Flogging savers until morale improves, that’s how ECB President Mario Draghi is going to fire up the economy in his bailiwick. Among other things, he announced that the ECB would lower key interest rates from nearly nothing to next to nothing and impose negative deposit rates on the reserves that banks stash at the ECB.
The goals beyond destroying savers? Hammering down the euro, but given the efforts by the Fed, the Bank of Japan, and others to hammer down their own currencies, it’s going to be a slog. And motivating over-indebted companies to borrow even more to invest for worthy projects that don’t exist – because if they existed, banks would have gone after them, awash in liquidity as they are.
Savers are going to pay. Prudent behavior is precisely what current monetary policies are trying to stamp out. But savings used to be one of the drivers of real economic growth. Banks would lend that money to be used building a plant or a house, financing inventories, etc., creating economic activity along the way. Banks would attract that money by paying savers some interest. They’d then lend it out at a higher rate. The difference would be the compensation for their role as intermediary and for shouldering the risk of the loans. Now that banks can get their money from central banks for free, savers have become the universal punching bag of monetary policy.
But how good are these policies for the real economy? Japan has inflicted them on its savers for two decades, and look what happened: the government has borrowed without constraints since debt is nearly free. Result: the Japanese economy is now suffocating under a mountain of debt.
The ECB has been prescribing the same medicine for the Eurozone, but on Thursday it tweaked the dosage. And how has the economy done?
It has been on fire, judging by the Stoxx 600 index whose component companies are spread across Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK. The index closed at 347.4 on Friday, up 6.6% year-to-date, up 26.4% from June 2013, and up 43% from May 2012, just before Draghi’s magic promise to do “whatever it takes.”
In short, the European economy has been on a phenomenal roll.
Serial recessions, unemployment fiascos, toppling banks, collapsing auto sales… they didn’t exist, according to the Stoxx 600. And Wall Street has been trumpeting asset allocations that are stuffed with European equities, and that has pumped American money into European stocks, and so they’ve soared even more.
The Wall Street hype machine has been in overdrive. Its “analysts” have been forecasting crazy earnings growth estimates for the Stoxx 600 companies in order to rationalize ever higher stock prices. So for the first quarter this year, according to Thomson Reuters, analysts had forecast earnings growth of a dizzying 36.3%. That was on July 1, 2013. By October 1, they’d lowered their forecasts to 29.2%, and by February to 10.4%. By May 29, as companies were reporting the actual numbers, the growth “forecast” had unceremoniously dropped to 1.9%.
Same thing quarter after quarter. For the fourth quarter 2014, they’re still riding their favorite hype horse, currently expecting, I’m not kidding, 39.3% earnings growth, which is down from 40.2% a week earlier! And it has been doing wonders to the Stoxx 600 which continues to defy gravity.
But what the heck is wrong with this picture?