Everyone thinks there will be some kind of stimulus but I think this is becoming a sideshow to the real fact. There is a global bank run underway. Stimulus will have no effect on that. The 1 trillion euro LTRO operation the ECB undertook basically gave foreign creditors the liquidity to sell their sovereign bonds to the Spanish, French, Italian banks that were compelled by the their respective governments to buy the debt. The recent $100 billion euro Spanish bank bailout was more of the same and the financial markets saw right thru it. Spanish borrowing costs are higher today than when the program was announced over last weekend. The question is what can they do? What they need to do is apparently impossible to do. Germany is not going to write a blank check for Spain, Italy, and France. It will get worse before it gets better.
So most likely the borrowing costs for Spain and Italy will continue to rise. The countries will have to reduce spending and thus further dampen the economy. Pro-growth initiatives will be put in place but the only real productive initiative government has at its disposal is deficit spending and that is increasingly ruled out. Since Germany exports 44% to the rest of Europe their economy will certainly slow down. This is why Soros says they have 3 months to act before the economy will be clearly weakening and there will not be political will to help others. My guess is they won’t act now or later.
This is what the oil and material markets are telling us. The world is going through a global synchronized slow down.
Nothing goes down in a straight line and the euro is probably due for some kind of tradable bounce but it’s a fundamentally flawed currency and will never be strong again short of a bona fide fiscal and monetary union. People see now the emperor has no clothes. I don’t pretend to know what is going to happen but it’s clearly like a bad marriage. All parties learn to live with one another or someone leaves as the emotional costs just become unbearable. In this case it will be German’s collective disgust at the profligate ways of their neighbors. Germany wants Greece out as this would make it easier for Merkel and the financial industrial complex to sell the German populace thinly disguised bailouts designed to limit their own losses more than help the debt stricken countries. Continued aid to Spain, Italy is a harder and harder sale.
I expect Greece to just go broke and issue IOUs like California and ultimately leave the euro but stay in the Euro zone trade pact. Bloomberg has a name for their new currency already, the Guero. But that’s still the sideshow. It’s Spain, Italy, and even France. The one unintended consequence of the euro is that it is bringing the era of large government spending to an end sooner than later. It will take decades for the world to adjust to this.
You can be sure everything and then some is being discussed behind the scenes at central banks and major governments. There is no way to stop a bank run without a blanket guarantee, close the bank, or severely constrain the flight of capital. By all accounts there is a global bank run going on within Europe. Money in all its forms is moving to Germany , U.K, U.S, and elsewhere from the periphery.
So how do we cope? There may be no where to hide but cash. Line up with dividend stocks that you can justify valuations. My minimum threshold is 3.25%, slightly over what BlackRock says is the inflation rate. There are other yield options.
Buy utilities, residential rental properties, and investment grade intermediate term corporate bonds perhaps. Other strategies will be much harder… although real growth will be richly valued but hard to find.