About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, June 06, 2012

Euro Area -- My Bottom Line Case

In terms of critical measures such as monetary liquidity and broader, credit driven liquidity Euro
area monetary policy has been too tight over the past four or so years. It is not replicating the
 liquidity tightening in the US evident over the 2004 - 2008 period, but the results could be
very hazardous noetheless. In recent years, the EZ has experienced sizable deposit withdrawals and
bank dis-intermediation, and, by imposing new capitalization rules on its banks, the EZ is
inviting banks to reduce admittedly high leverage via cutting asset holdings. Thus, the Euro area
is experiencing both inadequate liquidity growth in real terms and a developing credit deflation
in real terms. These squeezes do not just invite economic weakness, they invite more serious
deflationary recession. ECB money / credit  Money, adjusted for inflation, is starting to disappear
from the system.

US history shows there is a decent relationship between the duration of a liquidity squeeze and
the severity of the subsequent economic downturn. The Euro area is now cruising along toward progressively more treacherous waters, which when reached, could produce a broadscale economic emergency. The longer the EU waits to commit to reliquifying its economy, the worse the losses
in output, jobs and social stability are likely to be.

Now, the Euro area recession does show signs of deepening and broadening. So, EZ officials
are likely going to have to provide fiscal as well as the critical monetary support to avoid far
deeper problems down the road.

Diverse politics and the cumbersome structure of the EZ power centers have made this process
very frustrating for investors and traders. If I was a younger guy, I suspect I would be quite
fascinated with this very important piece of history playing out in front of us. But, as an
emerging geezer, I think I'll stick with the monetary tools I've learned watching the Fed for
nearly 50 years and keep my eye on what the ECB does and shows datawise.

Hopes have taken an upswing with another EU summit out ahead for late June. Note on the
accompanying chart of Euro Stoxx 50 how key indicators are trying to bottom and note as well
the large surge of volume that went with the recent sell down. Euro Stoxx 50

1 comment:

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