3/7/20: ECB Jumping the Proverbial Shark?

ECB's money-printing press has been running overtime these weeks. So let's put the Euro area central banks' monetary policy shenanigans into perspective, comparing them to the Global Financial Crisis (GFC) related measures, the Euro area sovereign debt crisis and the subsequent painful recovery:

Good thing: ECB has deployed COVID19 response at scale and fast. Bad thing: it is highly uncertain how much growth all of this activism is going to sustain. From 2000 through 1Q 2020, there is zero (statistically) relationship between current GDP growth (nominal) and ECB assets accumulation in the same year and in prior year:

Even ignoring statistical significance, the relationship itself is not positive, especially in the lagged data. In other words, there is absolutely no evidence of causality from ECB asset purchases to higher economic growth. While reasons for this results are complex (and not really a matter for this post), there are some serious questions to be asked as to how much tangible growth is being sustained by the Central Bank's activism. On the other side of the same argument, if we assume that the ECB purchases of assets are effective at sustaining growth in the Euro area economy, then we must have some serious questions as to what the Euro area economy is capable of producing in terms of GDP growth without such interventions.

In simple terms: we are damned if we do, and damned if we do not:

• Either monetary activism is not effective at sustaining growth, or
• If monetary activism is effective, then the state of the economic institutions overall is so dire, it remains comatose even with extraordinary supports from Frankfurt.

Neither is a pleasant conclusion. And there is not a third alternative.

Just in case you need a reality check on how poor Euro area's growth has been, here is a summary:

12/6/20: Summary of the Eurosystem Response Measures to COVID19

Great and tight summary of the Eurosystem monetary policies deployed in response to COVID19 pandemic: https://blocnotesdeleco.banque-france.fr/en/blog-entry/monetary-policy-measures-taken-eurosystem-response-covid-19.  Cumulative total through the end of May, EUR 1.27 trillion.

10/7/19: Financialising Stagnant Growth: From Japanified Economy to Christine Lagarde

Monetary policy since the GFC of 2008 has been characterised by the near-zero (and even negative) policy rates, negative bank rates, negative Government debt yields and rampant asset price inflation. The result has been zombification of the advanced economies.

Here is the latest advanced estimate of the Eurozone real GDP growth based on the CEPR/Banca d'Italia Eurocoin indicator:

Current forecast for 2Q 2019 growth in the Eurozone, based on Eurocoin indicator is for 0.17% q/q expansion. June Eurocoin sits at 0.14%, the lowest since September 2013. The growth rate forecast has now been sub-0.25% (below 1% annual) in five months (through June 2019) and counting. Meanwhile, the link between growth and inflation has been weakening, as shown in the chart below:

Both, from the point of view of view of the current data relative to 1Q 2019 and to 2Q 2018 and to Q1 2018, growth rates are shrinking, per above. The ECB, however, remains stuck in the proverbial hard corner (chart next):

 Five years into zero policy rates, inflation is gradually creeping up (chart above), but growth is nowhere to be seen (chart next):

Worse, tangible fundamentals (captured by the models, like Eurocoin) of economic growth are becoming less and less consistent with actual growth outruns - a feature of the economy that is becoming dependent on things other than real investment and real demand for generating expansion in GDP. Both, the chart above and the chart below, highlight this troubling fact.

All of this suggests that we are in the period in economic development that is fully consistent with the secular stagnation thesis: traditional tools of monetary and fiscal policies are no longer sufficient in generating real economic growth. Instead, these tools help sustain economies overloaded with debt. It is an extend-and-pretend model of economic development: as long as corporates and households can be supported in carrying existent debt loads through monetary accommodation, the economy remains afloat (no recession, nor crisis blowout), but the levels of debt are so prohibitively high that no new debt can be accumulated to generate economic expansion.

The markets know as much. Investors know that zombie loans (loans with no capacity of servicing them should interest rates rise) mean zombie banks. Zombie banks mean zombie new borrowing markets. Zombie new borrowing markets mean zombie real investment by households and companies. Zombie investment means zombie demand. Zombie demand means deflationary supply. Rinse and repeat.

This knowledge in the markets is tangible. It takes a change in investors expectations (as in recent changes in outlook toward the reversal of the monetary tightening in the U.S. and Europe) to reprice assets. No actual value added growth enters the equation. Assets are no longer being priced on their productive capacity. And the markets are now fully finacialised. Which is to say, they are now fully monetary policy-driven.

Enter Christine Lagarde, the new head of the ECB. Lagarde's appointment is hardly an accident or a politically correct nod to women in leadership. It is the only logical choice of the financialised zombie economics of the monetary policy. To re-start borrowing or debt cycle, the EU is hoping for mutualisation of the sovereign debt markets. In other words, it is hoping to leverage the only unencumbered asset the EU still has: surplus countries' bonds. Lagarde's job at the ECB will be to run the creation of the eurobonds, bonds that will proportionally link euro area members' bonds into a single product to be monetised by the ECB as a support for market pricing. There is probably EUR 2-3 trillion worth of the international and monetary demand for these, opening up the room for more borrowing and more fiscal spending.

12/6/19: All's Well in the Euro Paradise

All is well in the Euro [economy] Paradise...

Via @FT, Germany's latest 10 year bunds auction got off a great start as "the country auctioned 10-year Bunds at a yield of minus 0.24 per cent, according to Germany’s finance agency. The yield was well below the minus 0.07 per cent at the previous 10-year auction in late May. The previous trough of minus 0.11 per cent was recorded in 2016. Notably, demand in Wednesday’s auction was the weakest since late January, with investors placing bids for 1.6-times more than the €22bn that was issued."

Because while the "Euro is forever", economic growth (and the possibility of monetary normalisation) is for never... 

12/5/18: Monetary Activism at ECB: A Chart of Failure

A simple chart, a great observation by Holger Zschaepitz @Schuldensuehner: "Chart of failure: #Eurozone core inflation has plunged to 0.7% despite #ECB balance sheet at record high. If ECB permanently fails to hit its #inflation target, it's time to rethink target. By the way, there is inflation in stocks, bonds, real estate not measured in official CPI."

The story of ECB racing away from the Fed and even BoJ in pursuit of the inflation Nirvana:

Which brings us to a bigger question: with ECB at play, what is there to brag about when it comes to Europe's latest growth "renaissance"? Read my article in the Business Post tomorrow... 

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.

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…

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:

18/2/16: Europe's Problem is Not Germany...

CES-Ifo just released their survey results for the regular poll of some 220 German economists. And if you think that professionals are at any odds with Schäuble on monetary policy of the ECB, think again.

Which, of course, is absolutely correct. For German economy, ECB's policy is too loose. For French economy, about right. For Italy and Spain - probably somewhat too restrictive, although who on Earth can tell with any degree of confidence what 'about right' policy for these two can even look like...

Still, the key point remains: Euro is still a malfunctioning currency that cannot reconcile differences between various economies. In other words, Europe's problem is not Germany. It is not France, nor Spain, nor Italy. Europe's problem is not even Euro. Instead, Europe's problem is Europe.

17/7/15: ECB Rate Decision & Monetary Conditions in the Euro Area

Yesterday, ECB left unchanged their key policy rates. Updating my central banks' policy charts,

First, current policy rates for major advanced economies:

Next: duration and magnitude of rates overshooting (target range set outside mean (pre-crisis period, Euro coverage) +/-1/2 STDEV)

We are now into 80th consecutive month of interest rates statistically outside the mean range, with magnitude of deviation of some 3.05% down on the mean. This implies mean-reversion (increase in the rates) of between 2.70-3.4%.

Meanwhile, 12 mo Euribor margin over policy rates is up to 0.119% in Jul (to-date) compared to 0.113% in June. Corporate rates for new loans (>1mln Euro and 1-5 years duration) margin over ECB rate was up at 2.28% in May compared to 2.03% in April. May was the month when direction of Euribor margin diverged from direction of corporate loans margin, implying increase in banks margins.

Overall, the above shows that pressure on rates reversion to the mean is building up, while banks margins were improving (though we only have data through May on this). Nonetheless, banks margins are down on 2012-2014 averages, implying that more of the costs of any mean reversion in policy rates under current conditions will have to be absorbed by the borrowers.

Good thing, ECB is in no rush to get ahead on rates increases, yet…