As news of the latest “shock and awe” ECB bail out of Club Med was released today it catalyzed a quick return to euphoria in risk assets. Global markets are rallying big time. Despite the “powerful QE bazooka news” ….we remain Euro sceptics. As we watch the bear sentiment reversal from last week’s Chicken Little “the sky is falling” environment we can’t stop thinking about the Wizard of Oz. Remember him?..that scary all powerful dude who ruled with an iron fist over the Emerald City? Remember also how shocked we were when we got to see the real Wizard after Toto pulled the curtain back? There was a little old guy sitting on a stool pulling levers creating sound and lighting effects that were supposed to make him something he wasn’t…all omnipotent and powerful…someone to respect. The truth was shocking. He was just a cute little old guy with great pyrotechnic skills.
I can’t help but think of the ECB’s Jean Claude Trichet (JCT) in the same faux Wizardry context. Like poor Dorothy, we all want to think of him like the Wizard of OZ…all powerful and omnipotent…. dropping $1trillion of global taxpayers money on the capital markets in one grandiose motion…earth shaking stuff like that. We are seeing that hope and false assumption in the short covering rallies in risk assets today…but oddly not in the Euro. Helicopter Ben?… meet the Wizard of Euroz!!! Can the QE inspired euphoria last? We doubt it. The truth is… JCT and his ECB colleagues are caught behind the curtain that is the balkanized Euro zone, pulling levers which only create temporary sound and visual effects but that in the long run cannot solve the inherent fiscal and monetary problems of the Euro zone. Unfortunately the ECB does not have the same powers as the FOMC. The Federal Reserve was successful after the Lehman crisis because of their Federal Central Banking authority. The ECB does not have that…yet. Only serious structural reforms of the EU/EC experiment will suffice….anything less will continue to be tested by the “market speculators” who no doubt will probably take another run at the Euro…soon.
It will not be enough in the long haul to put more taxpayers money on the table…the ECB cannot pull one lever that raises taxes; another that creates austerity programs for the Club Med zone; another the halts the riots in Greece; another that raises debt levels across the Euro zone and the rest of the world (don’t forget the IMF is on this bailout too!); another that cuts spending; and another that gets continued approval from all 16 member states; and finally another that removes political risk by giving Angela Merkel back her majority government and removes the uncertainty of the hung UK parliament. Deflation remains the primary threat to global markets…especially in the Euro zone and there is no one lever that can remove that. Only growth can help pull the Euro zone out its debt deflation spiral and unfortunately the fiscal levers that the Wizards of Euroz are pulling now are not pro growth.
So we remain Euro sceptics and expect over time that the curtain will be pulled on the Wizards of Euroz efforts to solve their deleveraging crisis….Therefore our proactive global asset allocation favours a conservative posture over the next twelve months. We continue to favour an overweight in Treasuries and cash at the expense of equities…particularly the Euro zone where we are currently at a zero weight relative to client benchmarks.
Don’t miss: Here’s Who Gets Slammed In A Greek Collapse >
This is a guest post from the Peter Stock of Stock Investment Management Inc in Manchester, VT.
Business Insider Emails & Alerts
Site highlights each day to your inbox.