Kass: Super Mario Buffers
This column originally appeared on Real Money Pro at 8:34 a.m. EDT on Sept. 6.
NEW YORK ( Real Money) -- This morning, in response to a plan already telegraphed last weekend by Mario Draghi to buy short-term sovereign debt of ailing countries, the S&P 500 futures advanced by 9 handles.
I plan to sell/short this news for several basic reasons:
- Not only is Europe slipping more rapidly into a deeper recession but the implementation of serious and effective longer-term policy responses remains unlikely. Band-Aid policy measures of providing liquidity (which aids the transmission of monetary policy) remain the operative palliative, and they will likely continue for some time to come. Easing and the temporary purchase by the ECB of sovereign debt from peripheral countries will not durably counter insolvency but, ultimately, the solvency problem will be addressed by a painful debt restructuring. While Europe is geographically united, it is culturally and politically diverse, and a surrender of national sovereignty to the required extent necessary is unlikely. In time, the euro will probably be pulled apart as tensions increase across geographic and socioeconomic fault lines. In other words, there will be many more Thursdays with Mario.
- While Draghi's plan will temporarily aid the transmission of monetary policy, we can look at the massive doses of monetary stimulation in the U.S. as a template. Despite unprecedented easing, we are now more than three years after the Great Recession of 2008-2009, and the domestic economic economy is growing (in real terms) at only 1.8%. Given the more dire state of the eurozone (accelerating inflation, decelerating economic growth and rising unemployment), how will it be possible for Europe to grow out of its debt problem? The answer is that it won't be able to without the heavy lifting and unpopular policies that could encourage growth by cutting expenditures and balancing trade. And I am concerned that Europe's wave (and deteriorating growth prospects) will crash on our shore in the year ahead, rendering vulnerable consensus forecasts for 2013-2014 corporate profits.
"Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil." -- Frederic Bastiat, "That Which Is Seen and That Which Is Unseen"From my perch, investors are not being traditional in their investing; they are instead depending and are guided by their reliance on effective stimulative policy (and a global easing put). Risks are high of policy disappointment. And as long as the eurozone fails to address formidable and persistent cyclical and structural economic growth concerns, sell the news.
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