Donald Luskin, chief investment officer at Trend Macro, discusses the left wing media’s attacks against the current state of the economy, how Democrats have criticized President Trump’s tax policy and the U.S., Mexico trade deal.
Don Luskin, chief investment officer at Trend Macro, joined SiriusXM host Rebecca Mansour on Monday’s Breitbart News Tonight to discuss his recent Wall Street Journal op-ed, “China Is Losing the Trade War with Trump.”
There is a reason Jason Furman didn’t cite any specifics to back up his claim that “financial markets reacted” to President Trump’s tweet about Friday’s jobs report “with unusual volatility for the early morning hours” (“The Economic Risks of Trump’s Premature Tweeting,” op-ed, June 4). The reason is that they didn’t. In the 69 minutes between the tweet and the actual release, futures contracts on the S&P 500 meandered randomly in a narrow range of about one-tenth of a percent of the index’s value. The yield of the 10-year U.S. Treasury bond rose less than two one-hundredths of 1%, moving in the same direction and at the same pace as it had been all night.
The more notable aspect of Mr. Furman’s commentary is that it may mark the first time that a former Obama administration official has admitted that one of President Trump’s tweets was truthful.
Donald L. Luskin
CIO, Trend Macrolytics LLC
...Don Luskin of Trend Macrolytics wrote to clients about Mr. Trump’s plan for new tariffs—essentially taxes on steel and aluminum consumers: "Trump’s economic record has been excellent, and we draw assurance from that. But the very fact that this is his first big mistake requires markets to let him know he’s making it – which is one reason we think this has to prolong the present stock market correction. Considering that Trump has bragged so often about the rising stock market, presumably he would listen when it sends him a message."
Let’s hope so. Mr. Trump’s tweets this week suggesting it’s all just part of a NAFTA renegotiation may have some investors feeling less concerned, and perhaps that’s reflected in a more cheerful market as of this writing. This column thinks Mr. Trump is playing with fire. But on Friday Mr. Luskin suggested that the anti-growth tariff plan might be watered down a bit and expressed the hope that we are simply witnessing “the classic ‘big ask’ gambit in the art of the deal, designed to wring concessions out of counterparties. The negotiations will overlap with the ongoing NAFTA wrangling, as Canada and Mexico are the number one and number three exporters of steel to the US, respectively.”
Donald Luskin, chief investment officer at TrendMacro, offers a simpler reason why stocks eventually stop going down. “It halts once the algos and investors run out of stuff to sell,” he said, adding that a rebound gives investors “hope ... and that starts the healing.”
The Wall Street Journal editorial page has always been appropriately skeptical of the claims of former Federal Reserve Chair Ben Bernanke during the quantitative-easing era. So there’s no reason, today, to let his dubious rationales for QE be a basis for worry about stock prices now that these programs are finally being unwound.
In your Jan. 17 editorial “The Tax-Reform Stock Rally,” you say Ben Bernanke sold QE “as a tool to drive investors into riskier assets, including stocks.” But it isn’t true just because he said it. When the Fed buys bonds or mortgage-backed securities, it gives the seller, in payment, a cash deposit on the Fed’s balance sheet. In such a transaction, all that happens is that the duration-risk of long-term Treasurys and the prepayment risk of MBS is taken out of the market by the Fed, replaced with a riskless overnight deposit that earns the prevailing fed-funds rate. Whatever rationales Mr. Bernanke may have offered, the true boon of QE was simply to de-risk a market that was reeling from the worst financial panic in generations.
Nobody was driven into stocks, or into anything else. If for some reason an investor, who had sold his Treasury bonds to the Fed, decided to use the cash proceeds to buy stocks, then some other investor would have to sell those stocks. There is, of necessity, no change at all in the net ownership of stocks.
De-risking was important after the global financial crisis, so the Fed’s buying several trillion dollars of Treasurys and MBS may have actually made a difference, if only by calming things down a little bit. But the crisis has long been resolved, and markets don’t need to be de-risked any longer. In today’s more risk-tolerant environment, the Fed’s glacial runoff of its bond and MBS portfolio, through natural maturation, not outright sales, will drip a little risk back into the market one day at a time. Today’s market won’t even notice.
By unwinding its asset portfolio now, when the market can easily tolerate a little more risk, the Fed is not imperiling the economic expansion and the bull market in stocks, but prolonging them by returning to a more normal and predictable policy posture.
Donald L. Luskin
CIO, Trend Macrolytics LLC
...We’ve been hosting an op-ed debate on stock prices, and last week financial consultant Donald Luskin made his case for the running of the bulls as expected corporate earnings are adjusted upward due to tax reform. Harvard economist Martin Feldstein makes the case for caution nearby, arguing that equity prices are fated to fall as the Federal Reserve reverses its long period of asset purchases and low interest rates, and inflation makes a comeback. Both men could be right, depending on your investment time frame.
The bullish case is based on expectations of capitalized profits, which have risen smartly with the cut in corporate tax rates. The higher after-tax returns flow into higher asset values, all else being equal. The surprise is that stocks have kept rising this year, with the S&P 500 up some 4%. This suggests that many investors underestimated the possibility of pro-growth tax reform passing last year, and now they are catching up to the implications...
But the tax math will be tricky for many high-earners in states with the highest tax rates. The bill reduces the top federal tax rate to 37% from 39.6% and increases the threshold at which it kicks in to $600,000 from $470,000 for couples filing jointly. Our friend Don Luskin did the math and says that high earners in states with top rates exceeding 6.56% could see their tax bills increase.
Donald Luskin, chief investment officer for Trend Macrolytics, said that Republican Roy Moore’s loss in Alabama will be a big incentive for Republican leaders to “drive the negotiations to a conclusion.”
“It makes more urgent the need for the GOP to exploit its 2018 electoral map advantage in the Senate — tax cuts are the perfect trophy to bring the voters, now without the stench of Moore’s sexual misconduct scandals," he wrote in an analysis for investors Tuesday night.
The risk to financial markets is more about political unrest and instability in Saudi Arabia, rather than a dramatic drop to Prince Alwaleed's U.S. stock holdings, like Citigroup, which he has owned since 1991, and Apple.
"The risk for global markets is that the Saudi royal family destroys itself in a fratricidal game of thrones, opening the door to a new radical regime that would be hostile to U.S. interests or play games with oil supplies," said Donald Luskin, chief investment officer at the financial firm TrendMacro.
Don Luskin of Trend Macrolytics wrote to clients this morning about the aftermath of Charlottesville: "We think it’s a clinical case of mass hysteria – and one of the strangest we’ve ever seen. It’s not about the event itself. It’s about President Donald Trump’s reaction to the event, because he is the most famous and fascinating man who has ever lived, and what we’ve called the Trump Infamy Ecosystem profits from exploiting that strange fact. And it’s not even about whether Trump is a racist. It is self-evident that he is not, because there is no evidence that he is (just as it is self-evident that his campaign didn’t conspire with Russia to hack the election). His sin is that he has failed to express his outrage at the event in a particular way – or, more precisely, that he has expressed it in a way that doesn’t kowtow to the identity politics lobby."
Mr. Luskin points to a number of polls suggesting that the hysterical reaction to Mr. Trump is occurring within the media profession, not among the public at large. For example, an NPR/PBS NewsHour/Marist Poll finds that even a survey sample that gives Mr. Trump his standard lousy approval rating overwhelmingly agrees with the President that statues of Confederate leaders should not be torn down. Even a plurality of African-Americans agrees that the statues should remain in place as symbols of our history.
...Regardless, it is striking that after much of the media labored so hard this week to try to tie Mr. Trump to white supremacists, the public doesn’t seem to be buying it. In what was portrayed as perhaps his worst week in office, the RealClearPolitics average shows a slight improvement in his weak approval ratings. According to Mr. Luskin, this could be a buying opportunity for investors: "...we think Trump’s defiance of prevailing norms of identity politics has profound pro-growth implications. Whatever else it may bring along with it, its embrace by the electorate points to a generational 'turning' away from anti-business and risk aversion trends that have choked off growth in the Not So Great Expansion following the Great Recession. If this moment becomes a referendum on Trump, then it may also be referendum on that 'turning.' Our optimism that we are entering a new secular period of better growth and risk-tolerance has never come from Trump as a person, but rather from the cultural forces – the “animal spirits,” to use an almost pejorative term for them – that have welled up from the grass roots, choosing Trump as their best available representative."
"Don't let the milestones cause you to miss the simple underlying story: corporate earnings are at all-time highs. So stocks are at all-time highs," says Donald Luskin, chief investment officer at TrendMacro in Chicago. That's how it is supposed to work, he adds.
...Donald Luskin of Trend Macrolytics thinks Mr. Trump has every right to take credit for rising markets. In a note to clients this week he acknowledges the view of many investors that “all of the pro-growth hopes and dreams that flourished right after Trump’s surprise election have now been crushed by the swamp, and Trump’s own seeming self-destructiveness.”
Mr. Luskin has a different view and writes that booming U.S. stock markets probably represent a “rational recognition that, since Trump took office, many pro-growth hopes and dreams have already become reality.” Mr. Luskin continues, “We’re not trying to be either cheerleaders or partisans here. But it’s a reality that a great deal of pro-growth progress has been made.” He ticks off a list that includes pipeline approvals, the rollback of various Obama-era rules, and the hiring of deregulators to run the EPA, the FCC and other federal agencies.
As for disturbing news out of Washington, Mr. Luskin sees Mr. Trump at the center of “an ecosystem self-perpetuated by the lust for power by politicians on both sides of the aisle, and the lust for audience by the media both liberal and conservative. The apex predator in this ecosystem is Trump, who controls it all by following Roger Stone’s rule that ‘it is better to be infamous than not to be famous at all.’ That’s not a recipe for clarity.”
Mr. Luskin observes that neither Mr. Trump nor the journalists who hate him seem to have much interest in presenting a “false image of calm and control,” as might have prevailed in some earlier administrations. Mr. Luskin writes:
"What is happening here is that the swamp hasn’t gotten drained yet, but we are seeing it more clearly than ever before. You can tell yourself that things are actually worse now, but we think the truth is that you are just seeing for the first time distasteful realities that have been there all along."
What does it mean for investors? Mr. Luskin concludes:
"Despite seeming chaos in Washington, US stocks are on track for a 2017 total return of 20.9%, twice the historical average, and risk premia are lower. Technically, a correction is overdue. But risk-tolerant markets can handle the chaos of the Trump infamy ecosystem. It is informationally efficient to reveal distasteful processes that were there all along, but concealed."
As our friend Donald Luskin has pointed out, the Schumer Democrats have no standing to stop Republicans from eliminating the blue state tax benefit if they sit out the debate. The GOP only has an incentive to deal if Mr. Schumer delivers at least eight Democrats to provide the 60 votes to make tax reform permanent under Senate budget rules. What will it be, Chuck, play or have your constituents pay?
Today’s jobs report might seem perfect in the context of recent years. But Mr. Trump wants Reagan-style growth, not Obama- or Bush-style job creation. Donald Luskin of Trend Macrolytics writes in a note to clients today that while this morning’s report was better than expected, it’s actually a “middle of the pack jobs report.”
It’s disappointing that Martin Feldstein, once the champion of Reaganomics, would now need to defend the House GOP’s border-adjustment scheme by arguing that it is necessary for “cutting the corporate tax rate—and stimulating economic growth—without a major increase in the budget deficit.” Three decades ago Mr. Feldstein would have argued that cutting the U.S. corporate tax rate from the highest in the world would decrease the budget deficit precisely because it will stimulate growth.
I’m surprised by the naiveté of Mr. Luskin in assuming that Republicans welcome a (truly) more objective rule in setting interest rates. Consider that in December 2016 the newly appointed (January 2017) Vice Chairman of the House Subcommittee on Monetary Policy and Trade Roger Williams whined about only the second one quarter-point interest rate rise in a decade to a level which is still well below what most rules-based advocates would calculate. Does conservative dogma include perpetual, unwarranted interest-cost subsidization for all borrowers and debtors?
In the course of my hunt for Donalds, I happened to connect with Donald Luskin, a Chicago-based economic strategist who supported Trump in the election. His firm, TrendMacro, was by his estimation one of the earliest predictors of a Trump win. So does Luskin love all the attention he’s getting just because of his first name? “I can’t think of a single case where anyone’s ever raised it,” he said. Still, he’s worked it into a few jokes, sure. “Part of my work is to talk about political developments, so I’ll say something like, ‘I just want to make it perfectly clear that I am only a Donald, I’m not the Donald.’ ” And that’s really it. “Donald’s just not all that unusual. I think it’s less weird than if my name happened to be Barack.”
The S&P 500 — and not the Dow — is also the performance benchmark that money managers are compared against, adds Don Luskin, chief investment officer at TrendMacro. “A pro is only interested in what benchmark he is trying to beat,” Luskin says.
Adds Luskin: “Retail investors who still think about the Dow do so out of nostalgic habit. But investors who make up the vast majority of trading nowadays look at more sophisticated indexes that are better constructed and more diversified.”
The Journal article also indicated that “retailers and oil refiners have lined up against the measure, warning it would drive up their tax bills and force them to raise prices.” It also reported that Koch Industries “last month said the border-adjustment measure could have ‘devastating’ long-term consequences for the economy and the American consumer.” In an opinion piece, Donald Luskin wrote that “the costs [of taxing imports] would be passed on to Americans in some form: either to consumers through higher prices or to stockholders through lower profits.”
“When there is a quantum shift in growth expectations, the arithmetic of P-E multiples fails to capture the value in stocks,” argues Don Luskin, chief investment officer at TrendMacro. “Why look at this quarter’s earnings, or for that matter why just look one year ahead, to appraise what a company might earn? If America is really going to be great again, stock prices should look to above-trend earnings growth that could last for several years. That will make stocks appear expensive, but they’re really not.”
Whether the bullish hype turns out to be the right trade remains to be seen, as Trump has yet to get the keys to the White House or make one of his campaign promises come true.
"Whatever else the future holds, Trump has already made the U.S. stock market great again," Don Luskin, chief investment officer at investment firm TrendMacro, told USA TODAY.
...don’t rule out a bear market if Clinton loses, warns Don Luskin, chief investment officer at financial research firm TrendMacro. “If Trump wins … stocks will drop at least 20% just like that,” Luskin told USA TODAY. “Because markets hate to be surprised and hate it when the conventional wisdom is dead wrong. Just look at the reaction to Brexit.”
...Violence in the aftermath of the election, if it occurs, is viewed as a short-term hiccup... Adds Luskin: “Markets are not typically rattled by violence in the streets. Remember 1968 — riots, assassinations, shootings all over the world — stocks just went higher and higher, through it all.”
The market is similarly divided over recent comments by Fed Chair Janet Yellen that there could some benefit to running a "high-pressure economy," with 49 percent saying the Fed should run one and 43 percent saying it shouldn't. "It's hilarious that Yellen thinks, at this point, she has the power to wave a magic wand and 'run a high-pressure economy,'" wrote Donald Luskin, chief investment officer of Trend Macrolytics.
...Donald Luskin, chief investment officer at TrendMacro, a financial research firm, zapped out a recent report to clients titled, Let’s Talk About Something Other than the Election.
Republicans see the growth in the 1980s and the late 1990s growth after capital gains rate cuts as proof that people are more willing to save, work and invest if they can keep more of what they earn.
“When the pie is as large as possible, then you have the least questions about the distribution of that pie,” said Donald Luskin, chief investment officer at Trend Macrolytics. “We’re not having a serious economically driven conversation about this. We’re just having a populist appeal.”
"Whatever happens with Deutsche Bank, this is not — I repeat, not — a Lehman moment," says Don Luskin, chief investment officer at investment firm TrendMacro. "We are not looking at globally interconnected fragility like we were in 2008. And if anything goes wrong at all, after the 2008 experience, the central banks of the world know precisely what to do to put the fire out."
"When push comes to shove, Merkel will bail out Deutsche Bank," says Luskin of TrendMacro.
"God bless Lael Brainard,'' wrote Donald Luskin, chief investment officer of Trend Macrolytics, a reference to the Fed governor who recently offered a detailed speech of why the Fed shouldn't hike.
...the Trump haters say we must throw Mr. Trump over the bus in order to save the Senate and House majorities.This is a foolhardy strategy because one can’t win without the other. As economist Donald Luskin puts it in his historical analysis of presidential races and Senate gains: “It is clear from history that the House and the Senate always move in the same party direction as the White House, and with the same magnitude. That means the presidential candidate is like a boat that congressional candidates are riding on. It’s really stupid to torpedo that boat."
Says Don Luskin, chief investment officer at TrendMacro: “Trump’s plan has been up on his website for many months. There is nothing new about it at all. Everyone is acting as though he ‘finally’ laid out his ‘plan’ for ‘the economy.’ It’s been there in plain sight all along. It got a few tweaks yesterday, but there is no news here at all.”
"The key lesson is that when bond yields are so persistently low, there is really no sensible place for money to go except for stocks," says Don Luskin, chief investment officer at TrendMacro. "That puts a safety net under stocks, and events that would normally be bear markets turn out to be mere corrections and buying opportunities."
If only Mr. Trump were as eloquent in expressing his goals and objectives as Mr. Luskin, what a difference it could make for America.
Donald Luskin, TrendMacro, discusses Trump's stance on trade and what it will take to make America grow again.
"We don't believe it will happen," Don Luskin, chief investment officer at TrendMacro, told clients in a note titled "Is the Fed Stuck On Stupid?"
Adds Luskin: "We still think no hike until December, and probably not even then. There's not good reason for it , and lots of good reasons against it."
"Yellen is effectively admitting that 'liftoff' was an error," Don Luskin, chief investment officer at TrendMacro, noted in a report to clients before the opening bell. "It's one and done until the environment changes substantially.
We speak with Luskin about how the dramatic drop in crude oil prices has affected the global economy and how it will likely affect it in the future.
Financial analyst and our contributor Donald Luskin has described Donald Trump as a "black swan" over the political economy. He's referring to an outlier event that few anticipated and whose impact is impossible to predict. As the voting season begins in Iowa, this strikes us as a useful way for Republicans to think about the Trump candidacy.
"The current very strong relative attractiveness of stocks versus bonds puts a safety net under how far equities can fall," says Donald Luskin, chief investment officer at TrendMacro. "There's a natural hedge here. More panic in China should drive long-term bond yields lower as a safe-haven play, and that would make stocks look even more attractive on a relative basis."
I said people were going to anticipate the end of the Obama era. I didn't say it was going to happen in the first week of the year. This was obviously the roughest week in equity markets. But Donald Luskin noted in our paper that the 70% decline of oil prices over the last year represents $2.9 trillion of savings to consumers world-wide. This is enormous. You couple this with people seeing the end of the Obama era, and eventually we're going to get more discussion about tax reform in the Republican primary. I think that optimism starts coming back.
"Many of the headwinds that sparked the U.S. stock market's biggest swoon since 2011 are no longer weighing down the market like they did earlier this year, says Don Luskin, chief investment officer at TrendMacro.
"The big August correction was caused by the strong dollar, collapsing oil prices, a scary slowdown in China, and a Fed that seemed determined to hike rates despite it all," says Luskin. "Every risk factor driving the big correction has reversed for the better now."
"We went three years, two months and 21 days without a 10% correction in the (S&P 500), says Don Luskin, market strategist at TrendMacro. "It was overdue. That doesn't make it a bear market."
"China's move highlights the fragility of the global economy, and the Fed is always inclined toward a 'safety first' attitude -- so in the absence of any compelling reason to hike rates, this will be just one more reason not to," Donald Luskin, chief investment officer at TrendMacro, told USA TODAY. "China's move will have repercussions that may take time to play out, including an implicit strengthening of the dollar that would tend to lower inflation. The Fed will want to play wait-and-see. They've waited almost seven years. Why not a couple more meetings?"
Greek banks have for months been relying heavily on what is called "emergency liquidity assistance" from the European Central Bank for just more than 80 billion euros ($90 billion).
"It's a bit like printing euros for that one national bank," said Donald Luskin, chief investment officer at TrendMacro, who points out the loan comes at a higher interest rate since it's often backed by the flimsiest of notes. "But ELA doesn't come as an obligation or a risk of the Eurosystem."
"It's strange because normally the banks that take on the risk make the decisions, but in this case it's Greece with the risk, and the ECB making the decision," Luskin told CNBC.
"This is the ultimate pressure point the ECB has on Greece, it's the real thing," Luskin said. "If the ECB says no more ELA, then Greece goes back to the Stone Age."
I'm saying that, five years from now, if you adjust for today's dollars, we're going to be between $15 and $40. That's been our forecast all along and it still is.
However, it takes time for technology to play out. Right now there are frackers who can produce a barrel of oil for $23 and there are frackers who can produce a barrel of oil for $90. Somewhere in between there is a fracker who can produce a barrel of oil for $50. Right now he's the one for whom there is just enough demand. So that's why the price is where it is.
OPEC is no longer the swing producer. It's the American fracker who is the swing producer. American frackers have, at today's level of demand, a cost function that is between about $25 and $80. So, unless there is a demand collapse and I can show you all kinds of statistics that show that demand is actually growing, which is what you would expect when prices come down we're moving up through the cost structure.
"The Chicago floors were unique social environments that I treasured," said Donald Luskin, who traded on the Chicago Board of Exchange in the early-1980s and would go on to become a respected and veteran investment officer with Wells Fargo and BlackRock. "They were ladders of opportunity through which completely noncredentialed new entrants could get up close and personal with high finance."
Like Luskin, many current and former members lamented the gritty environment of the floor that built not only careers, but life skills.
"Everyone there is trying to take advantage of everyone else. It is dog eat dog. ... Yet the acts of kindness and friendship and generosity that emerge from the combat create a kind of camaraderie I've never experienced anywhere else," said Luskin, who is chief investment officer at his own firm, Trend Macrolytics.
The ECB's move is "not as big a deal as it seems," TrendMacro CIO Donald Luskin wrote in a note, especially in light of Wednesday morning's announcement that the ECB had authorized Greece's central bank to use "Emergency Liquidity Assistance" for Greek banks as needed.
"If you put both of today's policy moves together, what it means is that the Greek government -- not the Eurosystem -- will be on the hook for the collateral. But there will still be a funding mechanism for the banks, in case there is a serious run on them. That's the important thing," Luskin wrote.
Don Luskin, chief investment officer at TrendMacro, says the bad market action tied to sinking oil prices will eventually play out and exhaust itself.
"The instabilities are upon us -- in spades; the big losers are identifying themselves," says Luskin. "It seems that's all markets are focusing on now. But the instabilities are short-term, and we think we'll get through them without a lot of damage. On the other side beyond the instabilities is an enormous stimulus to global growth in the form of liberation from a decade of the highest oil prices in history. In the US, just the drop in gasoline prices represents a tax cut almost equivalent to abolishing the payroll tax. Be patient, be alert -- in this instability will emerge great opportunity."
The geographic shift of the Ebola crisis to U.S. soil in recent days has also put investors on edge, as concern about the spread of the virus and its potential impact on economic growth mounts but with no clear answers evident.
"This is the authentic black swan, the one nobody expected," says Don Luskin, chief Investment officer at TrendMacro. "Markets are experiencing the shock of recognition with Ebola."
"People waited in line to buy Alibaba because they think CEO Jack Ma is the smartest man in the world," says Donald Luskin, chief investment officer at TrendMacro. "Hey, everybody -- the guy you think is the smartest man in the world thinks it's a good time to sell stocks. And you want to buy? Really?"
Still, Luskin doesn't think the Alibaba-all-the-time storyline caused a market top. Instead, he says the booming-BABA narrative "signaled that a correction was long overdue." ...Luskin, for one, doesn't think Alibaba marks a major top, the one that leads to a full-fledged bear-market drop of 20% or more.
Big round numbers like 1900 are often tough to barrel through easily..
Don Luskin, chief investment officer at TrendMacro, says the recent market weakness is history.
"Round numbers are meaningless, but it's meaningful to make all-time highs," says Luskin. "The winter correction is over. Spring has sprung. It's going to be a very good year. The sector rotation out of growth stocks that had everyone scared in April is over, and in fact has reversed itself. "
Fallout from the sanctions -- and from Russia's destabilization of Ukraine -- could be far-reaching. The worst-case economic scenarios are fairly awful, says Donald Luskin, chief investment officer for Trend Macrolytics.
"We think the feasible worst-case is a war of strong trade sanctions, depriving Russia and Europe of mutual trade," he says. "That would hit both sides hard -- Russia, because if derives 12.3% of GDP from exports to Europe, and Europe because it sources a significant share of its natural gas from Russia."
"To have only a 6% correction is a great sign of strength," says Donald Luskin, chief investment officer at TrendMacro. "It is telling us that U.S. stocks might have been tired but didn't want to go down. They just took a little nap."
..."The economy is not sprinting, but it's finally back on its feet," Luskin says.
Now that Bernanke has tapered twice in succession and in equal $10 billion increments, it could reduce Yellen's flexibility if circumstances change, warns Donald Luskin of Trend Macrolytics.
"Bernanke has handed Yellen a fait accompli, an established policy trend that will be difficult for her to contradict," he told clients.
Lorcan Roche Kelly, chief Europe strategist at TrendMacro, a US fund advisory firm, said the euro-area GDP numbers were at odds with ECB lending data, which showed continuing reductions in credit to small and medium- sized companies.
Without increasing credit to this critical sector, any return to vigorous growth was nearly impossible.
Now we come to what happened at last week's ECB announcement and presser. Most of the subsequent commentary focused on the main refinancing rate cut, the hint of a negative deposit rate, and the commitment to spur lending to small- and medium-sized companies.
But our pal Lorcan Roche Kelly of TrendMacro emphasised something different in his latest note:
- Most critically, in his speech at the press conference, ECB President Mario Draghi also gave the longest forward commitment yet to the continuation of weekly fixed-rate full-allotment refinancing operations by the ECB: they will now continue until July 2014. As forward guidance goes, this is a pale shadow of the Fed's policies, but it is a major step for the ECB.
- This move is not exactly another long-term refinancing operation (LTRO). Rather, it is a long-term commitment by the ECB to provide limitless liquidity every week, on a short-term basis.
- It is roughly analogous to a 15-month LTRO that banks can access on a weekly basis.
- It renders meaningless much of the free option given by the 3-year LTROs. The two 3-year LTRO operations only extend for five and seven months, respectively, beyond the new commitment from the ECB.
- This may well lead to increased early repayments of the current outstanding 3-year LTROs. For banks the upside to remaining in the operations has been largely removed today.As the terms are fixed until July 2014 at the earliest, banks can now be assured of funding when they need it in the short to medium term, without being forced to access it immediately -- as happened in the 3-year LTROs.
Draghi's recent comments are being mainly interpreted as a double-down on austerity. That's not wrong and it remains unfortunate, but there are several complicating factors that are nonetheless worth remembering.
One is simply that Draghi probably needs to keep reiterating the importance of budget constraints for internal political reasons (giving himself cover at the Bundesbank).
Another is that Draghi has long been more concerned with structural changes in labour markets and economies than in broad-based austerity for its own sake, as Lorcan notes. Draghi is generally against tax hikes, for instance, and would prefer spending cuts. Of course, this particular nuance isn't exactly comforting given the brutal choices faced by the countries on the periphery.
In a note put out yesterday, Lorcan Roche Kelly of Trend Macrolytics has a slightly contrarian take on what the ECB should do tomorrow. First of all, he does think there will be a rate cut, whereas previously he was skeptical.
BUT, he argues that a rate cut isn't the right tool for the job, and won't accomplish anything because of how broken everything is. Instead, the ECB needs to open up new channels to extend credit to Small and Medium Sized Enterprises, especially in the periphery where traditional monetary policy channels are impaired.
For a broad example of what the ECB could do that would actually be effective, he writes:
It may be that these moves are enough to prompt action from the ECB -- such as increasing collateral eligibility of SME credits, or so-called "structural operations" through the national central banks. If they were, then that would certainly be much more positive for the euro area than a rate cut.
As usual with the ECB, this Thursday the rate announcement is made 45 minutes before the press conference starts. An announcement of a rate cut is a likely signal that the ECB is going to do nothing more. Conversely, no rate cut announcement should not necessarily be viewed as a time to sell. The data -- especially the inflation data -- demands a reaction from the ECB. If it -- correctly -- chooses not to use the interest rate tool, then anything else it chooses will have more of the "big bang" properties that can give the ongoing rally new legs. On the other hand, if the ECB does nothing at all, we will have the seen the top in the peripheral debt rally, at least until the ECB finally responds.
Analyst Lorcan Roche Kelly, of Trend Macrolytics, said Mr Dijsselbloem's comments risked discouraging investment in Europe.
''Any reason anyone should leave more than EUR 100,000 in a euro area bank after [his] comments? Any at all?'' he tweeted.
The European Central Bank Thursday...announced that if Cyprus didn't finally iron out a deal with international creditors by Monday, then the ECB would cut off emergency funding to the country's banks.
"This is a hard deadline of Monday evening on the continued existence of the Cypriot banking system as we know it," said Lorcan Roche Kelly, chief Europe strategist at research firm Trend Macro in Ireland. "While it was never likely that it would survive intact, the ECB has this morning forced the issue."
This is all being played out against the threat of ELA being cut from Monday. ...It's worth noting that quite a few of the people we talked to this morning didn't see it that way and expected an eventual fudge. But others we respect, such as Lorcan Roche Kelly at Trend Macro, see this as a very hard line -- why else would the ECB have mentioned Monday, 25 March 2013 in their release.
TREND MACRO, Lorcan Roche Kelly: "Reports on depositors being in the firing line have been circulating for weeks, and so it is not a surprise that the bail-in has been announced. However, the risks -- beyond upsetting Cypriot depositors -- are unknown. The rather bold assumption on the part of the Europeans is that this will have little effect. They may well be right. There have been rumors of a depositor bail-in for weeks and there have been no signs of flight. The ECB has promised to back-stop any disruption -- that is a promise that we can rely on. However, the risk is that depositors outside Cyprus will take fright and start to leave their banks. The euro has no single treasury backing it. Therefore, more than any other currency it has to rely on trust to maintain its value. With this deal, the euro area is testing the trust of both the markets and ordinary depositors. It seems likely that it will pass the test, but the judgement is out of its hands. Bank deposit flight can be [handled]. Trust in the currency cannot so easily be restored."
The government hopes that the 10-year issue and another long-term offering later this year will make it eligible for help from the ECB's still-untested program of bond purchases, known as Outright Monetary Transactions, which would in turn help push its borrowing costs lower. "If there is some clarification forthcoming from the ECB as to whether Ireland has reached the bar required to qualify for OMT, then Ireland should be home and hosed on exiting the bailout program this year," said Lorcan Roche Kelly, chief European strategist at research firm TrendMacro.
There's a debate in Ireland happening tonight designed to help reduce the massive debt burden the country is still facing since the collapse of the country's banks in the financial crisis... Lorcan Roche Kelly of Trend Macrolytics has emailed us a fantastic explainer of what's going on in Ireland. This is the clearest explanation we've seen yet, and we're very grateful for Lorcan's clarity on this. Be sure to follow him on Twitter @lorcanrk.
In the wake of the collapse of the Irish property market, two of the worst Irish banks -- Anglo Irish Bank and Irish Nationwide Building Society -- were nationalized and turned into a new institution called Irish Bank Resolution Corporation (IBRC) with the intention of working the institution down over a number of years.
The new institution had funding needs of over EUR 30 billion that were met by the government -- as owner of the institution -- writing a debt instrument called a Promissory Note. This note was repoed through the Irish Central Bank through a mechanism called Extraordinary Liquidity Assistance (ELA). Under ECB rules, ELA is outside normal ECB lending and is done at a national central bank level with ECB oversight.
The terms of the Promissory notes require payment at the end of each March of EUR 3.1 billion from current spending.
The current government -- elected in 2011 -- promised to reform the Promissory notes to end the arrangement requiring EUR 3.1 bn annual payments.
In the approach to to next payment -- due in 8 weeks the government has promised not to make the payment.
Two weeks ago a government proposal to exchange the prom notes with longer term debt on the Irish Central Bank balance sheet was rejected by the ECB.
Today's developments are the government trying to skin the cat another way. First, they are ending IBRC. After the passage of the legislation currently in front of the Dáil, it will no longer exist.
The IBRC assets will be moved to NAMA (Ireland's bad bank). The prom note will be replaced at the Irish Central Bank with NAMA issued bonds that are covered by a government guarantee.
The NAMA bonds will be structured like normal bonds -- only requiring annual interest payments until the end of their term -- and so will lead to reduced current expenditure in the short term.
However, this deal still has to be given the ok from the ECB who have oversight of the Irish Central Bank. They may make their decision tomorrow, if so it will be announced by Mario Draghi at the ECB press conference at 1:30 GMT.
The government and Honohan need to find a way to restructure the notes in a way that leaves the net impact on the money supply at zero. Otherwise Ireland's central bank could be accused of printing money, a policy opposed by the ECB.
A central bank commitment to hold Irish government bonds for 15 years "in this case would be for fiscal policy reasons, which makes it monetary financing, which is a no-no," said Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC.
We chatted with analyst Lorcan Roche Kelly of Trend Macrolytics to get his take.
Well the big picture is that the ECB is the only central bank that's acting relatively "tight" right now. The Fed will be on hold for awhile. Japan is doing new easing. The Bank of England is likely to do more under Mark Carney. You get the picture.
...The LTRO paydown will cause the ECB balance sheet to shrink (!) next week. A shrinking balance sheet is rare in this day and age, but as Roche Kelly notes this shouldn't really be characterized as a tightening, since the ECB's policy stance remains the same. If banks need money, it's no more expensive than it was before, so there shouldn't be any real-world economic constraint by this balance sheet shrinkage.