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'.

17/10/17: Welcome to the Keynesian Monetarist Paradise

Via IMF, a chart plotting changes in sovereign debt holdings across Government, International & Central Bank agencies (so-called G-4 Official) and private debt holders:

Note:

1. These are changes in the stock of debt, not the actual stock of debt;
2. These are changes in the stock of debt of only four largest advanced economies;
3. These are changes in the stock of only sovereign debt, excluding quasi-sovereign, private and household debts; and
4. The years of forward forecast are, allegedly, the years of QE unwinding.

This debt bubble is a money-printing bubble which is a Keynesian Government 'stimulus' bubble. Look at the above. QED.

And, if you have not reaped its upside, you will pay its downside. Now, check your pockets.

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...

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.

14/6/17: Unwinding the Mess: Fed's Road Map to QunE

As promised in the previous post, a quick update on Fed’s latest guidance regarding its plans to unwind the $4.5 trillion sized balance sheet, to the Quantitative un-Easing...

First, the size and the composition of the problem:

So, as noted in the post here: http://trueeconomics.blogspot.com/2017/06/13617-unwinding-mess-ecb-vs-fed.html, the Fed is aiming to gradually unwind the size of its assets exposures on both, the U.S. Treasuries and MBS (mortgage-backed securities). This is a tricky task, because simply dumping both asset classes into the markets (aka, selling them to investors) risks pushing yields on Government debt up and value of Government bonds down, as well as the value of MBS assets down. The problem with this is that all of these assets are systemically important to… err… systemically important financial institutions (banks, pension funds, investment funds and insurance companies).

Should yields on Government debt explode due to the Fed selling, the U.S. Government will simultaneously: 1) pay more on its debt; and 2) get less of rebates from the Fed (the returned payments on debt held by the Fed). This would be ugly. Uglier yet, the value of these bonds will fall, creating pressure on the assets valuations for assets held by banks, investment funds, insurance companies and pensions funds. In other words, these institutions will have to accumulate more assets to cover their capital cushions and/or sustain their funds valuations. Or they will have to reduce lending and provision of payouts.

Should MBS assets decline in value, there will be an assets write down for private sector financial institutions holding them. The result will be the same as above: less lending, more expensive credit and lower profit margins.

With this in mind, today’s Fed announcement is an interesting one. The FOMC “currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated,” according to today’s statement. And the FOMC provides some guidance to this normalization program:

Instead of dumping assets into the market, the Fed will try to gradually shrink the balance sheet by ‘rolling off’ a fixed amount of assets every month. At the start, the Fed will ‘roll off’ $10 billion a month, split between $6 billion from Treasuries and $4 billion from MBS. Three months later, the numbers will rise to $20 billion per month: $12 billion for Treasuries and $8 billion for MBS. Subsequently, ‘roll-offs’ will rise $10 billion per month ever three months ($6 billion for Treasuries and $4 billion for MBS). The ‘roll-off’ will be capped once it reaches $30 billion for Treasuries and $20 billion for MBS.

This modestly-paced plan suggests that the ‘roll off’ will concentrate on non-replacement of maturing instruments, rather than on direct sales of existent instruments.

What we do not know: 1) when the ‘roll off’ process will begin, and 2) when will it stop (in other words, what is the target level of both assets on Fed’s balance sheet in the long run. But the rest is pretty much consistent with my view presented here: http://trueeconomics.blogspot.com/2017/06/13617-unwinding-mess-ecb-vs-fed.html.




PS: A neat summary of Fed decisions and votes here: http://fingfx.thomsonreuters.com/gfx/rngs/USA-FED/010030ZL253/

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.

10/6/17: Cart & Rails of the U.S. Monetary Policy

So, folks, what’s wrong with this picture, eh?

Let’s start thinking. The U.S. Treasury yields are underlying the global measure of inflation since the onset of the global ‘fake recovery’. Both have been and are still trending to the downside. Sounds plausible for a ‘hedge’ asset against global economic stagnation. And the U.S. Treasuries can be thought of as such, given the U.S. economy’s lead-timing for the global economy. Except for a couple of things:

1. U.S. Treasury is literally running out of money (by August, it will need to issue new paper to cover arising obligations and there is a pesky problem of debt ceiling looming again);
2. U.S. Fed is signalling two (or possibly three) hikes over the next 6 months and (even more importantly) no willingness to restart buying Treasuries again;
3. U.S. political risks are rising, not abating, and (equally important) these risks are now evolving faster than global geopolitical risks (the hedge’ is becoming less ‘safe’ than the risks it is supposed to hedge);
4. U.S. Fed is staring at the prospect of potential increase in decisions uncertainty as it is about to start welcoming new members ho will be replacing the tried-and-trusted QE-philes;
5. Meanwhile, the gap between the Fed policy’s long term objectives and the reality on the ground is growing: private debt is rising, financial assets valuations are spinning out of control and 

So as the U.S. 10-year paper is nearing yields of 2%, and as the premium on Treasuries relative to global inflation is widening once again, the U.S. Fed is facing a growing problem: tightening rates is necessary to restore U.S. dollar (and U.S. Treasuries) credibility as a global risk hedge (the key reason anyone wants to hold these assets), but raising rates is likely to take the wind out of the sails of the financial markets and the real economy. Absent that wind, the entire scheme of debt-fuelled growth and recovery is likely to collapse. 

Cart is flying one way. Rails are pointing the other. And no one is calling it a crash… yet…

16/5/17: Navigating the Bubbling Up Investment Seas

Here are the slides from my presentation at the IPU Conference 2017 two weeks ago:

15/4/17: Unconventional monetary policies: a warning

Just as the Fed (and now with some grumbling on the horizon, possibly soon, ECB) tightens the rates, the legacy of the monetary adventurism that swept across both advanced and developing economies since 2007-2008 remains a towering rock, hard to climb, impossible to shift.

Back in July last year, Claudio Borio, of the BIS, with a co-author Anna Zabai authored a paper titled “Unconventional monetary policies: a re-appraisal” that attempts to gauge at least one slope of the monetarist mountain.

In it, the authors “explore the effectiveness and balance of benefits and costs of so-called “unconventional” monetary policy measures extensively implemented in the wake of the financial crisis: balance sheet policies (commonly termed “quantitative easing”), forward guidance and negative policy rates”.

The authors reach three main conclusions:

1. “there is ample evidence that, to varying degrees, these measures have succeeded in influencing financial conditions even though their ultimate impact on output and inflation is harder to pin down”. Which is sort of like telling a patient that instead of a cataract surgery he got a lobotomy, but now that he is awake and out of the coma, everything is fine. Why? Because the monetary policy was not supposed to trigger financial conditions improvements. It was supposed to deploy such improvements in order to secure real economic gains.
2. “the balance of the benefits and costs is likely to deteriorate over time”. Which means that the full cost of the monetary adventurism will be greater that the currently visible distortions suggest. And it will be long run.
3. “the measures are generally best regarded as exceptional, for use in very specific circumstances. Whether this will turn out to be the case, however, is doubtful at best and depends on more fundamental features of monetary policy frameworks”. Wait, what? Ah, here it is explained somewhat better: “They were supposed to be exceptional and temporary – hence the term “unconventional”. They risk becoming standard and permanent, as the boundaries of the unconventional are stretched day after day.”

You can see the permanence emerging in the trends (either continuously expanding or flat) when it comes to simply looking at the Central Banks’ balance sheets:

And the trend in terms of instrumentation:

The above two charts and the rest of Borio-Zabai analysis simply paints a picture of a sugar addicted kid who locked himself in a candy store. Good luck depriving him of that ‘just the last one, honest, ma!’ candy…

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.

21/9/16: BOJ New (non) Bazuka

A bit more on BOJ 'inverse' Twist here: http://expresso.sapo.pt/economia/2016-09-21-Banco-do-Japao-lanca-mao-de-nova-bazuca.

21/9/16: BOJ & Fed: Surprises at the End of Policy Line?

My comment for Portugal's Expresso on Bank of Japan and U.S. Fed rate setting meetings (comment prior to both): http://expresso.sapo.pt/economia/2016-09-20-Mercados-nao-esperam-subida-de-juros-nos-Estados-Unidos

English version:

With Bank of Japan clearly running out of assets to buy to sustain its continued efforts to further ease money supply, the Bank’s September 20th meeting is likely to be more significant from the markets perspective than the Fed’s. Back in July, Bank of Japan initiated a comprehensive review of its current policy measures. This move was based on two key pressures faced by Tokyo: the complete lack of monetary policy effectiveness and the shortages of assets eligible for BOJ purchases, still remaining in the markets.

My suspicion is that BOJ is likely to go for the reversal of the Fed’s Operation Twist, buying - as Washington did in 1961 and 2011 - shorter maturity bonds. In 2011, the Fed opted to buy longer-term debt and selling short term bonds. The Fed objective back then was to flatten the yield curve. Bank of Japan today is more desperate to see steepening in maturity curve instead. Paired with deeper foray into negative deposit rates territory, such an Inverse Twist move is probably the likeliest outrun of the current BOJ policy debate, with both policy changes carrying a probability of around 60-70 percent for September 20th meeting. On a longer odds side, expansion of volumes of purchases of bonds (doing more of the same option) for BOJ, in my opinion carries a probability of just 30-40 percent.

BOJ announcement of new policies is potentially more important to the global markets than the Fed’s, in the short run, because BOJ policy options are pretty much similar to those of the ECB, and because Tokyo faces a greater urgency to move this time around. Across the bonds markets, in recent months, there has been an increasing sense that ultra-aggressive monetary policies (those led by BOJ and ECB) have lost their effectiveness just at the time when the central bankers are rapidly running out of option to produce further monetary stimulus without engaging in an outright helicopter money creation. At the same time, as monetary policy effectiveness declined, markets reliance on central banks pumping more and more liquidity into the global financial system is rising as economic fundamentals stubbornly refusing to support current markets valuations in both equities and bonds.


Fed’s rate setting meeting, coming hours after Bank of Japan’s one, will be less predictable and has the capacity to take markets off guard. Prevailing market consensus is that the Fed will simply amplify its extremely moderate hawkish position, signalling once again the growing consensus toward a rate rise after the November Presidential election. In my view, this is the most probable outrun with a probability of around 75 percent. However, given the signs of strengthening economy over 3Q 2016, and the early indications of improving inflationary outlook on foot of August figures, the Fed might surprise with a 25 bps hike in base rates - a low probability (roughly 25%) event. On the ‘hold policy’ side, there has been some disappointing recent economic releases, with a decline in retail sales, flat producer prices inflation and a large drop in industrial production. These, alongside the political cycle, weigh heavily on the probability of a rate hike this week.


The key to the September rates outlook and the markets dynamics will be the twin combination of BOJ and Fed moves. Dovish Fed, alongside further aggressive expansion of Japan’s monetary policy will serve as a forward signal for the ECB to boost its own asset purchasing programme. This is a more likely outcome of Wednesday news flow, given the conditions in the domestic economies and in the global trade environment. Any surprises on the side of the Fed or BOJ deviating from dovish stands will likely be interpreted by the markets as a trigger for bonds sell-off and will also be negative for share prices.

19/3/16: Shares Buy-Backs: The Horror Show of QE Cash Excesses is Back

Remember the meme of the ‘recovery’?

The story of years of rising shares buy-backs by corporate desperate to do something / anything with all the debt they could get their hands on from the lending banks, whilst having no interest in investing any of these loans in real activity.

Well, back at the end of 2011 and the start of 2014, pumped up on hopium  of the so-called imminent recovery in global demand, we witnessed two dips in shares buy-backs, with resulting volatility going the flat trend taking us through some 12 months before lifting off the whole circus to new highs.

Source: @soberlook

And as you can see, the same momentum is now back. Shares buy-backs are booming once again, almost reaching all time highs of 2007. Thus, the toxic scenario whereby companies use cheap credit (QE-funded) to leverage themselves only to fund shares buybacks and not to fund new investment - that vicious cycle of leverage risk and wealth destruction - is open us once again.

Note: I have been tracking the topic on this blog, covering few months back the link between buybacks and lack of corporate capex: http://trueeconomics.blogspot.com/2015/11/111115-take-buyback-pill-us-corporates.html.

3/3/16: Hitting Record Deflationary Expectations & Waves of Monetary Activism

In a fully-repaired world of the global economy...

Source: Bloomberg

Per SocGen, thus, all the QE and monetary activism have gone pretty much nowhere, as deflationary expectations are hitting all-time record levels. And that with the U.S. inflationary readings coming in relatively strong (see http://www.bloomberg.com/news/articles/2016-03-03/socgen-global-deflationary-fears-just-hit-an-all-time-high).

Which might be a positive thing today, but can turn into a pesky problem tomorrow. Why? Because U.S. inflationary firming up may be a result of the past monetary policy mismatches between the Fed and the rest of the world. If so, we are witnessing not a structural return to 'normalcy' but a simple iteration of a vicious cycle, whereby competitive devaluations, financial repressions and monetary easing waves simply transfer liquidity surpluses around the world, cancelling each other out when it comes to global growth.

Give that possibility a thought...

28/2/16: ECB in March: A Thaw or a Spring Blizzard?

My comment on what to expect from the ECB in March for Expresso http://en.calameo.com/books/004629676f86bc6c6796a.

As usual, full comment in English here:

While the transmission mechanism has been improving in recent months across the euro area, leading to stronger lending conditions across the common currency area and a wider range of the member states' economies, inflationary dynamics remained extremely weak, even when stripping out the effects of oil and other commodities prices. As the result, ECB continues to see inflation as the key target and is likely to intensify its efforts to boost price formation mechanism.

Thus, despite all the ECB efforts, inflation remains stubbornly low and even slipping back toward zero in more recent data prints. Improved lending is not sufficient to create a major capex boost on the ground, weighing heavily on growth dynamics. Lower costs of borrowing for the euro area governments, while providing significant room for fiscal manoeuvre, is simply not sufficient to sustain a robust recovery. About the only functioning side of the monetary policy to-date has been the devaluation of the euro vis a vis the US dollar - a dynamic more influenced by the Fed policy stance than by the ECB alone.

My expectation is that the ECB will cut its deposit rate to -40 bps (a cut of 10 basis points on current) with a strong chance that such a cut can be even deeper. We can further expect some announcement on an extension of the QE programme beyond the end of 1H 2017.

The key problem, however, is that the ECB is also becoming more and more aware of the evidence that past QE measures in Japan, the UK, the euro area and across Europe ex-Euro area have failed to deliver a sufficient demand side boost to these economies. Thus, in recent months, the ECB has been increasing rhetorical pressure on member states governments to engage in supply side stimuli. Unfortunately, this too is a misguided effort.

In the present conditions, characterised by markets uncertainty, heavy debt overhangs and mis-allocated investment on foot of previous QE rounds, neither supply nor demand sides of the policy equation hold a promise of repairing the euro area economy. In addition, accelerated QE will likely feed through to the markets via higher volatility and possible liquidity tightening (bid-ask spreads widening, fear of scarcity of high quality government bonds and uncertainty over viability of the current monetary policy course).