World Cup of Liquidity

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

With the eyes of the world currently trained on Brazil, and the incredible spectacle of the globe’s most popular sporting event, there is another coordinated effort taking place on the world stage, albeit one with less fanfare and pageantry, but possessing a far greater effect on the global economy, and that is the historically accommodative policies of two of the world’s major central banks. The unprecedented amount of liquidity being thrust into the system by these institutions has helped fuel the current bull market in equities, which continues to push stocks listed around the world further and further into record territory.

World CupThe more powerful of these central banks, the Federal Reserve Bank of The United States, is attempting to gradually extricate itself from a portion of the record measures it has taken to revive growth following the Great Recession, which have caused its balance sheet swell to more than $4 trillion (New York Times) while not causing the economy to suddenly decelerate. “To this end, last week the Fed announced a continuation of the reduction of its monthly bond purchases by $10 billion, bringing the new total to $35 billion.” They also voiced their collective intention to keep short-term interest rates at their current historically low levels until 2015. Financial markets rallied following this news as investors focused largely on the Fed’s comments regarding rates, as well as the little-discussed fact that although their monthly purchases are being slowly phased out, the Central Bank continues to reinvest the proceeds from maturing bonds, thus maintaining a measure of the palliative effect. According to the New York Times, “Fed officials generally argue that the effect of bond buying on the economy is determined by the Fed’s total holdings, not its monthly purchases. In this view, reinvestment would preserve the effect of the stimulus campaign.” Although the American Central Bank is attempting to pare back its efforts to boost growth in the world’s largest economy, the accommodative measures currently in place look to remain so long after its bond purchases are concluded.

Preisser_Liquidity_6.23.17_2Mario Draghi, on June 5, made history when he announced that the European Central Bank (ECB) had become the first major Central Bank to introduce a negative deposit rate. As part of a collection of measures designed to spur growth and combat what has become dangerously low inflation within the Monetary Union, the ECB effectively began penalizing banks for any attempt to keep high levels of cash stored with them. In addition to this unprecedented step, Mr. Draghi unveiled a plan to issue four-year loans at current interest rates to banks, with the stipulation that the funds in turn be lent to businesses within the Eurozone, (New York Times). The actions of the ECB were cheered by investors who sent stocks listed across the Continent to levels unseen in more than six-and-a-half years, with the expectation that the Central Bank will remain committed to combating the significant economic challenges that remain for this collection of sovereign nations. To this end, Mr. Draghi suggested, during his press conference, that he is considering additional growth inducing measures, which may include the highly controversial step of direct asset purchases. Mr. Draghi gave voice to his resolve, and a glimpse of what the future might hold when he said, “we think this is a significant package. Are we finished? The answer is no” (New York Times).

The actions of both the Federal Reserve and the European Central Bank have directly contributed to the current rally in risk assets, but have also created a conundrum of sorts for investors; as though their historic measures have sent prices to record levels, the conclusion of these programs carry with them serious risks of disruption, as they too are unprecedented.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Investment Insights Podcast – June 6, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded June 5, 2014): Bill reacts to the long-awaited policy change announcement from Mario Draghi, president of the European Central Bank.

What we like: Announcement met or exceeded expectations; lower interest rates; bank lending stimulated; a wide variety of positives overall

What we don’t like: Didn’t deliver the “helicopter”; fell short of establishing a program to buy securities, similar to quantitative easing

What we are doing about it: Leaning towards a more bullish posture in Europe; looking at emerging market companies that would benefit from the lower interest rates

Click the play icon below to launch the audio recording or click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Eurozone Crisis Report Card

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

In January 2013 Amy Magnotta wrote in detail about how the actions of the European Central Bank (ECB) finally gave the markets confidence that policy makers could get their sovereign debt problems under control.[1] The purpose of this blog is to measure the progress of the ECB’s actions, as well as other critical steps taken to resolve the Eurozone crisis.

Maintaining the Euro: A+
The markets put a lot of faith in the comments made by the head of the ECB Mario Draghi in July, 2012. Draghi stated that he would “Pledge to do whatever it takes to preserve the euro.” These words have proven to be monumental in preserving the euro as a currency. Following his announcement, the ECB still had to put together a plan that would be approved by the ECB’s governing council (comprised of banking representatives from each of the 18 EU countries)[2]. The politics of the approval essentially boiled down to whether or not each council member supported the euro as a currency. Draghi’s plan ultimately passed when Germany’s Chancellor, Angela Merkel, endorsed it in September 2012.[3] The stabilization of the euro boosted lending and borrowing for European banks, and allowed governments to introduce necessary economic reforms outlined in the plan.

Since the plan was approved, the euro’s value versus the U.S. Dollar has continued to rise; reaching levels last seen in 2011. There is still some debate as to whether or not the currency will last over the long term, but for now its stability has helped avoid the worst possible outcome (financial collapse). There are several key elections coming up over the next month, which could renew the threat of breaking up the currency if anti-EU officials are elected.

Government Deficit Levels: B
The average Eurozone government deficit came in at 3.0% in 2013, which was down from 3.7% in 2012. Budgets will need to remain tight for years to come.

Corporate Earnings: B
The MSCI Europe All Cap Index has returned 27.46% in 2013 and 5.01% so far in 2014 (as of last week). The Euro area also recorded first quarter 2014 GDP growth at +0.2% (-1.2% in Q1 2013).[4] This indicates that companies in Europe have established some positive earnings growth since the peak of the crisis. On a global scale, Europe looks like an attractive market for growth.

Dressel_EuroZone_ReportCard_5.30.14

Unemployment: C
Unemployment in the Eurozone has stabilized, but has not improved significantly enough to overcome its structural problems. The best improvements have come out of Spain, Ireland and Portugal due to a variety of reasons. In Ireland, emigration has helped reduce jobless claims while a majority of economic sectors increased employment growth. In Spain, the increased competitiveness in the manufacturing sector has been a large contributor. Portugal has seen a broad reduction in unemployment stemming from the strict labor reforms mandated by the ECB in exchange for bailout packages. These reforms are increasing worker hours, cutting overtime payments, reducing holidays, and giving companies the ability to replace poorly performing employees.[5]

Dressel_EuroZone_ReportCard_5.30.14_1[6]

There are also some important fundamental factors detracting from the overall labor market recovery. The large divide between temporary workers and permanent workers in many Eurozone countries has made labor markets especially difficult to reform. This is likely due to a mismatch of skills between employers and workers. High employment taxes and conservative decision-making by local governments and corporations have also created challenges for the recovery.

Additional Reading: Euro Area Labor Markets

Debt Levels: D
Total accumulated public debt in the Eurozone has actually gotten worse since the ECB’s plan was introduced. In 2013 it was 92.6% of gross domestic product, up from 90.7% in 2012. The stated European Union limit is 60%, which reflects the extremely high amount of government borrowing required to stabilize their economies.

Overall Recovery Progress: B-
On a positive note, governments are finally able to participate in bond markets without the fear of bankruptcy looming. Banks are lending again. Unemployment appears to have peaked and political officials recognize the importance of improving economic progress.

Unlike the 2008 U.S. recovery however, progress is noticeably slower. The social unrest, slow decision making, low confidence levels, and now geopolitical risks in Ukraine have hampered the recovery. When you consider the financial state of Europe less than two years ago, you have to give the ECB, and Europe in general, some credit. Things are slowly heading in the right direction.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

[1] January 4, 2013. “Is Europe on the Mend?” http://blog.brinkercapital.com/2013/01/04/is-europe-on-the-mend/
[2]
European Central Bank. http://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html
[3] September 6, 2012. “Technical features of Outright Monetary Transactions. European Central Bank.” http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html
[4] Eurostat
[5] August 6, 2012. “Portugal Enforces Labour Reforms but More Demanded.” http://www.wsws.org/en/articles/2012/08/port-a06.html
[6] Eurostat (provided by Google Public Data)

Investment Insights Podcast – February 7, 2014

Investment Insights PodcastBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 6, 2014):

  • What we like: Stability in emerging market currencies; European Central Bank fighting deflation
  • What we don’t like: Hypersensitivity to growth metrics
  • What we are doing about it: Letting natural hedging between asset classes manage volatility; remaining neutral in other portfolios; looking for a good employment number

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Is Europe on the Mend?

Magnotta@AmyLMagnotta, CFA, Brinker Capital

We have spent so much time focusing on the U.S. fiscal cliff that the concerns regarding Europe seemed to have been pushed to the sideline. On the positive side there has been progress in Europe. Mario Draghi, head of the European Central Bank, can take some credit for the progress. The Financial Times even named him their Person of the Year.

The €1 trillion Long-Term Refinancing Operation (LTRO) put in place in late 2011 helped fund the banking system. In July, Draghi pledged to “do whatever it takes to preserve the euro.” His words were followed up by the ECB’s open-ended sovereign bond buying program called Outright Money Transactions (OMTs) designed to keep yields on Eurozone sovereign bonds in check. The next step could be establishing the ECB as the direct supervisor of the region’s banks.

Source: FactSet

Source: FactSet

These actions have brought down borrowing costs for problem countries such as Italy and Spain, helping to change the trajectory of the crisis and prevent an economic collapse. Yields on 10-Year Italian and Spanish bonds have fallen over 200 basis points to 4.4% and 5.2%, respectively. The Euro has also strengthened versus the U.S. dollar since July, from a low of 1.21 $/€ to 1.32 $/€ today.

Source: FactSet

Source: FactSet

I wonder how long this lull in volatility in the region can continue in the face of a weak growth in the region. Seven Eurozone countries fell into recession in 2012 — Greece, Portugal, Italy, Spain, Cyprus, Slovenia and Finland. The Greek economy experienced its 17th consecutive quarter of contraction, while Portugal completed its second year of recession. There remains a stark difference in the economic performance of Germany and the rest of the Eurozone. Unemployment rates are at very high levels and continue to increase. Youth unemployment is above 50% in both Greece and Spain, a recipe for social unrest.

The ECB’s actions have bought time for the Eurozone economies to get their sovereign debt problems under control. However, continued austerity measures implemented in an attempt to repair the debt crisis have only served to further weaken growth in the region and exacerbate the situation by pushing debt to GDP ratios even higher. While some confidence has been restored to the markets, policymakers should attempt to implement more pro-growth measures to pull the region out of recession.

12.28.12_Magnotta_Europe_ChartCombo

Europe’s equity markets have rebounded nicely in 2012, leading global equity markets on a relative basis since the second quarter; the rally helped by the ECB’s actions. I remain concerned that the ECB’s measures, while improving confidence, do not address the underlying problems of weak to negative economic growth combined with deleveraging. Weak growth in the region should weigh on corporate earnings and keep a ceiling on equity valuations. The deleveraging process takes years to work through. Because the situation remains fragile, we are likely still prone to event risk and periods of increased volatility in the region.

Source: FactSet

Source: FactSet

Investment Commentary From Brinker’s Joe Preisser 6-11-12

As investors across the globe continued to grapple with the uncertainty on the European continent, the prospect of additional, accommodative monetary policies being enacted by several of the world’s major Central Banks sent share prices higher across indices this week.  In Europe, on Wednesday, stocks rallied to their best single day performance in more than seven months following a meeting of the European Central Bank(ECB).  Although the rate setting committee elected to maintain the current level, the President of the ECB, Mario Draghi signaled that measures designed to stimulate the euro-zone’s economy would be forthcoming if growth were to falter.  According to Bloomberg News, “Global stocks rallied the most this year, the euro strengthened and commodities jumped on speculation policy makers will take steps to revive the slowing economy.” Mr. Draghi’s sentiments were echoed on this side of the proverbial ‘pond’ by Federal Reserve Chairman Ben Bernanke in an appearance before a Congressional budget committee in which he reiterated that the Central Bank, “remains prepared to take action as needed to protect the U.S. financial system and economy” (New York Times).

Stocks rose across continent’s in the wake of an unexpected decision by the Central Bank of China on Thursday, to cut interest rates for the first time since 2008, in an attempt to stimulate growth in what has been a slowing economy.  According to the New York Times, “China cut its benchmark lending rate Thursday, for the first time in nearly four years, adding to efforts to reverse a sharp economic downturn.” The nation’s policy makers are once again demonstrating their continued resolve to act in an effort to thwart the negative effects of Europe’s sovereign debt crisis, which have rippled through the global economy. Dariusz Kowalczyk, an economist at Credit Agricole was quoted by the New York Times as saying, “The biggest impact of the move is likely to be on sentiment, both among businesses and consumers domestically by showing Beijing is bringing out the big guns to support growth…investors know that they have more ammunition if need be and a good track record in using it.”

Through the confusion the nations of the European Union face as a result of the precarious state of affairs in the nation of Greece, where the rapidly approaching national elections to be held on June 17th will serve as a referendum on the country’s membership in the euro zone, the Continent’s leaders have drawn closer to an accord on a rescue package for embattled Spanish financial institutions.  In an effort to halt the flight of capital still rattling the country and mitigate the dangers facing what is the fourth largest economy in Europe, the possibility that emergency funding could be made available to the banks themselves has come to the fore.   Throughout the current crisis Spain has strongly resisted attempts by its European partners to encourage the country to accept a rescue package, as the disbursement of these funds in the past has come laden with broad conditionality that has meant the need for additional austerity.  The most recent proposals, to lend directly to the troubled institutions themselves, have been designed with terms limited to the financial sector in an effort to make them more palatable to the government, thus displaying the resolve of Europe’s leaders to combat the current crisis and offering hope for a successful resolution.