By Matthew Lynn at Marketwatch
Asset prices are going up in Spain, Ireland and Portugal
Sixty billion euros here. A hundred billion there. To paraphrase Everett Dirksen’s apocryphal quote about the U.S. budget, pretty soon you are talking about real money. Earlier this year, the European Central Bank launched its quantitative easing program with 60 billion euros a month of asset purchases by the central bank.
Now, in response to some mild turbulence in the bond market, it is talking about front-loading QE, taking the total of fresh cash minted in Frankfurt every month up to 100 billion or even more. In short, real money.
Academics will no doubt be discussing the effectiveness of QE in lifting the real economy for a couple of generations at least, and probably not reaching any definitive conclusions. Perhaps it pulls countries out of a recession, or perhaps they would have eventually started to grow again anyway? One thing we can say for sure, however, is that it boosts asset prices.
In fact, it is already happening. A series of Mario Draghi bubbles are already inflating across the eurozone. Where exactly? Well, Spanish construction is booming, Dublin house prices are soaring, German wages are accelerating, Malta is riding a wave of hot money, and Portuguese equities are among the best performers in the world. For a lucky few investors, QE is already working its magic.
The ECB president probably had no choice but to finally bite the bullet and launch the ECB’s own version of QE earlier this year. The continent was sliding rapidly into deflation, with prices dropping in countries such as Spain. The economy was slipping into a depression, and unemployment was rising relentlessly even as the rest of the global economy was recovering. The only real surprise was that it took so long.
That doesn’t mean, however, that the money created won’t blow up asset prices. Indeed, it is already happening. Here are five markets that are already benefitting from the tidal wave of money Draghi has created.
First, take a look at Spanish construction. Only a couple of years ago, we were reading about how Spain was littered with empty housing estates and airports with one flight a day, the forlorn legacy of the building boom that was raging all through the middle of the last decade. You might think there was nothing left to build — but, as it turns out, you’d be wrong. The cranes are back in action again. Construction output in Spain is currently growing at 12% year-on-year, by far the fastest sector of the economy. Cement consumption is up by 8% this year. The property market is humming again.
Second, Dublin housing. There were few hotter markets at the height of the last boom than Irish housing — nor many crashes that were quite so bad. Now, the froth is back again, and anyone who snapped up a bargain as the country was bailed out and its banks went into intensive care will be feeling smug by now. Irish houses prices are up by 16% year-on-year, and by 22% in the capital, Dublin. The emerald tiger is catching another wave of hot money, and starting to boom again. Don’t be surprised if prices keep going even higher.
Third, German wages. For a decade, despite having supposedly the strongest economy in Europe, German wages had hardly risen. Now that is starting to change. The metalworkers union just secured a 3.4% rise, a decent hike in a country where deflation is still a threat, and prices are not likely to rise. Other workers want a better deal as well. This week, the train drivers are on strike, for the ninth time in the last year, as they push for a 5% pay rise and a shorter working week (who says the trains in Germany run on time). Already in 2015 Germany has lost twice as many days to industrial action as it did during the whole of 2014, according to the German Economic Institute. By the end of the year, wages in Germany are likely to be racing ahead at record levels.
Fourth, Maltese assets: The tiny Mediterranean island is expected to record the fastest growth in the European Union this year, at 3.6%. Prices are not rising quite as fast as they are in Dublin, but property is up by 10% year-on-year, the second fastest rate in the eurozone. Some of the local banks are reporting that their balance sheets are expanding by 40% a year or more. Has the Maltese economy suddenly had a surge of competitiveness? It seems unlikely. In fact, it is emerging as the new Cyprus — an offshore haven for all the hot money within the eurozone to find a temporary home.
Five, Portuguese stocks: It is hard to think of anything very good to say about the Portuguese economy four years after the country had to be bailed out. The economy is only expected to expand by 1.6% this year, only marginally better than the 0.9% it managed last year. Unemployment is still running at more than 13% and shows little sign of falling significantly. But, hey, you never guess that from the stock market. Lisbon’s PSI Index PSI20, -0.51% is up by 25% this year already, making it one of the strongest markets in the world.
In reality, central banks can print money when they want to . But they can’t control where it washes up. Some of the rising markets might be useful — higher wages in Germany, for example, might help to rebalance that country’s massive trade surplus.
But in the main Draghi’s tidal wave of euros is most likely to simply to blow up another series of asset bubbles. Indeed, in many cases they are exactly the same bubbles that blew up last time around, such as Spanish construction and Dublin property. That may be great for investors who get in on those markets on the way up. But it won’t do much to fix the eurozone economy — and it will inevitably be very painful when they finally pop.