to 0.5 chf.
Are taxes going to be based on that 100$ profit or on that 0 chf profit ?
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