Wasington, DC -- (ReleaseWire) -- 02/04/2015 --Despite a major announcement from the European Central Bank this past week, we may have seen the beginning of the end of quantitative easing largesse in our markets. This is a good thing, although it will certainly bring pain with it.
One reason I believe this may be true is the news coming out of Davos. The annual meeting of the World Economic Forum was held last week in the Swiss ski resort of Davos, Switzerland. Often, this event is simply the wealthiest and most powerful people in the world participating in self-congratulatory navel gazing and musing about nebulous non-topics, but this year's meeting included discussions that shed some light on what might become of quantitative easing in the future. From the Davos 2015 Executive Summary: "Complexity, fragility and uncertainty are all challenging progress at global, regional and national levels, potentially ending an era of economic integration and international partnership that began in 1989. What is clear is that we are confronted by profound political, economic, social and, above all, technological transformations. They are altering long-standing assumptions about our prospects, resulting in an entirely 'new global context' for future decision-making. This new context requires a greater awareness of the near and long-term implications of the following trends and developments," including, "The expected normalization of monetary policy through the reduction of quantitative easing and a future rise in interest rates."
During one session, Lawrence Summers, the former U.S. Secretary of the Treasury, said that "deflation and secular stagnation are the risks of our time", while Gary Cohn, President and Chief Operating Officer of Goldman Sachs, told participants the world is in a "currency war". He continued to say, "One of the easier ways to stimulate your economy is to weaken your currency." It certainly seems that these world financial leaders, political leaders, and academics were preparing for a sea-change even as the European Central Bank was preparing to start up the printing presses on March 1st and create 60 billion euro a week.
Some of the risks discussed at Davos we are already seeing in the United States and throughout developed economies, due to Keynesian intervention from the Federal Reserve and other central banks. We certainly already have tenacious un- and under-employment, and increasing economic disparity is wiping out the middle class as wealth is transferred to the banks and the top one percent by quantitative easing. The 2015 Global Risk Report also warns of deflation, going on to call out frothiness in housing, credit and equity markets: "Conversely, low interest rates have also fueled the risk of asset bubbles. Since the financial crisis, the use of expansionary monetary policy—such as quantitative easing and zero interest rates—has not had the expected impact of significantly increasing credit availability in the real economy, instead leading to a reflation of asset prices. Credit booms and asset bubbles have historically resulted in bank bailouts and recession in the real economy."
As we said, the European Central Bank is starting up their printing press on March 1st. Since many of those decision makers were undoubtedly at the WEF Annual Meeting in Davos, it seems that they must know as well as we do that something of that size is actually going to end badly, not just for Europe, but for all of us. Let's look at some of the specific reasons this is likely true.
First is the fact that the range of assets the ECB intends to buy under quantitative easing is limited. The plan is only to buy eurozone government bonds, not futures contracts in U.S. or European markets. This probably won't buoy European stock markets, especially in the face of the weak earnings and revenue levels they face today.
A second issue is, of course, Greece. Germany, in particular, has raised the issue that ECB quantitative easing would unfairly aid uncompetitive nations that do little to help themselves. As a result, ECB measures are restricted to purchasing no more than 33 percent of bonds from any single issuer. This matters greatly, as the victor in yesterday's Greek election was the left-wing Syriza party, which has pledged to renegotiate Greece's debt. The one-third limit prohibits the ECB from providing Greece with the liquidity that they are going to demand, when the Greek people have just given their mandate that earlier bailout terms from the European Union are too strict. If there is no accommodation, that could potentially lead to something like the 2013 Cyprus "bank holiday," when the government kept banks closed for two extra days after a holiday so regulators could prepare for a potential run after a 10 billion euro bailout from the European Union.
This leads to the third issue with the ECB's quantitative easing, which is disunity among eurozone leaders. It seems like QE in Europe is actually just a play to buy time for the politicians to find out what they're going to do next. Unfortunately, it also destabilizes the euro, which is the biggest threat to European economic growth and markets in 2015.
Amazingly, even JPMorgan, one of the biggest beneficiaries of the Fed's quantitative easing, is starting to admit what happens when you print money out of thin air. JPM's Nikolaos Panigirtzoglou said last week that QE's wealth effects are not "evenly distributing," that the boost in equity and housing wealth is benefiting primarily those that are already wealthy. That's certainly the wealthiest one percent. Even those wealth effects we saw in the United States will be limited in the eurozone, because of the regulatory restrictions mentioned earlier, and lower bond yields will sharply widen insurance company and pension fund deficits. Individual savers who are long on cash are seeing their income and wealth erode. JPMorgan also warns that QE can exacerbate currency wars. Actions by Denmark and the Swiss National Bank in the last two weeks show how difficult it is for neighboring countries to follow the ECBs shift towards easier monetary policy.
Why is JPMorgan turning on the Keynesian hand that has fed it for these last half-dozen years? Perhaps once the truth faucet has been turned on, it's hard to turn it back off again.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or dbennett@bennettgroupfinancial.com
The Beginning of the End by Dawn Bennet