Pro Perspectives 9/23/19

September 23, 2019

It was just 11 days ago that the ECB announced it would restart QE, promising to buy 20 billion euros a month, indefinitely, starting in November.  

That plan might be scrapped before it starts.  It might not be enough.

This morning, a September estimate on German manufacturing data was reported.  It was the weakest in seven years.  That seven-year comparison has unique significance when it comes to Europe.  It was mid-2012 when Europe was on the brink of cascading sovereign debt defaults.  Italy and Spain were the teetering dominos.  The disaster was only averted because Draghi pulled out the central bank bazooka, promising to do 'whatever it takes' to stave off a melt-down.  

This weak reading on current manufacturing should seal the fate for a German recession (two consecutive quarters of negative GDP growth).  That would mean technical recession in the biggest economy in the euro zone. 

So, as I said, the ECB's new QE plan may get scrapped before it starts.  Europe may need something bigger and bolder.  As I suggested going into the last ECB meeting, we may see them ultimately outright buy European stocks.  They need a strategy to reduce the risk premium in stocks — to drive risk-taking, investment and ultimately demand. Negative rates haven't worked in Europe, because the policies aren't forcing savers into higher risk assets — because it's not in their culture to buy stocks.

With that, through the past decade of global QE, U.S. blue chip stocks (S&P 500) have outperformed European blue-chips (Stoxx 50) by eight times (eight-fold).      

As you can see in the chart above, the Euro Stoxx 50 remains almost 40% off of the 2000 highs.