For its Monday evening news show, the French-language national TV station in Switzerland invited me on May 10th, to comment on the rescue plan hammered out over the previous weekend by the European Union and the International Monetary Fund. The plan commits 750 billion euro (roughly a trillion US dollars) to rescue... hmm, to rescue what exactly? The euro, bankrupt Greece, or its endangered peers Portugal and Spain, the global financial system? I must candidly admit that I have been unable to figure out the goal of this much praised intervention.
The only clear message I got from very satisfied European politicians was that this vast sum would "tame the ugly speculators." So would the threat that the European Central Bank could (if not contrary to the letter then surely to the spirit of its strict charter) buy public debt on the secondary market. Anders Borg, the Swedish Finance Minister, allowed no room for misinterpretation when he described market participants as a "wolf pack."
The first question from my TV interviewer was disarming: "Could you please explain to our viewers what one trillion Swiss francs or dollars actually means?" Trying to come up a smart comparison, for example, it is actually more than two times the Swiss GDP, I suddenly felt dizzy. Is a trillion dollars really what it takes today to stop market participants from panicking?
Like Alice in Wonderland, we’ve grown accustomed distorted reality. Scale has lost its meaning as the numbers grow ever larger. Whenever markets falter, calm can only be restored by a vast flood of liquidity, it seems. But let's be clear about something: Behind the smokescreen of jargon and crypto-technical explanations, as they struggle to reassure the public that everything is under control, the central banks and governments – all of them, even the European Central Bank since last weekend – are simply trying to print their way out of their misery. By printing money they hope to soothe the market.
Consider just one example of the new reality: countries that themselves could be next in line for aid can use an EU Special Purpose Vehicle to support countries under fiscal stress. Will this make the European Union stronger? It reminds me of Baron von Munchhausen, who tried to pull himself out of a swamp by his hair. Of course, the profligate countries will now loudly approve severe austerity measures. But unless the EU is really willing to send those countries hurtling back towards the Stone Age, I doubt that these measures will ever be implemented in full.
Ultimately the solution will be inflation. The fever of higher prices eats up debt and liabilities and hence helps to repair the stressed balance sheets of households, financial intermediaries and governments. However, in a world with overcapacities and deleveraging pressures, creating inflation is a daunting task. So for the time being those large amounts of liquidity thrown at the markets will increase a certain form of volatility. Impressive rallies will be followed by abrupt corrections, whenever market participants feel the aches of liquidity withdrawal.
In this very volatile world broad buy and hold strategies will continue to underperform the returns of agile investors, who take on risk selectively but who are also willing to sell sometimes, when the tide turns.
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