According to the Phillips Curve, inflation varies inversely to unemployment. The Eurozone
has persistent unemployment at a double digit rate and is veering toward deflation with a
recent CPI of 0.7% yr/yr. The ECB, which has struggled to keep the Euro economy afloat after Mr.
Trichet trashed recovery chances with an anti - inflation program in 2010 before he retired, is
set this week to ease policy further ostensibly with a cut to short rates and a program to make
more credit available to cash strapped smaller businesses. Euro M-1 money which had responded
nicely to easing polices under the Draghi regime has pitched down in growth to 5% yr/yr and
appears on a recessionary and deflationary course unless the ECB engineers further liquidity
growth for the system. With private sector credit demand still falling and fiscal and regulatory restraint still the order of the day, the ECB is the only game in town. Moreover, social pressures
are building in the EZ and are fostering populist political movements. Further stagnation or
outright deflationary recession can only lead to more social and political destabilization.
The Euro stock market could be interesting if The ECB can get away from minor tinkering and
fine tuning. Waiting much longer for further proof of economic deterioration before stepping
hard on the monetary accelerator could prove very risky in a deeply fundamental way.
IEV Euro 350 iShares Note: the IEV is about 20% below the highs of 2007.
- Peter Richardson
- 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 !!!