Michael Platt, founder of BlueCrest Capital Management, told Bloomberg Television’s Stephanie Ruhle on “Market Makers” today that “Europe has no credible plan for growth” and Draghi’s plan to buy government bonds is a revised version of ESM and a way to buy time.
Platt also said that the euro is “interesting because it reminds me of the situation in the yen. You never would have expected the yen to be such a strong currency for the last 25 years.” Excerpts from the interview can be found below, courtesy of Bloomberg Television.
Platt on why the market has performed well this year:
“It has done very well because central banks have continued to pour money at the problem. Particularly, the ECB has continued to pour money into the markets in a process that can only really be described as buying time. These are constant liquidity fixes for solvency problems in the Eurozone.”
“Trading tactically, when you hear an announcement of a program that is important and as large in scale as the OMT program, absolutely, you can trade go for risk-on trading and trade that tactically. I think it depends on your time frame. if you’re a hedge fund like we are, on and an individual basis, our traders can trade on a 1, 2, 3, 4, 5 day view no problem. If you’re a pension fund, your ship is considerably larger. You’re driving a super tanker. You cannot trade that tactically. I don’t think he would want to rearrange your entire portfolio if you look at LTRO was a the three-month trade and we don’t know how long the OMT trade will be before the market puts the sovereigns back under pressure.”
On Draghi’s remarks:
“What it means to me is, if you look at the ESM, it’s a process that provides money to sovereigns who are in need of it, providing backstop and underwriting for their bond markets. I don’t really see much difference between OMT and the ESM. If the ESM acquired a banking license and leveraged itself up to the ceiling and just endlessly bought Italy and Spain, that is really what is going on through the encouragement of private capital to go into Italy and Spain, which is the money the ESM would have borrowed. And they are doing that with the comfort of knowing that the ECB will provide them with a free put. Anytime those markets come under pressure and those sovereigns can’t fund themselves, they can fill in the form, go to the ECB and in comes unlimited buying.”
On his outlook for year end and 2013:
“There’s no credible plan for growth. Monetary policy and monetary conditions in Europe are exceedingly tight, interest rates are the zero boundary, fiscal policy is incredibly tight. The IMF put out a piece strongly arguing that at this point in time, fiscal multipliers are somewhere between 0.9 and 1.7, which in English means that if an austerity packages 5% of GDP, you might see actual GDP decline up to 9%. Because of automatic stabilizers of payments for unemployed people and because of the reduction would get in the environment for tax receipts, you might not even see budget deficits fall anyway.”
On whether anything has changed for the people in countries like Italy and Spain:
“Things have definitely changes. Unemployment has gone higher, GDP has gone lower. The quantity of bad debts in countries and banks such as Italy and Spain have increased. The lethal embrace of the banks on the sovereigns has increased. Liquidity has been poured in everywhere. And so in the presence of that money and funding, the immediacy of a crisis — the market wanted to be in crisis. The market wanted to pressurize the sovereign
debt market last November and again in July. But every time a check is thrown at the situation to delay it.”
“We’re in a world where there is too much debt. If you indebt a consumer they stop spending. If you indebt a sovereign, they embark on an austerity program. If you indebt a corporate, they stop investing. Debt kills growth. If we continue to print money endlessly, in the end there will be no debt because we will have monetized it all.”
On the euro:
“It’s interesting. The reason why it is interesting is because it reminds me of the situation in the yen. You never would have expected the yen to be such a strong currency for the last 25 years. It has been uncontrollably strong, even when a nuclear reactor blew up and Tokyo was potentially poisoned… Look at the euro, we traded down to 1.19 when it first became apparent the Greek situation was quick to become a major problem. We subsequently traded 10 big figures higher in amongst a load of outturns on the political and economic front, which can only be described as worst case. What is it doing 10 big figures higher? When you get into these situations, if you take an area and collapse domestic consumption, you end up with a trade surplus. If that area also has a lot of domestic problems, they tend to sell their external assets and bring money home. It is all demand for the currency.
“If you look at what has happened since the initial problems in Greece, it is no secret that European banks have problems funding dollar assets. I think that significance sales of dollar assets took place, significant repatriation of foreign money particularly dollars were sold and euros were purchased to shore up the balance sheets in Europe….There’s an enormous balance sheet in Europe compared to the U.S. Money was brought home. I think that the investment people that were holding euros probably sold into that. Net net, the euro has gone higher. I don’t know very many people at this point who were long the euro as an investment. No one is long this thing. It has gone higher. it feels like it is turning into a situation not dissimilar to a situation that occurred with the Japanese yen.”
On U.S. equities:
“The reality is, what else do you want to do with your money? If you leave it in the bank, you get no percent. You take bank credit risk. Inflation is 1.5 to 2 so you will lose money for sure. If you put it into government debt, the yields are very, very low in the short date. You don’t like the long end of that market either and the yields are incredibly low. Commodities have not been great performers this year, particularly with the energy complex lower. There really is not a lot of alternative. You can find good stories in the equity market. Individual stocks that make sense. The earnings yield is higher, like 6-7%.”
On whether he’d buy European equities or stick to U.S. equities:
“It is likely that in the end, we will reach a moment in Europe where it is an existential for them to properly print money, to get out of their problems and remove the debt. If we take a hypothetical situation where the ECB just printed 5 trillion euros, distributed at GDP weighted, we have a completely unfair redistribution of wealth from holders of debt to the people who are in debt, and we removed that debt, then we would have enormous rally in equities. If we reach a point where it is sort of a disorderly breakup of the euro–and that would be followed by printing at the government level to sort out their problems–you get a 10% GDP drop in Europe. That would cause a big dip in equities and you would probably want to buy that.”
“Banks have been heavily subsidized by the actions of central banks, there’s no question about it. They have had a huge amount of tail risk taken out of the market, which affected their balance sheets and has been taken out. The stocks and bonds of these banks have responded positively. Getting back to the original point on growth, if you keep on running growth at -1% to 2% indefinitely, nothing will save anybody. Eventually, you’ll reach a point where all balance sheets and all government debt is unsustainable. It will not continue forever, but at the moment, we’re going into another European downturn. It is risky.”