In 2020, Central Bankers Everywhere Are Being Exposed
Sun, 11/15/2020 – 09:20
In the race to pretend to debase, Europe’s central bank has pulled ahead of America’s. The ECB’s balance of digitally-printed bank reserves is rising fast while the Federal Reserve’s reserves plateaued months ago. For the first time in its history, the Europeans claim “excess liquidity” (their term) in excess of €3.3 trillion and steadily rising.
In years long past, this “flood” would’ve unleashed howls of protest spoken primarily in the German language, the damning label “Weimar” thrown loosely around in even mainstream channels. Nowadays, barely a peep.
One big reason why is the constant and real flood of instead deflationary signals proliferating and rising. Where inflation – or at the very least early signs of inflation – are supposed to be, there remain only the opposite despite the ECB on the winning side of QE pacing.
Not just current measurements of consumer prices, either. Those are actually falling, by the way, with negative CPI’s (and HICP’s, as they do over there) growing more negative in October (-0.3% y/y; -0.5% in Germany). Even stripping away volatile (down as well as up) food and energy prices in Europe, the Euro Area’s “core” inflation rate was the same +0.2% year-over-year last month as it had been the month before (September).
Both months at record lows, in other words.
In the bond market, the bund market, actually, yields on federal German securities have been steadily sinking since late August. The 10-year constant maturity rate had gotten as “high” as -0.39% on the 31st but is now (as of this writing) back down to -0.64%, within sight of its own record lows.
What’s interesting about that trend in bunds (along with the same in schätzes and bobls) is that it has been near exactly mirrored by the exchange rate in the dollar, a plateau in US Treasury TIPS (American inflation expectations), interest rate swap spreads, and most of all global oil prices. Not strictly European doubts.
More interesting still, while practically every other market had turned deflationary (or, against the prior reflation direction) right at the end of August or in the first few days of September, the one which hadn’t was nominal US Treasury yields. These had been rising modestly.
This is not something you’d expect, anything other than the shortest run deviations between the US government market and its German counterpart. For years, the two have almost uniformly traded in near-lockstep fashion. Though at different levels, day-to-day changes on any given day along with the overall direction and behavior, these had been a pretty dependable constant throughout many years of these QE-follies.
Neither German nor American government bond investors have believed much in whatever either of their central banks have been selling (by buying assets). Certainly not to the point of an inflationary future both the ECB and the Fed have been, at times like these, absolutely desperate to paint.
There was, however, one multi-month period when, like the past few months, nominal UST yields rose while their German equivalent fell. It was the middle of 2018.
Insanely enough, most people might remember this period as the best economic boom of our lifetimes. The United States like Europe, each’s set of central bankers had claimed both had been thick in the throes of only the best of times.
In reality, as bonds traded, it was no such thing anywhere. Globally synchronized growth had already disappointed to the point that by January 2018 the global economy wasn’t synchronized any longer. Europe, particularly German, fell hard on its face right from 2018’s start.
Mario Draghi, the ECB’s top storyteller at the time, told the world not to worry about Europe. Still-ongoing QE in entering its fourth year would ensure this stumble was nothing more than a “transitory” one. The forecast for inflation and eventual acceleration remained undoubted, he said.
Though there was something annoyingly unsettling in the way he said it. From January 2018:
“The strong cyclical momentum, the ongoing reduction of economic slack and increasing capacity utilisation strengthen further our confidence that inflation will converge towards our inflation aim of below, but close to, 2%. At the same time, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.”
If you don’t speak central banker, I’ll translate: our models show inflation rising like we want and badly need, but right now there isn’t a single bit of evidence our models are correct.
The dollar had stopped falling against the euro (and a myriad of other currencies) right as Draghi spoke in January. Ominously, it then began to rise and in many cases quite sharply. Before long, the determined wreckage typical to rising dollar periods began to appear in more obvious ways that couldn’t be ignored no matter how hard officials made the media try.
Thus, German bunds stopped in their reflation tracks (February 2018) and easily, immediately reverted back to deflationary type. Economic growth in Germany, Europe, and a bunch of other places around the world halted, too.
Obviously, inflation was off the menu because it was never on the menu. Just in the models.
While that was going on in Europe (and across especially emerging market economies, sparking officials in some of them to plead, in the media, with Federal Reserve officials to at least pay attention to the rising dollar instead of their econometric models stuck like Europe’s on reflation then inflation which had already been thoroughly invalidated by the dollar’s rise), in America the word “decoupling” had reemerged just as it had at several points in the past. This didn’t quite mean what the term otherwise means to convey.
I wrote in September 2018 that you couldn’t ignore it any longer. Most did anyway:
“If the global money system tightens, the global economic system can do nothing about it. That doesn’t mean, however, that it registers everywhere at the same time. Decoupling is really just a misunderstanding of how that tightening is an irregular process, nothing ever goes in a straight line, a blindness to what are, in the end, differences only in timing and intensity.”
US Treasury yields were at the same time showing some resistance to Jay Powell’s forecasts. While nominal interest rates were rising throughout the middle of 2018 in contrast to those in Germany, the yield curve was being flattened out starting at the long end by Jay Powell’s rate hikes at the short end. In some curves, eurodollar futures, these were already inverted (June 2018).
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