Submitted by Bill Blain of Mint Partners
Draghi makes a long-term call.. but how much time has it? And Iceland to win the World Cup?
“Son, do not take this bet, for as sure as you stand there, you are going to end up with an earful of cider”
There is pain on the high-yield desk this morning. A highly levered Saudi Arabia to win sure-fire bet went spectacularly wrong. Hosts Russia, the “worst team in the competition”, slaughtered them 5-0. Anyone else got “can’t possibly go wrong” money-making tips for the World Cup? (I idly wonder tho….. as Saudi was being thrashed on the Moscow pitch, the two countries looked to have sealed their unlikely oil alliance with aligned production hikes on the cards in July.. Interesting… just say y’know…)
Back in the fantasy leagues we call Europe…… I was equally wrong when I predicted Mario Draghi would prevaricate, dither and kick the QE can further down the road following y’day’s Riga ECB meeting.
The ECB took a decision! Draghi made clear the Euro 30 bln programme ends by December and the buying will be scaled back in the final quarter. I was expecting more mumble-swerve about data dependency and such.. On the other hand, his decisiveness on QE was neatly balanced by an absolute blank re timing guidance on when the ECB is going to start to hiking rates. Summer 2019? Maybe, maybe not... It was a masterclass in both give and take, playing to his political masters in Brussels and his financial benefactors in Berlin. Bravisimo!
The bond buying programme has been the ECB’s only real tool to stimulate the European economy and drive inflation. My reckoning is its’ been about as economically effective as pushing a heavy boulder up-hill with a wet ball of wool or a Theresa May. The reasons the European economy remains so anaemic are more to do with the Euro – the need to restructure economies at a time of enforced austerity to make the common currency work.
Sitting here in the eyrie of Mint Towers its seems kind of obvious these are mutually self-defeating policies: you can’t grow an economy with zero interest rates while simultaneously stifling it with austerity. And, structural reform hasn’t worked either – just look at youth unemployment and the massive target 2 imbalances.
Yet… perhaps I’m missing something fundamentally positive about Europe?
My Macro-colleague Martin Malone thinks so – he sees the potential for strong European growth supported by positive tailwinds over the next few years. He’s looking for Europe to repeat some of the positive gains we’ve seen in the US. He’s expecting 1) a boost from a positive output gap, 2) rising real estate, 3) rising stock markets, 4) bond yields remaining long-term low, 5) a massive DOMAR spread (NGDP-10-year bond), 6) ongoing negative real interest rates, 7) the Euro remaining around 1.16 (average has been 1.26), 8) and unemployment falling from 10% towards 7%.
I’m not entirely bought into the Europe is fixed argument. I’m balancing Martin’s positivity with my concerns about a Europe fractured by populism. How does Europe cope with recalcitrants like Italy, Greece or some of the Eastern Provinces? How will Europe cope with policy problems.. ?
For instance, is it all about to go pear-shaped in Germany? Ructions among Merkel’s coalition partners over immigration policy threaten her position. As Italy and Eastern Europe turn back ships and slam the doors, the lack of a common policy lies the heart of a new crisis between Merkel’s CSU and its “sister” party, the Bavarian CS threatening the relationship with the warm and fuzzy SPD. Read about it on: https://www.theguardian.com/world/2018/jun/14/merkel-coalition-at-risk-as-talks-on-refugee-policy-falter
Back in the real world – plenty of stuff to worry about from Turkey, Argentina, South-East Asia and just how bad the EM wobbles can get. We’ll spend the weekend wondering about Trump signing tariffs on China goods – what’s the likely response? Brexit roils on the UK Houses of Parliament – it really isn’t funny.. but you have to laugh at the sheer incompetency of it all..
Have a great weekend… I’m looking forward to Iceland thrashing Argentina on Saturday… Was practicing the Icelandic Anthem last night on my guitar:
“We come from the Land of Ice and Snow, from the midnight sun where the hot springs glow….. Valhalla.. I am coming”
The Argies don’t stand a chance…