February 16, 2012
There are those who have been waiting to buy undilutable precious metals in response to a headline announcement from the Fed that it is starting to buy up hundreds of billions of Treasurys or MBS. This is understandable – after all that is precisely the trigger that the headline scanning robots which account for 90% of market action in the past year are programmed to do. And the worst thing that one can do is put on the right trade at the wrong time. Yet it may come as a surprise to some, that while the world was waiting, and waiting, and waiting, for Bernanke to hit the Print button, virtually every other central bank was quietly unleashing it own mini tsunami of liquidity. In fact, as Morgan Stanley puts it, “the Great Monetary Easing Part 2 is in full swing.” But wait, there’s more: in an Austrian world, where fundamentals don’t matter and only how much additional nominal fiat is created is relevant, it is sheer idiocy to assume that the printers will stop here… or anywhere for that matter. They simply can’t, now that the marginal utility of every dollars is sub 1.00 relative to GDP creation. This means that by the time the Global Weimar is in full swing, we will see much, much more easing. Sure enough, MS anticipates an unprecedented additional round of easing in the months ahead. So for those waiting to buy gold et al at the same time as DE Shaw’s correlation quants do, the time will be long gone. Because slowly everyone is realizing that it is not the Fed that is the marginal creator of fake money. It is everyone.
Behold, the Great Monetary Easing part 2:
The Great Monetary Easing Part 2 is in full swing – and begets inflation risks. Global monetary policy interconnectedness, the impact of central bank easing on commodity prices, and the possibility of an improved outlook for the real economy could mean a return of the Global Inflation Merry-Go-Round:
1) Super-expansionary monetary policy in the major developed economies, particularly the US, a) contributes to commodity inflation and b) is imported by EM central banks through (US dollar) soft and hard pegs.
2) Price pressures rise in EM due to domestic overheating and higher commodity prices. Inflation is then re-exported to DM through more expensive goods exports.
3) More expensive imports from EM and dearer commodities raise inflation in DM. In turn, DM central banks initiate the next round by maintaining – or increasing – monetary accommodation.
2013 might yet look like 2011 on the inflation front.
The Great Monetary Easing (Part 2), is in full swing … In response to a slowing global economy and further downside risks emanating from the possibility of an escalating Eurozone debt crisis, central banks all over the world – and across the DM-EM divide – have been deploying their arsenal for a while now, and should continue to do so. The result is aggressive monetary easing on a global scale – what we have dubbed the Great Monetary Easing, part 2 (GME 2 – see Sunday Start: What Next in the Global Economy, January 22, 2012); this follows on from GME1 in 2009-10. The GME2 is now in full swing. Last week, the Bank of England announced a further GBP 50bn of gilts purchases, to take place over the next 3 months. On Tuesday, the Bank of Japan upped the target of its Asset Purchase Program by 50%, from JPY 20trn to JPY 30trn, with the increment concentrated exclusively on JGB purchases. We think Sweden’s Riksbank will pick up the baton from the Bank of Japan on Thursday and cut the repo rate by 25 basis points.
Half the world’s central banks have reqliuified in the past few months!
Out of a total of 33 central banks under our coverage, 16 have eased policy in various ways since 4Q11; 7 out of 10 DM central banks and 9 out of 23 EM central banks. Many of these central banks will ease further, on our forecasts, while the central banks of Poland, Korea, Malaysia and Mexico, which have not cut so far, will also join in (and the National Bank of Hungary will likely reverse its 100 basis points of hikes over the course of the year).
What is surprising, is that the primary beneficiary of these hundreds of billions in excess liquidity from around the world, has so far been the US, where courtesy of the biggest equity market, the reflexive flaw that the stock market is the economy has led to what some have noted is decoupling, when in reality it is merely outperformance of the US stock market, where the bulk of global liquidity has concentrated. And now, like in 2011, that luiqidity is starting to spill over again: gas just hit $3.52, and rising ever faster, which just happens to be the most direct, implicit tax on US consumera. And it is now detracting from growth.
Finally, another way of visualizing the global central banks’ balance sheets.