The big news this week is Mario Draghi and the European Central Bank (ECB). Let’s look at that, but first let’s see if we can take a 30,000 foot view at the problem and how the markets might behave going forward.
Collectively, the number one global problem is DEBT. Can we grow our collective incomes in a healthy way that we are able to cover our debts? For long periods of time, debt helps to fuel growth but at some point it becomes too big. Think in terms of what you earn and what you have to spend after you pay your bills. When you have too much debt and more of your income goes to pay off your debt, you have less to spend on other things. Your economy slows.
On a larger scale, this is what is happening to economies most everywhere – Japan, U.S., Europe and China. So, in steps the central banks to goose the system. Step one, central banks lower rates. However, when rates go to zero, central banks have lost the power so they move to step two. Step two is quantitative easing “QE”, also known as large scale asset purchases. The Fed did this in the last recession and again recently. The ECB is doing it now and Japan on and off since 1991.
Step two causes asset prices to rise, but they then reach a point when valuations grow too rich and forward return potential is low. Steps one and two hope to activate our collective animal spending spirits. We feel wealthier so we spend…so the theory goes. After you’ve done step two several times, subsequent moves are less powerful. As Ray Dailo says in a recent Bloomberg interview (link below), and I mentioned several months ago, the central banks reach a point where they are “pushing on a string”.
So what comes next? We are likely moving to step 3, or “helicopter money.” This amounts to direct government spending to stimulate the economy. The idea is to force spending since the private sector isn’t doing enough. Who does that spending? The government. Print and spend.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.