Swiftly Jumping through the ECB’s Hoop
Pfäffikon SZ, Switzerland – Investors have had to deal with a range of issues this year. In January there was the mini crisis in the Emerging Markets, followed by the unrest in Ukraine. Speculation surrounding the Fed’s possible interest hike became the next hurdle. The so-called ‘momentum stocks’ in particular got burnt. The invasion of ISIS in Iraq had only just gotten started when panic struck in Europe regarding the solvency of the Portuguese banking system. The downing of MH17 resulted in a range of speculations which led to the expansion of sanctions on Russia. At the moment Ebola is haunting the financial markets. It’s quite the list – one where investors who kept their heads cool are still the best off.
Drawing Board Cycling
In order to preempt any form of panic, banks are encouraging a so-called stress test. The ECB has mandated this stress test in an attempt to restore public confidence in the banks. A noble endeavour on the face of it. Former Dutch professional cyclist and world improver – Maarten Ducrot – calls the recent stress test “drawing board cycling”; it all works out on paper and the winner is known beforehand. And he is not the only citizen to be critical about the ECB’s stress test. I refer to the brainchild of fellow columnist Pieter Lakeman who hits the nail on the head. This test indeed does not cause the bankers much stress. Moreover little is known about how banks would handle a possible deflationary scenario in Europe.
Pride
In any case; Mario Draghi – President of the ECB – presented the figures last Sunday with some pride, noting that the banks have become stronger. But in my view the reality is somewhat more nuanced. It confirms the policy that banks are not – or only ever so slightly – loaning out to the business sector. And that the bankers – more than anything else – have put themselves first. Up until now the client has been marginalized, because first there needed to be a swift jump through the ECB’s hoop. I can only hope that the banks will finally change that policy and work together for a further recovery in Europe.
Divergence
In the attached graph it becomes painfully clear what the state of affairs is. The divergence between the US economy and that of Europe is quite striking. Europe and the US in terms of monetary policy are very similar to one another. They have one monetary unit, one central bank and don’t suffer from currency fluctuations between them. Still it’s remarkable that where the US is relatively successful, Europe is muddling through in a scenario whereby even deflation and a new recession are lurking. Europe simply needs to quickly reform while at the same time it continues to pose a threat for global stability. The good news is that a crisis in Russia, Ukraine or Europe would become the mother of all investment opportunities. Homework enough to be done for the investor with a distant horizon. That, does not require an ECB stress test.
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.
