2016 is shaping up to be the year that everyone finally comes to terms with the fact that the monetary emperors truly have no clothes.
To be sure, it’s been a long time coming. For nearly 8 years, market participants and economists convinced themselves that the answer was always “more Keynes.” Global trade still stagnant? Cut rates. Economic growth still stuck in neutral? Buy more assets.
It was almost as if everyone lost sight of the fact that if printing fiat scrip and tinkering with the cost of money were the answers, there would never be any problems. That is, policy makers can always hit ctrl+P and/or move rates around. But in order to resuscitate anemic aggregate demand and revive inflation, you need to tackle the core problems facing the global economy – not paper over them (and we mean “paper over them” in the most literal sense of the term).
Well late last month, central banks officially lost control of the narrative. Kuroda’s move into negative territory reeked of desperation and given the surging JPY and tumbling Japanese stocks, it’s pretty clear that the half-life on central bank easing has fallen dramatically.
And so, as the market wakes up from the punchbowl party with a massive hangover, everyone is suddenly left to contemplate “quantitative failure.” Below, courtesy of BofA’s Michael Hartnett is a bullet point summary of 8 years spent chasing the dragon… and a list of the disappointing results.
Earlier today, we discussed how after 8 long years spent wandering punch drunk through a dream-like Keynesian wonderland where all financial assets rise inexorably, the world finally woke up last month with a terrible hangover only to discover that after 637 rate cuts and $12.3 trillion in asset purchases, “quantitative easing” has been a “quantitative failure.”
Perhaps it was the harrowing volatility that tipped investors off to the fact that central bankers were failing. Or perhaps it was the realization that the persistent disinflationary impulse that hangs over developed markets isn’t exactly compatible with the notion that central banks are “succeeding.” Or maybe it was the BoJ’s move into NIRP which was quickly followed by a canceled JGB auction, a soaring JPY, and crashing Japanese equities. Of course it could have been tumbling yields on the US 10Y. Take your pick, but whatever the catalyst, everyone suddenly began to talk about central banker impotence as opposed to central banker omnipotence, and at that point, the narrative was lost.
Of course it’s too late to turn back now. There’s no telling what markets would do if central banks were to suddenly admit that this has all been one giant mistake and so, the monetary powers that be stick to the script. For instance, Haruhiko Kuroda – who is known for saying things so at odds with reality that one can only laugh – said last night that “negative rates are clearly having an effect” – just as Japanese stocks were collapsing on themselves (again).
And central bankers aren’t just doubling down on the rhetoric. They’re doubling down on the easing. Earlier this week, Stefan Ingves and the Riksbank cut Sweden’s repo rate by 15 more bps to -0.50% and Mario Draghi and co. are almost sure to follow suit next month. Meanwhile, Janet Yellen admitted that NIRP has been studied for the US.
U.S. stocks rallied in a big way Friday, getting a lift from an explosive rally in oil and some good news in the beleaguered banking sector.
The Dow Jones industrials snapped a five-day losing streak, jumping 314 points, or 2.0%, to close at 15,974. The broader Standard & Poor’s 500 was up 2.0% and the Nasdaq composite added 1.7%.
Oil helped stoke the rebound, which actually started Thursday afternoon when the Dow pulled out of a steep dive and 157 points off a 412-point loss in the last 90 minutes of trading. A barrel of U.S.- produced crude was up about 12% to more than $29 a barrel — its best day since 2009 — as optimism grew that OPEC might finally cut production.
n Europe, Germany’s DAX index rose 2.5%, France’s CAC 40 gained 2.5% and Britain’s FTSE 100 was up 3.1%.
The economy of the 19-nation eurozone grew by 0.3% in last 3 months of 2015, figures showed Friday, following news that Germany expanded by a quarterly rate of 0.3%.
When the first lot of 14 banks was nationalised in 1969, one of the things said in those heady times filled with socialist fervour was that, with the banks’ resources at the government’s disposal, it might even be able to abolish the income tax. No one thought then that money would flow the other way: your tax money would be used by the government to finance mismanaged banks…because they finance businessmen who then don’t repay the loans. So who exactly is laughing all the way to (or from) the bank? Perhaps there is a need for some anger here. But who do we get angry with? The government (who is the shareholder on our behalf)? The regulator, which is the Reserve Bank? Bank managements? Bank employees’ trade unions? Those who took the money and became rich while defaulting? Or all of them?
The skeletons are coming tumbling out just now because RBI has woken up to insist that banks prepare proper accounts. But what was RBI doing these many years when it knowingly allowed banks to present fictional accounts quarter after quarter? We suspected the truth because every time a new chief executive took charge, loan write-offs would suddenly mount for the preceding quarter. Also, the market knew the truth–or government banks would not have been quoting well below their book value all this time. Indeed 19 of 24 listed government banks stocks now quote at less than half of book value, some at a discount of 75 per cent. Clearly, investors still think these banks’ books are akin to fiction.
What about the government, which has been appointing all the senior people in banks for decades? It is no secret that many chief executives were buying their positions. One presumes the money was paid on their behalf by businessmen—who, you can bet, were favoured later with loans that would not bear scrutiny. Also, when the new government declared that there would be no more phone calls from the government to banks, the implications about past practice were clear. As it happens, the phone calls have not stopped.