Super Mario saves the day….short term benefits for long term cost, says RMG’s Richardson

RMG Wealth Management’s CIO Stewart Richardson says there is an ongoing risk that long term costs of policies such as QE will set Europe’s economies up for bigger pain in the long term.

It’s been a momentous week. The ECB is prepared to start printing money despite German protests. Although this has cheered markets in the short term, we need to be very careful about where Europe and the developed world generally are heading. We will set out below what we think the ECB plan means for equities in the short term, update our thoughts on the probability of QE3 from the FED next week and then spend some time explaining our thoughts on where Europe and the developed world may be heading in the long term as they stretch the boundaries of non-traditional policies.

Quick thought on European equities

Mario Draghi unveiled his plan to save the Euro, and it does look like he has bought a heck of a lot of time. Whether this time is used wisely by the politicians is very debatable, but the likelihood of the Eurozone unravelling has been reduced for the time being (probably for 12 months at least). We have been mostly on the bearish side of European equities for the last two years although the risks are more balanced now that the ECB is primed to print unlimited amounts of money (more on this below). In the next few months, we expect to be a bit more constructive on European equities, especially relative to the US.

Our current thoughts on the potential for more stimulus from the FED

The employment report from the US on Friday was by and large pretty disappointing. Although the unemployment rate dropped from 8.3% to 8.1% businesses hired fewer new workers than expected and the household survey (separate survey from the business or Non Farm Payroll survey) showed fewer people employed in the economy. Furthermore, hours worked and hourly wages were both below expected.

In today’s warped market, although this widely followed economic report was worse than expected, i.e. bad news, because it may encourage the FED to launch its third round of money printing, it is deemed to be good news!

Despite this disappointing report, it is still not a slam dunk that the FED will print next week. The fact that US equities were mixed on Friday despite the increased expectation of fresh printing illustrates that there is still some uncertainty on this, and we would also argue that the market has already moved to price in a good deal of any perceived good news on FED actions.

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