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To Citi, "The Failure Of ECB QE Looks Clear" And The Global Reserve Unwind Will Only Make It Worse
Mario Draghi and the ECB have a habit of patting themselves on the back when it comes to what they imagine the happy outcomes of their monetary policy decisions have been. In fact, they have a habit of congratulating themselves on positive outcomes even before said outcomes have been observed or have even had time to play out.
On the one hand, that sends a message to the market that the central bank has a lot of confidence in its own omnipotence and indeed, Mario Draghi is famous for executing one of the most successful examples of jawboning in the history of central banking when, after proclaiming at the height of the eurozone debt crisis that the ECB would do “whatever it takes”, he forestalled the ECB’s “emperor has no clothes moment” for at least two years.
On the other hand, congratulating oneself for things that haven’t happened yet risks palpable embarrassment should things not turn out the way you thought they would and that, ladies and gentlemen, is precisely where Mario Draghi finds himself going into tomorrow’s ECB announcement which the market will be watching closely, and not for confetti attacks, but for hints (or even an announcement) of more QE.
Why would the ECB expand QE you ask? Well, first because PSPP really hasn’t worked, despite Draghi’s protestations, and second because, as we noted yesterday, “the only thing that can offset the synthetic inverse QE that China and/or the rest of the EMs embarked on as Zero Hedge first warned last November, is more quite tangible QE conducted elsewhere, ideally at the ECB (which is currently 6 months into its first QE episode), or Japan (although the ceiling to debt monetization there may have been already hit with the BOJ already monetizing more than 100% of all gross issuance) but not the Fed, whose rate hike intentions are what started this entire global reserve liquidation fiasco in the first place."
But don’t take our word for it, just ask Citi who isn’t mincing words when it comes to the ECB’s failure to boost inflation expectations and forever vanquish the deflationary bogeyman.
“The failure of the current ECB QE programme looks clear,” Citi says, before offering the following explanation for that rather heretical assessment:
Inflation expectations have collapsed across the short term and long term. The Draghi ECB has been characterized by a cycle that starts with a defense of the prevailing policy, then moves to an eventual policy reaction, later followed by assuredness on what has been achieved. That assuredness, most recently highlighted in Draghi’s June press conference when he dismissed bond market volatility, should now give way to a sense that economic events have not played out as expected in our view. This should be reflected in downward revisions in ECB staff forecasts for growth and inflation.
So there, summarized, is the ECB QE failure bit. Now, here’s Citi's bullets on why Mario Draghi may be first up to bat to combat the effect of EM FX reserve drawdowns:
- The decline in currency reserves has been notable since Sep-14, and averages nearly $60bn per month.
- The evolution in balance sheets is important for real rates. Figure 16 highlights the change in 5y5y real rates versus change in balance sheet size.
- Forex reserve unwinds are important – but so are central bank balance sheet expansion. Academic research suggests a 1% of US GDP decline in either case results in +30bp 10y UST.
- Figure 17 models the current state of play where we factor in global central bank balance sheet and reserve moves. Real USD 5y5y is close to fair.
And here’s Citi, summarizing: “it seems reasonable to expect Forex reserves to decline, in which case central banks will face a meaningful tightening in monetary and financial conditions [and] markets should therefore be also alert to central banks offsetting these reserve flow impacts should the current dynamic of modest growth and weak inflation persist.”
But the punchline, as we detailed on Tuesday evening, is that EM flows are no longer correlated to G3 balance sheet expansion. Instead, they're tracking the Fed's balance sheet alone.
What that means is that no matter what Mario Draghi does, quantitative tightening will continue unabated until the Fed realizes that it missed its rate hike window and must now at the very least not hike and if it wants to prevent an outright EM meltdown and the attendant loss of global liquidity, will need to launch QE4 - and in a hurry.
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“The failure of the current ECB QE programme looks clear,” Citi says
But QE by the Fed has been a resounding success as all the money has gone to the banksters and the 0.1%
The Fed Won: America's 0.1% Are Now Wealthier Than The Bottom 90%http://www.zerohedge.com/news/2014-11-11/fed-won-americas-01-are-now-wea...
Did you see that you can buy a stand for your Apple Watch? Holy shit dude!
But is there a Kim Kardashian stand for it??
And what's going on with Ashley Madison now??
But the Fed will raise rates this month to show they're on top of this problem.
And that'll be a difference that will make no difference, except to cause the markets to throw a fit like an infant with a full diaper. This is going to be a long Winter......
"Mario Draghi and the ECB have a habit of patting themselves on the back when it comes to what they imagine the happy outcomes of their monetary policy decisions have been"
That's because the outcomes are always very happy....For them and Banksters Inc.
whatever. they have one mandate, and one only: price stability. a term lost in translation, imho
"But the punchline, as we detailed on Tuesday evening, is that EM flows are no longer correlated to G3 balance sheet expansion. Instead, they're tracking the Fed's balance sheet alone."
meaning they are reacting to the tides of the USD only
"What that means is that no matter what Mario Draghi does, quantitative tightening will continue unabated until the Fed realizes that it missed its rate hike window and must now at the very least not hike and if it wants to prevent an outright EM meltdown and the attendant loss of global liquidity, will need to launch QE4 - and in a hurry."
and this "quantitative tightening", which just means the PBOC selling USTs... affects the USD only, causing or not a reaction from the FED... only
Draghi, on the other side, might come to the point that he increases his buying... until there is nothing left to buy. And wouldn't that be hilarious?
Yes QE tightening has weakened the grip of WS/FED on Euro plays.
I don't know if this is good or bad for Euro. But Germany will suffer as mercantilist if China goes into global trade withdrawal.
However if the Euro group survives its own implosion it could win big over time from the USD's relative demise especially in ME and Asia.
Its a very convoluted world; but that is now visible since Ukraine/Syrac cold war start; aka 2014.
Since QE only affects stock prices and I don't have a dime in the market, it makes no difference to me if the FED does QE or not. They will never get the economy fired up with Zero interest rates or QE. They will have to crash it sooner or later. They will do that when the elite are positioned to advantage. That will be soon I think.
Philosophical, yet gracefully related.
The Primacy of Jewish Genes - YouTube
Some at the ADL are looking to get burn bagged. /LOL
http://diplopundit.net/burnbagarchive/
There are known genes for PTSD. It would be interesting to see if these are concentrated in Jews. That might be a cross check on the study. Too bad you don't provide a link so people can check it. BTW in typical human populations the genes for PTSD run at about a 20% frequency. About 1/2 of those get enough trauma to trigger PTSD. And that pretty much accounts for the % of the population into alcohol and other drugs to excess.
You might like this general study of the subject:
http://classicalvalues.com/2013/12/dna-ptsd-and-abused-children/
"tightening" will abate when EMs run low/out of "tightener" (forex)
then what?
got popcorn?
So the doddering old girl has missed the rate-hike bus. Next up, the dead rabbit QE4 bounce out a hat, or maybe like that one in Outer Limits.
Q: Why would the ECB expand QE you ask?
A: Because the world's CBs are 2 trick ponies. QE + rate cuts.
How anout CB1 and CB2 receptors?
QE=deflation...
Chaos. No-one knows anything! The Fed can't raise rates, the Fed will raise rates. The dollar will collapse, the dollar won't. Buy gold, what do you think all of those AMRAPs are for? Chaos. I'm going fishing!
QE4
"These inbuilt chemical delivery systems dose marines with a powerful mix of synthetic adrenaline, endorphins, and a psychotropic aggression enhancer. Marines on stims benefit from greatly increased speed and reflexes, but are subject to long-term side effects including and not limited to insomnia, weight loss, mania/hypomania, seizures, paranoiac hallucinations, internal hemorrhaging, and cerebral deterioration. Nonetheless, both commanders and the marines themselves stand by the use of stims as essential to their continued survival and effectiveness on the battlefield."- The uses and risks of stimpacks.
More moneyprinting.... what could possibly go wrong....
Why is there so much anti-semitism demonstrated on this website?
I thought it was forbidden.
...Apparently you've been pidgeonholed (cornholed) as a One Trick Two Comment Pony.
Jews have been tested as having the highest IQs among the world's populations. Maybe we could learn from them...
QE EVERYWHERE IS A FAILURE.
DEBT enabled bullshit. These debt lovers are personally responsible....if they signed on to debt....they should be liable for it.
Every last one of them.
Better get out while you can and buy that cross-bow and camper. It will be a lot safer in the woods.
>synthetic inverse QE
Well obviously their derivative immelman hybrid vortex shredder has entered a converse equilibrium phase and why is everyone on this site so infatuated with Queen Elizabeth?
According to Rickards the ECB and Draghi have done hardly anything in terms of real QE, only a couple billion dollars worth. Seems they have constraints the FED doesn't have so Draghi mainly just talks a good game, but that's about it.
So when a Krugman clone pundit claims it's not working perhaps that's code for, "Lets print big money like Japan and the FED."
"QE hasn't worked because they did not do enough of it". Krugman.
"Socialism/Communism/Fascism hasn't worked because the right people were not in charge". any dumb shit liberal commentator.
Of course they know it doesn't do anything for the economy that's just a cover story.
The real story is that it's an hidden Bank Bailout and that's why after QE started Germany dared to be tough on Greece.
Can someone explain why a decline in EM dollar reserves is the opposite of QE, please?