Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Dynamic Maximizers®
  • Retirement Compounders®
  • Free Email Signup

Eurocrats Cry Wolf

May 18, 2017 By Jeremy Jones, CFA

It seems as though the half-life of euro-zone bailouts is getting shorter. It was only a month ago that policy makers announced a bailout plan that was supposed to put an end to the region’s debt crisis once and for all. Admittedly, the details of the plan were vague and it lacked credibility, but that didn’t stop equity markets from rallying in October as rumors and speculation about the plan were leaked to the press. If euro-zone leaders were attempting to boost global equity markets by announcing a plan to make a plan weeks in the future, they succeeded. October was the best month for the S&P 500 in almost two decades. But as equity investors came to the realization that the euro-area plan was at best an incomplete solution, stocks sold off. As of Friday, the S&P 500 had given up almost 80% of its October gains and had fallen 11% from its October 27high.

With each failed bailout attempt, the crisis becomes more serious. The core of the euro area is now losing the confidence of investors. Government bond yields in France and Belgium are rising to troublesome levels, and last week a German bond auction failed. What started out as a debt problem in Greece has morphed into an existential crisis of the euro. Euro-area policy makers are now back to square one. They need to announce yet another bailout plan to save the common currency.

Financial markets see the European Central Bank (ECB) as the only credible solution, but Germany is vehemently opposed to debt monetization. Just last week, German Prime Minister Angela Merkel shot down hopes for ECB intervention and joint euro-bonds, by saying that she remained “firmly convinced” that the ECB’s mandate could not be changed and that European Commission proposals for joint bond issuance were “extraordinarily inappropriate.”

So plan B has apparently been activated. What is plan B? Prop up equity markets with the promise to announce a lasting solution to the crisis at an undetermined date in the future. It worked in October; why wouldn’t it work now?

On Thursday, Merkel, French President Nicolas Sarkozy, and Italian Acting Prime Minister Mario Monti agreed to respect the independence of the ECB by not making positive or negative demands on the bank regarding the crisis. The agreement not to comment on an ECB bailout set the stage for the rumor mill to whip stock prices around. Sure enough, before Asian markets opened Sunday night, La Stampa, an Italian newspaper, ran a story that indicated the International Monetary Fund (IMF) was planning an $800-billion bailout of Italy (backed by the ECB). The story ignited a powerful rally in Asian markets that carried through to European and U.S. markets this morning.

The IMF has since denied the report, but that hasn’t stopped speculation that policy makers are planning to deliver a credible solution to the crisis. In fact, the lead story in this morning’s Wall Street Journal is “Europe’s Leaders Pursue New Pact.” The overarching theme of the article is that a more stringent fiscal pact under negotiation by euro-area policy makers may provide cover for the ECB to fire up the printing press. The article even speculates that some ECB members plan to outvote the Germans on the board who remain opposed to debt monetization.

I can’t tell you whether the rumors and speculation in the media are just another example of European policy makers crying wolf or whether the ECB is actually planning to forcibly intervene in sovereign bond markets. The last we heard, Germany was opposed to the ECB monetizing government debt. Outvoting the Germans would be a risky strategy for the ECB to pursue, but it is also true that without ECB intervention (or a fiscal union) things could spiral out of control in Europe.

It should be clear that the eventual outcome of the euro-area debt crisis remains uncertain. Investors are welcome to take today’s stock-market rally as a signal that the euro-zone debt crisis has passed, but they may be be disappointed. Equity markets have consistently gotten it wrong when it comes to this crisis. The smart money is in the bond market. An end to the euro-zone debt crisis will likely be marked by a decided tightening in euro-area sovereign bond spreads. There has been improvement in euro-area spreads this morning, but nothing that signals an end to the crisis. A defensive investment strategy remains the mandate.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Consumer Economy is Hot
  • More Good News for the Economy
  • Immigration Powering Canada’s Economy
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • China Builds an Anti-Quad Coalition - May 27, 2022
  • There Are Tech Companies “Still Dreaming of Boundless Growth” - May 26, 2022
  • How Can the Fed Prevent Stagflation? - May 25, 2022

Search Young Research

Most Popular

  • MARKET TURNING: Canada's Housing Market Turmoil
  • BUY THE DIPS? Can You Catch a Ginsu Knife?
  • Watch Out for Your Worst Enemy
  • How Can the Fed Prevent Stagflation?
  • Now You Can Own Your Vacation and It Doesn’t Have to Be a Time Share
  • Job Market Survival Advice for Graduates and for Those YOU Love
  • BULLWHIPPED? Inventory Overhang Could Slow Growth in Certain Sectors
  • Big Banks Adopting Blockchain for Short-Term Trading
  • The Power of a Compound Interest Table
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • KRISTALLNACHT: How Well Intentioned Gun Registries Become Tools of Evil
  • Your Survival Guy: “Life on Main Street Hasn’t Been This Hard in a While”
  • Is America About to Lose Its Investments in Colombia?
  • POWER MOVE? Did Viktor Orban Just Seize Control of Hungary?
  • Americans Are Abandoning ESPN and Woke Professional Sports Leagues
  • If You Have a Plan, I Believe You’ll Get to Where You Want to Go
  • President Joe Biden’s Good Question
  • Georgia Proves All Politics Are Local
  • VIDEO: DeSantis: America “Cannot Have a Ministry of Truth”
  • Can America Cut It’s Spending in Half? YES! It’s Been Done Before

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2022 | Terms & Conditions

loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.