Interview Date: 28 January 2015
The following is a satirical view of the world from afar. Readers should be cautious and accept that some of the comments may be considered trivial.
The heading to today’s article may confuse you but all will become clearer as we delve into recent economic events in Europe and Australia.
Last week, after much delay and intense political debate, the European Central Bank (ECB) announced its version of Quantitative Easing (QE). It declared that some one trillion euros of government bonds and private securities would be purchased with printed euros over an 18 month period commencing this March and ending in September 2016. The delay had been excruciating as ECB President Draghi had for many months – or was it years? – led world capital markets to believe that QE was absolutely coming.
The delay had been caused by the intransigence of the German courts and bureaucracy which interpreted their constitution as implying that QE could not legally be supported by Germany. In a last-ditch attempt at sabotage, the Germans tried to make QE impossible by requiring that the buttons to the Euro printing presses be started by a non-human (i.e. an alien).
Figure 1. Quantitative Easing: The Theory
The Macro View can disclose this to you because the buttons were indeed pressed by an alien – our old friend Karl Mars Bar. Many of you may recall Karl is the Investment Manager of the Martian Future Fund (MFF), and over the years he has granted the ‘Macro View’ exclusive interviews and commentaries concerning Europe and world markets generally. (Previous interviews available on StocksInValue: December 2013 – The View from Mars; December 2012 – Cricket, Politics & the world in 2013 and many more)
Over the weekend, we found Karl at the Australian Tennis Open where he was a guest of one of Australia’s major banks. Karl loves sport but remains intrigued as to why he is invited to the corporate boxes of some of the world’s largest institutions. Anyway, we caught up with Karl outside the bank’s corporate box and coaxed him into a quick interview.
Clime: Karl, welcome back to Australia.
Karl: Thank you, it’s good to be back.
Clime: Are you reviewing investment opportunities in Australia?
Karl: No, I cannot say that. I was in Europe last week on a secret mission and the opportunity came up to come down under for the tennis, and I grabbed the chance. I don’t get to see tennis live at home so it’s always great to be here and soak up the atmosphere with generous servings of champagne and lobster. Banks certainly are doing well down here – and I am not even a shareholder.
Clime: We will get back to Europe shortly, but we could not help but notice that the Australian Treasurer Hockey is in the box with you. Has he sought from you any advice from the Martian investment perspective?
Karl: Well, I wouldn’t like to divulge too much but he is clearly interested in our Martian Health Scheme (MHS). I noted his recent declaration that someone in Australia has just been born who will live to 150 years old. I congratulated him on that achievement but alerted him to the fact that an average Martian already lives to over 150 Martian years, which actually equals about 290 Earth years and so you still have some catching up to do.
Clime: Does that mean that the funding of the MHS is out of control like Australia’s will be?
Karl: No, that’s not the case. The reason we live to 150 Martian years is because we have very healthy 100 year old Martians who don’t need medical help. That’s why we live longer. I pointed this out to your Treasurer and he seemed genuinely perplexed by the fiscal benefits of good health outcomes. Longer life should mean lower health costs. I thought that was why your Government sold Medibank Private – but clearly I was wrong.
StocksInValue: So the MFF did not invest in the Medibank float?
Karl: Did anyone invest in it? That’s an interesting concept in Australia. I find many people use the expression “invest” when they really just trade or gamble with other people’s capital. I guess it legitimizes the share market down here. No, we didn’t invest but I think the Martian Future Hedge Fund flipped some over a few times but they actually lost on the $A exposure.
Clime: So is currency a big problem for investing at present for the MFF?
Karl: It’s a shocker from a Martian perspective. The printing of currencies on Earth has devalued everything and the Martian dogma and martinis (our currency) has revalued through the stratosphere. Using the Big Mac index, I found that I could not actually buy enough burgers and chips to make up one dogma on my recent trip to Brussels. I left the change and the girl behind the counter said she wouldn’t need to work again.
Figure 2. Euro/USD 60 Day History
Clime: Should Australia undertake QE?
Karl: If you haven’t joined the party then you are probably paying for it. Or as my mother told me once – if you are the last one to the party then you will be cleaning up the mess. I guess that you guys down here think that it is not right to print money but it is actually more sensible than giving the Duke of Edinburgh a knighthood. In Brussels last week, Draghi confided in me that he could not understand why the Chinese and the Aussies let the Europeans, the Japanese, the Yanks and the Poms get away with printing money. I have to admit that I find it strange too.
Clime: So what should Australia do?
Karl: As I told Joe at the champagne bar a few minutes back, you have a choice. You can either borrow billions and pay interest for the next 30 years, or you print billions and pay no interest ever.
Clime: What was the Treasurer’s response?
Karl: He seemed genuinely perplexed by the alternative. He did not seem to realize that Australia had a choice.
Clime: Europe – is there now some hope of recovery from the QE policy?
Karl: Well, they think so and that’s a great start. But the real problem for Europe is that anyone who does not work for a bank or the bureaucracy doesn’t have a job and wants to leave. I think the biggest risk for a European economic recovery is actually having an economic recovery! Draghi knows this and the ECB is actually planning to have thirty years of recession and it aims to have German 30 year bonds yielding nothing by September next year. That is its real (but covert) plan and so far it is on track.
Figure 3. Tumbling Down
Source. The Wall Street Journal
Clime: Sorry, but our readers may be confused by that comment – can you explain it more simply?
Karl: Well, as you know the hedge f 10f9 unds, which are funded by banks (that in turn are funded by the ECB for no cost) have virtually bought every European bond on issue – except the really smelly Greek ones. Virtually all bonds are now yielding less than 1%. Every hedge fund worth their management fee has been front running the ECB waiting for the Germans to agree to QE. Today the so-called best euro bonds (German and Swiss) are showing a negative yield for up to 5 years. That doesn’t make sense to us Martians and especially with euros falling out of the sky like confetti.
Figure 4. Germany Bund ‘Curve’
Source. Alhambra Investment Partners
Clime: Sorry, but why does recovery risk recovery?
Karl: Guys, think about it. The ECB claims to be targeting inflation at 2%, but is going to buy negative yielding bonds. Has anyone studied economics in this world? If inflation goes to 2% then bond yields must rise to well above 2% at some point. I would think that would snuff out most European governments and the bond holders will be toasted. So today, all my clients who are not European are trying to get out of Euro bonds before the currency devalues into a black hole. The QE program is a gift from god to hedge funds across the solar system!
Clime: So that is why the ECB says it will be sharing the default risk with member Central Banks?
Karl: No, I think you are reading and believing too much. Frankly, I read that part of the policy and I could not make sense of it, so I immediately assumed it was nonsense. Remember that no one other than the Greeks, the Cypriots and the Irish have shared in the pain of Europe!
Clime: Were you in Europe for the Davos Economic Forum?
Karl: Look, that was my cover and I actually think every European fund manager uses it as a cover to get a paid skiing holiday. I will give you a scoop today. I was seconded by the ECB to press the button on QE in Europe. Angela Merkel thought she would be clever and insist that a non-human be involved in the start of QE. My old friend Prince Andrew was secretly holidaying on Mars and he passed on the message to me from Draghi. So I literally packed my bags with the Prince and caught the first space probe back to Europe. Andrew went off skiing in Davos and I went straight to Brussels for high level talks.
Clime: The Greek election – any issues there?
Karl: Frankly, I like the no tie policy implemented by new Prime Minister Alexis Tsipras. That is the first real Greek attempt at austerity. Soon it will be no shirt. I think they will end up wearing no undies at some point, and that will literally be the bottom of their cycle.
Clime: How do you see the big economies of the US, China and Japan?
Karl: I don’t bother with Japan. However I do give them credit though for proving that you cannot create inflation by QE. They were the first ones to show that, but no one believed them. I think the US is going to patent QE at some point and claim it was their invention. The Chinese will copy it and sell it to Australia, and the whole world will be awash with worthless paper at some point. On this basis I know that the Martian Future Hedge Fund is running long world equities and short world currencies and guess what – we are losing more on the currency – Wonderful stuff!
Clime: Any last advice for Australian investors?
Karl: Stay happy and please do not expect or plan to live to 150 years old. That will simply stress you to death. There is no way that you will have enough savings to last that long.
Clime: Thank you Karl.
Karl: My pleasure. Now back to the tennis. Go Nick!
Interview Date: 28 January 2015