As this post is penned markets are busy tumbling out of bed because, to quote some chap from Edison Investment Research (who seems intent on proving that City based individuals are now totally enclosed within their Ivory Towers) “We are not sure why, having promised so recently to be focused on the external risks to the Eurozone economy, the ECB was willing to disappoint the markets in this way,”
Yes. Mario Draghi promised to extend QE until March 2017, with options to go beyond this date, extended the remit of QE to include purchasing municipal and other peripheral governmental assets and cut the deposit rate to -0.3% (rather than the -0.4% the market expected, without ever explaining how it helps – hint – it doesn’t!).
But this wasn’t enough. Not only wasn’t it enough, it was apparently very disappointing. What do they want? Human sacrifice!
It can’t be that they get that monetarism doesn’t work otherwise markets would have sold off a long time ago, no apparently they were all just hoping for more, probably lots of direct equity buying so all the strategists could say “look Mum profits aren’t rising but the stocks going up…see I do know what I’m talking about..”
Now look, QE does produce results but real economic stimulus isn’t one of them, indeed it is almost certainly deleterious after the initial sugar rush, although it does support financial markets that rather need it when they are disconnected from any kind of rational analysis, either bottom -up fundamental, or top-down macro (which is exactly where most asset markets are now -disconnected from reality – seriously we are way passed tech boom stupidity at the moment…..and unlike most now in the industry Prometheus was there in 99/00 running a dealing desk so has history!).
Indeed if you want to understand why Asian markets and Commodities are so bad at the moment it’s that while they benefited from inflows from US QE back in 2010/11 now they are having to fend for themselves on fundamentals that are struggling and it hurts. Don’t be fooled by the current meager growth in the EZ and US to support asset valuations, markets are pricing in a boom that will never come this cycle (and frankly why do the markets need their deluded levels of stimulus…because the boom will not come…..how does this simple circle not join up?).
Markets are currently showing themselves for what they are at the moment. A funny money casino. By all means participate with open eyes as there is money to be made on both sides, (and ultimately Ben Graham’s weighing machine will support those who buy cheap opportunities for the long term) but don’t for one moment think anything rational is going on here now.
Caveat Emptor