McDonald, author of the best-selling Colossal Failure of Common Sense – a book about the collapse of Lehman Brothers – rated stocks undervalued. But despite that he told me he would remain a seller of all rallies until politicians and policymakers pulled out a bazooka of the kind seen in 2008.
It’s a theme with widespread backing as markets wait for some decisive short-term action that will allow a big upside rally.
It’s worth reminding ourselves what – in market terms – decisive action might look like. This was the list that McDonald put out.
1. Giving the European Stability Mechanism (ESM) a banking licence.
2. European Stability Mechanism lending directly to banks.
3. European-wide deposit guarantee scheme.
5. ECB quantitative easing (QE).
Of the five, Eurobonds and then full ECB quantitative easing are the most unlikely and certainly then only in an emergency – for example an imminent euro breakup. So that leaves us with the first three.
Right now, there’s still considerable uncertainty surrounding the future of the ESM, not least because deliberations of the German Constitutional court will likely delay ratification by the Bundestag. Merkel set a 28 June deadline for a vote, but it might now go beyond the 9 July target set for the ESM to be up and running.
What happens will be a good gauge as to whether we’re close to the point, as Monument Securities’ Stephen Lewis puts it, where “commitment in leading German political circles to European integration clashes with the principles of the German constitution”. This leads us to problems with the third idea, the European-wide deposit guarantee scheme. On closer inspection this path to banking union merely looks like fiscal union in another guise. As a result, it’s highly unlikely to get approval.
We are at an impasse because any steps to improve the fortunes of the euro area imply taking a meaningful step to full political integration. But are the European elite really ready to take steps that will end up in their political extinction? And even if they are, can they persuade the people of Europe to accept the democratic deficit it implies?
Until see some clarity on these fundamental questions, many investors will believe it’s far easier to stay on the sidelines. The bond markets of Germany, Britain and the United States are likely to remain the preferred cash deposit facilities. We shall soon find out.
Ross Westgate co-hosts Worldwide Exchange daily from London and anchors Strictly Money on CNBC