The rise of financial markets: Liquidity surplus missing in the rest of the economy! Patrick Pilsner's Chronicle.

Exchange trends, almost all over the world, and especially in Europe, are setting one record after another. Everything is jumping upwards! Nevertheless, the European economy is stagnating. France is regularly lowering its growth forecast, increasing its deficit. Germany is in recession. China is finding it increasingly difficult to justify the Party's growth figures. But everything keeps growing. Everything really isn't.

Construction and real estate are postponing, as has been anticipated for many months, with the indifference of public authorities. SMEs are finding it increasingly difficult to find funding, as are start-ups. Household budgets are noticing that their purchasing power is being seriously eroded, and the end of the month is increasingly difficult to reach. There is no reason for most to try to borrow money.

By tightening its monetary policy too late and too hard, the ECB has significantly weakened our economy. The ECB thought to fight inflation, but its policies have only a small impact on price increases, and a much bigger impact on financing our economy, construction and real estate. The rise in inflation was largely due to the withdrawal of Covid, the war in Ukraine, big supply problems, now famously supply chain problems, and rising raw material and energy prices. Apart from the war in Ukraine, growth factors have naturally returned to a healthier equilibrium. For example, construction costs are down 10-15%. And the ECB is not so much responsible for all of this unless it confuses correlation and causation.

On the other hand, the rise in cash rates has severely limited the ability of many households to go into debt to buy homes. The ECB, as well as the government of Édouard Philippe, Jean Castex, Elisabeth Born and Gabriel Attal, have a share of the blame for this. Their efforts to punish this sector have succeeded admirably. It is useless for the new minister to persist in wanting to increase supply, the problem is demand!

Epargna is no longer going to construction, nor is it going to SMEs or startups. Investors realize that the economy is stagnating. They are focusing their investments on stable, leading, international, liquid stocks like the EuroStoxx 50 and, of course, sovereign debt. The result is a kind of "flight to quality".

Raising cash rates too sharply does not actually affect states and large companies. States and large companies borrow on a long-term basis, and long-term rates have remained at acceptable levels. On the other hand, SMEs are financing on a short-term or at appropriate short-term rates. They cannot borrow at 6 or 8% when their profits are stagnant at best. For household budgets, when they have some spare cash, why buy a rental home that is struggling to yield 1-2%, after paying land taxes, IFI, income tax, after dealing with plumbing problems, thermal renovation, non-payment of rent or occupancy, when deposit accounts yield 4%? Why look for a home loan when we are told every day in the papers that rates will go down by the end of spring and prices will fall?

Available liquid funds are no longer going into real estate. But they still have to be invested somewhere, especially since the so-called 'covid years' have led to a significant increase in liquidity among wealthy households. Before, doctor's and dentist's epargna was used to buy a studio to put a student, a policeman or a nurse in, and to prepare for retirement. Today, it is better to have Nvidia or Hermès shares or deposits. They are less taxed, more readily available and at the moment much more profitable. Even bitcoin is popular despite its use by traffickers, terrorists and rogue states. "Cryptocurrencies are more attractive than studios. Until the ECB opens its eyes and realizes that it can and should lower its cash rates!

In this case, in contrast to the usual situation, monetary policy easing and expansion will not lead to the traditional growth of markets, but will trigger the phenomenon of a general spillover of money from financial markets into investment in housing and again into small and medium-sized enterprises. I look forward to the day after tomorrow, and in finance, the day after tomorrow is tomorrow.... Patrick Pilcer, consultant and expert on financial markets, president of Pilcer & Associates and author of the Opinion Internationale column.