Stop the Madness!

Davide Accomazzo

Email: davide@cervinocapital.com

In spite of all the drama that is unfolding on the international stage, the path to a better global economic environment is fairly simple.

First the US should maneuver its fiscal position with a long term deficit reduction goal in mind (not short term rash actions) while shifting the mix of policies toward investment projects and education rather than pure consumption. 

Then Europe should face up to its responsibilities and issue a Eurobond which is really the only solution to save the Euro if that is indeed the ultimate policy goal; otherwise, all the European talking heads should announce a press conference and tell the whole world that they were just kidding about a common currency and now the joke is over.

Then last but not least, China (and most exporting economies… including Germany) should shift their systems toward increasing domestic demand rather than pursuing merely mercantilist policies.

If these three steps could be undertaken, the whole world would witness an amazing period of high growth and improving global standards of living (and…yes some higher commodity prices as well…).

Unfortunately, the cumulative imbalances of all the policy mistakes of the last 15 years and the reality of today’s politics, is condemning all of us to a seemingly never ending cold winter in classic Kondratieff style.

In an almost surreal fashion, our beloved leaders are pursuing the exact opposite policies in a futile attempt to perpetuate their own special interests and the short-term survival of their personal power.  In this framework, global leadership is producing rushed and unbalanced austerity plans, growing global balance of payments dislocations and out of control monetary policies.  Savers are robbed through financial repression (read: artificially low yields), honest investors are hit with higher than necessary volatility, genuine entrepreneurs are forced out of the system by uncertainty of rules and regulations and a disappearing of real opportunities.

In this context we lived through the Jackson Hole meeting, where all the most important financial alchemists converged at the end of August for a few days of brain storming. Last year, Chairman Bernanke utilized this forum to launch Quantitative Easing Part Deux, which just like in a bad movie sequel, failed to spark economic activity and/or lasting increases in asset prices.  More liquidity is clearly not the answer in a balance sheet recession like the one we are experiencing but this eventually will not stop central banks from giving a hand to their commercial/investment banking friends. Bernanke was relatively tight lipped about his options and seemed to hint that Congress was better positioned to deal with the crisis at this juncture.  Nevertheless, the idea that the Fed will engage in some kind of Operation Twist like few decades ago (in essence a lengthening of the duration of the Fed’s portfolio in an attempt to keep longer term rates low)  is taking hold in the collective mindset.  No new details were provided on such an undertaking in last Thursday new Bernanke’s speech but the consensus remains he will push for it.  On Thursday, we also had President Obama’s speech on his job plan; while the proposed headline number was higher than expected (around $450 billions over an expected $300 billions) the lack of details and the short term nature of the remedies proposed failed to inspire investors worldwide.

Ultimately growth and a subsiding of assets volatility will not come back to the markets until somebody stop the madness (or better: the stupidity).  Markets are dysfunctional because they mirror dysfunctional political systems and political players and dysfunctional monetary policies.

Time to reset….. 

Contact details:

davide@cervinocapital.com