There are no big themes dominating the news today. So it is a perfect time to hit a couple of themes with an economic and market theme approach. Let’s talk banks, Japanese trade, the currency wars and deflation.
This is an abbreviated post from our subscription series at Credit Writedowns Pro. Michael Pettis has a good piece on debt and credit that I ran on the blog this morning. His thoughts on loss socialization are important not just in the context of China but also of other markets like Europe, the US, Canada and Australia where private debt […]
Burgeoning debt was not an unlucky accident. It is fundamental to the way the growth model works, and we have arrived at the stage, probably described most imaginatively by Hyman Minsky in his work on balance sheets, in which the system requires an acceleration in credit growth simply to maintain existing levels of economic activity. China’s debt problems, in other words, cannot be resolved administratively, by fixing the shadow banking system, by imposing discipline on borrowers, or indeed by eliminating financial repression (much of which, by the way, has already been squeezed out of the system by lower nominal GDP growth). Without a massive transfer of wealth from the state sector to the household sector it will be impossible, I would argue, for GDP growth rates of anything above 3-4% – and perhaps even less – to occur without a further unsustainable increase in debt, whether that increase occurs inside or outside the formal banking system and whether or not discipline has been imposed on borrowers.
The title here is a bit provocative I know. But it is really something I stole from an article about Stephen Roach’s view that I will use as a jumping off point for my Friday review.
I am not impressed with macro policy that is managed purely to give a cyclical boost to the economy at the expense of secular sustainability. That makes it hard to look at what’s happening with macro policy now without scepticism and criticism. I would like to say that the upbeat near-turn forecasts are something to celebrate. But I can’t because they are predicated on unsustainable secular trends. A few brief thoughts below
Summary The ECB did the expected this morning and lowered interest rates enough to send bank deposit rates at the ECB into negative territory. The ECB also met market expectations with an additional easing measure by implementing an LTRO with lending to household and business strings attached. Though these actions were expected, they are unprecedented, and, for that reason, dramatic. […]
By Markus K Brunnermeier and Yuliy Sannikov This post originally appeared on Vox and represents what this site believes is a very likely action the ECB could take for monetary easing later this week. Eurozone monetary policy transmission is broken. A key aspect of this is the failure of credit to get to small and medium enterprises, and consumers. This […]
Today’s post is a potpourri of events I am seeing from around the world that impinge on macro. Europe. As expected, European consumer price inflation came in at 0.5% following the unexpected dip in German inflation. I believe the ECB will act on this, but not just via an interest rate cut but also with some other non-traditional form of […]
Money supply and LEI in the US are pointing down
Fed hawkishness is increasing
Credit excesses continue in high yield
There are widespread signs of credit market froth. This is a telltale sign of top of the cycle or near top of the cycle excess. Think 2005, 2006 or 2007. The key bit here is that credit markets transmit distress in a way that equity markets do not because when the credit writedowns are forced onto banks, the knock-on effects are severe. Let me go through some of these signs of excess with you. As I do so, let’s be clear that the froth is largely due to investors reaching for yield due to excessively low nominal and negative real interest rates. Financial repression has consequences.
What is the ECB likely to do come June? There has been a lot of speculation in the media about the ECB’s next move but the ECB has yet to make definitive statements on which way it is leaning and why. I believe quantitative easing is out of the question but I also believe the ECB is likely to ease in some manner come June.
I believe investors are reaching for yield and there are multiple signals indicating such. This is a direct outgrowth of easy money policies by central banks as nominal yields are at record lows and real yields are negative. Investors, particularly pension funds, are having a hard time adjusting to the new monetary regime of financial repression and low nominal returns. […]