A few years ago, starting just after the financial crisis hit the US Stock Market, the European Union went into a crisis that threatened the future of the EU. Greece, Portugal, Spain, Italy… remember that? The crisis finally started to break its grip on the market news flow in September of 2011. Gold prices, functioning this time as a fear gauge while coming in at all time highs, started to recede. Then Mario Draghi mentioned those magic words -- “everything necessary” -- and the market believed him. Europe became the new place to invest your cash amongst the institutions. The average individual investor was still on the equity sidelines. Fast forward to 2014…
Well, like most other analysts were reporting at the time, Europe hadn’t done much of anything from a monetary basis because the ECB lacked the power. Seventeen countries make up the European Union. It makes sense that without a strong central bank, making real monetary change is very difficult. The question of who’s going to pay for it is brought up -- Germany?
That’s exactly what the Germans were thinking, and that’s exactly what Europe got… not much relief. It was hoped things would be different, such as possibly following the US economic recovery; I mean, they were doing Long Term Repurchase Option, or LTRO’s. But then again, the US followed a very different model than Europe, primarily because it could, not because it was popular.
The Federal Reserve liquefied the US economy and continued to liquefy with QE1-3. Most remember TARP, the Troubled Asset Relief Program of 2008. That was $750 billion*. But do you remember the $16 trillion the Fed lent out to other international entities like banks, companies, and countries? (Bloomburg, 2011) Needless to say, it was a lot of liquification. Right now, Japan is going through a liquification process right now with their own version of QE3. In fact, I recently read in the Japanese Abenomics article on Wikipedia that their QE would be equivalent to $200B a month if it was taking place in the US market. So, Japan is liquefying and Europe needs to do the same, but can they? How quickly? What will it take to convince the market? Answers to these questions are unknowable.
So the US economy is doing okay but not great, and Europe goes into a 2.0 recession, only this time it’s new and improved. So what are the impacts? Investors are selling European stocks and currency. With margin debt being at an all time high, it makes sense that along with Euro stock selling you also have to have US stock selling. The US dollar is strengthening. With proceeds from the sales, and as a hedge against coming volatility, investors are buying US Treasuries. The 10yr yield dropped below 2%** on the morning of October 15th. Looking at the European crisis 1.0 should provide some insight as to how to handle 2.0.
The economic forecasts set forth in the communication may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
Government Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
*US Department of Treasury