Thursday, May 21, 2015

The Euro is terminally ill. We are at the stage of chemo and radiation to keep it alive. The medecines will get progressively worse from here and may themselves kill the patient. But, make no mistake, the Euro is going to die.  I must admit that Draghi looks like one of those Sicilian chaps who would saw off your legs just below the knee with a rusty hacksaw, go to church with his extended family, have Sunday lunch on the terrace of a fine palazzo, then come back to scoop out your eyeballs with the silver teaspoon from his post-prandial espresso.There is no exit policy as the US is about to find out when it tries to raise rates later this year. This is obvious when you consider the wisdom behind fixing a problem of too much debt with more cheaper debt and ignoring all the structural issues that are strangling the real economy. In the UK they are in the same boat although its going to be a bit longer before we sink too. The housing market in the UK is a direct result of this misallocation of assets that he mentions as a risk. Its disguising the real problems in our economy and the longer it goes on the worse is going to be the adjustment. At 2% mortgage rates a one percent increase is a 50% in payments - how do our miracle workers at the bank think that is going to go down. Every year that rates stay this low more and more people take on homes AND debt that is mispriced.  Anyone who thinks this dont end badly are living in the same world as the policy clowns who devised this clueless tragedy.  "The premium on liquidity, when it is abundant, is very low, so people tend naturally to invest in assets which in other circumstances would be considered to be illiquid. This premium is expected to stay low as long as the abundant liquidity conditions last. That’s why exiting from abundant liquidity policies has to be done very, very carefully.”  Can someone explain this too me? What I'm getting is that once you have started QE you cannot stop - which seems to tie in with the experience in the USA.

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