In this video we analyse:
Daniel Lacalle is PhD in Economics and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
@dlacalle_IA
If EU countries get used to ultra-low rates the risk of multibillion nominal and real losses in bond portfolios and pension funds is enormous, because the tiniest tilt in inflation will make the house of cards collapse. Goldman estimates losses of $2.5 trillion worldwide from a 1% rise in inflation. It is so relevant that if interest rates raised a stunted 1% in the EU it would lead to massive budget cuts to maintain current deficits.
Of course, Draghi does not stop repeating, and he did it again on Thursday, that this period of excessive liquidity must serve to correct imbalances and implement structural reforms. But no one seems to listen. Cheap money calls for cheap action. More “fiscal stimulus” and more spending.
Draghi, knowing that almost no eurozone economy could absorb the rate hikes and increased risk if the repurchase program ended in March 2017, as it was announced, decided on Thursday to extend it until December although “reducing” the pace of purchases. That is, kick the can forward and an optical reduction because tapering from 80 to 60 billion per month is irrelevant when excess liquidity in the system has soared from about $ 125 billion to $ 1 trillion in the QE program period.
With this measure, Draghi seeks to achieve two things: That governments reconsider their positions and put structural measures in place without creating a serious liquidity problem. On the other hand, to help the yield curve reflect a slight rise that helps banks out of the hole in which they are with negative interest rates.
The problem is that the structural challenges of the European economy -demography and overcapacity- are not solved by perpetuating imbalances because governments and economic agents simply get used to seemingly temporary measures as if they were eternal.
Daniel Lacalle is a PhD economist and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
@dlacalle_IA
For those of you counting at home, the world’s top 50 global central banks have cut interest rates (drum roll please) almost 700 times since the collapse of Lehman Brothers.
That’s a lot of cuts. Combine that astounding figure with almost $24 trillion worth of asset purchases, and then ask yourself the following question:
What exactly did we all get from this unprecedented amount of stimulus?
Not much according to economist and author Daniel Lacalle. Here in the United States, the economy has continued to slow down, from a 3.3% year-over-year growth rate in the first quarter of 2015 to 1.6% today. This happened despite a ballooning in the Federal Reserve’s balance sheet to an historic, eye-popping $4.4 trillion.
Here’s what Lacalle had to say on this subject with Hedgeye CEO Keith McCullough in the video excerpt above:
“There’s a concept that we as investors need to think about, especially when we’re doing global macro. What we’re talking about here is return on invested capital. If you’ve spent $24 trillion fiscal/monetary stimulus, and you get 1.6% economic growth, my friend, if that isn’t an economy slowing down I don’t know what you’re talking about!”
Want more? Click here to watch the entire interview of Lacalle and McCullough, “HedgeyeTV Exclusive: Italy’s Banking Crisis & What it Means for Europe.”
@hedgeye
@KeithMcCullough