Ok, get ready. The September central bank-a-thon begins Thursday at 8:00 ET with Super Mario and the ECB.
For those who missed it, here’s the complete September tail risk event schedule courtesy of UBS:
(Chart: UBS)
So let’s talk Draghi, shall we? Now if you ask us, we think the counter-cyclical room is limited here and that’s an understatement. You’re buying corporates, you’re buying sovereigns, you’re in NIRP, you’ve launched more TLTROs, and yet this is what the 5y5y looks like:
(Charts: Citi)
Note the hilarious title of the right pane: “QE is not doing enough to boost equities.” Well, gee, isn’t that a shame? Because we thought it was supposed to boost aggregate demand and perhaps even global trade. Instead, it’s been turned into a bubble blowing machine across multiple continents.
Well, Keynesian limits be damned, Citi is expecting more tomorrow. Here’s a preview:
“While there are various solutions to deliver more stimulus, we suspect a deal will be agreed to extend the length of the Asset Purchase Programme (APP) by at least six months to Sep-17, while maintaining the size of monthly purchases at €80bn. To facilitate buying securities and address growing worries about Bund scarcity, we think that the GC will conclude that some adjustments to the modalities of QE are needed. We believe that the consensus will prefer to increase the issue/issuer share from 33% to perhaps as high as 50% for bonds that do not have collective action clauses (CACs), rather than make changes to the rule of not buying bonds whose secondary market yield is under the ECB’s -0.4% deposit rate, let alone move away from the ECB capital key (representing roughly each country’s share of euro area GDP). Finally, to help incentivise banks to bid at the Targeted Long-Term Refinancing Operations (TLTRO II), we expect a 10bp cut in the refinancing rate to -0.1%.”
For us, the worrisome part of that is the issue cap. 50%?! Even for non-CAC bonds that’s absurd. They’re cornering the market. Heisenberg is someone who knows a lot about Einsteinian insanity and this folks, is Einsteinian insanity. It’s not working. They need to unwind it - now. They’ve distorted credit risk and made it impossible for investors to accurately appraise the risk/reward in credit markets. And can you guess what’s coming next (as we previewed earlier this week)? This:
(Reuters)
They’re just going to go the Japan route and nationalize everything. The corporate bond market, the sovereign bond market, and the stock market. And you know, we’ll be completely honest with you, they’ll be successful - until they aren’t.
We will maintain this theory until the bitter end: the key lies in how long it takes for the general public to fully grasp what’s going on here.
And they will. Even if it takes a half decade. You simply cannot commandeer free markets on a multi-trillion dollar scale. Eventually, people’s common sense will kick in. If central banks own all the bonds and all the stocks, then what is the point of any of this? And how did they afford to buy the whole market? Well, they printed money. That’s not an argument for holding gold (which, we’re sorry, is a practically useless shiny metal that will have exactly zero value in a scenario where the world reverts to a barter system), it’s an argument that these monetary authorities need to stop. Because this is getting to the point that the general public is going to see through the obfuscation.
And that, my friends, will be the end of that.