Isaac Meyer, who as president of the Federal Deposit Insurance Corporation managed the bankruptcy and subsequent restructuring of three thousand American banks in the 2010s, published in 2008 a book of harsh criticism of the neurotically hyperactive line followed by the US Treasury and the Federal Reserve during the fall XNUMX crisis.
The title of the book, Senseless Panic, is significant. If everyone had been a little calmer, Meyer argues, many bankruptcies on the one hand and many costly bailouts on the other could have been avoided. The debate on 2008 will continue for decades not only on the causes of the crisis, but also on policy reactions. Some historians will agree with Meyer and another will instead confirm the positive judgment prevailing today when we look back at what the Fed did in those months.
We don't want to take sides here. We just want to remind you that the Fed's activism resulted, among other things, in the use of 85 billion of public money to bail out the private insurance group AIG. All without consulting anyone. Saving one company rather than another is a discretionary choice that typically belongs to the political authority, not to the monetary one. The Fed's decision, moreover, was strongly attacked by Republicans in Congress and the Democratic left did not like it either. At the conclusion of the debate, it was decided to increase the transparency of the Fed's operations without however limiting its discretion, which is precious in the event of an acute crisis.
It all lasted a couple of months and then we didn't talk about it anymore. It occurred to no one to appeal to the Supreme Court. A political problem must be solved politically, not judicially. In Europe, on the contrary, to limit the scope of the OMT (the possibility of discretionary purchases of government bonds of this or that state by the ECB) German policy has hidden behind recourse to the judiciary. The result is that the MTO, decided in the summer of 2012, is still in limbo. The European Court of Justice will give its final ruling only in autumn 2015, after which the case will return to the examination of the German Constitutional Court, which will take a few more months to pronounce.
Four years to decide on a first aid tool suggests two things. The first is the structural difference between an America that faces problems head on and a Europe that faces them in court. The second is that German political dominance over the Eurozone is based not on the clarity of principles but, on the contrary, on their discretionary use. If the OMT were to suit Berlin, it would already be ready and approved by the ECB. If, on the other hand, he doesn't like it, it would be blocked by supporting the opportunity to wait for the court's verdict. Moreover, the fact that it was the Court of Justice itself that argued that it is not up to the judges to deal with monetary policy is indicative of how specious certain German arguments are.
We will find German ambiguity in the European Quantitative Easing that Draghi will almost certainly announce on January 22nd. We will not see the enthusiasm of Japan, which has now decided in its heart to solve its problems with permanent monetization and devaluation. Instead we will see a Qe with the handbrake on and a sullen Germany that will try in every way to discredit and limit it. In reality, the German government has already accepted the idea of quantitative easing for some time. The weakening of the euro, accelerated by the prospect of Qe, is seen well in Berlin. However, Germany will try to pose as a victim and will in fact retain a veto power over the amounts and duration. For this reason, the positive reaction of the markets from the 22nd onwards will probably be less overwhelming than what we have seen in similar cases in America and Japan.
Not to mention that as early as January 25 we will have a Greece governed by Tsipras. Nothing tragic, please, but one more argument for those who argue that Europe, for those who invest, is just a trap full of unknowns and pitfalls. Everything we have written so far should confirm this idea. Europe has been, is and will remain structurally less attractive than America for investments and even in comparison with Japan, which in any case has a long-term strategy by now defined, will continue to be disadvantaged in many respects. And yet, for the next 12-18 months, Europe will enjoy two formidable cyclical benefits, the devaluation of the euro and the collapse of oil. Speaking of energy, let us recall that America is not only the world's leading producer, but is also surrounded by producers (Canada and Mexico) who are already beginning to feel the effects of the fall in the price of crude oil.
The Eurozone, by contrast, produces neither oil nor gas. A more expansive monetary policy in Europe will then have to be added to the two cyclical advantages mentioned, in the face of an America that will sooner or later raise rates. The moment is also good for Europe in terms of portfolio positioning. In recent months we have had continuous macro positive surprises from America and negative ones from the Eurozone. For the past couple of weeks, however, the United States has been sending disappointing signals, while Europe will gradually begin to show (cyclical) signs of life. The gap between American growth and ours will narrow and wallets, still unprepared, will not be able to ignore it.
At some point, the markets will begin to wonder whether narrowing the growth gap should not lead to a reconsideration of the euro-dollar exchange rate. After the first effects of the European Qe, perhaps between 1.10 and 1.15, the devaluation of the euro will stop. However, we will hardly see a significant turnaround because the prospect of rising rates will continue to loom over America, while we know that Europe will keep them at zero for the entire foreseeable horizon. For portfolios, it will therefore be a question of forcefully selling the American stock exchange and using the proceeds in part to slowly reduce the overall exposure to equity (suitable at these market heights) and in part to invest in European equities. The portion of net risk reduction, made up of dollars deriving from the sale of US equities, could be parked for a few months in 7-year Treasuries, which offer the highest yield among the G-XNUMX countries.
