What will save the Wunderbund* (and related QE trades)?
On the back of news “that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer” — really scuppering the plans of those local governments to restructure their massive debts — some rumours of “Chinese QE” began floating about over the past few days.
But that seems to have passed…. and now it’s chatter of an ECB style LTRO that’s being heard in the wind.
Either way though, we think it would be a better idea to forget the QE or LTRO comparisons this time around — it muddies the water — and instead concentrate on what China is trying to achieve. Read more
Deutsche Bank has long been an unloved stock.
Not only does it trade stubbornly below book-value, a bleak revenue outlook in January led to the promise of a major strategy rethink for the group, including the prospect of job cuts, asset sales and the streamlining of investment banking divisions.
Among options on the table is a sale of the group’s Postbank retail business — a division it acquired in 2008 in the hope of bringing deposit funding to the aid of its investment banking arm. Read more
Economics blogger Ben Bernanke wrote today on why interest rates are lower than they’ve been in the past. His argument is that changing estimates of future growth and inflation are to blame, rather than an overly activist Fed. While we have some sympathy for this view, we’re struck by the fact that it partly contradicts what Bernanke said when he was actually at the Fed.
In particular, compare this passage from Bernanke’s recent post (emphasis ours): Read more
We know there’s been a great deal of change on the asset-side of banks’ balance sheets since the crisis. But if you ever wanted it summed up in one table, look no further than the following:
These came out yesterday courtesy of BofAML’s 2015 look at looong term trends in financial markets by Harnett and Leung…
The obvious place to start:
And the obvious place to continue, asset prices: Read more
Eric Rosengren, the President of the Federal Reserve Bank of Boston, gave a speech in Frankfurt on Thursday arguing that the Fed’s full employment mandate gave the central bank more flexibility to be aggressive earlier, and that open-ended programmes that are tied to economic targets are more effective than purchases of predetermined size and duration.
Nothing novel there. But his speech also contained, perhaps inadvertently, some interesting arguments that the rounds of bond-buying after the acute phase of the financial crisis did little for the real economy. (We covered the tenuous relationship between asset purchase programmes and inflation here.) Read more
You know how Bitcoin miners get a natural advantage in the cryptocurrency pyramid of inequality because of being early adopters that get first dibs on all new currency that’s created?
Turns out the ECB has a similar problem.
Here’s a nice write up of the distributive problems associated with QE-style helicopter drops in the current asset-purchasing framework from Pierre Monnin, a fellow at the Council on Economic Policies (our emphasis):
In practice, targeted money drops, like quantitative easing (QE), do not spread instantaneously throughout the economy. Like a vaccine, money is injected at one place and then disperses more or less quickly to other areas. Stephen Williamson and Olivier Ledoit have closely looked at how a money injection moves through the economy. They both use a model in which different economic groups trade randomly and repeatedly with each other.
Guesswork from Deutsche (click to enlarge):
From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like:
We know instinctively that the Bank of England doesn’t like to be seen to be inflating stock market bubbles. That money printed for the purposes of quantitative easing might be flowing into the hands of existing equity holders (such as corporate executive management) would reinforce the wholly disagreeable notion that Britain’s central bank was actually fuelling the growth in wealth inequality.
So we should not be surprised when two Bank economists, Michael Joyce and Zhuoshi Liu, together with a colleague from Bath University, Ian Tonks, publish a piece of research stating… Read more
On the potential death of that long awaited negative deposit rate, interesting thoughts from HSBC’s Steven Major below if sovereign quantitative easing does eventually raise its head in Europe.
But first, a necessary nod to QE skepticism from Peter Stella:
Rather amazingly, a crude quantitative measure of ECB stimulus—the sum of refinancing operations and securities held for monetary policy purposes—peaked the very month of Dr. Draghi’s [whatever it takes] speech. Those who are now seeking QE apparently believe that, despite the inverse correlation between quantitative stimulus and actual results, an increase in the size of the ECB balance sheet will lead to an outcome superior to that associated with the increase in policy “size” evident above during the 14 months prior to the Draghi speech. During that time, the sum of ECB monetary operations instruments expanded by 168 percent without any discernible palliative impact on markets. So if the definition of insanity is repeatedly trying the same behavior and expecting different results, the market would appear slightly insane. Or perhaps it is simply guilty of failing to fully comprehend the complexity of monetary operations, and more specifically, which monetary medicines work and which do not.
With the European Central Bank keeping everyone guessing on the prospect of Eurozone QE, uncertainties over exactly how Draghi will choose to act to curb the deflation risk building in the region are beginning to create a headache for non-Eurozone members such as Poland.
Whilst Poland’s economy has proved resilient to the downturn thus far, deflationary trends are creeping into the country putting central bankers under pressure to act decisively sooner rather than later. The key metric everyone is worried about is a dip in Poland’s annual rate of consumer price inflation to a negative 0.3 per cent. Read more
A farewell to QE (of sorts) from Michael Hartnett et al at BofAML:
A recent US Treasury paper calculated that between Jan’09 and Apr’13 the S&P500 index rose 570 points in the weeks the Fed bought $5bn or more securities, 141 points in the weeks it bought up to $5bn, and fell 51 points in the weeks the Fed sold securities.
The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.)
We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions).
Let’s start by looking at the changes in actual inflation since the start of 2010. Read more
Reuters is reporting that the European Central Bank might be willing to purchase corporate bonds as part of its €1 trillion effort to restore “the size of [its] balance sheet towards the dimensions it used to have at the beginning of 2012.” The story has also been picked up by the FT and WSJ.
We didn’t immediately get why the ECB would decide to do this, especially since spreads on even the junkiest of junk debt are still quite narrow. (Lufthansa’s recent 5-year note yielding just 1.1 per cent at issuance comes to mind.)
One explanation is that the size of the markets the ECB has already agreed to target — asset-backed securities and covered bonds — is too small for the central bank to achieve its objectives. Read more