Here he is again, that cheery fellow, Jens Weidmann, president of the Bundesbank (or Buba as it has become..ahem…affectionately known) has fired another shot across the bows of Draghi and the markets anticipation of Eurozone QE. He was speaking in Madrid last Monday and said “Instead of focusing on the purchasing program, we should focus on how you find growth”, while also pointing out that the efforts to fund government deficits (so QE to you and me) face “high legal hurdles”….which should be no surprise to anyone who reads this blog regularly.
Looking at the latest Eurozone PMI figures, out this morning, which show the Eurozone as a whole at just 50.1 (50 being break-even) and with Germany shocking on the back of a contracting 49.5 print, there can be little doubt that Europe should definitely be looking out for growth:
Click/Tap to enlarge
The question is, does Jens have the right medicine for Europe’s woes, or even understand the diagnosis. What if he is wrong and QE is the cure for Europe’s ills?
Now Prometheus has called for Eurozone QE before, indeed we were quite vocal back on the old format in April 2012, as the Euro crisis was at the front of everyone’s mind. Draghi was new in the post and we hoped he would let loose the money printing machine….but this is where the reasoning completely disconnected from the mainstream which sees QE as a growth driver…..because we believed it could be used to backstop sovereign debt if the thorn was grasped and the unwinding of the Frankencurrency could begin in controlled circumstances.
What we got of course was the Draghi, “whatever it takes” bluff which calmed the markets and let the charade continue, but the very calming of the markets convinced politicians it would all be all right and they continued on their merry way as if nothing had changed. Since when the lives of many millions across Europe have been further blighted by economic depression.
And will the ECB now commit to QE? Well again we have seen the words, particularly the talk of expanding the central banks balance sheet, which as critics have pointed out means that government bonds pretty much have to be included. However even the French have dampened things, with their central bank president, Christian Noyer informing us “The statement by the governing council is not formulated as a firm commitment but as an expectation”….. hmmmm….. I expect to win the lottery this weekend…but I have been wrong before now.
But according to Andrew Roberts, RBS’s bank credit strategist (who to be totally fair has a good track record at RBS and before at Merrill Lynch) who has argued: “Be very bullish. The huge elephant in the room is ready to roar again, and we want to be onside……It is a good time to be an equity, and credit, and periphery and bond bull, All ‘risk on’ wins” (as a note he is an actuary and I think you should probably be careful when an actuary tries to sound like he is a US sports commentator)
And why is this happening, why will QE blow investments out of the water? “We are seeing the ‘Japanification’ setting in across Europe”. Apparently this is meant to be a good thing for investors….have you seen the chart for the Nikkei since their bubble collapsed over 20 years ago?…No? ….Please see below:
(Source: InvestmentTools.com) Click/Tap to enlarge
But undeterred Mr Roberts goes on and tells us that with the Germans pursuing budget surpluses (unlike Japan that at least tried – and is now going gangbusters – to stimulate away deflation) “There are simply fewer and fewer Bunds to buy,and everybody, wants them”.
Errrrr……I must be missing something here. This will be marvellous for asset prices…. how exactly? You are telling us the the European economy will be a terrible place for growth, profits, jobs, so buy assets on the back of stimulus that might well not come. Even if it did the Germans, who hold the purse strings, won’t let it, or at least not unless they too hit serious recession, when it will be too late………Essentially RBS is telling us to make large bets on assets that will be terrifically overvalued against a crumbling reality because they have folded, they admit the game is up. Forget investing in fundamentals, speculating on government money printing is the only game in town……but don’t worry about the millions unemployed and hopeless, the rise of extremism and strife…. you couldn’t make this up.
Perhaps, if you ignore the evidence, you may argue that the QE will change the fundamentals sufficiently to promote growth. However we still agree with Jens that the answer is not QE, for government bond yields have been on the floor across Europe for an age now to no discernible effect. As we have argued before if you are going to buy assets in the market the way to help Europe is to supercharge and deregulate the ABS market and in effect create a Eurozone TARP (Troubled Asset Relief Program, as introduced in the US in the immediate aftermath of the Lehman collapse) to help recapitalise the banks, who still hold the equivalent of at least 9% EZ GDP as BAD DEBTS.
Frankly even this won’t help much as it seems clear that those banks that are solvent are not finding much demand for loans, as there is little demand across Europe….which is basically the problem. Unless there is an impossible change in German attitudes (not going to happen soon, as they strictly enforce their balanced budget rules, when only they can help generate demand growth in Europe….at least before their coming slowdown really kicks in hard) only a currency dissolution will restore growth sufficiently to allow growth to reset. Without growth the supply side reforms so desperately needed across Europe cannot work as if they were implemented now they would just drive depression to catastrophe. We are passed a tipping point.
Ultimately governments will probably print money to some economic effect, when desperation drives them down the route of printing money directly into the economies directly, in a fashion already hinted at by the IMF, which itself seems to be gearing up for a new slowdown. What will have to happen to get us there I shudder to think, but I fear we may find out sooner rather than later.
So while Jens is right about QE and right that we need to find ways of stimulating growth directly he still shows no sign of getting to the heart of the problem, or just how disruptive the solutions are going to have to be. Until he gets that he is just another roadblock to Europe finding a healthier future.