Axel Weber, former head of Germany’s central bank says the ECB is going to halt QE soon and hike rates by September.
Weber warns Markets Unprepared for Central Bank Shifts.
Investors are dangerously unprepared for a sharp rise in eurozone bond yields when US interest rates march higher and European quantitative easing ends, Axel Weber, chairman of UBS and the former head of the Bundesbank, has warned.
The jump in US rates could spark big jolts in the markets as the long spell of aggressive monetary easing across the globe has left many investors off-guard over a swing in the global rate cycle, he added.
“I don’t think we will have increasing divergence among the major central banks in the world for much longer,” Mr Weber said, predicting that Europe would follow the US with a rate rise by next September at the latest. “I think the ECB is closer to slowing its current quantitative easing programme than many in the market expect.”
Until now, the eurozone has not seen a similar swing in rates as short-term rates have stayed low — or even negative in some markets — while the ECB has been engaged in aggressive QE, including extensive bond purchases.
But Mr Weber predicted that the ECB would end its bond purchases sooner than many investors had assumed, sending the eurozone yield curve higher. “A large part of the market is uni-directionally positioned and it is positioned in a direction where you will have to take off some of those positions over the course of 2017,” he said.
Mr Weber also voiced support for Mr Trump’s plans to move away from only monetary stimulus toward more structural measures and fiscal stimulus, such as large-scale infrastructure projects. He aired concern that US companies with international operations could be negatively affected by the president-elect’s plans to alter trade agreements.
“Markets know how to price and discount market risk,” he said. “Markets are much less good at pricing political uncertainty . . . Our broad presence in continental Europe gives us optionality in case we need to move employees from London to onshore locations. Optionality is going to be the name of the game.”
Shocked?
I will not be shocked if the ECB tapers QE. It isn’t doing Europe a bit of good.
As for hikes, I doubt it, unless the ECB is forced to hike in response to a euro plunging out of control, possibly in response to Italy leaving the eurozone. It seems a bit early for that scenario, but Italy is likely to exit the Eurozone in due time causing all sorts of havoc.
Everyone seems to have bought into the idea that a big round of inflation is coming shortly. I think a deflationary asset-bubble bust is more likely, with central banks having to reverse hikes (assuming they get hikes in the first place).
Mike “Mish” Shedlock
My model says that without QE, base rates in EU should be around 1%. They’ll have to raise to make it look like the wizard is running the show, and not the market.
For eight years my model blew chunks because it wasn’t designed to handle QE, without it, it works like a charm.
Increased rates could help DB, Commerz.
The open market has already started to force bond yields higher in Europe. The ECB is reacting.
Politely disagree somewhat.
Rates will certainly rise someday and QE will someday taper and stop. My belief is that it will be later rather than sooner. When rates rise, however, they will probably rise with enthusiasm. Some countries will look like distressed debt while today they look peachy keen and low by all historical standards. As some have predicted … 2009 * a lot.
Europe is famous for kick the can. QE and ECB rate management is simply a variation of ECB/EU kick the can. It’s not high finance. It’s not miracle economics. It’s simple keeping the plate spinning until some miracle happens by to allow it to end, else it will continue until it can’t.
While QE might have started out as a liquidity rescue by Bernanke in 2009, it morphed into a new form of simple fraud that all central banks and their respective governments embraced as a scheme to monetize debt, keep or increase government services, and not raise taxes. Like all government officials, they will let someone else fix it long after they are out of office. Added to the simple fraud is a game of hot potato .. the loser gets to see rates rise and governments deal with massive debt loads in one way or another.
The Economics profession, prostitutes that they are, has developed many fake theories and models that support the fallacy of QE and the goodness of using printed money to manage rates low and monetize sovereign, agency, and commercial debt. Nobody credible will fight them on it because it would be career suicide to apply simple common sense to their theories. The press would add in a fair amount of personal ridicule if anyone with credibility disagreed. The goal would be to destroy the person who shined a light on the fraud. (See Trump candidacy for an example.)
Gravity always wins eventually. We’re closer to the end than the beginning of QE and rate management. It will be further off than discussed above but it will happen. The US is normalizing rates somewhat. That plus the end of secret fraternity that has shoved globalization down out throats will be the crack in the dam.
(RE ‘the secret fraternity’: … now THAT’S what I would like to know more about. There’s obvious conscious parallelism … if a group of disconnect people look like they’re acting together they probably are but the connections are deliberately hidden. But nobody that I have read has explained it all as an insider would.)
meant this as a new topic, not a reply. sorry.
But in order to create false models, wouldn’t that be based on the assumption that they actually understood the correct model?
Isn’t it more plausible, the ‘kool aid drinking, one-trick-pony theory’?
The same way a goldbug is a die hard goldbug, isn’t a Keynesian a die hard Keynesian?
Wouldn’t therefore it be more logical that you have group think among well intentioned fools?
People that might actually be attempting to act for the better good, but their theory is failed and all they know from their books is to try more of the same. Forced to do something, they therefore repeatedly choose to do more of the same.
There is no shortage of criticism that they lash out upon one another, unless that is all theater for the hoi polloi, I find it particularly difficult to believe it is all being done with bad intentions.
I vote for ignorance.
I think you’re giving them too much credit. A few obviously know their theories are cr*p and made up to support outright fraud. The rest go along because they know there’s a job in it for them or there’s a job loss if they don’t. Some fairly large number probably actually believe their theories are valid because important people act as if they are.
Plus, it’s the perfect fraud. Nobody will prosecute anyone ever. The people at the top who profit will never have to return anything, even after it blows up. The people who received the ‘free’ govt services paid for by low rates and monetized debt are actually in receipt of value. If they didn’t want what they got, they should have told their politicians to stop with the generosity.
Actually, Japan is the only country getting it right. The BOJ will someday tell the Japanese Treasury to not bother repaying the debt they own. They will write it off and the cost will be $0 since it was printed money. After a one week scandal, it will be hailed as genius. Then they’ll do it again, but start out slowly.
Economics is all about false models. You take a relationship, cherry pick some parts that appear to relate to each other, then take a snapshot. It’s now fixed. Then you gin up some complex math that’s really a fantasy about the static relationship. The math creates artificial flows based on some ideas that can be sold to peers. The end result is proof of concept. Everyone goes along for a wide variety of reasons. Simple fraud, yet brilliantly institutionalized and so common it’s makes me look ridiculous to question it.
You vote for ignorance. I vote for conspiracy.
Look up “conscious parallelism”. It basically means that if disconnected groups act in a similar way for similar or interrelated goals, they probably are acting in agreement, only the agreement is hidden from public view. It’s basically two or more groups being sneaky and hiding their plan but, if needed, using a cover story to explain any interaction that’s discovered.
Globalism, monetarism. rate management, QE worldwide, too big to fail, all, to me, look like conscious parallelism. There’s a hidden agenda and an organization behind the groupthink. Someone is keeping everyone in line with a plan they all agreed to at the top. Only that plan is now falling apart with Brexit, Trump, Italy, and possible rates normalizing in the US for starters.
What I would love to know is how the plan originated, spread, and was maintained. It would take an insider to spill the beans. Actually, probably an assistant to a top insider. I have no idea if it will ever happen.
wasn’t there a statement a while back that inferred the baton of stimulus was being handed round? Japan, then US, then Europe/UK and round again to try to reach some sort of escape velocity?
Couldn’t globalism just simply be a function of a bunch of Socialists following the Marxist handbook? Nefarious – yes; hidden -no. Politics really is not something I express opinions on very often nor do I know a tremendous amount about. I just know what I like. Small and weak gubermint. But that is an extension of my lack of trust in people who obtain power.
And if the only acceptable candidates for a job as head of central banks have to come from a Keynesian academic background, wouldn’t once again you just be watching a group of people following their playbook?
To me the globalist crap bothers the sh+t out of me, and I am thrilled watching it all fall apart. But I honestly can’t see anything any central bank has done that has surprised me, with the exception of the size with which they did it. But what they did, fits right in line with their playbook. Economy not moving–> lower rates –>still not moving –> lower rates –> still not moving –> lower rates –> still not moving and already at 0 –> lower rates… where’s the shock to that?
Continuing on the economist side of things, if you showed me even one model that made complete sense of things, and show me an organized suppression of it, I will gladly agree with you.
And yes, there would definitely be very disparaging comments made about the person who wrote that model, but that is because he/she would make a lot of people feel extremely foolish.
Nonetheless, if it had right wing non-globalist political benefit, MSNBC would present those disparaging arguments, but FOX would make him/her the poster boy for the new right.
Just look at all the following comments about market will fall –>fed will lower rates –> there won’t be inflation –>fed will lower rates, economy will stall –>fed will lower rates, where is the surprise action?
Only person here that doesn’t think this function is true, is probably me, but I wouldn’t dare say it without 200-300 pages of supporting argument, because I’d be laughed at.
wrldtrst
It’s possible the coordination of monetarist and central bank financing of the world is only a fad and coincidence. In other words, Bernanke started it and everyone else decided independently it was a good idea and built their own version of it. But I think the ‘conspiracy’ came along after somebody saw a good thing and started to exploit it. NIRP, rate management, and sovereign debt monetization are part along with the trade treaties that have failed of late and the general call for globalization. Maybe it’s a shared fad among elites, but how do they coordinate? Central bank money printing is the financing arm of the group.
Re models that make sense: You miss my point. They don’t exist and never will for anything but the most simple relationships, and only some of the time. Economic model building for macro planning is an institutionalized fraud … so institutionalized I look silly for criticizing it.
“how do they coordinate? ”
Davos, right in front of our faces.
Honestly, in my limited experience with corporate America, nothing made me more nuts than the realization that no one at the most senior levels ever wanted to stick their nose out and take a risk. Essentially, If we all do it together and we are wrong, no one can point a finger at me. So let’s all do the same damn thing, at the same damn time. Safety in numbers. Like a five year old telling you “Well, bobby did it too,” and no mother around to ask about jumping off a bridge. It was infuriating.
wrldtrst
Davos
That’s the name I was trying to remember. Is the annual agenda and discussion a secret or does the meeting content leak out? Or is the real deal done in small groups behind locked doors? What about after Davos … how do they keep track of the progress?
wrldtrst
Also, you are correct, cowardice explains a lot at inflection or turning points. Also, to a cynic like me, it’s also a tool to manage the labor force, such as the FOMC being managed by ??? in the background.
I’ve only been to Davos on my own dime, to ski. Never been invited to the world economic forum, but it is an open schedule of events for about 1,500- 2,000 people. Mostly global leaders of one form or another that go to silly lectures and like the sense of feeling self important, but more than anything it is a social power networking thing. As an accountant, think of building intangible assets like goodwill. Cntacts at that level are extraordinarily valuable. I just simply do not believe in the whole Zioglobal cabal nonsense, it makes no sense to me how that would even be executed. Yes there are some absurdly rich, powerful, influential people in this world, but controlling it, is a stretch for my imagination, although I do see how the thought of it, is in an odd way comforting to people.
wrldtrst
Yet the conscious parallelism comes across like a slap in the face. Needs to be reconciled.
wrldtrst
conscious parallelism is a term from intermediate economics – specifically industrial organization and prices. Ii’s been used to identify market power derived via conspiracy. I think RICO might be derived from it, although that’s only a guess.
…and Trump, outsider – yes, shining light – spit my milk on that one.
Better than that monster Hillary, but nothing to be proud of.
“Better than that monster Hillary, but nothing to be proud of.”
Yes, I suspect that Trump might be slightly more knowledgeable on the subject of economics than her. Here’s a ten second clip of Hillary on, I’d guess, the subject of a higher minimum wage. As one YouTube commenter said sarcastically, then lets raise the minimum wage to $100/hr:
I would like to respond, but I am in a “secular stagnation” at the moment. 🙂
Crack in the dam. Hopeful sign but expect it to be put down forcefully to keep the plate spinning a while longer.
Yes, the ECB will most likely follow in the footsteps of the Fed and talk about raising rates for at least a year before they actually do anything.
And if higher rates in the US happen to tip the economy here into recession, then all bets are off. We will most likely be talking about NIRP at that point.
They talk tough when there is stability.
But when the market goes down or growth stalls (or slips into recession), they’ll do a 180 and double down on past (failed) policies.
Back in early 2010 there were quite a few speeches by Federal Reserve governors / presidents on exiting QE. Then growth stalled summer of 2010. At Jackson Hole that year (august) Bernanke hinted at further QE … became reality at year’s end with QE2.
Just too much debt (and derivatives tied to it) that will explode if rates have a sustained move up.
Japan here we come.
“Markets know how to price and discount market risk,”
LOL! Nice one!
Euro bounced back.
Interest rates are at historic lows and stock prices are at historic highs. Both are going to reverse. But it is not going to happen until there is real competition for investable funds. And with corporate investment at historic lows, rates will stay low for awhile.
Corporations won’t invest until consumer demand picks up, but labor has no bargaining power. This is exactly the conundrum faced by the federal government in the Great Depression. Last time it was fixed with WWII.
Pretty much in agreement.
As a bond bull I do think rates will rise eventually … out of the ashes following the next recession.
“Everyone seems to have bought into the idea that a big round of inflation is coming shortly. I think a deflationary asset-bubble bust is more likely, with central banks having to reverse hikes (assuming they get hikes in the first place).”
I got your Six here.
The whole Trump Reflation talk is nonsense. Just about everyone on board. Yet, when I read their reasons NARY a word on 1) Total debt levels 2) strength of $US 3) possibility of recession. If someone could weave these 3 points into an argument supporting increased growth … I’m all ears.
A move higher in rates will hurt housing (and households who used cash out refis to fuel consumption … in the heyday before The Recession households were taking out $500 billion/yr) and force more disposable income (or govt budget) toward servicing existing debt…. and less for present / future consumption. Higher $US will hurt exports / capex / earnigs and provide disinflationary pressure. With inventories / sales at recessionary levels, as is … ANY slowdown could be enough to push US into a recession.
Where should your money be if rates go up?
short fixed income
Still have to contend that a Crack Up Boom is where this all ends. But to get to that, one more big gnarly bout of financial panic might be necessary to prompt the CBs into full on helicopter money mode. Only a matter of time.
Lest we forget the motives,,,,https://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm
Mish, what do you think about this one?
http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-one-understanding-ubers-bleak-operating-economics.html
The service Uber provides, is not very difficult to provide anymore. It was clever as heck when launched, but over time, all that is left is some residual mindshare and a sizable scale effect wrt reputations. None of which justifies them taking nearly the kind of cut their current valuation requires, in order to make sense. The drivers have every incentive to route around Uber for as many rides as possible, and ditto for passengers. Both for monetary and privacy reasons.
Heck, the Uber guys themselves are fully aware of that. But what’s a geek to do, when a run-amuck financial elite conspires to shower him with billions, despite him only having done some tens to hundred millions worth of work?
So now, Uber’s business is increasingly focused on ensuring ride sharing is “regulated,” “fair,” and not full of “unserious” operators…….. Just like their old nemesis, the incumbent Taxi rackets…. They may just get there as well, unless people wake up and gel around a reliable payment system for online services, that are less prone to government intervention than Apple’s and Google’s ran-for-the-benefit-of-the-NSA-and-their-clients monoliths.
Amazon did the same thing for years
I expect Uber will survive
Amazon was spending money mostly on R&D and new products. Uber spends most of it’s money on their drivers. Driver-less cars may solve this, IF Uber switches to them soon enough.
Will take 5-7 years IMO.
Doubt it is any sooner than 5
Telegraphing rates hikes half a year in advance? Is this the new normal?
Stop the QE already. Printing is confiscation.
Mish, sorry, if Greece hasn’t left yet, what makes you think Italy will leave?