Consequently, the rumour is that those losses have increased substantially. In the same way, once the second phase of the ECB’s LTRO scheme was completed in February, providing much needed liquidity to the European banking system, the market started to look for the next path of least resistance.
χελος του γκρεμο*
During this period it has been to play on the fears within the eurozone and put upward pressure on bond yields in the euro periphery, pushing down prices of risk assets. Meanwhile the so-called safe haven asset classes, which tend to be under-owned by the majority of active investors, have been pushed to all-time highs.
Greece has called an election for 17 June and no one knows for sure which way that vote will go and what the consequences for euro membership will be. The Greek population wants to stay in the euro but is not prepared to accept the levels of austerity demanded by Germany. So we watch as a runaway train hurtles towards the immovable object.
The only question is how serious the damage might be. What will be the knock-on effects? The bearish view is that without support from the EU, deposits will leave banks and Greece will be forced to leave the euro.
As in both 2010 and 2011, we are at the precipice in Europe and we don’t know for sure whether the authorities will act swiftly enough or decisively enough to avert a collapse in confidence. This would constitute a deflationary shock for the European economy and therefore for the global economy too.
QE a must for ECB
In this scenario the EU authorities need to act decisively, become much more forward thinking, recognise the huge risks we are facing and adopt policies that have been resisted to date.
The ECB needs to be permitted to start a QE programme, creating money to buy government bonds. Unfortunately EU politicians have not shown the ability to act in a decisive manner so far in this crisis so investors are in a difficult position trying to balance portfolios. Do they follow the trend into safe havens on the assumption that expensive assets will get even more expensive? Or should they try to focus on the long term?
With the FTSE 100 index providing a dividend yield which is double that provided by ten-year gilts, longer-term investors should resist short-term gains and think longer term. Going back to 2000, the huge rally and subsequent crash of technology shares caused widespread losses, causing a permanent reduction in appetite for equities.
We believe gilts could be building towards a similar crescendo.
* Greek for ‘cliff edge’ (according to Google Translate)