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Central Bank Follies: We’re All Japanese

Posted on January 13, 2015

An interview with financial expert Gerard Minack, a bear.


Fairfax: What are the big global risks you see out there in the coming few years?

GM: The biggest bubble out there is central bank credibility. If Draghi was a stock he’d be on a P/E of 200. Yellen’s on 100. When that bubble pops, all hell will break loose again, and there you really just want to be in cash.

Fairfax: So the biggest risks are in Europe?

GM: Yep. The problem is the next crisis will not be in the periphery and it will not be in the banks; it will be economic and it will be in the core.

The big problem is the internal competitive imbalances in Europe. The problem’s not [that] the euro is too high against the dollar, it’s not that the euro is too high against the yen. The problem is that the French franc is too high against the deutschemark, and Mr Draghi can’t fix that. From the resulting economic stress you’re getting political blowback. You’re getting fringe parties flourishing everywhere. There are whole landmines of elections coming up in the next 18 months, any one of which could throw up a result that could get the crisis back as front page news.

Fairfax: So you still don’t believe the euro can survive?

GM: That’s still the case. You can restore your competitiveness in a fixed-exchange-rate regime.

The solution is simple, and it’s what the periphery has done: it’s called having a depression. It’s 20 per cent unemployment and large nominal wage cuts. The trouble is that the small economies can be bossed around, but you can’t see the French taking the same medicine.

But what’s quite clear is they will not take the action pro-actively. Mr Draghi bought them time with “whatever it takes”, but they sat back and twiddled their thumbs. They need the cattle prod of crisis to get them to react.

I actually think that the next crisis – which is inevitable over a two or three-year horizon – will be a great buying opportunity for euro equities because they will get very cheap.

Fairfax: Isn’t there the chance that the actions taken by central banks to soften, if extend, the pain will eventually lead to a more delayed and gradual return to normality, without a crisis?

GM: In a way I think we are all turning Japanese. In the 1990s when they first tackled their bubble – and it was world’s best-practice bubble, it was spectacular! – initially most analysts, myself included, applauded. It looked like they had let the air out gently without a recession: rates and growth came down and unemployment did not go up.

But the point was that it was the second downturn in ’97 that nailed them; only after then did the Japanese “turn Japanese”.

Now, we’ve shot a lot of bullets in the global financial crisis and the next downturn I think will reveal most other people are turning Japanese. Unfortunately the one policy that blindingly obviously works is fiscal policy, but it’s very unlikely to be doable in the next downturn; in the US due to congressional gridlock, and it will be disabled in Europe because they won’t have a centralised fiscal authority.

So you’re left response-less when you enter the next downturn, with monetary policy that is ineffectual, unconventional monetary policy that’s just embroidery, and very close to deflation.

Fairfax: Most investors would share to a large extent many of the views you’ve described – does that mean we’re all bears now?

GM: The funny thing is there is a disconnect between what investors are saying and what they are doing. No one thinks all the problems the global financial crisis revealed have been healed. But when you have an equity rally like you’ve seen for the past four or five years, then everybody has had to participate to some extent.

What you’ve had are fully invested bears.

(For the rest of the interview, click the link.)

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