It is not often that investors are treated to the wisdom of U.S. Treasury Secretary Jack Lew. I am sure that Mr. Lew is a fine man but he is an example of a political appointment serving in a role beyond his pay grade. If I had a question about my 1040-EZ form I would search him out but on global economics and politics I would hope he wouldn’t answer the phone at 3 a.m. In an well-staged leak of his prepared words to be delivered in Brisbane, Australia at the G-20 conclave this weekend, Secretary Lew warns Europe that it risks suffering a lost decade similar to Japan if it fails to undertake fiscal policies to stimulate growth. In a Financial Times article by Robin Harding, Secretary Lew is quoted at the World Affairs Council in Seattle as saying: “Resolute action by national authorities and other European bodies is needed to reduce the risk that the region could fall into a deeper slump. The world cannot afford a European lost decade.” Mr. Lew suggests the usual actions of monetary, fiscal and structural efforts to lift growth or what has become known as Abenomics three arrows.
The U.S. believes that the Japanese plan is now a prototype for all advanced countries but not every political and economic entity has the social cohesion of Japan. Europe certainly needs fiscal stimulus but what about the Maastricht Treaty and its covenants? As the creditor for Europe, Germany maintains that rules must be adhered to and the profligate shall not be rewarded. If the rules on fiscal thresholds are cast aside the possible result is the rise of anti-Brussels parties in Germany and certainly France. If it is monetary policy that is the sole engine of economic stimulus the result will be a depreciation of the EURO, which is contrary to previous G-20 communiques about nations not depreciating their currencies for competitive trade advantage. (Please see the last central bank meetings of Sweden, Japan, New Zealand, Australia). The ECB will be, in the words of Senator Chuck Schumer, “the only game in town.” If monetary policy is the main policy tool the EURO will have to depreciate and then Secretary Lew is left with a major dilemma.
In today’s pre-G-20 speech the Secretary lays forth the Obama administration’s main point for global growth: “The world is counting on the U.S. economy to drive the global recovery. But the global recovery cannot prosper broadly relying on the United States to be the importer of first and last resort, nor can it rely on the United States to grow fast enough to make up for weak growth in major world economies.”
This may be the U.S. policy but it runs into legal barriers in the EU, which Germany and others can utilize to stonewall policies they find inappropriate. The Japanese have made the global situation more difficult by embarking on massive QE with the result being immediate YEN depreciation. If many developed economies follow the BOJ model currencies will depreciate versus the DOLLAR and the Lew doctrine of everybody pulling their economic weight falls flat. If the U.S. dollar is the deemed the best of breed, America will become the receptacle of the world’s exports. Europe’s problems are a mosaic of bad policy and finger-pointing will not bring cooperation or resolution. Let the photo-ops begin!
***For the record, the EUR/CHF cross is hovering above its floor and trading at 1.2025. It has to be said: “Who is buying the Swiss to push it up against the euro when it is presumed that the Swiss National Bank will intervene to keep the Swiss Franc from appreciating through the floor?” Somebody is testing the resolve of the SNB and challenging President Thomas Jordan to create some policy to punish buyers of Swiss. If the EUR/CHF falls through the floor global currency markets are going to become very volatile.
The Swiss government has placed a large bet on being able to keep the Swiss franc from appreciating against the euro and other global currencies. Keep watch on the EURO SWISS INTEREST RATE CONTRACTS, which are 90-day interest rates (the symbol on CQG is QNZ4 for the December 2014 and QNU5 for September 2015), are both trading at a negative yield of 6 to 13 basis points. September 2015 is priced at 100.13. If the SNB moves to a more negative overnight rate these contracts should offer a good barometer and profitability.