At last, Friday! It’s been a long old week, but we have all managed to make it through to the end. And with plenty of topics of discussion, it’s probably best that we get straight into this week’s News, Views and Truths.
Regular readers, and clients that I have spoken to, will no doubt remember my single prediction; the European Central Bank will re-commence Quantitative Easing by September this year at the latest.
They announced that they are yesterday.
So not only did they announce a €20bn bond each month starting in November, but the ECB also cut interest rates to -0.5%. That is not a typo; negative 0.5%. And the reason? Germany is on the brink of recession. Inflation is moving into deflation and the US-China trade war is sapping all growth prospects from the region.
In his final act as ECB President, Mario Draghi has effectively launched “QE Infinity”; an ECB spokesman stated, “The Governing Council expects (bond purchases) to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.”
The ECB will keep on pumping money into the system until a point in the future when they feel that they can increase interest rates. To infinity and beyond.
And the market quickly realised this after the initial predictable reaction of falling euro and rallying bonds. Just three hours after the announcement, the euro was stronger on the day and bonds had fallen back. This rapid unravelling underlined the markets nagging doubts about the long-term effectiveness of the ECB’s efforts.
On that very front, forecasts by the ECB suggests that the region will continue to struggle, despite their best efforts. And as it seems that they have rolled their last dice, the question is now whether or not they have become a prisoner of the market’s expectations. Have the ECB entered into a perpetual feedback loop, where QE is seen to be the life support machine for the region’s economic fortunes? What will happen if it is turned off? Can it ever be turned off?
And finally, will this further artificial intervention by central banks simply prolong the inevitable? There is a genuine fear that QE damages the natural business cycle; whereas capitalism relies on investors backing strong companies and letting weak companies die, QE does not differentiate in the same way, supporting both the strong and the weak.
It is undoubtedly correct that the initial QE programme, in response to the Global Financial Crisis in 2008, helped avert a prolonged downturn in economic activity. But, if growth has previously been borrowed from the future, then we may be approaching that future which has already been stripped of growth.
And then what can the ECB do? In reality, very little. It is certainly time for the European Government to step up to the plate and stimulate growth from their own domestic fiscal policy. And that will be the focus in the coming weeks.
Another focus this week has been the publishing of the Operation Yellowhammer report on the cross-government civil contingency planning for the possibility of a no-deal Brexit.
I have two rules on this blog; no politics, no religion.
However, I have spoken to many people this week, clients included, who have been made genuinely worried by this publication. Or rather, the media projection of this.
Those that know me fully understand my cynicism relating to modern news reporting; bad news sells. And again, those that know me will understand my delight in being able to bring another perspective. So, as a result, moving away from our usual end of blog playlist, I am posting a video of a call received by Iain Dale of LBC radio.
The caller, responding to the Operation Yellowhammer report, advised that he used to run the Customs Terminal at the Port of Dover. Hopefully, this will give perspective and perhaps a comfort to those of you that are worried due to the recent media coverage.
Have a great weekend and I will see you all next week.
