Game Changer or Not?
That is the question on everyone’s mind.
Was this just another temporary measure in Europe that will fail sooner or later, and most likely sooner? Or is it something real. The start to a truly European Central Bank that can drive rates low as it chooses?
Is the economic data here stabilizing, albeit at an anemic level or was this too just an aberration and we are due to see the march of weak numbers resume?
To some extent, the real question is Europe having an “October 2008” moment where they are addressing some issues but the markets fail to respond for long, or are they having a “March 2009” moment, where suddenly everyone is looking for the “green shoots” or “brotes verdes”?
July was another difficult month for investors, as Spain’s financial and economic crisis deepened and the eurozone’s problems spread well beyond its borders.
The themes that have dominated the direction of global financial markets and determined the shape of investors’ returns continued to prevail during July. Indeed, the only “new” investment theme to emerge is the consequence of another negative trend emerging, as the drought sweeping through the U.S. Midwest wreaks havoc on grain crops and propels many agricultural commodity prices to higher and higher prices.
As the month draws to a close, investors will be bracing themselves for another flurry of economic data – payroll figures, second-quarter growth calculations, global PMI figures – while awaiting the outcome of central bank meetings in Europe and the United States. While some U.S. economists are still urging the Federal Reserve to embark on a third rount of quantitative easing, it may be hard for those policymakers to act, given that the U.S. housing market appears to be moving into recovery mode. (Full chartology here).
Guest post by Doug Short.
Here is a summary of the four market valuation indicators I updated at the beginning of the month.
|● The Crestmont Research P/E Ratio (more)
● The cyclical P/E ratio using the trailing
● The Q Ratio, which is the total price of the
● The relationship of the S&P Composite to
To facilitate comparisons, I’ve adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 27% to 44%, depending on the indicator. This is a modest increase over the previous month’s 25% to 41% range.
I’ve plotted the S&P regression data as an area chart type rather than a line to make the comparisons a bit easier to read. It also reinforces the difference between the line charts — which are simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart.
Solving the Euro crisis has been mainly on trying to talk about the bazooka, the whatever it takes and other empty phrasings. The question is, are Eurobonds inevitable? More on the subject via John Quiggin.
“Whatever it takes.” Those were the words followers of the euro zone have been waiting to hear ever since Mario Draghi replaced Jean-Claude Trichet as head of the European Central Bank. To spell out the quote in full, Draghi said: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
Central bankers are famously gnomic in their utterances. This is, however, about as unambiguous as they ever get. Jean-Claude Trichet used exactly the same phrase in reference to his determination to put inflation control ahead of all other objectives, and he demonstrated it with policies that came to the edge of destroying the euro in order to save it from inflation. Draghi’s choice of words therefore amounts to, at the minimum, a sharp change of course.
Of all the actions open to the ECB, there is only one that is sufficiently big, and sufficiently controversial, to justify Draghi’s statement. That is a decision to buy the bonds of EU member states, if necessary printing euros to do so, and accepting the risk of higher inflation.