The European Central Bank (ECB) announced yesterday plans to begin a $70 billion monthly bond-buying program (also known as Quantitative Easing) beginning in March of 2015. The monetary stimulus program is expected to last until at least September of 2016. This means that over the next 18 months, roughly $1.26 trillion will be pumped into the $13 trillion EU economy. The ECB eased into this decision as they tried various measures over more than five years, including loans to banks and the lowering of interest rates, to help spur economic activity. This EU bond buying program will be instituted to ease the low output and low inflation environment in hopes of creating some momentum towards economic growth.
With the ECB purchasing bonds at this level, bond prices should remain inflated and interest rates low for some time. With low borrowing and deposit rates, the incentive for equity investments in theory should increase for investors. Equity investments create long-term wealth and in essence productive economic growth. The central banks continue to use their influence on markets and growth through any means necessary. They have opened the door and are doing everything they can to get investors to walk through, but with the recent recession still so fresh, investors are only taking a peek.
Although the credibility of central banks has been challenged of late, former President James A. Garfield once stated “He who controls the money supply of a nation controls the nation.” The central banks of the US, Japan, and now the EU will have each participated in Quantitative Easing to spur growth and fight deflation. With these three economies producing almost half of the global GDP, it is widely known that their commitment to business as usual will continue forward. The market is still trying to determine what this growth will cost when it is truly felt. In the meantime, the hope is that this shot in the arm will provide the energy to create the momentum necessary for more productive long-term investment needed in the EU and across the world.
While one may expect international equity markets (particularly the EU) to get a short-term boost on this action, it is very difficult to correctly and consistently make short-term market calls. Whether it happens, how long it may last, and the overall impact is anyone’s guess. We do know that international equity markets have lagged U.S. markets the last few years. This may very well provide an opportunity to recoup some recent losses or step into an underweight international equity position. Only time will tell.
The creation and preservation of wealth takes structure, time, and discipline aligned with one’s unique situation. Opportunities abound.
All comments and suggestions are welcome.
Tony Basalla