The aftermath

If you're reading this, chances are that you know that the ECB held a monetary policy meeting yesterday.  It's only slightly less likely that you're aware that Mario Draghi unveiled a panoply of measures that comfortably exceeded the market expectation, in aggregate.  And if you know those two things, you probably know how the market reacted....both initially, and after Draghi snatched defeat from the jaws of victory (temporarily, at least) by stating that   "From today's perspective, and taking into account the support of our measures to growth and inflation, we don't anticipate that it will be necessary to reduce rates further."

First things first: from a policy perspective, the suite of measures announced yesterday was about as good as it could have been.   One can debate all day whether the primary channel of nonstandard policy measures is to affect the real economy (either directly or via portfolio decisions) or simply to send a signal and influence sentiment.  The reality is that it's a mixture of both, though Macro Man would lean more towards the latter.  Either way, the ECB exceeded expectations.  Briefly looking at the measures in turn:

Refi rate: In a surprising decision, the refi rate was cut to zero from 0.05%.  It's very difficult to characterize this as anything but a signalling mechanism, though it does mean that borrowing money from the ECB is literally free (albeit with haircuts.)  The marginal lending rate was also cut by 5 bps, though that's pretty irrelevant these days.

Depo rate: Cut 10 bps, in line with the market's base case.  Although ERH6 perversely rallied initially, it eventually went lower to settle at 100.22, within a tick of where it should have done based on the EONIA pricing described yesterday.

APP:  The size of asset purchases was increased by 20 billion per month, more than expected, though the fact that the program was not extended was perhaps a small disappointment.  The purchase limit per security was also increased to 50%, though only for bonds issued by international organizations- not Eurozone governments.  Still, in aggregate, a pretty clear win.

CSPP:  The ECB announced a corporate sector purchase program to buy non-financial investment grade corporate bonds.  As noted yesterday, the market was on the fence about whether they might do something like this, so in aggregate it was a winning move.   The CSPP purchases will start near the end of Q2 and the amounts will be included in the 80 bio per month total purchase amounts.

TLTROs:  Macro Man noted yesterday that the ECB would likely be drawn towards its old standby of LTROs, and so it came to pass.  The schema for determining the ultimate borrowing rate is an interesting one.  Each bank will be given a benchmark, which is the lower of zero and its loan growth rate for the twelve months ending in January 2016.

For the reference period of Feb 2016 to January 2018, if net loan growth is at or below the benchmark, the rate on the TLRTO is the prevailing refi rate- which as we've seen is now zero.  Loan growth above the benchmark will result in lower borrowing rates...including rates as low as the depo rate if the aggregate net loan growth is 2.5% over that two yer period.  That's just 1.25% per annum above the benchmark (and remember, a number of banks will have negative benchmarks, so could conceivably borrow at the depo rate if they merely shrink their loan books more slowly.)

As a point of reference, here is what y/y loan growth looks like on an aggregate basis at the moment:

If banks were, in aggregate, to continue their current pace of lending growth over the next two years, the aggregate gain would be 1.76%.  That would imply a large aggregate reduction in the lending rate on the TLTROs, possibly approaching the minimum (insofar as there will be a number of banks with negative loan growth captured in the data.)

Although Macro Man was somewhat skeptical of this approach yesterday, the carrot looks sufficiently juicy and the bogey sufficiently easy to really mitigate some of the possible negative impacts on bank margins from NIRP.   As such, this could possibly be a big win for the ECB and the banking sector, particularly if it can forestall the foreshadowing of doom observed at the bottom of this post from a few weeks ago.

So naturally, when Draghi suggested that NIRP won't get any NIRPier and that future policy moves will focus on nonstandard measures that won't negatively impact lending margins as much (Constancio's lame remonstrances to the contrary notwithstanding), Eurozone banks put in the rarely observed "Mt. Blanc" technical formation on the intraday chart.


Of course, this was just a piece of what was a larger shift in asset prices.  European bonds trading at sharply negative yields did the rational thing and sold off, given that there was clearly some promise of future rate cuts embedded in the price.  Euribor unsurpisingly followed suit.  Note that even with the rate carnage, Schatz yields remain below the depo rate, so more downside probably awaits.

Yesterday's nearly 4 big figure range in the euro was modest in comparison to December's bloodbath, but still must have hurt a lot of people...a lot.  To some degree, the move was justified, insofar as there was an immediate adjustment in the Eurozone interest rate profile.  Given the sharp move lower after the initial announcement, it looks like a lot of people sold EUR into a hole...and paid the price.


Funny enough, Macro Man's suggestion to sell both the euro and bonds worked a treat if done in equally risk-weighted amounts.   Yesterday's squeeze in EUR/USD was a 2.1 standard deviation event (using a lookback window starting at the beginning of December), while the sell-off in Schatz was a 3.75 SD event.  The relative move is even more extreme using a one year lookback window.

Looking forward, the near term outlook for the euro is a bit nebulous.  If rates markets continue to reprice, it's difficult to see EUR/USD tumbling without surprisingly hawkish developments from the Fed (which may well happen, mind you.)  Can QE/LTROs alone push the euro lower?   Certainly- didn't Fed QE sink the dollar in the early part of this decade?  Of course, if things appear to improve in Europe then the EUR might be ripe for a squeeze, particularly if the ECB declines to extend the maturity of the APP.   As it stands, Macro Man could see EUR/USD do more of what it's been doing- whiz around in a range without actually going anywhere.  Having the discipline to avoid it may well be your best port of call for a while.


The impact on Euro credit markets seems rather more obvious, and CDS spreads duly compressed smartly yesterday.   Experience suggests that spreads should continue to tighten moving forwards.   To some extent, this is merely helping those who already have access to credit in the Eurozone, and bank lending remains the primary spigot through which Euro credit flows.   That being said, a rally in Euro IG should percolate throughout Eurozone credit markets, though of course it's reasonable to expect bank paper to widen to non-financial IG.

As for banks, Macro Man finds it somewhat perverse that they sold off based on no more rate cuts.  Front end Eurozone government yields look to be as negative as they're going to get, so it's hard to argue that non standard measures will hurt banks in that fashion, and in several instances they could possibly help.  As such, Macro Man would be inclined to fade the afternoon sell-off; while Eurozone banks are, in aggregate, still a shambles, there's a price for everything and that price is probably not zero (or 85 on the SX7E).    

Is all of this some sort of prelude to monetization/helicopter money?   Almost certainly not, though Draghi didn't dismiss the latter out of hand.   There's a school of thought that Draghi only snuck all of this stuff through because Weidmann was on the sub's bench this month.   Well Mr. Weidmann almost certainly would have argued and voted against these measures if he could, it seems incredulous that he wouldn't have spoken out in the deliberations even without having a vote.  As such, Macro Man doesn't put a whole lot of credence in the theory that none of this would have happened if only poor Jens could have voted "nein".  That being said, it seems likely that opposition to proper helicopter money type operations would be very substantial, not least because of the logistical hurdles as Draghi implied.

In sum, the ECB did well except for Draghi's own goal on rates.   (Why say that, even with qualifications?)  The euro is a bit of a dog's breakfast at the moment, rates will probably sell off a bit more, but ultimately risk assets should bounce back from the late session swoon.   Kuroda-san, Janet, the ball's in your court. 

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Booger
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March 11, 2016 at 11:42 AM ×

After the announcement, it looked dead set to bang through and I think everyone assumed that Draghi would kick a goal. I went to bed thinking it's in the bag, then to my surprise I woke up with all my stops taken out. Owch.

Many theories:
1. The market is so impressed by the ECB package, the demand for euros has gone up
2. Draghi made an error in not dragging out the whole package over a few more meetings (but then he might be accused of under-delivering as in the last meeting)
3. He made a bad misstep by pointing out that the ECB are likely out of the picture until the end of the year before any further action.
4. The euro was set to rip anyway

I wonder whether it was a combination of poor guidance/expectations management and the statement about no further rate cuts that crystalised to everyone that they are done until the end of the year, tripping off that face-ripping rally as LB would put it.

Now that the shorts have been taken out, my guess is that it will gently float back to 1.10. Beyond that I am not so sure. It may well rally further with the ECB out of the picture for at least another 6 months.

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Anonymous
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March 11, 2016 at 12:16 PM ×

You're assuming FED doesn't raise within next 6months. They probably will. 1.10 is the euro anchor for forseeable i think.

In ECB's last minutes, they noted the reducing impact of fx. As Pol noted, there has been a shift in tactics in yesterday's announcement.

Incentives to lend for banks and incentives to borrow for corporate. From stick to carrot.

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washedup
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March 11, 2016 at 12:48 PM ×

Booger - your point no. 1 is quite funny.
I frankly agree most with 4., unfortunately this is one of those hand waving unprovable observations. The question really is, is a weak euro the lynchpin of the ECBs efforts to meet their inflation mandate, or a not so innocent byproduct of easing? The problem with the weak euro argument has been that by shifting allocations into the dollar trade (and lowering commodities), the costs of that approach have arguably exceeded the benefits - why? because a dollar of credit easing in any EM is more powerful for global reflation than multiple dollars in western europe, and at this point the optimal global solution sans fiscal stimulus is a stronger euro, a slightly lower dollar, and an at worst static yen - normally europe would be the biggest loser in this inflationary equation, unless euro strengthening leads to higher commodities, which leads to a compression in overall credit spreads, which solves everyone's problem at once. The two most critical things to watch for in the next 2-3 months will be the eurjpv vs brent correlation, and relative performance of high yield vs equities.
Critically, it seems like the central bank hot potato asset reflation leading to higher inflation idea remains the only game in town - for now - and the ECB's actions prove it. Which is why I agree with Pol's conclusions in his blog.

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Bruce in Tennessee
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March 11, 2016 at 1:01 PM ×

Cogito ergo sum. I think after reading this morning that it is entirely too early to finalize an opinion about Mr. Draghi and also about his Chinese counterparts. I see from just a few of the things available that the Chinese want to hold down wages, that the Germans opine perhaps 50% of their small banks could go BK in the next five years, that the Euro initially went up against the dollar, and so forth.

I think the next week will be spent on more leisurely activities, to paraphrase LB...

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Bruce in Tennessee
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March 11, 2016 at 1:05 PM ×

Volatility decreases productivity, MM?

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Wurmold
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March 11, 2016 at 1:17 PM ×

"the rarely observed 'Mt. Blanc' technical formation" ??
That's "Cerro Torre" or I'm a Dutchman!

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Bruce in Tennessee
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March 11, 2016 at 1:24 PM ×

https://en.wikipedia.org/wiki/Irving_Fisher

Debt-deflation
Further information: Debt deflation

Following the stock market crash of 1929, and in light of the ensuing Great Depression, Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble. According to Fisher, the bursting of the credit bubble unleashes a series of effects that have serious negative impact on the real economy:

Debt liquidation and distress selling.
Contraction of the money supply as bank loans are paid off.
A fall in the level of asset prices.
A still greater fall in the net worth of businesses, precipitating bankruptcies.
A fall in profits.
A reduction in output, in trade and in employment.
Pessimism and loss of confidence.
Hoarding of money.
A fall in nominal interest rates and a rise in deflation-adjusted interest rates.

...It has only been 8 years, and now Mario brings out his bazooka......hmmmm...

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Anonymous
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March 11, 2016 at 1:59 PM ×

Whats your point BinT ?

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Bruce in Tennessee
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March 11, 2016 at 2:12 PM ×

I would have thought my point was pretty obvious, but anyway...

LB posted an interesting bit on Jeffrey Gundlach the other day, and in simple terms it said that ole Jeff realized volatility was killing many investors, and he accepted it and was thus far trading between the bounces realizing he'd have to predict the next whipsaw, and be ahead of it. Smart bubbas like LB are realizing the same. Very difficult, but perhaps possible...

As far as Fisher is concerned, these ideas were printed many years ago, after a similar bout of world economic troubles, but the ideas in the media today seem to be that the Chinese and the EU are going to overcome the global stagnation that everyone here realizes is the reality. My point is that you bubbas looking at the futures today probably should consider that it has been 8 years of this water torture of expecting a miracle and not getting one...and that you might look at Jeff and LB as savants rather than Mario...

Capiche?

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Anonymous
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March 11, 2016 at 3:51 PM ×


5 years ago, the five-year yield in Ireland was 17%. Now it’s negative.

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abee crombie
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March 11, 2016 at 5:26 PM ×

S&P tagging the 200 day.... time to short. put a time stop in for a few days, though you never know next week with Fed and BoJ. Either way if equities really are bid, then I would think, EZ has a lot of catching up to do, so might be a spread opportunity there

Wow credit is bid. Suddenly everyone wants commodity fixed income

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Anonymous
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March 11, 2016 at 5:33 PM ×

Aud rocketing too, dont think rba likes it.

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Anonymous
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March 11, 2016 at 6:19 PM ×

BinT,
It's not been 8 years of water torture unless for the entire time you have been looking for the future to exactly rhyme with the past. It just doesn't work that way. Every now and then it might help to ask this question: "What could possibly go right?"

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washedup
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March 11, 2016 at 6:58 PM ×

@anon 6:19 - indeed - someone forgot to tell zero hedge and jeff gundlach that the yawning gap between high yield credit and equities, which is apparently the reason we are all supposed to be hiding in nuclear bunkers, can in fact be closed in more than one way.
BinT on your "ideas in the media today seem to be that the Chinese and the EU are going to overcome the global stagnation", you and I must be reading completely different magazines, talking to a different set of people, and watching different TV channels, because I get a totally different impression - wax away at the idea that the events unfolding in China and Europe will lead us down a deflationary toilet bowl (I plead guilty on holding that opinion from time to time FWIW), but please don't tell me its uncrowded or in any way contrarian to think so anymore - maybe 2 years ago, but not right now.

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abee crombie
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March 11, 2016 at 7:08 PM ×

From DZ. Interesting thoughts on ECB

The decision by the ECB yesterday represents a sharp change in the usage of extraordinary monetary policies during the post crisis era. Mario delivered aggressively on all easing measures related to the DOMESTIC credit channel. He upped QE purchases by a larger than expected 20b/month. He introduced the purchase of non-financial IG corporate bonds. And he set up refinancing facilities which will allow financial institutions to secure long term funding for European securities at rates as low as -40bps. Mario went "full bazooka" on the DIRECT QE led portfolio balance channel. These policies will DIRECTLY ignite domestic credit formation in the Eurozone. Further, they will DIRECTLY force a portfolio movement out of risk-free/IG assets into higher risk assets. And of course, this is what we all hope will spark animal spirits, business investment, job creation, real returns on capital, and a real business cycle upswing in the Eurozone.

What was missing in Mario's new policy directive was the traditional usage of risk free real rates as a driver of further easing. Of course he did take the depo rate down by -10bps, but at the same time he crushed forward guidance in the press conference. And it was the latter which created all the confusion (ie the 4 figure rise in EURUSD). Basically, Mario declared that the ECB was done with using the INDIRECT rate channel as a way to spur credit formation, investment growth and portfolio balance effects. The question of course is - "why did he do that?".

Let me say up front that I do not think it has anything to do with the effectiveness of further moves into negative territory for short term rates. These moves are highly effective. They lower real rates, spur investment and consumption, and most importantly weaken the currency. But it is this latter effect which has been so troublesome for all central bankers. It is what has been at the heart of the "currency war" debate since the Fed started using rates and forward guidance back in 2008. When using the interest rate channel to drive a credit easing you end up stealing growth from your trading partners via the currency. And that in turn creates a lot of negative externalities.

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abee crombie
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March 11, 2016 at 7:08 PM ×

What Mario did yesterday was to engineer a credit easing without a currency devaluation. And my suspicion is that this was all part of a gentlemen's agreement back at the G20 meeting. Here was what I think happened in Shanghai. The BoJ and ECB proclaimed that they were both going to ease aggressively in March. The PBOC then said, well if you drive the EUR to parity and JPY to 130 with deeper negative rates we will break the USD peg. And that's when everyone said, ooohhh not so fast. It was surely well understood by all participants that the August and January CNY moves had destroyed all the hard reflationary work the ECB and BoJ had done since Q4 2014. And a full break in the CNY peg would bring a further nasty and unwieldy tightening in global financial conditions (i.e. our 1998 argument). No one wanted that! Also, it was no doubt widely understood by all those involved that the Chinese (with the peg in place) could not take a significant strengthening in the DXY given their domestic debt and growth situation. So the players in this very complex currency war game all sat down and came up with a simple agreement. The ECB and BoJ would focus purely on the DOMESTIC credit easing channel. They would not use these highly powerful negative rates (and forward guidance) to lower risk free real rates, and in turn weaken their currencies. Further, the Fed likely gave assurances that it would not remove accommodation too quickly via rate rises. That would also keep the DXY in check and give the Chinese time to use fiscal policy and structural reforms to manage the unwind of their debt bubble. All that said, I can imagine the Fed is thinking long and hard about ways to focus less on rate rises and more on a domestic credit tightening if conditions warrant further accommodation removal. The exchange rate externalities which arise from using rates may simply be too problematic given the delicate bilateral "detente" structure between the PBOC and FOMC. That is certainly some food for further thought.

In any case, the easiest way to confirm this G20 currency peace agreement theory will be to watch the BoJ next week. If they ramp ETF purchases and look to set up funding structures which DIRECTLY support portfolio balance moves into riskier assets, while at the same time playing down the future use of negative rates, then "it's a bingo" as Christoph Waltz would say! I cannot wait to find out happens next week. In the mean time I think the market will need to digest this very large change in ECB (and possibly all central bank) policy. If there truly is a currency peace agreement in place, all market correlation patterns between currencies, rates and equites will need to change. This could create some very "spiky" flows in the coming weeks as many systematic algorithms begin to break. Good luck trading.

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washedup
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March 11, 2016 at 7:16 PM ×

abee - thx for that - I couldn't agree more - I would just make one minor change, replacing

'this was all part of a gentlemen's agreement back at the G20 meeting' with

'this was all part of an agreement struck at a gentlemen's club back at the G20 meeting'

if only I had some images to go with that story…..

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Macro Man
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March 11, 2016 at 7:20 PM ×

Ironically, Zervos is probably the guy that most fits BinT's caricature of a Kool-aid drinker.

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Anonymous
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March 11, 2016 at 8:31 PM ×

Some serious quality analysis today here, Pols blog and the comments here. I am grateful. Discount all price action from the last 3 months. It's like a cloud has been lifted in Europe, and I was a bear. These coming weeks will tell a lot.

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Anonymous
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March 11, 2016 at 8:44 PM ×

Y even a gentlemans agreement ? Y not annouce it openly ? I would have thoughT an open annoucement would make the coordination more powerful. Y keep mum ?

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AB
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March 11, 2016 at 9:48 PM ×

Abee, that note reads like a post from a bullish zero-hedge site. Rife with conspiracy theory.

I have a tough time drawing the long winding line from any of these monetary policy actions to the incomes of those people who have a high propensity to consume out of incremental income. Don't we have to assume that companies and asset owners are going to take this stimulus and physically invest? Without, what do actually get out of these policies? The impact on asset prices can be nullified rather quickly.

That being said, I get the short-run impact on asset prices. But, if there is no real economy effect, shouldn't we expect the long-run effect on asset returns to be nil?

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Booger
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March 11, 2016 at 10:04 PM ×

Abee: Interesting article. I am not convinced the BOJ or ECB do not want a lower exchange rate as an important mechanism.

Also, I am not so sure Draghi kicked an own goal on purpose. I tend to think they probably in a panic similar to BOJ. If eur.usd settles in 1.1-1.2 range then this may not be good for industrial production in Europe.

Something has definitely changed in terms of FX sentiment to Japanese/Euro easing though. The last 3 times the FX market has gone against the wishes of BOJ/ECB. The BOJ meeting, one could chalk up to the market being freaked out by the Kuroda change of turn. The ECB meeting before the last one you could chalk down to disappointment and poor expectations management. The recent ECB announcement is clear though - they delivered, but the market decided to rip based on a remark by Draghi that at other times would have been relatively innoculous.

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EschewObfuscation
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March 11, 2016 at 10:25 PM ×

@abee

So... Paying negative interest on reserves (i.e. taking money from banks and destroying it) weakens your currency, but letting them borrow at negative rates (i.e. printing money and handing it to them) or printing an extra 20B/month and buying IG bonds (!) does not weaken your currency? Have I got that right?

If I am the only person who thinks that sounds crazy, then I must be the crazy one. Could someone please elaborate?

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Mr. T
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March 11, 2016 at 11:07 PM ×

So US breakevens are in crazy rally mode. We've got many commodities pushing well off their bottoms - oil is up 50%, iron, even some of the softs are doing better. Stocks are pushing higher, led by commodity producers. Forget the anchoring bias of where they were, if you were just fitting over a 2 month horizon I think most people would be inclined to say inflation is rising, in real terms, with little help from FX. When CPI in the US starts printing north of 2%, the whole risk-off theme of the fed being out of bullets to fight deflation could look downright insane. What if the fed starts looking right - that the commodity decline was temporarily lowering inflation and thats done? Everyone hates this rally, particularly in the commodity space. I'm not so sure. Wouldn't be the first time I get tricked into buying a bear market rally, but thats what I'm doing. A debt swap here, an equity issuance there, and those bonds trading at .50 are gonna look real cheap - as silly as the bunds at 162. This has to be one of the biggest disconnects out there now - sovereigns with solidly negative yields with commodity price inflation? Explain to me again how Japan for example is going to not pass on higher input costs?

I'm not a chart guy, but isnt 'GLEN LN' putting in the picture perfect double bottom?

long all parts of the capital structure in commodities, short neg yielding bonds.

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Canuck Banker
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March 12, 2016 at 2:30 AM ×

I suggest that the ECB is largely irrelevant to commodities. What is happening in China is what will make or break commodities. Do you they need more real stuff, like oil, coal, iron ore, copper etc, to build more ghost cities, or not? Getting the Europeans to have an extra espresso or spend a few euros more on the premium weiner schnitzel isn't going to move the needle on commodities. So the real question is whether the rumors about equitizing NPLs in China are true, and if so, what is the consequence.

Notwithstanding my doubts about commodity inflation, if we look at the relation between commodities and equities, I can't see how commodity price escalation can be good for equities at this juncture. If prices rise, rates will have to as well to counter inflation. Since relatively high equity multiples are largely a consequence of free money from central banks, taking away that liquidity shrinks the multiples and causes equities to go down.

If commodities don't inflate, it means that the global economy is contracting, and so will earnings. Shares would go down, but for the additional liquidity that would flow from central banks. But should we not doubt the efficacy of that route? BinT raises a good question about how much longer markets can expect central bank flimflamery to have an impact when we have spent the last 8 years waiting, to no avail.

BTW, I had the first oil relate insolvency in my portfolio this week. Lots more in the hopper, so how anyone can expect the situation in the real world to have somehow stabilized escapes me.

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abee crombie
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March 12, 2016 at 4:36 AM ×

Guys I didn't endorse that dz commentary, just thought it was useful to share. Call him a kool aid drinker or anti zh, for sure but he's made some good calls and brings an interesting viewpoint.

He's going to debate Jim grant on Monetary policy in April. If anyone here is going I'd love to get some notes.

It hard to be bearish at $40 oil but Exxon or chevron only down slightly from 2014 highs seems a little odd. Maybe I'm late to the game or maybe supply is gonna fall off a cliff in 2017 but oil is done in my view. $60 maybe. Saudi Arabia is pumping like mad bc they know it. Electric cars are coming.. Over investment, free money and constant productivity improvement mean lower break evens. But still lots of room from current prices to 50 or 60 but I don't see this as a demand led bull like in the previous 10 years.

Mr t. Commodity bonds already up a lot. Distressed guys buy when yields are double digits. But they aren't there anymore, more like high singles. For sure a good carry but a lot less marginal buyers, imo..I find it hard to believe that if the credit cycle did turn last year, that feb 2015 was it and now we are going back. Chk, only announced restructuring, not much pain anywhere else. If commodity prices rally it won't be much of a restructuring at all. Doesn't this feel a little like after bear sterns went bust. Hey banks are ok, party on.

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Anonymous
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March 12, 2016 at 5:08 AM ×

"Electric cars are coming". 2014 US electricity generated was 39% coal, 27% natural gas, 19% nuclear, 6% hydro, 1.7% biomass, 4.4% wind .4% solar
There's really no such thing as an "electric" car.

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washedup
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March 12, 2016 at 9:31 AM ×

canuck/abee XOM/CVX always outperform in distressed environments because of L/S - no I don't think the credit cycle is over what's happening here is a continuing short squeeze, but it's a lot more powerful than anything we have seen in the last couple of years, and arguably still gaining momentum, because for the first time credit is leading it and not diverging from it. Could this all fall apart next week? Of course - we will see.

Canuck re: oil prices and equity values, low oil prices were bad and now that its heading higher that's bad too? C'mon - if you are counting inventory data and talking about China slowing down thats yesterday's news - as for ECB being irrelevant to oil, if tomorrow a CB came and announced they would buy oil futures because inflation was too low and oil was the only reason (not far from the truth by the way) , you don't think that would matter in a market where a $2 BN purchase (50k lots) is usually enough to move it $2-3? Even a very small probability adjustment in the financial world trumps anything in the physical world.

$30-50 oil is in my opinion commodity goldilocks after the dust settles, people adjust their recency bias that oil is 'crashing', and cost structures get rationalized. I daresay that could be the new long term trading range just like it was for, um, 10 years before everyone's Grandma came to hear of GSCI. I wouldn't worry about inflation from commodity base effects (although I am on record as saying there will be plenty from other sources) unless we cross $50, which I consider very very unlikely.

Welcome to the 90's - here is a playlist to jog your memory:
https://www.youtube.com/playlist?list=PLWsC2QS0CG39P6H3aK6xBXx1SW2L0klmd

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Anonymous
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March 12, 2016 at 9:40 AM ×

Re EVs & renewables, yes, but... a secular shift is afoot, the script being "things take longer to happen than you think they will, and then they happen faster than you thought they could".

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Anonymous
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March 12, 2016 at 10:01 AM ×

"The exchange rate channel was viewed as also playing an important role in the transmission of the monetary policy measures to the broader economy. It was noted that more recently, however, this channel had weakened owing in particular to the depreciation of the currencies of emerging market economies. "

Tha is from the ECB minutes of the previous meeting. It is clear from this & their actions they have shifted policy. The currency wars are over for now. FED hikes will have to come though to balance things or else equity markets will go berzerk to upside.

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Anonymous
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March 12, 2016 at 10:12 AM ×

Washed: Re your comment on the mega "short squeeze", does this imply you see as still in a longer term downtrend/bear ?

Anon 1001 - "FED hikes will have to come though to balance things or else equity markets will go berzerk to upside."

Remembered reading GMO's note where Grantham stated that this dip wasnt the "big" one as we are missing the euphoria. If we do go berzerk upside through CB moves, that will fit their narrative and timeline of bigger trouble a year or 2 down the line.



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Booger
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March 12, 2016 at 1:34 PM ×

Anon 10:01, Grantham is like Hussman, I don't think it helps for macro timing. Grantham seems to have checked out in terms of even getting his newsletter out by the next quarter. His views on oil, fracking, the housing bubble in Canada/Australia/NZ have not been correct to date.

Abee: thanks for sharing the article, very interesting read. Agree with shorting S&P, 2020 might be early though. I am very tempted to short AUD.USD at these levels but not sure how far this dollar correction will go.

Canuck Banker: agree with your sentiments, unfortunately, there is the short term before the long term. In the short term, things could go up for another few weeks.

Washed: the system effects of euro weakness have definitely been negative via the effects on China. Although it may weaken worldwide growth, I think the Europeans and Japanese still assess it as net growth positive for them. With the Chinese recently reaffirming their soft peg to the dollar, the Europeans and Japanese may have more incentive to try to weaken further before the Chinese do. It drags on the teat of U.S growth, but with the U.S fine still, why not? I think the Europeans and Japanese are more worried about the decline in industrial production than oil price/inflation effects. It seems they are in a long game of 3 way prisoners dilemma with the Chinese.

Unfortunately, the markets have not cooperated with the FX effect in the last 3 months. It will be interesting to see if the Japanese redouble their efforts next week. In a slowing world, without a crisis, competitive devaluation still seems to make logical sense (G20 rhetoric aside). In a crisis, collaboration makes more sense, but there is no crisis to motivate collaboration currently.

It will be interesting to see if the euro QE mechanism will work without the exchange rate movement. I am not sure risk markets will believe QE pixie dust is effective for long without the exchange rate effect, which is the only clearly concrete part of it.

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Bruce in Tennessee
admin
March 12, 2016 at 1:48 PM ×

http://www.marketwatch.com/story/why-the-fed-should-stun-wall-street-with-a-rate-hike-2016-03-11

...reading through the comments, I am sure most here realize there is an almost complete disconnect with equities markets and the global economy. When you look back to 2007, and realize what has been done to heal the markets, this is prominent...of the big 4 global economic entities, and I mean the US, the EU as a whole, China, and Japan, 3 of the 4 are using methods to increase stimulus to economies that won't keep running by themselves. Again, this is after 8 or so years, so the grade would have to be D or lower on what has been tried...

The point? I would be cautious this week...if the Fed has determined to raise rates, things could get ugly quickly if a tantrum ensues. And yet, of course, where we are right now, a raise of .25% means little or nothing. At these levels, rate increases are like trying to move a stopped train...very little velocity or change when the first steps are taken...

(jstfr?)

2 cnets..

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Anonymous
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March 12, 2016 at 2:45 PM ×

Anyone want to comment on Yra Harris' idea that managing non-recognition of problem loans, i.e., avoiding bank insolvencies, explains a lot of what ECB did? Then stimulus etc. is just public relations cover, b'cuz banks with large NPL balances are, naturally, unable to see a decent loan anywhere (except among those who don't need to borrow).

http://yragharris.com/2016/03/10/pistol/#more-3031

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washedup
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March 12, 2016 at 4:04 PM ×

@anon 2:45 - by that logic anything done by any central bank that loosens monetary policy is some kind of a 'bail out' - duh - was anyone sitting back thinking CB's would rather have the banking system edge closer to destruction, than to kick the can down the road and hope human progress outpaces the credit cycle? So why the conspiracy theory?

@anon 10:12 yes I don't think commodity equities have finally bottomed for this cycle, primarily because upstream oil producers dominate the indexes and they are still overvalued - I am turning cautiously optimistic on refiners and natural gas at these levels though, but they are a small part of the equation.

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abee crombie
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March 13, 2016 at 1:41 PM ×

On ev's, check out Tony seba, either on YouTube or here.

http://mountaintownnews.net/2015/08/20/tony-sebas-startling-view-of-market-disruptions/

Maybe he is a little optimistic but when bmw says all cars will have some electric engine ( hybrid ) in near future, end result on oil consumption isn't good.

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abee crombie
admin
March 13, 2016 at 1:44 PM ×

On ev's, check out Tony seba, either on YouTube or here.

http://mountaintownnews.net/2015/08/20/tony-sebas-startling-view-of-market-disruptions/

Maybe he is a little optimistic but when bmw says all cars will have some electric engine ( hybrid ) in near future, end result on oil consumption isn't good.

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abee crombie
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March 13, 2016 at 1:49 PM ×

Also I love Grantham style but he totally messed me up on commodities in recent years. Was pounding the table saying iron ore was surely more than a bubble ( new regime ) in like 2013 when in fact he is supposed to be a professional bubble spotter and missed it, when it was pretty easy to spot, ( hindsight obviously ) if u looked on the ground.

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abee crombie
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March 13, 2016 at 1:58 PM ×

Also I love Grantham style but he totally messed me up on commodities in recent years. Was pounding the table saying iron ore was surely more than a bubble ( new regime ) in like 2013 when in fact he is supposed to be a professional bubble spotter and missed it, when it was pretty easy to spot, ( hindsight obviously ) if u looked on the ground.

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