Daily Picks Thursday: ECB to End Bond Buys but Signals Rate Hike Is Distant
June 14, 2018
4 Min Read
Here are summaries from a selection of articles we read today:
ECB to end bond buys but signals rate hike is distant
- The ECB announced on Thursday it would wrap up its bond purchase scheme by the close of the year.
- It was a balanced announcement reflecting the uncertainties hanging over the region’s economy.
- There will not be rapid tightening as interest rates would remain at record lows for another year.
- The euro zone growth forecast for this year was downgraded to 2.1% from 2.4% previously.
- The inflation forecast was upgraded to 1.7% from 1.4%, largely as a result of rising oil prices.
Much like Italian rout, markets may not price Brexit risks until they hit
- The calm in sterling is leading some to draw parallels with Italy’s mini-crisis where 1-2 months of relative calm following March 4 elections exploded onto markets at the end of May, prompting panicky last-minute selling.
- The pound has recovered about half of losses since the 2016 vote which saw the pound fall to 31-year lows.
- Current exchange rates at 11% below pre-referendum levels may adequately price the worst-case scenario of a no-deal or that markets are confident the worst will be averted.
- The calm may also reflect a broader shift in market psychology, increasingly evident in recent years, whereby risk is ignored until it hits traders squarely between the eyes.
- It could also be the case that no one has any idea what is going on, with the focus on Bank of England rate hikes instead.
- Markets may have stopped second-guessing Brexit talks, preferring to sit on the sidelines until the crunch point for avoiding a "hard" or disorderly Brexit hits home.
Lucre’s Allure - (Cryptocurrency)
- Today’s challenge from bitcoin as a plausible alternative currency depends on the superficially attractive notion that it is based on an inherently superior and more secure payment technology.
- With greater economic uncertainty and instability, there is greater demand for currency innovation.
- Bitcoin’s claim to combine anonymity and untraceability with security is what makes it attractive.
- Bitcoin looks like a 21st century version of gold. It can be created or mined through effort.
- Just as the price of gold depended on the fact that it took a great deal of human exertion to extract it from large quantities of earth in remote locations, bitcoin requires large amounts of computer-power driven by cheap energy.
- It marks a transformational shift in the perception of fundamental value.
- It may point to a new age when most and eventually all value may be created by the non-human interaction of machines and energy.
- It is not surprising that the fear of instability—and the association of new money with diabolical qualities—has reappeared.
Do We Really Have a Student Loan Crisis?
- There are approximately 2.5 million individuals with outstanding federal loans at the $100,000 level. As for the average, it is a more down-to-earth $17,000.
- 53% of all adults with a bachelor’s degree or more education have outstanding student debt.
- Now at $1.3 trillion, the amount of student debt owed by U.S. households has tripled from 2001-2016. However, unlike other forms of household debt, delinquencies have been rising.
- The Federal Reserve does not sound very concerned, they don’t believe the debt will constrain the consumption that is close to 70% of GDP and because 90% of outstanding student loan debt is guaranteed by the federal government, financial institutions are not “highly exposed".
- The Fed reminds us that the loans are adding to the human capital that fuels consumption. Those people with higher salaries will be more likely to buy an expensive house and car.
Brexit Postponement May Be an Option If Talks Get Messier
- Senior European Union officials have informally discussed whether the U.K. might need to stay in the bloc past March 2019 if Brexit negotiations don’t accelerate over the summer.
- A deal is needed if the U.K. is going to get the 21-month post-Brexit transition period.
- Any postponement would be a dramatic development, with Prime Minister Theresa May staking her reputation on Britain leaving the bloc on March 29, 2019.
- There is still a huge amount of work to do and both sides are “talking past each other” on many issues, particularly the Irish border backstop solution.
- A short time limited extension may be granted by the EU but governments are unlikely to allow a lengthy prolongation.
Global Trade Has a Trump Problem
- Trump continued his pattern of being friendlier with America’s enemies than with its friends.
- Russia is invoking its “essential security” to argue that the WTO has no standing to intervene against it. Canada and the European Union, among others, are arguing that essential security should not be a carte blanche for Russia to act as it wishes against Ukraine. Only one major nation has taken Russia’s side in this pivotal case - the U.S.
- If Russia wins the case, countries would be able to engage in almost any kind of protectionism by asserting a claim of essential security that would be unchallengeable. Which is why Trump supports them.
- A possible explanation for Trump’s behavior is that, in his worldview, national security appears to encompass freedom of action. To him, a great nation is unencumbered.
- Sovereign nations cooperate because they trust one another. By destroying trust, Trump could do lasting damage to the international order that supports shared prosperity.
- Defense Secretary James Mattis wrote in a February memo that unfair trade practices weren’t harming the Pentagon’s ability to get the steel and aluminium it needed and opposed blanket tariffs that would have “a negative impact on our key allies."
- In a good equilibrium, trade barriers are low and the world benefits from lower prices and enhanced variety. Workers who lose their jobs because of imports are retrained or financially supported with some of the gains society gets from freer trade.
- In a bad one, tariff walls rise so high that each country is like Robinson Crusoe, making everything it needs in a costly and inefficient way.
- The purpose of the WTO is to nudge the world toward a good equilibrium but the WTO has no real enforcement power. It can only convene and guide and inspire nations to coordinate around a better equilibrium.