Wall Street continues breaking records … But for the last 10 days, the American indexes progress at the speed of a wad of money burning up in a toaster.
Take the Dow Jones or the S&P500: They have increased by 0.4 percent in six sessions — five sessions with an upward trend and not a single session with a decrease superior to 0.1 percent to deplore. The top driving force seems to be working on super-slow mode.
If Wall Street was a Land Rover, we could think it is climbing its way up the slope by its electric winch — and not thanks to its six-cylinder engines.
Maybe this metaphor is more relevant than it first appears. Operators had a long time ago anticipated that the Fed would stop supplying fuel at the end of October; they have quit the bleachers since mid-September, convinced that nothing exciting would happen on the track.
Then the Bank of Japan barged in out of the blue with its big cistern. It re-injected $20 billion in the “top fuel” tanks, the latter of which ignited an anthological take-off (+13.5 percent on the Nasdaq, +15 percent on the Dow Transport).
You know the dragster race tenet: A radical acceleration akin to a crossbow shot as soon as the pilot fully throttles up, from 0 to 250 miles in less than 10 seconds … then the pilot opens the parachute to reduce the speed. After that, it is only a question of inertia since the reservoir tank of the car holds just enough to race the first 0.2 miles.
Once the car stops, the only way to go back is to get the car towed by a 4×4 … and to carry the metaphor further, the aforementioned 4×4 is the injection cycle promised by the European Central Bank (ECB). The ECB goes by small boosts of acceleration; it is not a question of releasing full power à la the Japanese in a banzai way.
Small Steps for Europe
On Monday, [Nov.] 17, in front of the European Parliament, Mario Draghi confirmed that he would do whatever it takes to support the euro, and that sovereign debt would be part of the buyback programs … Nevertheless, there is a big gap from theory to action, and the devil is in the details. In fact, it will be necessary to lower the ECB solidity standards in order to sponge up the peripheral debts, and Germany is not ready to give in: AA or A+ is fine, but BB is nein.
Even though the market foresees quantitative easing (QE), the ECB-promised injections are not enough to boost the engine and fire the turbo mode.
At this moment, it is still diesel … and it will stay that way, according to the markets, as long as Germany won’t allow Mario Draghi to throttle up fully (debt buyback that will never be redeemed, like the Fed or the Bank of Japan).
Nevertheless, I have been convinced since the beginning that even if the diesel was substituted for nitro-methane, the 4×4 would never be converted into a dragster because the propeller shaft is not conceived to sustain a sudden profligacy of power.
That is not the whole story: From the start, the economic infrastructure was not configured the same way in Europe and the U.S. Therefore, it is totally unthinkable to expect the same wealth effect theorized by the Fed or the Bank of Japan. A “wealth effect,” incidentally, that is only benefiting the wealthiest 1 percent in the U.S. or, let’s be magnanimous, the 3 percent.
The next generation of European retirees — except the few hundred billionaires that have transferred and converted their equity assets in shares to London, Belgium or Singapore — cannot hope that Mario Draghi‘s monetary munificence will change their lifestyle … or procure the illusion of unexpected wealth.
Some Crucial Differences
The European pension fund systems are essentially based upon repartition rather than capitalization. Assets finance the annuity of retirees. As long as the age distribution still comprises a greater number of economically active people than retirees and incomes adjust on cost of living, then all generations across the board increase their standard of living.
Otherwise, it is general pauperization that inexorably ensues … and pushing back retirement age is revealed to be disastrous when the chief problem is the integration of youth without great experience.
The report on the exit age of active professional life only works on paper. It does not provide conclusive results on a practical level, since our era seems to have become allergic to people in their 50s … and the job markets become a machine ostracizing all people who are getting on into their 60s.
“Liberals” cannot stop proclaiming that the solution resides in shifting the current system to a capitalization basis. Let’s assume for argument’s sake that France succumbs to the Anglo-Saxon model: A big part of the enterprise will be to convince savers to invest either in bond issuances that yield nothing, or in shares-based portfolios whose values are helium-inflated and completely disconnected from the real economy.
Europeans — except for the British — have a natural aversion for over-leveraging and are distrustful of asset bubbles …contrary to the Americans, who get along with both and are ready to back completely artificial monetary mechanisms as long as it sustains consumption and entails seeming cuts in unemployment.
Nonetheless, an ugly truth gleams through ever brighter every day: Massive QE does no work … except for rigging market values, like successive U.S. governments have done shamelessly. When it is a question of doping growth figures, the Pentagon strengthens its conventional and nuclear arsenal (on credit, naturally), and voilà.
Japan without Brakes
Japan cannot use this same obvious trick. If Shinzo Abe should risk rearming the country, it would be considered a hostile strategy by China and would be the beginning of a dangerous escalade.
So, Japan falls back into recession and displays a second quarter in contraction, GDP-wise (-0.4 percent in the third quarter after -1.9 percent in the second quarter; that is, -1.6 percent on an annual basis).
Some fools readily claimed that Abe’s government is on the right track and must not stray. According to them, Japan is a mere victim — such as the U.S. was nine months ago — of bad meteorological conditions (too much wind, too much rain, too much heat …).
Structural reforms, financed by debts, had to be carried on — even if it meant the implosion of debts and the next value-added tax increase postponed indefinitely.
Not a big deal — the Bank of Japan will print as much money as needed, for decades if necessary … since that is what markets demand.
And markets are never wrong — until they change their mind; then Japan will face a new kind of typhoon.