Germany is on the brink of recession, and the ECB can do nothing

• Half of the largest banks in the Eurozone would not survive more than 6 months in a liquidity shortage in the market
• Germany's GDP rose by just 0.1% in the third quarter compared to the second quarter of this year
• Stock indices perform well despite problems in Europe's real economy
• The profitability of pension funds in our country drops significantly to 0.08% in October
• Bitcoin price sees sharp jump in late October, gold price also rising

November officially marks the beginning of a new chapter in the history of the European Central Bank. Mario Draghi officially stepped down as governor and was replaced by Christine Lagarde, the former head of the IMF. The legacy that the Italian economist leaves behind at the ECB is at best mixed, and in my opinion, highly negative. More importantly, however, he leaves the ECB in a rather divided and even vulnerable position. The ECB’s primary objective – 2% average annual inflation in the Eurozone – has not been achieved. Moreover, in recent weeks, we have heard from both Draghi and other members of the central bank’s board that its monetary policy tools are no longer effective.

As I wrote in my last market commentary, central bankers are already calling for more aggressive fiscal policy because the ECB's money printing is no longer delivering the same results it used to. Key economies like Germany are seeing a serious slowdown and there is a high probability that the Eurozone will enter a recession next year. But the problems are even deeper than that. According to a new ECB study, half of the largest banks in the Eurozone would not survive if liquidity in the system "leaked" over a period of 6 months. Of course, the ECB would never allow liquidity to completely evaporate within such a period, but the fact that half of the big banks would collapse in just 6 months shows how fragile the banking system in the monetary union is.

Returning to the topic of growth, Germany's GDP barely rose by 0.1% in the third quarter of this year compared to the second. This practically means that a large part of the business there is already in recession, at least technically. The industrial sector is clearly in recession – its production has not increased in a single month since the beginning of the year. This is starting to be reflected in our country as well. For the first time since 2013, industrial production in Bulgaria has fallen for an entire quarter (the 3rd). The worst thing for us is that, as I wrote in the commentary on Budget 2020, a recession is coming to Europe, which will also affect Bulgaria, and the government is not preparing for it in any way.

Turning to the financial markets, we should note that October was actually a relatively good month for stock markets. The US S&P500 index rose by 3.3% during the month and continued to rise in early November, while the UK FTSE rose by around 1.8%. Interestingly, the German DAX also rose significantly, by nearly 5%, despite serious problems in German industry.

Meanwhile, the price of gold continued to rise, up about 2.56% in October. However, long-term bond prices fell by 1.11% during the same period. Overall, however, the "Permanent Portfolio" investment strategy we follow in our Virtual Pension Fund generated a return of 0.93%, which is not a bad result for the month, especially considering what happened to pension fund returns. They fell significantly to just 0.08% in October from 0.45% in September.

October also brought good developments for all crypto enthusiasts. The price of Bitcoin rose by over 10% during the month, mainly due to a very sharp jump on October 25 and 26. Unfortunately, since the beginning of November, the price of the most popular cryptocurrency in the world has slightly decreased. So far, it seems that we will not witness a serious increase in the price of Bitcoin in November, although we can never be sure when it comes to such volatile investments. October looked the same until the huge jump towards the end of the month occurred in just two days.

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