Monday, April 11, 2016

1--Helicopter money. Has the time arrived?


Which brings us to Bernanke's conclusion:

Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out...

He then pulls a quote from his own book "The Courage to Act"

"The deflation speech saddled me with the nickname 'Helicopter Ben.' In a discussion of hypothetical possibilities for combating deflation I mentioned an extreme tactic—a broad-based tax cut combined with money creation by the central bank to finance the cut. Milton Friedman had dubbed the approach a 'helicopter drop' of money. Dave Skidmore, the media relations officer…had advised me to delete the helicopter-drop metaphor…'It’s just not the sort of thing a central banker says,' he told me. I replied, 'Everybody knows Milton Friedman said it.' As it turned out, many Wall Street bond traders had apparently not delved deeply into Milton’s oeuvre.” (Ben Bernanke, The Courage to Act, 2015, p. 64) 


2--JPM: It's all about profits, and profits are decelerating


Overall, we believe that Q1 earnings will not provide much clarity, and we stick to our call from three weeks back that the Feb-March bounce in equities should be faded. Technicals are not supportive anymore and P/E multiples are at ytd highs....

And then, JPM cuts right to the gist of its bearishness: profit margins.

Big picture, one of our key medium-term concerns for equities remains the outlook for US profit margins. We have argued since late '14 that corporate profit margins appear to be peaking out for this cycle. The latest  NIPA data are confirming the deceleration, with our model pointing to much more downside. Weakness is broad-based, with margin compression seen in all subcategories of profits: domestic, foreign, financial and non-financial...





We think this deceleration will continue as productivity remains depressed and the top line is unlikely to accelerate. Profit margins are a particularly useful indicator to assess the stage of the business cycle. In the past 60 years, there has never been a recession starting before the peak in profit margins. However, once margins have peaked, the likelihood of a downturn increases materially.

We believe that the rollover in profit margins will be a constraint for equities, as profits have tended to drive most economic variables, capex and employment in particular. It will also likely have negative implications for corporate activity, especially as M&A, buybacks and dividends are at cycle highs, and US financing conditions are deteriorating. ...

The conclusion:

We believe that the rollover in profit margins will be a constraint for equities, as profits have tended to drive most economic variables, capex and employment in particular. It will also likely have negative implications for corporate activity, especially as M&A, buybacks and dividends are at cycle highs, and US financing conditions are deteriorating


3--Winning the class war hands-down







4---Yen: Flight of fancy: Dumping US stocks and buying yen, oh my


The yen hit a 17-month high against the dollar on Monday in the currency market's latest warning sign to equity investors.

The strength of the Japanese yen this year has been a bit of a surprise for many investors. The Japanese central bank has taken steps this year that could be expected to weaken the yen, most notably the move to negative interest rates. Yet the yen has risen 10 percent versus the U.S. dollar, a huge move for the currency market. ...

it is because the yen is used as a "funding currency." Due to low (and now subzero) Japanese interest rates, it is remarkably cheap to borrow yen in order to fund other investments. Of course, stocks — and U.S. stocks in particular — are among the most popular investments that would be funded.

From this standpoint, the surge in the yen is a disturbing sign indeed..

That is to say, in order to unwind those borrow-yen-to-buy-stocks trades, "they come back and start buying yen," currency trader Boris Schlossberg pointed out Friday on CNBC's "Power Lunch."

"So far, it really hasn't been the case that equities have gone down, but what everybody's worried about is that now that the yen has strengthened, it might signal the fact that smart money's getting out of equities early, because they're afraid that there's just no strength in the equity market," Schlossberg said.


5--Overheard: Positive Interest-Rate Policy


You’ve heard of ZIRP—zero interest-rate policy. And, more recently, NIRP—negative interest-rate policy. Get ready to start hearing about PIRP—positive interest-rate policy.

Arguably the boldest experiment in central banking right now isn’t the plunge into negative rates seen in parts of Europe and Japan. Negative rates are so widespread now that they can be considered the international norm. It is the U.S. that is the standout now. Recent comments from several Federal Reserve officials have made clear the Fed thinks it can continue along the path toward higher rates.

Consider, though, that the 10-year U.S. Treasury yield is now lower than it was one week, one month and one year ago. Two years ago, when the Fed was buying $45 billion in bonds each month to put downward pressure on longer-term rates, the yield was nearly 1 percentage point higher.

Turns out this PIRP walk is no stroll in the park.


6--Government Spending Cuts Escalate Clashes Over Monetary Policy


In the U.S., government outlays on goods and services as a share of the economy have fallen to historic lows. Consumption and investment by all governments—local, state and federal combined—dropped to 17.6% of gross domestic product in the fourth quarter of 2015, matching its lowest level in 66 years, according to the Commerce Department. Meanwhile, demographic changes have pushed up government transfer payments to individuals.

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                 former Congressional Budget Office director Doug Elmendorf and Louise Sheiner, a senior fellow at the Brookings Institution, who think ultralow interest rates should tip the scales in favor of more government borrowing and investment        

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