Submitted by Taps Coogan on the 26th of October 2018 to The Sounding Line.
Daniel Lacalle, Chief Economist at Tressis Gestión, recently gave a wide ranging interview with Macro Voices and expressed his relatively bullish view on US stocks and his deep concern about the Eurozone and its sovereign debt markets.
“Are we entering a massive bear market? I don’t think so and the reason why is (that) it is very unlikely that we will see monetary policies globally become really hawkish. We are talking about normalization and actually what we are seeing is a very very accommodative and very loose monetary policy. If you go to the 30-year bond in the United States, it gives you a real yield of about 0.07%. So that is going to probably continue to keep risky assets in a sort of elevated multiple type of environment. Does that mean higher multiples? Does that mean continuing to inflate the levels further? Not likely. I think that what happens is… what we have seen in Japan this year or what we’ve seen in the Eurozone for the last couple of years which is that monetary policy maintains multiples, it doesn’t increase multiples of both equities and… valuations of bonds.”
“There is a risk that the Fed gets nervous and delays the tightening, but it would be a very big mistake… The sort of placebo effect would last very little. Probably, it might even not work from the perspective of making different asset classes go further up. And more importantly, it would send a very negative signal to the market. If the Fed delays its rate hike plan, the message that it gives to the market is that they know something that we don’t and that is not a good thing. More importantly, it is a very negative message as well because if the Fed doesn’t build tools into the next cycle now, after loosing precious months in the Yellen tenure in which it could have capitalized on a very bullish market to raise rates,… it is going to be much worse when the cycle really turns, and that is the risk of stagflation that we… are living in the UK or that is something… that we should not ignore in the European Union as growth estimates come down.”
“The situation in Europe is one of missed opportunity. The Eurozone had a tremendous opportunity when the ECB launched its QE program for countries to really do their homework and improve their economies, get in shape, take the advantage of low interest rates and high liquidity to improve their debt and their fiscal imbalances. Most of the countries didn’t do that. Most of the countries basically took the savings of interest rate expenses, which amount to more than one trillion euros of saved interest expense from the ECB program, spent it all, and now they got used to very low rates and high liquidity and you are seeing the effects in countries like Italy. But not just Italy. You’ve seen that the French budget, the Spanish budget, the Portuguese budget, the Slovenian one as well, all of them, the governments are looking at two very dangerous things. One is to increase spending dramatically and the other one is to try to balance the budget with tax revenue estimates that are… close to science fiction. So the problem of the Eurozone is then that the ECB has injected two trillion euros into the economy. The balance sheet of the ECB is almost double, relative to GDP, to what the Federal Reserve’s balance sheet is, and what ends up happening is that despite that massive stimulus, and governments that have had very aggressive budgets.., the level of growth in the economy is very poor… and countries have not prepared themselves for the winter… Any investor… knows that there is no demand for Eurozone bonds at these yields. You would have to think of twice (the interest rate), at least, in some of the countries to even start getting the attention of the secondary market.”
There is much more to the interview so enjoy it above.
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