With the ECB running dangerously low on bonds to monetize even as its QE program has failed to spur inflation, Mario Draghi may have no choice but to unveil drastic changes to the central bank's QE programm tomorrow. Here are the options available to the central banker, and some ideas of how markets may react.
Today was another historic day in the monetary twilight zone that is Europe, when two large European, non-financial companies were the first in history to be paid by investors to borrow, courtesy of the ECB's corporate debt monetization program, which has unleashed an unprecedented scramble for frontrunning the central bank's purchases of corporate debt and a historic collapse in bond spreads.
"I don’t see a reason [for the ECB not to buy stocks]" said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics. "It isn’t obvious to me why a central bank wouldn’t always want a diversified portfolio, including equities."
Wall Street and Silicon Valley are two of the key strategic hubs of hyperpower global domination. The others are the industrial-military-surveillance-security complex – of which Hollywood and corporate media are the soft power extensions – and the petrodollar racket/tributary system.
On the verge of running out of bond to monetize, the ECB has engaged in something fed had expected: it is buying bonds from itself. But according to a troubling Reuters "trial balloon" that may be just the beginning: as Reuters writes, the "ECB may soon be forced to follow the Bank of Japan's example and buy equities as part of any expanded stimulus programme."
One day after Koichi Hamada, one of Shinzo Abe's inner circle of economic advisors, suggested that the BOJ should monetize foreign bonds, admitted that "I’ve studied economics for more than 50 years and I’ve believed that what works in the world mostly works in Japan as well," Hamada said at a seminar in Tokyo, later admitting that "in the past six months, I’m starting to see there is potential that Abenomics may not work well."
What happens next may put the past 7 years of simple "financial repression" and central bank failure to shame: in a lunch address by Princeton University economist Christopher Sims, "policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future."
The answer to ‘How do you stimulate the economy when there are no more conventional rate or unconventional QE/forward guidance tools?’ is ‘Broaden the set of assets that you can buy”. And while Congress may be unwilling when the unemployment rate is under 5%, they may be more willing at 7% if a recession is underway….and this means they can continue to do slow and unsteady hikes, based on the current framework.
Will the boys and girls still in the casino after the current election gong show is over patiently wait for their next fix from a beltway governance process that is in sheer pandemonium and stalemate? We think the odds are between slim and none. As we indicated previously, if Trump is elected the fiscal process will lapse into confrontation and paralysis for an indefinite spell.And if Hillary is elected, the Republican House will become a killing field for almost anything she proposes, and most especially the rank Keynesian apostasy of outright and massive debt monetization...
To quell any speculation that it may be easing off in its "inflation boosting" monetization efforts, moments ago the BOJ "leaked" what its September statement would be, and as Reuters reported the BOJ has "already prepared a preliminary outline of a "comprehensive" assessment of its policies due next month that will maintain a pledge to hit its 2 percent inflation target at the earliest date possible, sources familiar with its thinking said." The general tone would suggest that a tapering of the BOJ's massive stimulus program is unlikely.
Following yesterday's muted action which saw the S&P500 close unchanged, it has been more of the same listless trading overnight, with US equity index futures little changed as the Nikkei fell on the back of a stronger Yen, while government bonds rose and European stocks reversed early gains following the BOE failed bond monetization operation. Crude oil dropped for a second day after Saudi Arabia told OPEC that it pumped a record 10.67 million barrels of oil a day,