Investing in the time of big bazooka central banking
The third quarter could be summed up in two words: “Big Bazooka.”
This was a quarter that saw unprecedented monetary stimulus from the world’s three most powerful central banks. European Central Bank President Mario Draghi bought the Eurozone time to get its house in order with his announcement of potentially unlimited “outright monetary transactions” to assist any country in need, so long as that country agreed to austerity conditions.
Shortly thereafter, Fed Chairman Ben Bernanke threw gasoline on the fire by announcing “QE Infinity,” in which he promised to inject $40 billion in stimulus per month into the mortgage bond market indefinitely, meaning as long as it took for him to see improvement in the unemployment rate.
And almost as an afterthought, the Bank of Japan announced a major expansion of its own quantitative easing program, boosting it by 10 trillion yen.
As we enter the fourth quarter, this coordinated monetary attack is the single biggest bullish factor in an otherwise shaky macro environment.
U.S. investors appear content for now to ignore the elephant in the room, the infamous fiscal cliff of tax hikes and budget cuts that is slated to take effect at the beginning of 2013 barring action by Congress and approval by the President. In a heated election year, it’s hard to see them coming to much in the way of an agreement.
But the bigger worry in our view is the risk of the Eurozone slipping back into crisis. It would appear that Germany is doing everything in its power to undermine the major breakthroughs of the third quarter. Having failed to stop Mario Draghi from announcing his bond purchase plans, German Bundesbank President Jens Weidman appears to be getting his revenge by leading a charge against the plans for an EU banking union.
Meanwhile, German Finance Minister Wolfgang Shauble, along with his counterparts from the Netherlands and Finland, have now publicly opposed a bank bailout for Spain—months after a general consensus was formed about removing the “vicious circle between banks and sovereigns.”
We find these developments deeply disturbing because they erode the confidence that is so critical to a functioning capital market. They risk undoing months of progress in resolving the sovereign debt crisis, and each step backward makes the eventual disintegration of the Eurozone all the more likely.
Still, the market appears to be climbing this rather steep wall of worry, at least for now.
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