What more can we say about RBS’s ‘Monster QE’ note that hasn’t already been said by Ambrose Evans-Pritchard, of the Telegraph? Well, for a (facetious) start we can note some media-bank symbiosis:
* Monster QME coming. With fiscal policy off the agenda, we have always expected more QME (quantitative monetary easing). And this time will be different. We have always argued that buying of bonds is less efficient than guaranteeing yield levels, and that yields are the key, not raising money supply, given demand for credit is dead (so all QME did was raise bank reserves and show money velocity collapse). There has been a subtle shift from central banks toward our view, most evident from the UK MPC, whose £200bn programme started by focusing almost purely on underlying M4, but ended differently with MPC speeches about how successful it was in keeping Gilt yields low.
* The next shock and awe will be in the form of large scale QME, but with one massive difference – it will be focused on lowering yields, not expanding money supply (I think). So do not be surprised if the next QME is about guaranteeing yields at, say, 2% 10-yr US, or lower. Even if it is a vanilla buying programme as before, expect it to focus along the curve and bring all yields down in a monster bull flattener (you cannot bring down 5s and not 30s because that just changes savings’ maturity preference, it does not deter saving). Note today’s Telegraph article alleging that the Fed are already mulling more QME of another US$2.6trn (to take their balance sheet to US$5trn), which is totally unsurprising (we think CBs are far more dovish worldwide than investors/investment banks are). Others will follow. We are getting more bond bullish, not less.
But other than that, we can attempt to summarise.
Basically, RBS’ European rates team, Andrew Roberts, Giles Gale and Harvinder Sian, are advising their clients to prepare for a ‘cliff edge’ in the global banking system. That entails, amongst other things, market turmoil caused by the end of US fiscal stimulus and eurozone banking problems. Plus some concern that the new 2a-7 rule will limit US money markets and shatter global liquidity.
In other words — a global divergence between the US and Europe:
From what we can see, the USA is basically pulling up the drawbridge and retreating into its fortress, trying to protect its financial system from coming European banking problems. But the consequence is clear. Banking is about confidence. If you are reliant on markets to fund yourself and that confidence wanes, a total stop can occur immediately/within days. Northern Rock (75% reliant on wholesale markets) was the first example of this in the UK, though not the last. Once we apply 2a-7 (and the ability of US money funds to ‘put’ their EMU bank assets back to the issuer EMU banks within 7 days on signs of trouble, since the US money funds will from now on increasingly own 1yr securities with a 7 day put) to our economic slowdown/deflation themes, this means one thing. If there is a slowdown and sovereign trouble, the problems facing EMU banking have through this rule potentially become a whole lot worse. This worsens – and brings forward – the ‘cliff edge’ potential.
RBS’s advice is to “think the unthinkable.” Move into ‘safe haven’ US, UK and German government bonds. Go long gold and get ready for ultra-low yields on Treasuries, courtesy of that ‘monster.’
As a side note, we seem to remember the US’s QE being all about yield curve flattening from the beginning. It didn’t work for very long — for whatever reason, yields crept back up.
(And yes, the full RBS note is in the usual place — courtesy of the FT’s Chris Flood).
Related links:
Those low interest rate U-Zirpers at the BIS – FT Alphaville