Earlier today we noted [13]something long overdue: the big banks are slowly admitting that QE, especially in its extended NIRP version, is not working. To wit:
The problem of low inflation remains evident. Swiss inflation has collapsed into very negative territory, albeit precipitated by the SNB abandoning their currency peg earlier in the year. While Danish inflation has moved away from zero post big rate cuts in 2015, it is still hovering at just 0.5%. And Swedish inflation has been stuck around zero since early 2013.
Yet, household savings rates have also risen. For Switzerland and Sweden this appears to have happened at the tail end of 2013 (before the oil price decline). As the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.
For now, negative rates as a policy tool remain a “work in progress”, judging by the current inflation levels across Europe. But the rise in household savings rates amid so much central bank support is paradoxical to us, and mimics what we highlighted in the credit market earlier this year. Companies in Europe are deleveraging, not releveraging, and are buying back bonds not stock.
BofA showed this chart of soaring European interest rates coupled with surging savings rates: precisely the opposite of what the ECB's tacti intention.
[14]
Then, to our surprise, none other than Mario Draghi's former employer, Goldman Sachs, came out with a report which essentially doubled down on BofA's skepticism, by practically admitting that what the ECB is doing in a monetarilly interconnected world, where every central bank is now an activist exporter of its own deflation (and concurrently importing others' deflation) is not going to work.
The subdued and increasingly persistent inflation dynamics that have prevailed in recent years may have eroded central banks’ best line of defence in the face of adverse disinflationary shocks. The energy-price-driven decline in Euro area inflation from 2012 to 2015 has thrown this possibility into even sharper relief.
By embarking on unprecedented balance sheet operations and forward guidance, central banks in Europe have sought to ring-fence domestic inflation expectations and signal their intention to maintain monetary conditions easy for a protracted period of time. Mario Draghi himself described the ECB’s asset purchase programme as a way of ensuring that very low (and, at times, negative) inflation does not lead wage- and price-setters to adjust their behaviour to a perceived lower steady-state rate of inflation. However, judging from market-based implied measures of longer-term inflation expectations, the effectiveness of the ECB’s announcements has proved limited so far.
And once again, just like in the BofA case, this is the most diplomatic way Goldman could find to say that Europe's NIRP (and QE) are not working.
Its Exhibit A: the following chart showing the "history" of Europe's current and future inflation. It is self-evident that Europe's inflationary expectations have never been lower.
[15]
Why the sudden attack against unconventional monetary policy?
Perhaps the same reason just one month ago banks such as Citi and Macquarie came out and said outright monetary financing is just a matter of time.
Perhaps BofA, and now Goldman, are setting the stage for the next iteration: after all any rational person by now realizes that just by doing more of what has failed, will fail, and lead to even more spectacular volatility and bigger crashes.
However, that does not give the banks an option of simply giving up. As a result, while the market is currently in a euphoric mood - unknown for how much longer: after all the same dynamics that unleashed the EM crisis in the summer just came back with a vengeance with a Fed once again jawboning for a December rate hike and promoting a stronger dollar hinting at an even more violent EM upheaval in the months ahead - the large banks are quietly positioning their support for the "policy recommendation" that will follow the next deflationary surge.
For the answer whether it will finally be the inevitable helicopter money, find out after the next 5-10% market "crash."
