28/10/17: Supplies of Monetary Methadone: ECB's Recalibration

My take on ECB's latest policy announcements for the Sunday Business Post: https://www.businesspost.ie/opinion/supplies-monetary-methadone-will-continue-401179.

17/10/17: ECB Boldly Goes Where It Was Going Before

'News' have become quite volatile to the upside these days... you hit a "Publish" button on one blog post dealing with QE (http://trueeconomics.blogspot.com/2017/10/171017-welcome-to-keynesian-monetarist.html) and another stream of numbers rushes in to fill the void left behind by the completed post...

With a h/t to Holger Zschaepitz @Schuldensuehner:

In summary terms:

• ECB (world's largest holder of Government junk err... debt... err assets...) has ramped up its QE purchases by EUR34 billion, reaching the new historical high of EUR4.371 trillion. 
• Currently, ECB asset holdings amount to 40.5 percent of the euro area GDP.

Of course, much of this 'purchasing' goes to fund fiscally insolvent 'austerity' implementing Governments of Europe (with exception of Greece). Courtesy of the above blue mountain, majority of European Governments today can avail of the negative yielding money from 'the markets'.

29/9/17: Eurocoin: Eurozone growth is still on the upside trend

The latest data from Eurocoin - an early growth indicator published by Banca d’Italia and CEPR - shows robust continued growth dynamics for the common currency GDP through August-September 2017. Rising from 0.67 in August to 0.71 in September, Eurocoin posted the highest reading since March 2017 and matched the 3Q 2017 GDP growth projection of 0,67.

The charts below show both the trends in Eurocoin and underlying GDP growth, as well as key policy constraints for the monetary policy forward.

The last chart above shows significant gains in both growth and inflation over the last 12 months, with the euro area economy moving closer to the ECB target zone for higher rates. In fact, current state of unemployment and growth suggests policy rates at around 2.4-3 percent, while inflation is implying ECB rate in the regions of 1.25-1.5 percent.

In summary, euro area recovery continues at relative strength, with growth trending above the post-crisis period average since January 2017, and rising. Inflationary expectations are starting to edge toward the ECB target / tolerance zone, so October ECB meeting should be critical. Signals so far suggests that the ECB will outline core modalities of monetary policy normalisation, which will be further expanded upon before the end of 2017, setting the stage for QE unwinding and some cautious policy rates uplift from the start of 2018.

8/9/17: Euro complicates ECB's decision space

My pre-Council meeting analysis of the ECB monetary policy space was published in Sunday Business Post yesterday: https://www.businesspost.ie/opinion/currency-moves-complicate-ecbs-decision-396981.  It turned out to be pretty much on the money, focusing on euro FX rates constraints and QE normalisation path...

7/9/17: Deutsche Mark Euro?.. ECB, Taylor rule and monetary policy

In our Economics course @MIIS, we are covering the technological innovation contribution to the break down in the wage inflation, unemployment, and general inflation (Lecture 2). Here is fresh from the press data showing the divergence between actual monetary policy and the Taylor rule in Germany:

21/7/17: Professor Mario: Meet Irish Austerity Unsung Hero

In the previous post covering CSO's latest figures on Irish Fiscal metrics, I argued that the years of austerity amount to little more than a wholesale leveraging of the economy through higher taxes. Now, a quick note of thanks: thanks to Professor Mario Draghi for his efforts to reduce Government deficits, thus lifting much of the burden of real reforms off Irish political elites shoulders.

Let me explain. According to the CSO data, interest on Irish State debt obligations (excluding finacial services rescue-related measures) amounted to EUR 5.768 billion in 2011, rising to EUR7.298 billion in 2012 and peaking at EUR 7.774 billion in 2013. This moderated to EUR 7.608 billion in 2014, just as Professor Mario started his early-stage LTROs and TLTROs QE-shenanigans. And then it fell - as QE and QE2 programmes really came into full bloom: EUR6.854 billion in 2015 and EUR6.202 billion in 2016. Cumulative savings on interest since interest payments peak amounted to EUR2.65 billion.

That number equals to 75% of all cumulative savings achieved on the expenditure side (excluding capital transfers) over the entire period 2011-2016. That's right: 3/4 of Irish 'austerity' on the spending side was accounted for by... reduction in debt interest costs.

Say, thanks, Professor Mario. Hope you come visit us soon, again, with all your wonderful gifts...

22/6/17: Unwinding Monetary Excesses: FocusEconomics

Focus Economics are running my comment (amongst other analysts') on the Fed and ECB paths for unwinding QE: http://www.focus-economics.com/blog/how-will-fed-reduce-balance-sheet-how-will-ecb-end-qe.

13/6/17: Unwinding the Mess: ECB vs Fed

My guest post on the potential paths to unwinding monetary policies excesses by the Fed and ECB is available on FocusEconomics : http://www.focus-economics.com/blog/the-fed-ecb-at-a-crossroads-unwinding-qe.

10/6/2017: And the Ship [of Monetary Excesses] Sails On...

The happiness and the unbearable sunshine of Spring is basking the monetary dreamland of the advanced economies... Based on the latest data, world's 'leading' Central Banks continue to prime the pump, flooding the carburetor of the global markets engine with more and more fuel.

According to data collated by Yardeni Research, total asset holdings of the major Central Banks (the Fed, the ECB, the BOJ, and PBOC) have grown in April (and, judging by the preliminary data, expanded further in May):

May and April dynamics have been driven by continued aggressive build up in asset purchases by the ECB, which now surpassed both the Fed and BOJ in size of its balancesheet. In the euro area case, current 'miracle growth' cycle requires over 50% more in monetary steroids to sustain than the previous gargantuan effort to correct for the eruption of the Global Financial Crisis.

Meanwhile, the Fed has been holding the junkies on a steady supply of cash, having ramped its monetary easing earlier than the ECB and more aggressively. Still, despite the economy running on overheating (judging by official stats) jobs markets, the pride first of the Obama Administration and now of his successor, the Fed is yet to find its breath to tilt down:

Which is clearly unlike the case of their Chinese counterparts who are deploying creative monetarism to paint numbers-by-abstraction picture of its balancesheet.

To sustain the dip in its assets held line, PBOC has cut rates and dramatically reduced reserve ratio for banks.

And PBOC simultaneously expanded own lending programmes:

All in, PBOC certainly pushed some pain into the markets in recent months, but that pain is far less than the assets account dynamics suggest.

Unlike PBOC, BOJ can't figure out whether to shock the worlds Numero Uno monetary opioid addict (Japan's economy) or to appease. Tokyo re-primed its monetary pump in April and took a little of a knock down in May. Still, the most indebted economy in the advanced world still needs its Central Bank to afford its own borrowing. Which is to say, it still needs to drain future generations' resources to pay for today's retirees.

So here is the final snapshot of the 'dreamland' of global recovery:

As the chart above shows, dealing with the Global Financial Crisis (2008-2010) was cheaper, when it comes to monetary policy exertions, than dealing with the Global Recovery (2011-2013). But the Great 'Austerity' from 2014-on really made the Central Bankers' day: as Government debt across advanced economies rose, the financial markets gobbled up the surplus liquidity supplied by the Central Banks. And for all the money pumped into the bond and stock markets, for all the cash dumped into real estate and alternatives, for all the record-breaking art sales and wine auctions that this Recovery required, there is still no pulling the plug out of the monetary excesses bath.

18/7/17: Greece in Recession. Again.

Per recent data release, Greece is now back in an official recession, with 1Q 2017 growth coming in at -0.1%, following 4Q 2016 contraction of 1.2%. Worse, on seasonally-adjusted basis, Greek economy tanked 0.5% in 1Q 2017. The news shaved off some 0.9 percentage terms from 2017 FY growth outlook by the Government (from 2.7% to 1.8%), with EU Commission May forecasting growth of 2.1% and the IMF April forecast of 2.15%, down from October forecast of 2.77%.

Greece has been hammered by a combination of severe fiscal contractions (austerity), rounds of botched debt restructuring, and extreme fiscal and economic policy uncertainty since 2010, having previously fallen into a deep recession starting with 2008. Structural problems with the economy and demographics come on top of this and, at this stage in the game, are secondary to the above-listed factors in terms of driving down the country growth.

In simple terms, this - already 10 years long - crisis is fully down to the dysfunctional European policy making.

In real terms, Greek economy is now down almost 3 percentage points on where it was at the end of 2000 and even if we are to assume that the economy expands 2.15% in 2017, as projected by the IMF, Greece will still end 2017 some 0.76 percentage points below where it was at the start of its tenure in the euro area.

Meanwhile, the 2.1-2.15% forecasts are likely to be optimistic. Past record shows that, so far, since the start of the crisis, IMF’s forecasts were woefully inadequate in terms of capturing the true extent of the crisis in Greece.

As chart above shows, with exception of just two forecasts’ vintages, covering same year estimates (not actual forward forecasts), all forecasts forward turned out to be optimistic compared to the outrun (thick grey line for April 2017).

Another feature of the more recent forecast is that 2017 IMF outlook for Greece factors in worse expectations for 2018-2021 growth than ALL previous forecasts:

The key driver for this disaster is the EU-imposed set of policies and the resulting policy and economic uncertainty. In fact, if we were to take the lower envelope of growth projections by the IMF - projections that were based on the Fund’s assumptions that the EU will live up to its commitments to accommodate significant debt relief for the Greek economy from around 2013 on, today’s Greek real GDP would have been around 20-21 percent higher than it currently stands.

All in, Greece has sustained absolute and total economic devastation at the hands of the EU and its institutions, including ESM, ECB and EFSF. Yes, structurally, the Greek economy is far from being sound. In fact, it is completely, comprehensively rotten to the core and requires deep reforms. But this fact is a mere back row of violins to the real drama played out by the Eurogroup, the ESM and the ECB. The nation with already woeful demographics has lived through sixteen lost years, going onto seventeenth. Several generations are either face permanently damaged prospects of future careers, or have to deal with demolished hopes for a dignified retirement from the current ones, and a couple of generations currently in lower and higher education are about to join them.

15/4/17: Thick Mud of Inflationary Expectations

The fortunes of U.S. and euro area inflation expectations are changing and changing fast. I recently wrote about the need for taking a more defensive stance in structuring investors' portfolios when it comes to dealing with potential inflation risk (see the post linked here), and I also noted the continued build up in inflationary momentum in the case of euro area (see the post linked here).

Of course, the current momentum comes off the weak levels of inflation, so the monetary policy remains largely cautious for the U.S. Fed and accommodative for the ECB:

More to the point, long term expectations with respect to inflation remain still below 1.7-1.8 percent for the euro area, despite rising above 2 percent for the U.S. And the dynamics of expectations are trending down:

In fact, last week, the Fed's consumer survey showed U.S. consumers expecting 2.7% inflation compared to 3% in last month's survey, for both one-year-ahead and three-years-ahead expectations. But to complicate the matters:

• Euro area counterpart survey, released at the end of March, showed european households' inflationary expectations surging to a four-year high and actual inflation exceeding the ECB's 2 percent target for the first time (February reading came in at 2.1 percent, although the number was primarily driven by a jump in energy prices), and
• In the U.S. survey, median inflation uncertainty (a reflection of the uncertainty regarding future inflation outcomes) declined at the one-year but increased at the three-year ahead horizon.

Confused? When it comes to inflationary pressures forward, things appear to be relatively subdued in the shorter term in the U.S. and much more subdued in the euro area. Except for one small matter at hand: as the chart above illustrates, a swing from 1.72 percent to above 2.35 percent for the U.S. inflation forward expectations by markets participants can take just a month in the uncertain and volatile markets when ambiguity around the underlying economic and policy fundamentals increases. Inflation expectations dynamics are almost as volatile in the euro area.

Which, in simple terms, means three things:

1. From 'academic' point of view, we are in the world of uncertainty when it comes to inflationary pressures, not in the world of risk, which suggests that 'business as usual' for investors in terms of expecting moderate inflation and monetary accommodation to continue should be avoided;
2. From immediate investor perspective: don't panic, yet; and 
3. From more passive investor point of view: be prepared not to panic when everyone else starts panicking at last.

11/4/17: Euro Area Growth Conditions Remain Robust in 1Q 17

Eurocoin, Banca d'Italia and CEPR's leading indicator of economic growth in the euro area has slipped in March to 0.72 from 0.75 in February, with indicator remaining at its second highest reading since 2Q 2010.

Combined 1Q 2017 growth indictor is now signalling approximately 0.7% quarterly GDP growth rates, carrying the breakout momentum from previous quarters (see chart above). This brings most recent growth forecast over the 2001-2007 average.

From growth dynamics perspective, the pressure is now on ECB to start tightening monetary policy:

Inflationary pressures are still relatively moderate, but rising:

25/2/17: Eurocoin February 2017: Another Acceleration in Growth

A quick update on Eurocoin, the lead indicator for economic growth in the Euro area. In February, Eurocoin rose from 0.68 in January to 0.75 - hitting the highest level in 83 months and marking 10th consecutive monthly rise. The index has been now in a statistically positive growth territory every month since March 2015.

Implied 1Q 2017 GDP growth, as signalled by Eurocoin indicator is now at around 0.7 percent, which, if confirmed, will be the fastest pace of economic expansion since 1Q 2011.

The above chart shows that there is now a mounting pressure on the ECB to taper off its QE programme.

24/2/17: Monetary Policy Outlook for 2017

My article for Manning Financial covering monetary policy outlook is out and can be viewed here: https://issuu.com/publicationire/docs/mf_february_2017__1_?e=16572344/44717793.

Alternatively, click on the following images to enlarge

12/1/17: NIRP: Central Banks Monetary Easing Fireworks

Major central banks of the advanced economies have ended 2016 on another bang of fireworks of NIRP (Negative Interest Rates Policies).

Across the six major advanced economies (G6), namely the U.S., the UK, Euro area, Japan, Canada and Australia, average policy rates ended 2016 at 0.46 percent, just 0.04 percentage points up on November 2016 and 0.13 basis points down on December 2015. For G3 economies (U.S., Euro area and Japan, December 2016 average policy rate was at 0.18 percent, identical to 0.18 percent reading for December 2015.

For ECB, current rates environment is historically unprecedented. Based on the data from January 1999, current episode of low interest rates is now into 100th month in duration (measured as the number of months the rates have deviated from their historical mean) and the scale of downward deviation from the historical ‘norms’ is now at 4.29 percentage points, up on 4.24 percentage points in December 2015.

Since January 2016, the euribor rate for 12 month lending contracts in the euro interbank markets has been running below the ECB rate, the longest period of negative spread between interbank rates and policy rates on record.

Currently, mean-reversion (to pre-2008 crisis mean rates) for the euro area implies an uplift in policy rates of some 3.1 percentage points, implying a euribor rate at around 3.6-3.7 percent. Which would imply euro area average corporate borrowing rates at around 4.8-5.1 percent compared to current average rates of around 1.4 percent.

3/1/17: Euro growth greets 2017 with a bit of a bang

December marked another month of rising economic activity indicator for the euro area. Eurocoin, a leading growth indicator published by Banca d’Italia and CEPR notched up to 0.59 from 0.45 in November, implying annualised growth rate of 2.38 percent - the strongest growth signal in 67 months. It is worth remembering that in 2Q and 3Q 2016, real GDP growth slumped from 0.5% q/q recorded in 4Q 2015 - 1Q 2016 to 0.3% in Q2-Q3 2016. Latest 4Q 2016 reading for Eurocoin implies growth rate of around 0.47 percent, slightly below 1Q 2016 levels, but above the 0.31% average for the current expansionary cycle (from 2Q 2013 on).

Charts below illustrate these dynamics

Cyclical trends in growth rates currently imply ECB policy rate mispricing of around 2.0-2.5 percentage points (see chart below).

Meanwhile, inflationary dynamics, based on 12mo MA, suggest current monetary policy environment providing only a weak support to the upside.

The growth dynamics over the last 12 months are not exactly convincing. Even at currently above 2Q and 3Q forecast for 4Q 2016, FY 2016 growth is coming in at 1.58% annualised, against FY2015-2016 growth of 1.65%. Overall, this environment is unlikely to drive significant changes in ECB policy forward, as Frankfurt will continue to attempt supporting growth even if inflation ticks up to 0.4-0.5% q/q range for 12 months moving average basis.

17/9/16: The Mudslide Cometh for Your Ladder

One chart that really says it all when it comes to the fortunes of the Euro area economy:

And, courtesy of these monetary acrobatics, we now have private corporates issuing debt at negative yields, nominal yields...  http://blogs.wsj.com/moneybeat/2016/09/15/negative-yielding-corporate-debt-good-for-your-wealth/.

The train wreck of monetarist absurdity is now so far out on the wobbly bridge of economic systems devoid of productivity growth, consumer demand growth and capex demand that even the vultures have taken into the skies in anticipation of some juicy carrion. With $16 trillion (at the end of August) in sovereign debt yielding negative and with corporates now being paid to borrow, the idea of the savings-investment link - the fundamental basis of the economy - makes about as much sense today as voodoo does in medicine. Even WSJ noted as much: http://www.wsj.com/articles/the-5-000-year-government-debt-bubble-1472685194.

Which brings us to the simple point of action: don't buy bonds. Don't buy stocks. Hold defensive assets in stable proportions: gold, silver, land, fishing rights... anything other than the fundamentals-free paper.

As I recently quipped to an asset manager I used to work with:

"A mudslide off this mountain of debt will have to happen in order to correct the excesses built up in recent years. There is too much liquidity mass built into the markets devoid of investment demand, and too weak of an economy holding it. Everywhere. By fundamental metrics of value-added growth and organic demand expansion potential, every economy is simply sick. There is no productivity growth. There is no EPS growth, even with declining S down to waves of buy-outs. There is debt growth, with no capex & no EPS growth to underwrite that debt. There is a global banking system running totally on fumes pumped into it at an ever increasing rate by the Central Banks through direct monetary policies and by indirect means (regulatory shenanigans of ever-shifting capital and assets quality revisions). There is no trade growth. There is no market growth for trade. Neither supply side, nor demand side can hold much more, and countries, like the U.S., have run out of ability to find new lines of credit to inflate their economies. Students - kids! - are now so deep in debt before they even start working, they can't afford rents, let alone homes. Housing shortages & rents inflation are out of control. GenZ and GenY cannot afford renting and paying for groceries, and everyone is pretending that the ‘shared economy’ is a form of salvation when it really is a sign that people can’t pay for that second bedroom and need roommates to cover basic bills. Amidst all of that: 1% is riding high and dragging with it 10% that are public sector ‘heroes’ while bribing the 15% that are the elderly and don't give a damn about the future as long as they can afford their prescriptions. Take kids out of the equation, and the outright net recipients of subsidies and supports, and you have 25-30% of the total population who are carrying all the burden for the rest and are being crushed under debt, taxes and jobs markets that provide shit-for-wages careers. Happy times! Buy S&P. Buy penny stocks. Buy bonds. Buy sovereign debt. Buy risk-free Treasuries… Buy, Buy, Buy we hear from the sell-side. Because if you do not 'buy' you will miss the 'ladder'... Sounds familiar, folks? Right on... just as 2007 battle cry 'Buy Anglo shares' or 2005 call to 'Buy Romanian apartments' because, you know... who wants to miss 'The Ladder'?.."

14/9/16: Expresso on ECB forward policy options

My comment on ECB's recent decisions (pre-meeting) in Portugal's Expresso
http://expresso.sapo.pt/economia/2016-09-07-Com-os-governos-ausentes-BCE-empurrado-para-fazer-mais

30/5/16: ECB's TLTROs, via Expresso

Portugal's Expresso on ECB's TLTROs programme, with quotes from myself (amongst others):

26/5/16: European Reforms: Mostly "No Show" grades

An interesting heat map from Moody's covering the deteriorating pace of reforms in the euro area:

Source: @Schuldensuehner 

The key point is that under the monetary easing created by the ECB, Euro area sovereigns are all slacking off on reforms, especially more politically difficult reforms, such as product markets reforms (9 out of 11 states are in red, none in green), pensions & healthcare reforms and fiscal reforms (5 out of 11 are in read). The best performing countries are, bizarrely, Spain and Italy. Farcically, Ireland apparently does not require reforms to improve efficiency of public administration. Presumably, Moody's analysts never heard of tsunami of public waste unleashed by the likes of HSE and Irish Water.

Take it for what it is - a sketchy top-level view of the reforms landscape and give it a wonder: are ECB policies helping long term sustainability of European institutions or harming it?.. In 23 out of 60 point observations, the reforms have delivered so far 'no or limited progress' and only in 6 out of 60 point observations, the reforms have delivered 'substantial progress'. Go figure...