Bill Blain: “If You Want To See Inflation In Action, Then Financial Asset Prices Are Screaming “Danger, Danger”
by Bill Blain of Mint Partners
ZeroHedge.com
Jun 1, 2017
“I know that I am mad, but mother dearest, now, for this one time, I do not rave…. ”
A line from a Bloomberg article y’day caught my eye: “The economy is too good and money is too cheap”. I emphasise it deliberately. Note it down. It sums up the underlying problem succinctly. The threats implied in one single line are legion – but who is worried about inflation?
I’m told by very senior economists and analysts from around the financial markets the inflationary threat is low and probably overestimated. After all, the comfortable consensus seems to be we’re in for a new normal of 20-yrs of stable but low growth.
Wake up and smell the fricking coffee! The consensus is the consensus until its decisively proved wrong!
If you don’t believe there is inflation stare deep into your Bloomberg screens and call up the price of any and all financial assets; bonds or stocks. If you want to see inflation in action, then Financial Asset Prices are screaming “Danger, Danger Will Robinson, Danger!” If you want inflation – there it is. Methinks all these clever people aren’t seeing the inflationary Forest because of the financial asset trees.
I’m quite sure some of these very smart folk will be saying: “Calm down Blain.. Low bond yields mean there is no inflation. Calm. Calm.” These folk forget its central bank distortion keeping rates so low – and too much money. Why are stocks so high? Because folk think the economy is recovering… which means it will heat up.. These are mutually exclusive events.
Even more surprising is an article in the FT based on a European Commission paper calling for the bundling of European Sovereign Debt into a “new financial instrument”. That sounds awfully like debt mutualisation – packaging debt into a common instrument. Will it be a joint and several liability – meaning all Eurozone nations effective become liable for each other? That sounds like a screaming NO! from the Germans.
You can understand why the ECB is pushing it. Basically, they are running out of capacity to buy sovereign bonds into the QE purchase programme. Their purchases must be weighted on a relative balance of each country. However, that causes a massive distortion – Bunds are running out. All the German banks want/need to hold them, and the Germans are in surplus so aren’t selling more.
Meanwhile, the liabilities of all the other countries are rising, and the current set up of the ECB means it can’t absorb them because it’s stuck with the relative weightings. It can’t buy more Italy unless it can balance them with more Germany – which it can’t find!!!
And hence the real reason we’re dancing around an EU taper – it’s absolutely nothing to do with the success of the policy in creating European Growth. (I very much doubt it has.) Its all about being trapped in relative weighting rules meaning it can’t buy more without the Germans making a fundamental shift.
Let me try and explain the threat by example: Italy has massive sovereign debt to refinance, the only people holding Italy debt are weak Italian banks and those who still believe the ECB has unlimited appetite to buy more.. Something has to give..
The Rest…HERE
