The Great Gap between Rich and Poor
Pfäffikon SZ, Switzerland – Last month was dominated by the monetary decision-making in which the Swiss (SNB) and European Central Bank (ECB) played a central role. The Swiss no longer deemed it responsible to retain the peg between the franc and the weaker euro. This assessment and its timing, on part of the SNB, is remarkable. No more than a week later the ECB announced a massive monetary stimulus package (QE). It had become clear to the SNB that the ECB was preparing a currency swap which would flood the SNB with euros. A torrent of criticism was the result, but I have yet to see the most important point be raised.
Strong currency
The Netherlands and Germany are opposed to the ECB’s QE and from their perspective that is very understandable. Both countries are relatively healthy financially in comparison to many other countries within the EU and therefore do not see the need for stimulus. Initially the proponents of the monetary union argued that using the differences in interest rates, the euro could be managed; in today’s light, those arguments have become questionable. Switzerland, moreover, can be labeled an economically strong country. Their benefit is that they still have their own currency, even though many would see that as a burden. There is, however, nothing wrong with a strong currency, as the Klaas Knot of the Nederlandsche Bank argued recently.
Compounding
Switzerland is not the US or Greece who peddle on the international markets in an attempt to offload boatloads of government bonds only to subsequently squander their earnings. Norway used to have the same problem after blowing away their oil profits. The Norwegians, however, have become more sensible and now invest their profits in the Norwegian sovereign wealth fund, which has become the world’s biggest compounding engine. This makes the Swiss strategy all the more understandable.
QE in practice
Most of the criticism I read is that QE doesn’t work. Ben Bernanke, the former Fed chairman, once said that QE doesn’t work in theory, but it does in practice. In theory the moving around of a big stack of bonds and the associated price impact has no merits whatsoever. Critics emphasize that the money never reaches small and medium enterprises. APG, The Netherlands’ largest pension fund has indicated it won’t respond to the ECB’s avances. But in practice, the Fed – and now the ECB as well – is sending out a signal to the market that interest rates will remain low for many years to come. This signal in and of itself has more influence than the measure itself and that tends to go underreported.
Gap
I continue to hold that it was better for the ECB to do something rather than nothing. This, however, has a side effect; the gap between rich and poor is rapidly expanding. The likelihood of this gap widening in Europe has increased after the ECB’s measure. In reality the ECB also has a fiscal influence, even though it would never admit it. Cunning socialists will see their opportunity to introduce all kinds of strange tax proposals. I am of the opinion that the market closes the gap by itself, over time. It’s something we don’t need the socialists for. In this light it becomes interesting to ask oneself: when does the US reach a wage spiral?
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
