Draghi certainly made sure that the time between the Italian referendum last Sunday and the last FOMC meeting of the year next Wednesday is not wasted and that there are no excuses yet for long pub lunches.
Let us for a moment skip the bit about whether slowing the pace of bond purchases is or isn’t tapering, which is anyhow more of a linguistic concept than a formally defined tool of monetary policy. Let’s focus on key driver behind ECB action, namely the state of the Eurozone and its economy. For most if not all of the time I have been economically active it has been axiomatic that the European economy marches in step with the US, albeit with a small time delay. When America sneezed, the rest of the world caught a cold. At the same time, of course, when America started limbering up, European economies could get their running shoes out.
The most significant change in the way the world works has to be that this umbilical relationship between the two appears to have been severed. Sure, Draghi has confirmed the limits for how much and for how long the ECB will be supporting the economy – if it is ever proven that QE does in fact help and not hinder – but all of us should know by now that whatever the ECB says today can quite easily be reversed or overridden tomorrow. As movie mogul Louis B. Mayer said, a verbal agreement isn’t worth the paper it’s written on.
In the early days of QE and long before the ECB, in a 180-degree shift in direction and in total contradiction to its previous stance, jumped on the QE bandwagon, the common question was whether the economy was breathing easily because of or despite the monetary life-support machine and whether, once disconnected, it would get up fighting or simply turn up its toes and die. The US economy has largely recovered from the aftereffects of the global financial crisis; whether thanks to QE or simply within natural cyclicality is a moot point. But recovered it has. What it has not done, however, is to drag Europe along with it. Whether that is because of or despite the grand European project is surely also open to debate.
I attended a lunch yesterday at which one of the guests proudly declared that he had just read an article that suggested the eurozone would be much better off and that the single currency would stand a better chance of long-term survival without German membership. Really? I remember writing reams on that subject five or so years ago during the depth of the Greek debt crisis but as little as turkeys would vote for Christmas, why would the Germans be mad enough to walk away from one of the most generous of free lunches ever provided? Yes, of course they have to be principal funders of the bailouts and all that jazz but those are problems stored up for the next generation while providing plenty of jam today.
Pollo
In defence of the ECB and its boss one must concede that it is not only the eurozone’s central bank but also effectively its only efficient agency of central government. That’s fine and dandy but it still does not explain why the US is now firing pretty much on all cylinders while the eurozone is still arguing about how to clean the spark plugs. The European model is simple: set out immutable rules but leave yourself the right to declare any number of situations to be special cases and temporary exceptions. Thus, on the face of it, the eurozone is governed by strict rules whereas in reality most members continue to do more or less as they please. The current example of this is the Italian banks which will, without a doubt, end up being de facto rescued by state aid. No doubt there are lots of little tax-exempted, fully pensioned-up eurocrats sitting in Brussels trying to work out how to interpret the implementation of a state-funded bail-out without calling it that and having to punish Rome. If it walks like a duck and quacks like a duck… it’s a chicken.
Meanwhile global bond yields continue their march north. The current 10-year benchmark Bund, the 0% August 15 2026, was issued at a price of 100.48 and at a yield to maturity of -4.75bp. That bond is now trading at 96.37 and a yield of 38.2bp. Apart from having cost its investors 4% of their capital in just under four months while they are still paying the German government for that privilege, these bonds have done nothing for anyone and, in my humble opinion, even at 38.2bp do nothing clever. At the time at which the Bund was issued, US treasury 10-year yields were at 1.35%. This morning they are a 2.42%. Why would one want to stand in the way of this move unless one was a competitor in the world championships for catching falling knives? At 2.50%, there might be some short to medium-term value in Treasuries but what is there that’s compelling about 38bp for 10-year Bunds? And yet people still don’t get why global equities are on such a roll. Ever heard of asset allocation trades?
Looking back, I was asked a few days ago why I had failed to comment on France’s President François “Qui? Moi?” Hollande’s decision not to run for a second term, thus becoming the first incumbent of the Fourth Republic not to do so. I know that shooting a corpse isn’t murder but it’s still not a nice thing to do. Happy?
Alas, it’s that time of the week again and all that remains for me is to wish you and yours a happy and peaceful weekend. This morning the world is mourning the passing of John Glenn, the first American to orbit our fragile blue planet. I was a kid when that happened in 1962. To us, however, the real hero was the late Alan Shephard who was the first American in space when he rode the Mercury rocket there and back again without a circumnavigation. Shephard went on to command Apollo 14 and to become, at 47, the oldest person to walk on the moon. Shephard died in 1998, aged 74. Not that I’d wish in any way whatsoever to denigrate the achievements of Senator Glenn but please, as when dealing with markets, let’s remember that the newest news is not always the only news. The Twickenham autumn internationals are over – thanks Australia for popping in – and the Val Gardena downhill isn’t until next week. We might just have to go shopping. Yikes!