The most cynical game you’ll ever play

Tennis is the most beautiful of sports – Wimbledon, strawberries and cream, what could be better?

But as most keen amateurs will know, tennis is a game that can quickly descend into an ugly affair.

You see, unlike most sports, tennis isn’t about winning, so much as it is about not losing. Various studies suggest that between 65% and 95% of shots are lost, not won. A typical rally ends with a player hitting it into the net or long past the baseline. And that has a profound effect on a player’s psychology.

Weak players (and alas I count myself among them) can bring the whole game down. Just think about it: if you know that all you need to do is keep the ball in play and wait for the opposition to miss, then that’s exactly what you do. It’s a game that can bring out the absolute worst in you.

And it’s not just tennis. Exactly the same psychological and technical factors are bringing Europe into disrepute and farce right now.

The ECBs recent decision to descend into weak banking is an attempt weaken the game. The only thing is, when you’re playing against a class player, you won’t get away with it. And I think there is a very interesting play on this that I’d like to tell you about today.

Europe goes on the defensive

Let’s face it, as the EU developed it was widely acknowledged that the peripheral European states were largely based on weak macro-economic models. Weak currencies, weak government and weak economic programmes were set to be replaced by the stronger German ethos.

Germany’s Bundesbank was specifically chosen as the role model. With Germany’s winning formula, the rest of the players were expected to up their game.

And yet, only a couple of decades into the whole thing, things seem to be descending into farce. Rather than Germany providing the impetus to play well, what we see is Germany dragged down into a weak game.

Last week’s decision by the ECB to lower interest rates into negative territory and the fact that they’re now considering their own quantitative easing (QE) programme is surely a move in the wrong direction.

This is precisely the opposite of what was supposed to happen.

Where it all went wrong

For decades the Germans lead the way on sober and strong central banking. Make no mistake, as West Germany absorbed East Germany, so painful transitions were made. Labour market reform and reform of the welfare state was forced on the populace in proper Teutonic form.

If Germany could face structural change, so could the rest of Europe. That was the plan.

Yet, when it comes to actually playing the game, what we’ve seen is something quite different.

Latin Europe, and I’m thinking specifically of France, Spain and Italy, don’t want to play the beautiful game.

In the light of structural reform, last week we saw the French air traffic controllers go on strike. And that’s on top of rail strikes and all the rest of it. This is not what was supposed to happen.

We also saw the ECB succumb to another bout of classic weak play. Lower the currency, set up for inflation and give the punters what they want.

Long-term readers will know that I love France. Yet here I see a country that simply refuses to roll with the punches. Well over half of GDP is controlled by the state – and that’s by law. While most of the world accepts the fact that we all have to retire later, these guys swim against the tide.

There’s absolutely no will to reform. No need to play the game as it was envisaged.

And this is what it all boils down to.

Germany’s DAX vs the French CAC


Notice how at the start of the chart (five years ago), both the French and the German markets traded in synch. Yet in later years Germany has roared ahead. In fact, this is a chart that I’ve drawn your attention to before.

The fact is, Germany is a class player.

Yes it’s true that the Latin countries have dragged Germany into playing its own weaker game, but the problem is, this only serves to highlight Germany’s strengths.

In 2012 I suggested that there was a relatively risk-free way of playing this. A market neutral strategy of shorting the French CAC while going long the German DAX. And given what’s happening, the trade is working out very well.

With the ECB increasingly turning Latin, I see absolutely no reason to change tack.

As with tennis, central banking can be dragged down to the lowest common denominator.

It’s an ugly game, but it does give us the opportunity to continue to profit.

In the meantime have a happy Wimbledon. Unlike the rank amateurs in central banking, at least these guys are paying to win. Amateurs, step aside. This is a game for the grown-ups.

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    As Mercedes Benz are now using engines made by Renault ( have they not seen Red Bulls comments ) I suggest the beginning of the end for Germany, or the EU.

  • Len Gore

    Advice on how to short the CAC and go long on the DAX would be welcome.

  • CVZ

    Hi Bengt, are you sure you’ve taken into account that the Dax is a total return index (i.e. divs reinvested) vs the CAC which is price only (divs not reinvested)?

  • FR

    Would be good to have an update on previous Bengt tips such as agriterra or HRT participacoes petroleo

  • mikeT

    @CVZ Thanks for that crucial bit of information. What about the FTSE, SP, Nikkei and Hang Seng? Are there also anomalies between them? And why no comment from Bengt – either a grovelling apology or an explanation why this is not important?
    Yet if you stripped the dividends out of the DAX (or compounded them back into the CAC), the divergence between the two would reduce, which supports the basic premise that German corporates are undervalued relative to French. Or is the market telling us that “Yes it’s true that the Latin countries have dragged Germany into playing its own weaker game”, that this will continue (in fact worsen) and because “the ECB increasingly (is) turning Latin”, it is in fact time to reverse the long DAX/short CAC strategy? In other words, Germany is being dragged down by the rest.

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