When the Central Banks and Their Monetary Policy Aren’t Enough (w/ Christophe Ollari)

When the Central Banks and Their Monetary Policy Aren’t Enough (w/ Christophe Ollari)


CHRISTOPHE OLLARI: I’m Christophe Ollari and
I designed a few years ago a global macro, multi-currency, multi-asset research, and
this after roughly 20 years of trading in banks and hedge fund. I think that just even before I’m looking
at the details of the ECB package, I think what is very important, it’s a year ago, the
ECB announced the end of their QE program. We are one year later and we are just about
to see the resumption of the ABP. It just shows how much the global macro and
the European outlook has deteriorated in 12 months. I think it’s a very strong message. The objective was to start some normalization
and we are exactly back to where we were a year ago. About the package, I think that there’s two
ways to look at it. It’s very high expectations in mid-August
after some comments of ECB member where the market is starting to price an extremely aggressive
package. Compared to what was priced in three weeks
ago, it was some extent disappointing but we had over the last 10 days all the ECB hawks
on the White House and I think that market repriced their expectations and compared to
the expectations prior the meeting, I think we are roughly in line because we had the
10 bps cut and the markets were pricing 16 just ahead of the meeting. We had 20 billion of asset purchase. I think that market was expecting between
20 and 25 so it’s roughly in line and we had the tearing plus the more advantageous shareholder
terms. I would say that the package need said is
good. The big difference is I think that– and I
mentioned it in the last few days, it’s the key focus was on the forward right guidance
and I think that in total, that part was extremely dovish, because not only the end of the QE
program plus any hike will be contingent to inflation back to target the 2%, but staying
anchored around 2% for a sustainable period of time, which is quite a very aggressive
way to say you know what, our accommodation will remain in place for quite a lot of time,
especially considering that they revised lower the inflation forecast, especially for 2020,
which has been revised down from 1.4% to 1% and for 2021, we’re at 1.5%. You can assume that according to their projections,
we’re going to have QE for two years. This is the good part. Then you can assume that to some extent, they’ll
open the books but when you look at in the details, there are some early questions and
I’m wondering to some extent if it’s not the bulk of our books. Why? Because first of all, we learned very quickly
that there was no consensus and you can already see that dissenters are becoming vocal. This morning, ECB member not acknowledge that
there’s no need for QE, there was no need for such a legacy package and that the European
outlook was not in a state requiring such an aggressive accommodation. I think it was quite surprising for me to
see that influential members like Coeure– Benoit Coeure join the anti-QE camp. Then we have that question asked yesterday
to Draghi, asking if they discussed about the change of [inaudible] and he mentioned
that they didn’t, which in itself not to be a problem because we are still a year away
from the end of the collateral but it means that what looks QE infinity will be questioned
relatively soon by the old members saying why should we extend? We don’t have any more pool. You see that there is a fracture within the
ECB and maybe the bottom line up yesterday was it was not the ECB package, maybe it was
more like a Draghi package. Or it was not an ECB package, it was a peripheric
member package. The issue is, the question is, we had Draghi
for so many years and he put his print on the ECB monetary policy. What happened when Draghi leave? Is there a life beyond Draghi? Like is there life beyond Merkel? In fact, it’s more question marks about what’s
going to happen when Draghi leaves, and when Lagarde will step in? In fact, it’s a way to limit the– in fact
to limit, for each country, the amount of bonds you can buy and the question will be
if there is no more collateral available, that we need to push it to 50% to be able
to buy more government bonds and especially from Germany. To a certain extent, I agree with the comments
this morning, it’s they are unlikely to achieve much. If we can learn something from the last four
years, it’s in terms of real inflation, in terms of real GDP, QE and negative interest
rates didn’t achieve much. I think that what they are trying to do is
something very important. It’s keeping very loose financial conditions
and secondly, I think that the idea underneath is to keep all the term structure of the European
bonds as low as possible to give very easy funding conditions for the European governments. I think it’s more like okay, it’s a bridge
between the military policy and the fiscal policy to incentivize the governments to push
on the fiscal expansion [inaudible]. I think we reach the– at least properly,
we reached the peak of stress and pricing of the Armageddon scenario in mid-August. As far as I’m concerned, I think that we’ve
seen the lows in yield, especially in Europe. From now on, I don’t see much interest or
focus on those nominal curves and I think that by telling everyone rates are going to
stay low for a prolonged period of time, and that we’re going to do QE for the foreseeable
future, it becomes more like a carry threat and I imagine that there will be a lot of
interest on banking credit, for example, where you see can pick up some carry. My view is that the big move has happened
already on the European yield and I don’t see more juice down. I think that Europe is quite worrying global–
it’s got quite a worrying global outlook compared to 2017. Today, we see that GDP has more than helped,
inflation has more than helped as well and everybody’s trying to explain that one of
the key catalyst for the deterioration of the European outlook is in fact, the trade
war between the US and China. Again, we tend to forget that the reversal
of the European growth didn’t happen in 2018, but happened at the end of 2017, which was
in fact, the consequence of the change of old model growth by Beijing early 2017 and
you have the usual transmission mechanism between China on one side, and its carry growth,
and the very open economies starting with Germany and Europe. In fact, the European malaise started well
before the trade war. It started early 2017 which means that the
fate of European growth is not in Frankfurt, is not in the hands of the ECB. I think the fate of the European growth, as
usual, will be in Beijing and its ability and willingness to shift again into an old
growth model, it will be dictated by Washington and the US administration willingness to pause
the trade conflict or not. I think it will be dictated essentially by
Berlin, and the ability and willingness from Berlin and the German government to finally
put into cover their obsolete fiscal rectitude. It’s just like a very quick word on the BOJ. I think that what happened on the ECB side
has no implication at all on the BOJ. I think the BOJ has made clear that– [inaudible]
has been clear that they were very focused on the exchange rate. We know that the breakeven level for the Japanese
export are about one to seven so at 120, I don’t think that the BOJ is in any urge to
do anything. Also, last week, we had the Japan military
base, the expansion, and we went down to 2.3%, which I think is nobody talked a lot about
it, which is very worrying, because we are exactly back to the level pre-QE. In fact, it just mean that they have increased
the balance sheet of 200% of their GDP. They have injected trillions of liquidity. The liquidity didn’t– the cash didn’t go
anywhere. I think that the BOJ has already reached limits
of their monetary policy impulse. When Draghi said– well, he insisted on the
need of fiscal expansion in Europe and I think it was a clear acknowledgement that in Europe
as well, the military policy stimulus has reached its limits already. Again, preserving the loose financial conditions,
giving the conditions for the governments to use their budget surplus and implement
proper fiscal expansion but it’s not going to change anything for inflation and growth
in Europe. I still think that the Fed’s going to do 25. It’s very rare to see a 100% cut or a 95%
cut a few days before the FOMC and the FOMC decided not to deliver. The question is not on Wednesday, the question
is okay, what next? My guess is the Fed is still not ready to
do much more and I think it’s going to be very contingent to the data. I insisted a lot in the past and the fact
that the Fed has been already corrupted by the political sphere and you can see that
if the ECB has shown some fracture yesterday, and in the previous days, the Fed is fractured
as well and there is dissenters who are not ready to just to potentially– even if they
don’t talk about it, to give a free ride to talk of the elections and I think that there
is a very strong political aspect in the FOMC. Now, they’re going to do 25 and I think that
there is this very at best neutral message. The hawks at the Fed, they can just keep on
repeating unemployment rate at 3.7%, growth around 2%. Inflation, they’re not going to use their–
or they’re going to use the CPI saying we are back to 2.4%. Average earnings at 3.2%. I think that the Feds today were again on
the strong side. I think you’re going to have dissenters and
you’re going to have– people would question, “Do we need to do much more than another 25?” We have reached a very important point yesterday
and/or tomorrow or next Wednesday. It’s I think that for 2019, unless the macro
outlook deteriorates much further, I think we have seen the end of the easing wave of
the central banks. We had a lot of impulse given by the EM banks,
central banks, I think that the ECB is done for now unless you have a chromatic deterioration,
and I think the Fed will do 25 and maybe just not wait and see, but data dependent. We have reached that big wave of impulse. In that context, I think it’s very difficult
to see the dollar dramatically collapse, or correct. It’s only if you have slowly but surely an
inflection of the data, which is so far too early to predict. Again, and we’ll go back to Draghi, because
yesterday he said something that I thought was very interesting. He said that one of the first task of Lagarde
and in some brainstorming project will be to question the relevance of the inflation
target. Personally, I don’t think that it’s relevant
anymore because in fact, what is the point to have an inflation target at 2% when you
undershoot all the time, and you can never reverse a psychological effect. You can see it in Japan, people know that
2% will never be reached so it’s like an illusion. The problem is, what do you put instead? You put 1% to be sure that you are fulfilling
your mandate. This is an illusion as well, or do you put
4% just to show people that to create some inflationary momentum, I doubt it would work
neither. I think that the inflation target is illusionary
and obsolete but I still don’t know, to be honest, with the current monetary policy framework,
we can reach those targets. I think the answer is maybe in the ability
to create new economic approach, which will in time potentially boost the real inflation
and not only inflate our financial assets. I think that this will be the debate of the
next few years. I am massively convinced that QE, low interest
rates have only been a strong catalyst to boost financial assets. What has the ECB done yesterday is another
episode of financial QE. Financial QE will not bring anything except
it maybe fuel even more the anger and the resentment towards the elites, towards the
central banks, toward the banking system in general. I know that MMT has become a big subject and
attract a lot of stigma, is a Ponzi scheme. It’s a scam. I believe that it’s not about do we like MMT
or do we don’t like MMT? I think that it’s more like the concern in
what is underneath which is important. What is important is there is a global need
from voters to get the bigger share of the pie and the pie tend to reduce. It’s all about redistribution. I think that political candidates will integrate
some bout of MMT which in fact, already exist. What Donald Trump is asking for? He’s asking for spending and the Fed resuming
QE to basically transfer the public debt which is in the banking balance sheet into a public
balance sheet, the Fed balance sheet. What is doing the BOJ and the IB? They’re doing MMT to some extent, it’s they
put the rates at zero, everything is worth zero and they are just spending and the BOJ
is funding their fiscal stimulus. Even if we don’t call it MMT, it’s already
in place. What the ECB is telling everyone yesterday,
it was like, we’re going to do more QE, but you have to spend to– even if they don’t
want to call it social QE, they are cutting for that. They want to move away from the financial
QE into a social QE. The only one problem is it’s going to take
time but I think that it’s a debate, but I think, for me, this is the obvious journey
we are going toward. You remember the big dream of Bernanke when
he implemented the first round of QE? He was like, okay, we’re going to put a lot
of cash in the system, it’s going to inflate equity market, for example and then those
positive effects will slowly spill over into the real economy. That was a beautiful dream, it never happened. This is what I basically called financial
QE. It’s like, okay, we have created a gigantic
financial asset bubble that in reality, accepted the 10% part of the prohibition, nobody benefited
from it. I think you have different steps in the social
QE. The first step is what I think the ECB is
trying to put these like, we are buying your debt, spend into infrastructure, or basically
go by tax cut or income tax cut. That’s the first step and I think that that
first step, the central banks would be very keen to do. I think there is more extreme step where you
will end up with a government and the central banks working very close together, where in
fact, of the central banks will only be facilitating the spending of the government and warehouse
their debt in a public balance sheet. The gloves between the ECB and the European
governments or between ECB and Germany, I think that the message of Draghi– in many,
many years, I followed Draghi very carefully and I never saw him so adamant about the need
from the countries who are in a budget surplus to finally spend and spend in size. It was pointing, obviously, the German government. I think that is good expansion in Europe is
highly dependent on the ability of Germany to finally put their fiscal rectitude on the
side. I think that without Germany, it’s going to
be very extremely difficult for Europe to have a meaningful fiscal expansion. Is Germany ready to do it? Unfortunately, I think that it’s still not
there. I think that when they are talking about the
ability to do something like 50 billion, if the economy goes into recession, they will
be in technical recession in Q3. 50 billion is nothing and 50 billion is not enough. Does it mean as well, that if they go out
of recession, they will stop their fiscal expansion? I think that it’s not a structural move, that
we might do it very temporarily but we’re very far away from the European global broad
base and sizable fiscal expansion. I think that this will be the main task of
Lagarde. I still think that Germany will be extremely
reluctant to go that way. I think that is going to be in time fortunately. The problem we had for when you look at the
budget deficits in Europe from 2014 until 2018, is the trend is amazing. In fact, all the European governments have
deleveraged and reduced their deficits and four of them are in a surplus now. What does it mean? It mean that for four years, which is the
period when in fact, Draghi started QE, they used the monetary stimulus to create fiscal
austerity. There is no way that inflation could have
been created, because in fact, the money which was there has been taken away on the other
side. I think that if you have a mix between monetary
policy accommodation and fiscal expansion, you will finally have some maybe better chance
to create real inflation. I think that the best news for Europe right
now will be a rollover of the data in Germany further. I think that the more bleak the situation
and the outlook for Germany look, and maybe the more the German government will be ready
to finally cause [inaudible] and become a more, I would say, in sync with the real needs
of the economy. If the data imposing Germany and Europe more
globally, I think that you are starting to have a big problem because the hawks at the
ECB would start to be vocal, just calling for the end of QE and Germany will just very
quick to acknowledge that they don’t need to do any fiscal expansion. That’s when you end up with this outlook for
Europe which will be extremely shadow growth and undershooting inflation. I think that the strong message from yesterday
was like, it’s not necessarily QE infinity, but it is a last message, “We do that but
you have to do your part as well.” I think that Draghi insisting on the fact
that governments need to take the battle because they can’t save the European economy is in
fact the reality. It’s they have run– monetary policy stimulus
has run its course and would be very ineffective in terms of inflation or growth if the government
decide to keep on their fiscal austerity path. So far, 2019 has been extremely spectacular
and very mind blowing. I think that we reached in August a peak of
stress, a peak of Armageddon scenario which has been amplified by technical factors, and
especially negative convexity edging close. We are right now on all the asset classes
back on a very pivotal level and the next three months would be dictated by the ability
of Beijing and President Trump to maybe pause and to bring back some wisdom that is really
required after a quite [inaudible].

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