Well, the European Central Bank did not lower its interest rate from 0.75 percent on Thursday and the Euro strengthened to more than $1.30/€.
I had suggested earlier this week that because of the weakening state of the European economy that Mr. Draghi and the ECB might cut their interest rate. If such an event occurred, I argued, that the Euro would probably decline in value against the dollar.
Well, Mr. Draghi didn't budge and the Euro rose.
Europe wins because it appears as if the ECB is not going to loosen up on monetary policy any more. The United States loses because the Federal Reserve is just beginning QEInvinity.
Mr. Draghi played another note, however, bragging that the ECB's plan to buy government bonds under a newly announced program called "Outright Monetary Transactions," or OMT, had soothed the nerves of the financial markets. His main message was that the ECB was fully prepared to add liquidity to the financial system and that the OMT is in place to provide a backstop against further deterioration of the European economy.
In my view, the European economy is going to continue to weaken and Mr. Draghi's twists and turns are not going to reverse this pattern. And, as I have written many times over, more and more promises of liquidity are not going to correct what is wrong on the continent.
But, like the United States, the central bank seems to be the only game in town.
Spain still twiddles its thumbs and everyone else just stands around and watches. Greece seems to be trying to adhere to the wishes of the eurozone, yet several of the countries including the Netherlands and Finland are sufficiently dissatisfied with its efforts to see that financial help to Greece is withheld. And, Italy, Portugal and Ireland are still in the background waiting for another turn in the spotlight.
What most fail to see is that the world has changed, yet people are still fighting the battles of the 20th century. Hoping that monetary policy will solve the problem or that governments will recover and support another round of Keynesian fiscal stimulus is just hiding you head in a hole in the ground.
This applies to the United States as much as it does to Europe.
If short-term interest rates are going to remain near zero out until 2015 and if economic growth is going to be stuck in the 1.5 percent to 2.0 percent range during this time period then investment opportunities are going to be few and far between. Maybe this is what many in the investment community are trying to tell us. Maybe there are not a lot of "smart" investments to be made within such an environment.
In such an environment, maybe the only game in town for investors is to "play" the policy decisions of governments and government officials. If Europe eases up its monetary policy…then short the euro. If the United States retaliates with other monetary policy schemes…then short the US dollar. If Spain appears to be resolving its difficulties…then go long on Spanish bonds. If Spain seems to be moving independently and shunning financial help from elsewhere in Europe…then short Spanish bonds. And so on and so forth.
This may not be as rewarding as investing in a company that is going through a turnaround, or, one company buying another company to strengthen itself. But if it is the only game going on…one can only guess where the "money" is going to go.