Photo: Wikimedia COmmons
Jefferies chief market strategist David Zervos is calling for panic in a note out this morning, starting off his analysis with the scary pronouncement: “We are back in the kill zone—Apocalypse Europe.”Essentially, contagion from the European crisis is once again banging on the door of the global economy—not to mention the European economy—and now is the time to act. Gridlock among politicians and the mandate of the European Central Bank will constrain the eurozone’s ability to take any effective action.
The ECB was only set up with a price stability mandate, and its leaders are hence much more constrained than Federal Reserve officials. Simply put, the European armies were not set up with effective weapons. In the US we have bazookas, tomahawks and howitzers. In Europe, they can barely agree to fire a musket. This unfortunate set up for Europe means that they can become a serious negative externality on the world without any internal ability to fix the problem. Of course, then it becomes incumbent on the rest of the world to directly involve themselves in combating Europe’s turmoil (sadly we have seen this movie a few too many times in the last 100 years).
Zervos predicts that the rest of the world—in particular the Federal Reserve—is ready and willing to protect the still fragile U.S. economic recovery in any worst case scenario.
Thus the challenge for investors will be making it through a climate of expansionary monetary policy and historically low interest rates. “We will come out the other side with a massive risk rally and significant inflationary pressures brewing,” he concludes, citing similar analysis conducted late last year.