Currency or Economy
Pfäffikon SZ, Switzerland – Investors are increasingly choosing extremes in their policies. In recent weeks, I have highlighted some extremes that somewhat expose the unusual financial situation in which we find ourselves. Investors rely on a critical reasoning, also when a fundamental foundation is missing. In the past, such a situation never lasted very long. Meanwhile, Europeans are presented with the question; Do we opt for the euro or our economy?
TINA
Today, many investors reflect complacency and the feeling of wealth do the rest. Central bankers could take advantage of the phenomenon T.I.N.A. (‘There Is No Alternative’ for the holding of shares). This model is based on the ideas of central bankers that knowingly push investors in equities. The result is that share prices increase further, while a fundamental foundation is missing. This decoupling has long been underway but has caused much sadness among investors in the past. The feeling of extreme wealth is mainly a slithery and temporary phenomenon.
ECB’s Caprices
European citizens increasingly have to deal with the caprices of the European Central Bank (ECB). Now the Brexit is a fact more citizens are rightly scratching behind the ears. Several countries have long benefited of the euro, but this has turned into a disadvantage in some cases. Germany, for instance, benefited greatly from a relatively weak euro combined with a healthy economy. Derailed budgets of Spain, Portugal, and France were a blind eye to the Germans. But now the interest rate has turned to negative, and the ECB buys everything not nailed down. The fun is over for Germany, and this applies to more Northern European countries such as the Netherlands.
Germany
The inverted interest rate is a blessing for the weaker brothers in the EU. The cancellation of fines to notorious budget sinners is also a sign on the wall on the functioning of the EU as a whole. Slowly the adverse effects of the ECB’s policy become evident in countries like Germany. Germans are in general liquid and own relative little real estate. Current policies, therefore, works for the average German more and more oppressive. In the Netherlands the situation is slightly different, but also Dutch citizens will sooner or later face eroding growth and wealth in continuation of the ECB’s policy. In particular, the carefully build up Dutch pension- and insurance sector is demolished by Draghi et al.
The disadvantages of the euro are slowly increasing for the richer countries within the union. The key question is how long the citizens of these countries will accept this? The choice between the euro and the economy is quickly made in such cases. Germany seems to be a bit too big for the euro, which they will surely realize but not yet dare to speak out loud. For countries like the Netherlands, the time has come to prepare for a possible exit scenario of Germany.
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 mentioned shares and has no intention of doing so in the next 72 hours.
