We were stunned 10 days ago when, out of the blue, it seemed as if Deutsche Bank had finally figured it out: namely that constant central bank intervention is leading to increasingly more dire outcomes... such as a surge in DB CDS and its stock price plunging to record lows.
The bank which had been crushed over the past month, released a solemn appeal to the ECB and BOJ, in which it made it quite clear that any additional easing and continuous easy money will only hurt both DB and its peer banks.
In the report titled "The Risks From Further ECB and BOJ Easing" Deutsche Bank's Parag Thatte warned that with the Zero Lower Bound already breached in nearly a third of global markets, the benefits to risk assets from further easing no longer exist, and in fact it says that while central banks have hoped that such measures would "push investors out the risk spectrum" the "impact has been exactly the opposite."
Well, what a difference a week makes, because whoever wrote the first DB clearly got a tap on the shoulder.
Over the weekend, it was Deutsche Bank once again who reappeared with a narrative that, not all surprisingly, was the diametrical opposite of what DB said just one week earlier, when it made it very clear, that "sorry, it was only kidding", and that it is all up to the central banks after all. This is what Sebastian Raedler said, after he angrily took the podium over from last week's Parag Thatte.
Without policy intervention, there is more downside risk for equities: any ECB measure to support European banks (e.g., an LTRO to reduce bank funding stress) would likely trigger a market rally, but addresses only a symptom of the current credit stress, not the root cause. To avoid a further rise in US defaults, we will likely need to see a Fed relent, leading to a sustainable drop in the dollar, higher oil prices and reduced energy balance sheet stress. The problem is that there is little sign of the Fed wanting to give up (with the JOLTS survey strong and Yellen’s remarks that easing elsewhere offsets Fed tightening). In the absence of strong policy intervention, more downside for European equities is likely: if credit spreads rise to 1,150bps to reflect our strategists’ default scenario of 7.2%, this points to 10% downside for equities, while a full default cycle would mean around 20% downside. A US default cycle would increase the risk of a US recession, as the rising cost of debt capital reduces investment and hiring, while falling asset prices push up savings ratios, thereby lowering consumption growth. Our US economists have recently downgraded their 2016 growth forecast to 1.2%, significantly below consensus at 2.2%. During the past two default cycles, IT, autos and consumer durables have all seen their consensus EPS slashed by 80%+.
Oh no, a world without policy intervention, one where the global economy is finally allowed to determine what its true rate of growth is without 7 consecutive years of artificial liquidity "sweeteners." And as for the horror of stocks dropping another 20%... let's not even go there.
But wait, this is the same bank that just on February 6 said more easing brings major risks. It appears DB felt the need to footnote this statement, with an explanation that came also over the weekend, this time by way of equity strategist (Jim Bianco who still has a 2200 year end S&P target). It appears when DB says "easing" it only means "NIRP." Because if "easing" means "QE4", then by all means please do it.
Here is the nail in the coffin of whatever period of lucidity Deutsche Bank may have had, courtesy of David Bianco:
Escalating the currency war will bring mutually assured destruction, in our opinion. The WMD are negative interest rates. Central banks must stop the proliferation now. Negative rates don't stimulate beyond currency devaluation. They began with small CBs fighting flight-to-safety surges in their currency. But negative rates set by larger CBs produce no benefit in a soft global economy because they are countered. If Euro plunges, then others from GBP to RMB will too, and then if a strong dollar breaks the US economy the whole world will suffer. This spiral risk destabilizes FX markets and price setting in other markets and threatens saver and financial system health. Stick with QE!
So there you have it: Please no more easing, but only if easing means NIRP. As everyone has seen by now, more NIRP means a collapse in DB risk assets. But if "no more easing" means "even more QE", then go for it.
And just like that we are back to square minus one, where central banks are called upon to fix the mess that central banks made, while holding banks and their flip-flopping "analysts" (and year end bonus paychecks) hostage.