Ultimately, we know that this has to happen.
So what if the ECB buys time? Is last week's outsized response to Draghi's comments justified?
Europe is already years behind the U.S. in addressing secular and cyclical headwinds -- debt has accumulated dramatically in the interim interval, and the continent's economies have deepened into recession, unemployment has skyrocketed and the EU banking system is capital starved (and not likely to commit materially to lending in the immediate future).
In the U.S. we embraced unprecedented easing and nontraditional tools three-plus years ago, and all we have gotten in the face of our structural challenges is around 1.5% real GDP growth. In the U.S., three-plus years after the Great Decession, it is still necessary for policymakers to resort to nontraditional tools (QE3) in order to sustain growth.So, let's accept that the ECB's Draghi is going to do everything he can to avoid a deeper recession and possibly depression. Let's accept the inevitability of more effective firewalls through FDIC-like bank deposit insurance, more forceful EU fiscal integration, lowering of interest rates, restarting SMP/LTRO and aggressive purchases of sovereign debt. But where is the policy/action that will spur sustainable, long-term economic growth and allow for meaningful deficit reduction? Given the more serious problems that Europe faces and the depth of its economic woes, why should Europe produce better economic growth in the next three to four years than we have achieved in the U.S.? It won't, even with these stabilizers, little more than 1% real GDP growth can be expected for the EU. And even if the eurozone succeeds to the degree we have in the U.S., the European economies will be mired in weakness and subject to external shocks for years to come.
Time Travel Waits for No Man
"It only seems like yesterday ... a few Greek blokes were tossing a discus about, wrestling with each other in the sand and the crowd stood around.... No, wait a minute that was Club Med." -- "Doctor Who," Fear Her (2005)Then, there is Greece (which can no longer be saved) and the slowing in U.S., China and India economic growth rates, as well as the frightening steepness that the fiscal cliff represents. As expressed by the investment strategy team at Goldman Sachs, more than ever, we live in a macro world.
The Original Statman
Aristotle compiled the first known comprehensive list of all winners of the Olympic Games. Which means that quite probably he was sat in a bar with Plato, muttering, "Go on then, give me any year you like and I'll tell you who won the four-man bobsleigh." -- Mark Steel in The Independent (2006)From my perch, the U.S. stock market is essentially fairly valued now.
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