More spending and more debt - with these recommendations, Mario Draghi leaves the ECB

• Draghi urges Eurozone countries to adopt more aggressive fiscal policy
• Former central bankers and ECB board members have expressed serious disagreement with the ECB's current policy
• Interest rates on government debt in Europe continue to reach record lows
• Stock markets recovered slightly in September, but a new correction in early October brought them back to the levels of late August.
• Pension funds continued to report light and relatively stable returns

We can't help but start this month's market commentary with a look at Europe. A lot has happened on the Old Continent in the past few weeks. First, Mario Draghi (whose term as ECB president ends this month) said that Eurozone governments should not rely solely on the ECB's monetary stimulus and should undertake more aggressive fiscal policy to stimulate economic growth. Draghi expressed direct support for more "loose" fiscal policy by European governments, because the ECB's monetary stimulus alone is not enough. In a certain sense, he is absolutely right - the ECB's monetary stimulus is indeed increasingly incapable of generating even minimal growth in the Eurozone.

In another sense, however, he makes a fundamental mistake. Calling for looser fiscal policy in the Eurozone should be obvious madness, given the catastrophe that the Greek economy suffered just a few years ago. Has Draghi forgotten that it was the "aggressive" fiscal policy of the Greek state in the decade after joining the Eurozone that led to astronomical indebtedness, complete uncompetitiveness, and an economic collapse that risked destroying the entire monetary union? Has he forgotten that all member states were then forced to save Greece from the consequences of its own aggressive fiscal policy?

But Draghi has always been a supporter of the policy of "easy money", so such comments from him are not surprising. More interestingly, in recent weeks, several former governors of central banks in Europe and former members of the ECB board have expressed deep disagreement with the ECB's current monetary policy. Former central bankers of Germany, France, Austria and the Netherlands have published a document in which they say they consider the ECB's current aggressive monetary stimulus to be unjustified. They also say that this policy is leading to inflated property prices and may even sow the seeds of the next crisis.

Of course, these protests from the "old dogs" are of little consequence if they cannot influence the current heads of state in the Eurozone. After all, central bankers from the German Bundesbank have been regular critics of the ECB for decades. But such statements offer at least some hope that bankers and politicians in Europe may begin to realize the long-term destructive effects of the ECB's policies.

Meanwhile, financial markets in Europe continued to reap precisely these effects. Interest rates on government debt throughout the Eurozone continue to set new record lows and this trend is set to continue at least in the coming months. On the one hand, this is a big plus for the governments themselves, especially those of countries like Greece and Portugal, which are taking advantage of the moment to reduce their indebtedness by refinancing their debt at lower interest rates. On the other hand, however, as we have repeatedly explained, "easy" money is almost never used effectively, but is poured into unprofitable investments doomed to failure, both in the public and private sectors. This is precisely what leads to the cycles of booms and busts.

Stock markets rebounded slightly in September, both in Europe and the US. The US S&P500 index rose by nearly 2.5% last month, but fell again in early October. This trajectory was also repeated by European indices such as the German DAX and the British FTSE 100. However, the slight rise in stocks in September was enough to generally reverse the trends from August in the main investment categories. For example, the index fund of the American company Vanguard (the oldest passively managed index fund in the US) for the entire stock market in the country rose by 1.78% in September. Meanwhile, the index fund for the bond market fell by 2.68%. In August, the opposite was true.

Gold has also recorded an even bigger loss than bonds, however, falling 3.39% in September. Due to these developments, the "Permanent Portfolio", which we replicate in our Virtual Pension Fund and which has a significant allocation to gold, recorded a loss of about 1% for September. None of this is surprising; after the sharp jump in gold in August, stabilization and a slight correction were expected and normal. Gold is unlikely to fall significantly below its current level, and if its price also corrects in October, it will be by an even smaller percentage. Given that central banks are loosening their monetary policy, inflation expectations will rise, which is good news for precious metals, especially given the record low interest rates on debt instruments.

The most serious loss, however, was recorded in cryptocurrencies. The price of Bitcoin collapsed by over 20% in September, after undergoing a significant correction in August. Overall, after being in a four-month bull market from April to July, we can say that cryptocurrencies have been in a definite bear market since August. When it will end, no one knows, because the cryptocurrency market remains too volatile and illiquid to make predictions, especially short-term ones.

Against this backdrop, universal pension funds in Bulgaria reported a weak return of around 0.45% in September, only slightly lower than that reported in August. Overall, while market volatility has increased in recent months, pension fund returns have remained relatively stable and, more importantly, positive. This is an indication that, at least for the current context, the funds’ investment strategies are somewhat adequate. However, when the next crisis comes, the funds will almost certainly not be able to generate even this low return.

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