One and Done

April 20, 2016

“Short everything that man has touched”
Mark Baum (Steve Carell), The Big Short, 2015

Over the past couple of weeks, I’ve noticed that the phrase “helicopter money” is being used more frequently than ever before and it’s actually starting to sound like somebody is trying to make the market a bit more comfortable with the whole idea. If indeed that is true, then sooner or later we can expect another big step in the financial world towards absolute lunacy, hyperinflation and total collapse of the fiat money system.

The concept of “helicopter money” has been around for quite some time but so far, no central bank has had the courage to actually use it. Nevertheless, taking into account all the unconventional monetary policy tools that have been introduced since the crisis started back in 2008, I would not rule out the possibility that at one point, somebody will pull the trigger on that crazy plan as well. It is hard to predict how the market would react to such change as it would be something totally new for everyone but the fact is that if the leading central banks should choose to introduce this new measure, then the whole system itself may become relatively unstable. An instant rise in inflation is of course guaranteed but what happens after that is something that no one knows and realistically, we cannot even predict, what kind of side effects such insane plan would have in the long run.

The reason why this concept is being mentioned more frequently lies in the fact that the global recovery since the crisis has been weak and relatively uneven. Europe is clearly struggling in many areas and it seems that the ECB’s tools have perhaps supported the common currency union but they have not managed to spark a new round of strong paced recovery. Unemployment in the Euro area is still close to ten per cent which is way more than it should be and under such circumstances, it is very difficult to create suitable environment for economic growth. In the United States we have a similar situation but slightly better, however recent data suggests that things are slowly turning there as well and not towards growth.

US retail sales surprised to the downside last week and that built a case for weaker CPI figures as well which were confirmed the next day. Taking into account all the US data we’ve seen in the last couple of weeks, it is quite safe to say that the GDP figure for the first quarter is going to be exceptionally weak. Some analysts have already warned that we might even see a negative figure for the previous quarter and if that should be the case, then we basically have a confirmation that the FED will not do anything with the rates this year, unless they decide to lower it back to 0.25%. Even FOMC members have toned down their expectations lately and for example, FOMC’s Evans said recently that the FED can engineer more accommodation if it has to. Saying something like that during times when the Federal Reserve should be focused on tightening the monetary policy, cannot be a good sign for those, who bet on one or two rate hikes in 2016.

I’ve been very skeptical towards the whole “rate hike thing” since the FED made its first move and over time I have grown even more pessimistic about central bank’s policies in general. Don’t get me wrong here, I am very pleased with the fact the FED is at least trying to normalize its monetary policy but it just seems totally hopeless right now. The problem is that many other central banks are moving in the opposite direction, including the ECB and the fact that the two largest CB’s in the same world, try to cultivate entirely different monetary policies, just seems odd and unrealistic. Furthermore, United State’s economy has started to show signs of weakness, combined with a significant slowdown in the pace of the economic growth making the whole situation even more complex for the Federal Reserve and hence I’m almost convinced that they will revise their policy targets very, very soon.

First opportunity for the FED to change their views about their tightening plans is in the end of April. While some FOMC members still insist that April is a “live meeting” and hence they may increase the Federal Funds Rate by another 25bps, it is highly improbable. In reality, it’s far more likely that the FED will remain on hold and may even hint that the first rate hike may have been the last.

But then again, we'll find out shortly if that is correct or not.

Capital Properties FX