Buying Time: You Just Have To Get To The Superbowl In Order To Have A Chance At Winning The Superbowl
Mohamed El-Erian provides some questions and answers regarding QE in Europe: “Were the exuberant reactions of equity markets justified?” Yes. “Are economists as excited as markets?” No. That’s basically it. “The best the ECB can do is to buy time in the hope that other policy-making entities with better instruments will step in.” Which is kind of what QE is all about, right? Buying time? Also, consider this line from Draghi’s statement yesterday: “There must be a statute of limitations for those who say there will be inflation.” Bill McBride says “some policymakers have been wrong for years, both on monetary and fiscal policy…This buys more time for policymakers in Germany to change their approach (I doubt they will, there is no ‘statute of limitations’ for bad ideas).” Either way, at least one economist is optimistic: “the [Eurozone] now benefits from lower oil prices, some structural reforms, a strengthened banking sector and a big reduction in yields on sovereign debt. The ECB’s commitment might now trigger an upward spiral in confidence. One can at least be forgiven for hoping so.” Jeffrey Kleintop mostly agrees, but says Europe needs more structural reform (i.e. relaxing laws on hiring and firing) to achieve long term growth: “of the countries forced to take on reforms required by bailouts, Spain and Ireland have shown remarkable economic improvement and have led growth in Europe.” Meanwhile, time is all Draghi needs if this keeps up (alt): Markit’s PMI survey “rose to a five-month high of 52.2 in January from 51.4 in December, beating expectations of 51.9.”. Meanwhile, the ECB “has written to Greece’s top four banks, warning them
of a bank run to pay close attention to liquidity management ahead of Sunday’s election.” Also, Greece is likely to need a miracle another bailout extension. Also, what’s the recipe for a miracle? Low expectations (valuations) combined with realistic outcomes? In totally unrelated news, the Seahawks “pulled off one of the most exciting late-game comebacks in playoff history” and they’re headed to the Superbowl.
Shale Changes Everything
“Five years ago, total shale oil production in the U.S. was around 300,000 barrels a day…By 2013, it had risen to two million barrels a day. Today, output has at least doubled to between four million and five million barrels a day.” Furthermore, “because shale oil wells can be set up relatively quickly, the industry can react to market forces faster than traditional oil.” This is crucial. Remember the supermarket analogy? “The market no longer needs so great a risk premium embedded into the spot price, because supply can be delivered to the market as and when needed, without too much concern of a system-choking shortage every happening.”
Price Is Relative. And Right Now, Equities (Relative To Bonds) Are Attractive.
“With interest rates at rock-bottom levels, dividends have become wildly popular as one of the last remaining places you can earn a yield above inflation. They became viewed as bond substitutes for income-starved investors…Two things happened recently to help that trend: Interest rates on Treasury bonds have plunged…[and] dividend payouts have surged…Relative to bonds, S&P 500 companies may be about as cheap as they’ve ever been.”
By The Way, “Global Warming” Doesn’t Do Justice To Climate Change
Existing home sales increased 2.4% in December to an annual rate of 5.04 million units last month. That’s important. Think back to this time last year, you might remember the polar vortex icepocalypse that killed all the home buyers and ruined everyone’s forecast for economic growth (but not interest rates…). Well, apparently there haven’t been any icenados ripping through the country this winter (yet). Therefore, the weather shouldn’t be a scapegoat for bad economic growth. Just wanted to make you aware of that.
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