ECB QE to begin on Monday and China downgrades 2015 growth

By InvestSMART · 6 Mar 2015

By InvestSMART ·
6 Mar 2015

Comments

QE programs only have a real positive impact on an economy when markets are dysfunctional. This was clearly the case in 2008 in the US, but was not the case in both 2010 and 2012 and I don’t think that the US central bank policy added much to the recovery once the global financial crisis had passed. I believe that the same in happening in Europe now with the ECB introducing QE just as signs are emerging that growth is trending upwards and that the worst is over for the region for the time being, although the upside is not particularly bright. The interesting thing was the near-euphoria exhibited by Mario Draghi overnight with strong upgrades to growth and inflation in the next two years, which appear completely overdone given the structural issues at play in the region.

Nevertheless, with higher anticipated growth and inflation, the big question then becomes how long will the QE program last if the region defies the fundamentals and improves, and will Germany insist on tapering the program before September 2016 if that is the case? Nonetheless, I still think that the impending earnings upgrade cycle in Europe, will be enough for the region to continue to outperform the US who will have its own headwind as the US Fed starts hiking rates sometime this year. Meanwhile, another strange twist was the ECB agreeing to buy instruments on negative yields. If you are holding eligible securities that are close to -0.2% you are simply waiting for the ECB to take it off your hands for a profit. I have always said that the only way to profit from buying bonds with negative yield is the ‘bigger fool than thou’ and not only has that person entered the room, but he also has an extremely big wallet and different objectives to both you and I.

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Frequently Asked Questions about this Article…

What is the purpose of the ECB's QE program starting on Monday?

The European Central Bank's QE program aims to stimulate economic growth and inflation in the Eurozone. However, the article suggests that the timing may not be ideal as growth is already trending upwards, and the worst might be over for the region.

How does the ECB's QE program compare to the US QE efforts in 2008?

The article notes that QE programs are most effective when markets are dysfunctional, as was the case in the US in 2008. However, the current situation in Europe is different, with signs of growth already emerging, making the impact of QE less clear.

Why is there skepticism about the ECB's growth and inflation forecasts?

The article expresses skepticism about the ECB's optimistic growth and inflation forecasts due to ongoing structural issues in the region, suggesting that the upgrades may be overdone.

What could influence the duration of the ECB's QE program?

The duration of the ECB's QE program could be influenced by the region's economic performance. If growth and inflation improve significantly, there may be pressure, particularly from Germany, to taper the program before September 2016.

How might the ECB's QE program affect European and US markets differently?

The article suggests that the impending earnings upgrade cycle in Europe could help the region outperform the US, which may face challenges as the US Federal Reserve begins to hike interest rates.

What is unusual about the ECB's decision to buy instruments with negative yields?

The ECB's decision to buy instruments with negative yields is unusual because it allows investors holding securities close to -0.2% to sell them to the ECB for a profit, despite the negative yield.

What is the 'bigger fool' theory mentioned in relation to negative yield bonds?

The 'bigger fool' theory suggests that the only way to profit from buying bonds with negative yields is to sell them to someone willing to pay more, despite the lack of inherent value. The article humorously notes that the ECB has become this 'bigger fool' with a large wallet.

How can everyday investors benefit from the ECB's QE program?

Everyday investors might benefit from the ECB's QE program by holding eligible securities that the ECB is willing to buy, potentially selling them at a profit. Additionally, the program could lead to improved market conditions in Europe, offering investment opportunities.