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How much? How soon? Which assets? There are plenty of questions still to be answered about the European Central Bank’s easing of monetary policy, expected to be finally announced Thursday.
But two things are for sure. One is that the euro zone now has no option but to embark on some form of quantitative easing — what some analysts have already dubbed the Big Bazooka. The other is that it will not work out the way either the ECB or most analysts expect — nothing ever does.
In fact, euro-zone QE will have plenty of impact on the markets and economies, just as printing money did in the U.S., U.K., and Japan. But much of it will be in unexpected places — and certainly not where the central bank expects it.
Such as?
Eastern Europe XX:EEBCL +0.15% will witness an asset bubble, the British pound GBPUSD +0.01% will soar in value, the U.S. will raise interest rates BX:TMUBMUSD03M -18.72% faster than planned, Germany will learn to love printing money, and gold GCQ4 -0.10% will sink even deeper into a bear market. The one thing it probably won’t do, at least not to any great degree, is lift the European economy out of recession.
If ECB President Mario Draghi does not do something to ease European monetary policy on Thursday, then he will confound expectations, and be may well squander his hard-won credibility. The markets have certainly been led to believe he will act. With the rest of the global economy recovering, the situation in the euro zone remains dire.
The Dutch economy contracted once again in the latest quarter, and the French economy was flat. Even German growth is not looking as healthy as it did. Inflation is well below target, and prices may soon be falling in absolute terms. If the ECB does not move to counter that, it is hard to know when it will.
The form of easing has still to be made clear. Most likely is a cut in interest rates, followed by negative rates — that is, banks would have to pay for the privilege of leaving their cash with the ECB. It may come up with a targeted scheme to lend money directly to companies, as the Bank of England did in the U.K. Most radically of all, it may purchase assets — or indeed intervene in the currency markets — itself. That would be full-blown quantitative easing.
The history of central banks printing money, in Japan, the U.S. and the U.K., is that it does not work out the way anyone expects. The plan will be to lift the euro-zone economy. Yet it is more likely to have an impact elsewhere.
Here are five trends to watch.
First, an asset bubble in Eastern Europe. One thing we know for sure about QE is that the money spills over into neighboring economies. Euro-zone banks will be pumped up with fresh cash from their central bank. But they won’t necessarily lend it to small companies in Spain or Portugal. More likely it will find its way into speculative markets nearby. The emerging markets of Eastern Europe have been moribund since the crash of 2008, but European QE will trigger a boom in their assets, and in property in particular.
Second, the British pound will soar in value. The currency markets hate to see central banks printing money. Investors will bail out of the euro EURUSD -0.02% , and most will switch into its closest available proxy. That will be sterling. The U.K. is growing faster than the rest of Europe, and the Bank of England is talking about hiking rates next year. Paradoxically the strength of the pound — and the resulting fall in inflation — will postpone that rise. But for a year at least, sterling will be on the up.
Thirdly, a faster rise in U.S. interest rates. The Federal Reserve has still to decide when to raise rates. Liquidity created by the ECB will flood its way out into the world, and much of it will wind up in the U.S. — it is after all, the world’s largest economy. That will do some of the work the Fed’s own money-printing program was doing.
The net result? The Fed will be able to wind up its QE faster than anyone expects, and also start raising interest rates without it having any especially harmful impact — because euro-zone QE will have taken over the work the Fed was doing.
Four, the Germans start to love QE.
We keep reading that the Germans have a phobia about printing money because of the hyper-inflation of the 1920s. Well, maybe they do. But here’s what will happen in 2014. The ECB will be successful in lowering the exchange rate. That will help exporters — who just happen to be mostly German. Their profits will soar, and so will the share prices of the major exporting companies — which also happen to be German.
By 2015, the DAX DX AX +0.07% will be soaring, and so will the wealth of the average German. The result? They will start thinking QE is great, because people always like things that make them richer with little apparent effort.
Finally, gold will go into a full-fledged bear market. One thing everyone agrees on is that QE drives the gold price higher. It represents the debasement of the currency — and so on, and so on.
But here is a funny thing. It is an open secret the ECB is about to launch a huge program of QE, and what happens to gold? The price slumps. It is down from $1,300 an ounce in May to $1,245 now. The link may well be broken. If that idea gets any traction, then gold will be in trouble — and rather than just weakening, may well go into a full-blown bear market.
In fact, the one thing that is not likely to happen is a sustained recovery in the euro-zone economy. Other assets will soar, however, and the ECB’s generosity will line the pockets of the investors who get on the right side of that trade, just as the Fed’s and the Bank of Japan’s did before it.
5 unintended consequences of Draghi?s Big Bazooka - Matthew Lynn's London Eye - MarketWatch
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