Thoughts on Japan, China, and the Eurozone

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Nov 12, 2014 12:35:00 PM

and tagged Commentary

Leave a comment

eurozoneI’m currently reading Thinking, Fast and Slow by Daniel Kahneman—a great book on how we make decisions, and how we can learn to make better ones. Its assertions are shocking, and even insulting, but they’re all the more useful for it. (Look for a full review here soon.)

One of Kahneman’s points is how bad we are at remembering what we thought at a given time—and how we tend, in retrospect, to think we were much more prescient than we actually were. Only by returning to thoughts you wrote down at the time, and comparing them with what really happened, can you identify your mistakes and learn from them.

Thus inspired, I spent some time this weekend in the wayback machine, revisiting my old notes and writings from several years ago—in the aftermath of the financial crisis but before the financial markets had recovered strongly.

Don’t bet against a determined government

How did what I thought at the time stack up with what actually happened? My biggest mistake was to underestimate the willingness of government institutions, including the Federal Reserve, to intervene.

Simply put, the government wasn’t going to let the economy collapse; rather, it was going to do anything—repeat, anything—to make sure that didn’t happen, legal or not. To be sure, this wasn't a guarantee of success, but I didn’t give sufficient credence to the government’s determination, and I overestimated its chances of failure.

Back to the present . . .

The same dynamic is now playing out in Japan, where we just saw the central bank raise the ante on its quantitative easing program, and in China, where the government continues to stimulate to keep the economy moving.

Several years ago, I might have said that they can’t keep this up forever (and they can’t). Now, though, I’m much more aware that they may do far more than anyone thinks possible, if necessary. Just because I can’t see what their next steps are doesn’t mean they won’t come up with something. Failure is a bad bet right now.

You might say the same for Europe, but there I have my doubts. Unlike the U.S., Japan, or China, Europe doesn’t have unified institutions and a single political sphere. The European Central Bank is deeply split on the possibility of quantitative easing, and so it does far less than is needed. Germany and France, the two major powers, can’t even agree on the base assumptions for an economic policy.

Essentially, Europe simply cannot do what the U.S. did and Japan and China are doing; it’s politically impossible, both at the national level and, more important, at the level of actual voters.

And in another five years?

Looking back at my notes from today five years in the future, I suspect that China and Japan will have weathered the storm—though no doubt with quite a bit of collateral damage. I’m less hopeful about the eurozone. Although concentrated action could probably preserve it, the unity of purpose necessary to catalyze such measures simply isn't there.

Upcoming Appearances

Tune in to CNBC's Power Lunch on Wednesday, February 26, between 1:45 and 3:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Check local listings for availability. 

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®