By Sreekala Kochugovindan, Anando Maitra (Barclays) | History highlights the importance of the business cycle in determining the effect of rising rates on asset returns, a topic we discussed in depth in Scenarios for a shifting bond landscape. We examined US data since 1925 and selected episodes where US Treasuries sold off by more than 5% in one year. The results were pretty mixed, with equity returns ranging between plus and minus 50% and providing no consistent pattern.
MADRID | By JP Marín Arrese | The inability to implement a common economic stance aimed at delivering growth and jobs in Europe is putting the onus on monetary policy. The ECB stands as the only hope for redressing a dismal state of affairs. Yet, such high expectations could prove ill-founded. While Draghi saved the Euro’s plight back in mid-2012, he now seems utterly helpless to prevent deflationary bouts looming on the EZ horizon. His quantitative easing (QE) plan, far from achieving its goal, has lost steam. Many observers have put the blame on the ECB’s reluctance to enlarge the asset basket it is currently buying, demanding fully fledged QE, which involves junior debt and sovereigns. Yet, the flaw might lie in Europe’s failure to fully profit from monetary easing.
By Benjamin Cole via Historinhas | In one of the more inexplicable political dementias of our time, the modern-day Republican Party has become fixated on inflation, and peevishly infatuated with tight-money policies—when not blubbering about gold.
SAO PAOLO | By Marcus Nunes via Historinhas | Before it was Peter Coy with John Maynard Keynes Is the Economist the World Needs Now. Now it´s Anatole Kaletsky with The takeaway from six years of economic troubles? Keynes was right: The main lesson is that government decisions on taxes and public spending have turned out to be more important as drivers of economic activity than the monetary experiments with zero interest rates and quantitative easing that have dominated media and market attention.
MADRID | The Corner | Markets expect more dovish rhetoric from the Federal Reserve’s chairwoman Janet Yellen, who is addressing a Boston Fed conference on income inequality today. The fact that she has put the issue into the mainstream has earned support from working class communities. Visiting an under-privileged neighborhood on Thursday, she eschewed the chance to talk about monetary policy, but instead listened to stories about layoffs and lost savings. Wall Street took some comfort from the St. Louis Fed President, James Bullard, who said that the Federal Reserve should consider delaying the end of bond purchases, given declining inflation expectations.
MADRID | By JP Marín Arrese | Stock markets all over the world are plummeting while bond yields have regressed to fresh lows, as investors grow increasingly worried about growth prospects. Signs the US economy might be slowing down, coupled with the Eurozone plight, paints a gloomy scenario. Yet, the utter lack of direction in policies across the Atlantic stands as the most worrying concern.
SAO PAULO | By Marcus Nunes via Historinhas | For the last 16 months the Fed has been on “tightening mode”. This is very clearly reflected in the chart for inflation expectations above. When Bernanke started the “taper talk” in May 13 inflation expectations came down and stayed down. Following the June 14 FOMC meeting, dedicated to discussions of “policy normalization” inflation expectations dived! How can they be surprised with the consequences.
MADRID | The Corner | ECB’s president Mario Draghi is attending two speaking engagements today, where he is expected to insist on the central bank’s determination to deploy its unconventional measures if necessary, given the eurozone’s gloomy macro picture.
MADRID | By JP Marín Arrese | The Lehman Brothers example showed all too vividly how a credit institution might collapse should it find its coffers empty. Lack of confidence or sheer insolvency trigger financial crises. Yet the implosion always happens when depositors are unable to cash out their money. No wonder Basel III emphasized the need for banks to set up robust liquidity buffers.