I’m not quite sure what Friday’s massive rebound in risk asset prices is supposed to have told us other than that with money costing less than nothing, any kind of return, irrespective, looks sexy.
Whatever the monetary contortions that the ECB presented us with on Thursday might have been, and however asset prices adjusted to them, they do no good for anyone and display nothing other than the dire lack of options open to central banks. The iTraxx Main, neverthless, shot to 67pt from 84pt in one day, thus displaying one of the greatest acts of headless rallying I can remember in over 30 years in the business.
Madness
Albert Einstein fervently denied ever having said that insanity is doing the same thing over and over again and expecting different results but whether he said it or not is irrelevant to its veracity. I did, however, hear Sir Mervyn King, the former governor of the Bank of England, interviewed on the BBC World Service’s Hard Talk programme last night – it’s on the World Service’s website and is seriously worth listening to – on the back of the publication of his latest book titled “The End of Alchemy”. His view is that if after eight years of aggressive monetary stimulus the world economy has not returned to growth, then free money cannot be the solution. All I can say to that is “wow, I’d never have guessed!”.
Although entirely right. Sir Mervyn sadly brought the same ivory tower approach to the interview with which he ran the Bank. It’s easy to declare that one can sail through outer space using next to no fuel as long as one can conveniently forget how much of it takes to get into space in the first place. There is no question that when ZIRP and NIRP have finally run their fallacious course, the adjustment to a different regime will be unfathomably painful and destructive, but the longer we wait the worse it will be. I won’t bang on any longer about Merv the Swerve, other than to shake my head at his defence when asked for a mea culpa and coming back with a nostra culpa on behalf of all economists. Charming chap, eh?
Germany
Meanwhile the results in the German state elections in Saxony-Anhalt, Baden-Wuerttemberg and in the Rhineland-Palatinate make grim reading, not only for poor Mutti Merkel whose migrant policy has completely missed the electoral mark. Whatever chances the CDU might have had at regaining control of the latter two, they were shot to bits by AfD, the right-wing protest movement which began life objecting to bailing out all and sundry in the euro zone but which has shifted to become the mainstream anti-immigration platform. It might be politically diametrically opposed to the likes of Podemos or Syriza but it clearly bangs another nail in the coffin of the traditional left/right two party punch-up with which we have all grown up.
I suspect Mutti will carry on as though nothing has happened in the same way in that all traditional parties like to behave, as though all of this isn’t happening. In the UK last year four and a half million people voted for UKIP – I was, despite rumours to the contrary, not one of them – for the return of one seat in Parliament. Just because the electoral system doesn’t reflect that vote doesn’t mean it isn’t happening. There are a lot of unhappy people across Europe – and reflected in the progress of Donald in the US too – but their lack of adherence to endlessly proclaimed political correctness raises the questions of a) who has got it wrong and b) how could they have got it so wrong? I have quoted Bertold Brecht on the subject before when he suggests that if the government doesn’t like the behaviour of the citizenry, it might choose to dissolve it and elect itself a new one. How much longer can Berlin declare that it has got it right and the people have it wrong?
Bund yields at 0.26% don’t exactly trumpet success do they? Permit me to remind you that the benchmark 10-year Bund, the 0.5% 15-Feb-2026, only needs to see a rise in yield of 6bp in order to have a year’s coupon income wiped out. That demonstrates how much risk the ECB is pushing into the market and into the hands of insurance companies and of widows and orphans. At the same time banks and other lenders are being pushed into all manner of risks in order to find any return at all. The CLO market is on fire, just as it was in 2006/2007, and although there is nothing inherently wrong with repackaging the leveraged loan market, I do remember the way in which the CLO business symbiotically lived off the LBO business, and vice versa, just a decade ago and in the age of “originate to distribute”. Why can’t I hear alarm bells ringing? Well I can when I listen to Sir Mervyn but he’s a great one to pontificate.
Crude
We start the week with Brent still hanging on above US$40/bbl and even WTI looking as though it might give that level a try before long. Goldman’s now famous US$15/bbl is looking less and less likely and US$50 is now surely likely to trade before US$15. At this point in time rising oil prices are still a positive for stocks and the monetary authorities will be praying for a rebound in energy prices to give them the headline inflation they need in order to restore some of their battered credibility.
Note, also, the overnight news of a massive jump in Japanese January core machinery orders. The month-on-month rise was forecast at 1.9% but came in at a hefty 15% (?), which took out the forecast year-on-year number from -3.8% and gave us +8.4%. I’m not quite sure I get that one. If I’ve ever seen a statistical aberration, this is the one. Don’t get too excited.
Have a good week and remember that stock markets can move in a day by more than 10 years of Bund yields.