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View the article online at http://citywire.co.uk/wealth-manager/article/a746259

Stewart Cowley: the extraction of wisdom

by Stewart Cowley on Apr 14, 2014 at 14:30

Stewart Cowley: the extraction of wisdom

In the past couple of weeks I have had my wisdom teeth out and, due to damage to my lingual nerve in the process, how I perceive the world has changed.

For instance, the bloggers and trolls who follow around anyone who ventures into the public domain can, quite legally and without fear of redress, now write that 'Stewart Cowley has no taste'. Because I don’t - every meal has become a whole new set of adventures in texture and the degree to which I can detect salt, which is the dominant taste sensation that I am now left with.

Interestingly, this personal perception shift had coincided with a change in my investment perceptions again because of a small change in how to look at the world.

Draghi gets it

What has brought this about isn’t a slightly careless maxillofacial surgeon but something worse - European Central Bank chief, Mario Draghi and his carefully crafted press conference last week, showing that they had finally 'got it'.

The incredible shrinking financial system that is Europe is going to need some form of support process. Otherwise, the deflation that is all too obvious in the real economy is going to take hold.

What is clear from Draghi’s comments is that they are going to find their own version of quantitative easing – not for them the Americanised money printing that has seen the Federal Reserve’s balance sheet quadruple without major consequence for the real economy.

The US financial economy has become inflated – stocks, government and corporate bonds all have been twisted by the process but then again that was the purpose of it – but the real economy hasn’t experienced the inflationary burst you might have expected.

No, it looks like the Europeans are going to go for something more administrative: something that will see the ECB take onto its books the tangle of bad loans that is stopping the quantity of money from expanding.

It will also serve to counteract the self-inflicted wounds of Basel III and the Asset Quality Review which makes bankers cautious and, in aggregate, constrains money expansion at a time when the system needs it most.

Draghi may have learned his lesson from the previous March press conference when the mere suggestion that Europe would not support the system with QE sent the euro spiralling upwards, something that is now becoming of concern.

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