We produce information like in no other era, but we are not in the habit of carving it in stone or engraving it like the Sumerians on clay tablets which are preserved very well in the dry sand of the desert. We produce it on paper that will crumble in a few decades and on electronic media that will demagnetize even sooner, even without the need for particularly violent solar storms. In five thousand years historians will therefore have serious difficulties in reconstructing our years, more than we have today in giving a face to the mysterious Sea Peoples of the Bronze Age, which we know through the obelisk of Byblos and the tablets of Amarna, as well as for the terrified narratives and legends of the following decades and centuries.
So let's imagine the archaeologists of 7000 AD bent over Wall Street Journal of Las Vegas, found in the desert and dated between 2007 and 2008, and on Safe's Financial Times, found in the middle of the sand that had penetrated a fallout shelter in Arabia and dated with radio-carbon around 2015. Of these finds, the scholar of the future would write, unfortunately we have only fragments of the pages containing the stock market indexes. However, we know, from the vague and fabulous narratives handed down in the following historical phase, that between the two dates, 2007 and 2015, an event of a catastrophic nature took place, probably a flood, a war or an economic crisis, which upset the major civilization of the time. By comparing the stock market indexes, the scholar would continue, we can state with a good degree of certainty that the civilization that reacted best to the terrible crisis was the German-European one. The Dax index, which in 2007-2008 had reached a maximum of 8067, was in fact at 2015 in 11850, with an increase of 47 percent. On the other hand, the recovery of North American civilization was more modest. The SP 500, listed in 2007 at 1565, stood in 2015 at 2040, up 30 percent. We do not know what was the cause of this different performance. Probably the German-European monetary and fiscal policy was more expansionary than the North American one.
The thesis of those historians who have advanced the hypothesis of massive programs of public works in the Europe of those years is controversial. In fact, no trace has yet been found of these works. Instead, there is consensus among researchers on the serious decline of Chinese civilization. The Shanghai Stock Exchange, which in 2007 had exceeded 6000, was practically halved, in 2015, to 3290. Plagues, civil wars, Mongol invasions are often cited as possible causes. However, the hypothesis should not be overlooked that the communist dynasties of the time were totally incapable of launching those infrastructure programs (airports, construction, high-speed railways) and of increasing the availability of credit which at the time were often used to stimulate the question. In contrast to the Chinese collapse, Japanese civilization, protected by its isolation, merely stagnated, with the Nikkei and the yen standing exactly at the same levels as in 2015 in 2007.
Returning to us, this small attempt at fiction, as well as a tribute to the work of historians and archaeologists called to heroically stitch sporadic data into narratives endowed with meaning, reminds us how humbly one must try to explain and rationalize stock market movements. After all, humility is the keynote of this phase. It is a phase in which the European current account surplus (huge and growing) and the purchasing power parity between the euro and the dollar (between 1.15 and 1.25) fade into collective silence, overwhelmed by the deafening roar of the transhumance of immense herds of bison in the prairie (the streams). Formulas and theories bow, it seems, to the forces of nature. In reality, we know, the forces of nature are (at least up to now) evoked and directed by policymakers. Like the Abe of the three arrows, the ECB, basically moved by the same desperation, wants to amaze, leave everyone speechless and convince the world that this time it's moving on and getting serious. Reaching parity with the dollar, going below it, printing money to bring half of Europe's government bonds into a negative yield, demonstrating that Portuguese bonds can yield half of American ones, everything is part of a grandiose representation with the special effects of the court theater baroque, the one where even the king and queen bring their hand to their mouth and say Oooh.
In this context, it doesn't make much sense to quibble about the fundamentals or wait for corrections on the European stock exchanges or on the dollar to enter. In the fullness of time any excess will be corrected but now any hesitation or retracement would take away the pathos from the narrative and break the suspension of disbelief which is instead so essential to captivate an audience, such as the European one, tempered in skepticism by seven years of stagnation or decline. There is also an obvious political calculation. The Spanish elections in September are getting closer and closer. A Podemos victory would be an earthquake, far from Greece. The European recovery must therefore be visible to public opinion, not just to economists. Shifting dissent from Podemos to Ciudadanos (a moderate version that is growing very fast) must be done with the utmost haste. On the dollar and European stock exchanges, we will therefore continue head-on until the signs of recovery become incontrovertible. At that point the dollar will correct, at least temporarily, and the European stock markets will continue to rise at a slower and more physiological pace. In June-July, the Fed will take stock of the situation. If Europe has embarked on a convincing recovery, US rates will begin their normalization journey. At the slightest doubt, the hike will be postponed.
Next week, the Fed will probably drop the concept of patience and thus declare the phase of preparation for the hike open. In three weeks, US earnings will show the dents made by the strong dollar. This double hit could produce, in the worst case scenario, a ten percent correction from the highs. At that point, however, the rate hike will have been metabolized. European stocks will only be touched by the correction. If the decline were to be more substantial, it would be a good buying opportunity. The US output gap will close at the end of this year. The European output gap will close at the end of 2017. When the output gap closes it means that there are no more resources that can be used without producing inflation. It is the moment when the bonds must be sold without delay. Stock exchanges, for their part, can continue, albeit slowly, on condition that real rates do not rise. Let's get ready. We say all this, naturally, well aware that writing the history of the future, even the near future, is even more difficult than writing the history of the past.
