Latest / Bloomberg Intelligence / Carl Weinberg: ECB Steps Won't Work Amidst Sick Banks (Audio)

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Carl Weinberg: ECB Steps Won't Work Amidst Sick Banks (Audio) · Bloomberg Intelligence

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  Speaker 1: Charlie Pello, Thank you so very much. Now we're going
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  Speaker 1: com slash Muni van Eck Access the opportunities for this
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  Speaker 1: week turned to our own Catherine Cowdery. There are three
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  Speaker 1: single country e t s that are outperforming the broader
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  Speaker 1: market up as much as fort so far. They see
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  Speaker 1: here here's Bloomberg Intelligence analyst Eric bel tunis Peru is
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  Speaker 1: on fire. So this here because of gold, so believe
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  Speaker 1: it or not, Peru is the like forty five country
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  Speaker 1: in terms of GDP, but it's in the top five
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  Speaker 1: in golden silver mining. So it's been helped, you know,
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  Speaker 1: drastically by the uptick and gold and silver. And the
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  Speaker 1: thing with Peru is it's an emerging market, but it's
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  Speaker 1: so such a small country. It's really not represented in
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  Speaker 1: the big e M in the SES or et F
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  Speaker 1: as the I shares M s C I all Peru
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  Speaker 1: capted e T F is outperformed the broader market. It's
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  Speaker 1: attracted assets and now has two hundred eleven million dollars.
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  Speaker 1: Bel Tunis has some other examples of single country e
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  Speaker 1: t F that are rallying this year. The global x
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  Speaker 1: m s c I Grease e t F is up
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  Speaker 1: five point six percent and the global x MSCI Pakistan
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  Speaker 1: e t F has gained ten pc. That your Bloomberg
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  Speaker 1: et F report. I'm Katherine Cowdery. You're listening to taking
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  Speaker 1: stock with pim Fox and Kathleen Hay's on Bloomberg Radio
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  Speaker 1: taking stock of some global macro moves. We're going to
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  Speaker 1: start with the Eurozone, where the ECB's governing Council of
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  Speaker 1: Monterey conditions in the asset purchase program unchanged, but a
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  Speaker 1: lunch a lot of people to wonder on. Mario drags,
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  Speaker 1: the head of the ECB insistence that his stimulus program
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  Speaker 1: is home only half done, but also so what if
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  Speaker 1: its best effects are already spent? And why doesn't he
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  Speaker 1: get off the diamond move to do more. That brings
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  Speaker 1: us to my next guest. Carl Weinberg is a founder
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  Speaker 1: and head of High Frequency Economics and he joins us
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  Speaker 1: now so carl Uh, your point is that Mario Draggy
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  Speaker 1: is not doing as much as he could correct well
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  Speaker 1: at first high Kathley, and good to be on the program.
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  Speaker 1: I think what he's doing is not working and it's
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  Speaker 1: not being transmitted to the economy. So you can do
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  Speaker 1: as much as he wants, but he's not going to
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  Speaker 1: achieve his goal of getting inflation back to his desired
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  Speaker 1: rate of being just under two percent or thereabouts. What's wrong?
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  Speaker 1: Why is it not working? What should he do well?
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  Speaker 1: It's not working because banks aren't lending, and banks aren't
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  Speaker 1: lending because they're facing constantly rise in capital requirements under
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  Speaker 1: the new and ever changing regulatory environment they're operating in.
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  Speaker 1: So banks effectively remain under capitalized all the time. They're
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  Speaker 1: not in a position to increase their assets at risk
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  Speaker 1: if their ratio of capital to assets at risk is
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  Speaker 1: too low and they're having trouble raising capital. I think, also, Kathleen,
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  Speaker 1: it's just worth noting that it's not just me who's
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  Speaker 1: skeptical about what's going on. If you look carefully at
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  Speaker 1: the forecast from the ECB staff today, they published a
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  Speaker 1: new round of forecasts, and those numbers the only difference
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  Speaker 1: between them and the previous edition published in March is
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  Speaker 1: that in March they didn't include the increase in economic
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  Speaker 1: stimulus that was announced then, and these forecasts include that
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  Speaker 1: increase in quantitative easy and you know what, the two
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  Speaker 1: forecasts are functionally the same. Even the ECB staff says
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  Speaker 1: that amping up the size of the program and moving
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  Speaker 1: interest rates even more negative won't make the economy grow
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  Speaker 1: faster or get inflation closer to the desired rate. So
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  Speaker 1: they stop start buying some more corporate bonds. That's going
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  Speaker 1: to be good for whoever sells them, maybe, but not
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  Speaker 1: so good for the economy and the people of Europe
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  Speaker 1: who need this boost. Well, you know, if you ask me,
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  Speaker 1: and nobody ever did, of course, but if you ask me,
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  Speaker 1: this buying of corporate bonds really moves the ECB into
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  Speaker 1: dangerous territory in a number of regards. I mean, when
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  Speaker 1: they buy and sell sovereign bonds, they're affecting the entire
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  Speaker 1: uh lending structure of interest rates up and down across
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  Speaker 1: the board. But when they buy and sell corporate bonds,
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  Speaker 1: they're only affecting the spread between risky assets and safe assets.
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  Speaker 1: And now they're managing the price of risk, and that's
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  Speaker 1: a very very dangerous proposition. They also open themselves up to,
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  Speaker 1: I think some potential risk as to how they do it.
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  Speaker 1: I mean, whose corporate bonds are they going to buy?
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  Speaker 1: If there are two competitors in an industry and they
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  Speaker 1: buy the bonds of one and not the other, or
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  Speaker 1: buy them in differential sizes by whatever metric, then the
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  Speaker 1: one that bought to the lesser extent can claim that
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  Speaker 1: they're being discriminated against by the ECB. And boy does
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  Speaker 1: that open up a Pandora's box of trouble. So where
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  Speaker 1: is this going, Carl? What's going to happen? Uh? Is
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  Speaker 1: the economy is so to me very mixed in Europe.
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  Speaker 1: I know Germany is doing better, but some countries are
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  Speaker 1: not doing well. Spain is doing better. Is there a
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  Speaker 1: risk of a backslidding the recession? Is it just going
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  Speaker 1: to be sort of flat where it is? Because this
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  Speaker 1: is going to mean a lot for where those European
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  Speaker 1: bond yields go, where the equity markets, and certainly where
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  Speaker 1: the currency rates go. Well, you know, Kathleen, they're all flat,
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  Speaker 1: including Germany. And while everybody was what was was awed
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  Speaker 1: by Tuesday's employment report for Germany. You know, for every
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  Speaker 1: German that was taken out of unemployment by the growth
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  Speaker 1: of the economy, there were five immigrants who got jobs.
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  Speaker 1: All right, they're hiring low wage workers at subsistence wages
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  Speaker 1: whould have to come to Germany and work and be unemployed.
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  Speaker 1: They're not taking Germany's Germans out of unemployment. Three of
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  Speaker 1: the last four retail sales reports, which by the way,
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  Speaker 1: we're also reported on Tuesday, we're down. And four of
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  Speaker 1: the last five industrial production reports have been contractions. And
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  Speaker 1: we're going another industrial production report next week. So the
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  Speaker 1: whole Euroland economy is flat. And the reason it's flat
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  Speaker 1: is there's no credit. And the reason there's no credit
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  Speaker 1: it's not the ECB's fault. It's well, it's not the
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  Speaker 1: fault of ECB monetary policy. It's fault of being unwilling
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  Speaker 1: to fix the banking system properly, to recapitalize it, as
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  Speaker 1: we did in the United States with our tarp uh
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  Speaker 1: and let the banking system get on with this business
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  Speaker 1: from a newly rejuvenated capital base. I'm glad you say
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  Speaker 1: that the economies are impressive to you, because I look
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  Speaker 1: at these numbers two and I keep saying. When I
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  Speaker 1: read some of the things, I read like, where does
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  Speaker 1: everybody see all this strength? But anyway, let's talk about
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  Speaker 1: Japan because another big, big story this week is Prime
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  Speaker 1: Minister Abe announcing the delay of the increase in the
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  Speaker 1: national sales tax rate that would have taken effect next spring.
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  Speaker 1: Of course, you and I car remember when they raised
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  Speaker 1: it and helped cause recession a couple of years ago,
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  Speaker 1: the same thing. So he seems to have made the
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  Speaker 1: right decision. But there's a lot of politics involved here.
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  Speaker 1: There's a lot of politics involved. There are national elections
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  Speaker 1: for the upper house of the Diet coming in July,
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  Speaker 1: and clearly one way for the LDPD get votes is
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  Speaker 1: to postpone attack pike that they themselves have threatened to impose.
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  Speaker 1: And I think that that's part of what's going on.
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  Speaker 1: I think overall are very disappointed in their economy, which
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  Speaker 1: suffers from dual problems. The first problem is a cyclical
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  Speaker 1: downturn in the economy. Inventories relative to cells are the
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  Speaker 1: highest they've been any time in the post war period
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  Speaker 1: other than during the two thousand and eight financial crash
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  Speaker 1: and the two thousand and eleven earthquake crash. High inventories
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  Speaker 1: are a clear warning signal that the economy is headed
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  Speaker 1: into a recession. And then that recession comes along at
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  Speaker 1: declining secular trend. They're depopulating, and with the population shrinks
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  Speaker 1: because baby boomers age and now start to die off,
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  Speaker 1: then GDP has to go down, and he can reverse
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  Speaker 1: that secular trend. He can combat the inventory cycle a
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  Speaker 1: little bit, but his really Japan's outlook is really doomed
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  Speaker 1: by its demographics and by its overhanging debt burden. Well,
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  Speaker 1: you've said for a long time they had to restructure
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  Speaker 1: that debt to move ahead. Is that still your view. Well,
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  Speaker 1: they're going to have to restructure their debt whether they
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  Speaker 1: like it or not. At the end of the day,
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  Speaker 1: a shrinking population with a still rising debt burden now
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  Speaker 1: rising even fair ter because of the sales tax deferment
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  Speaker 1: al right, is going to lead to decreasing levels of
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  Speaker 1: income per capita for a shrinking number of people, and
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  Speaker 1: they're just going to have to give up more and
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  Speaker 1: more of their income to service the debt until something breaks,
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  Speaker 1: and that time is probably within sight, although not necessarily imminent. Carl,
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  Speaker 1: Let's take a quick look at the UK because the
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  Speaker 1: pounds have been trying to rally, having a tough time
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  Speaker 1: once again. Polls are showing that the vote for the
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  Speaker 1: leave camp is pulling ahead of the remains side when
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  Speaker 1: it comes to the UK leaving the year Zone. Yeah,
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  Speaker 1: well I think that, you know, the Brexit is kind
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  Speaker 1: of a wild card in all of this. However, the
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  Speaker 1: vote turns out the UK, I think it's going to
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  Speaker 1: suffer some retribution from Europe. You know, it should. London
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  Speaker 1: and the rebellious Island the financials capital for the continental
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  Speaker 1: financial affairs. I think we'll see a move to push
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  Speaker 1: Paris and Frankfort as the new financial center of Europe
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  Speaker 1: to the detriment of the city, and they'll probably be
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  Speaker 1: trade in other kind the political pushbacks as well. But
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  Speaker 1: the UK economy is also hurting because of the drop
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  Speaker 1: in global commodity prices. All those petro dollars and commodity
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  Speaker 1: dollars that came into London, that built the tall towers,
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  Speaker 1: that brought the town homes in Belgravia, that spend all
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  Speaker 1: the money on high streets. You know, all that investment
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  Speaker 1: and consumer money that comes from the Middle East and
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  Speaker 1: the Emerging World has been cut by two thirds by
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  Speaker 1: this drop in commodity prices, and that's leading to a slowdown.
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  Speaker 1: We see it in the construction index which was just
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  Speaker 1: updated today, and certainly industrial production is failing as well.
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  Speaker 1: So the UK is headed into economic trouble without regard
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  Speaker 1: to what it does on Brexit, and the Brexit just
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  Speaker 1: modulates that trouble. I'll also add Kathleen for Sterling that
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  Speaker 1: their current account deficit is the largest that's ever been
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  Speaker 1: as a share of GDP almost six percent, and that's
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  Speaker 1: not good. That's a big risk to Sterling taking us
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  Speaker 1: around the world. A nice macro view of the e
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  Speaker 1: cpral Weinberg is convinced that whatever they do, until they
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  Speaker 1: fix their bad banks, the economy is not going to
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  Speaker 1: grow and if anything, the danger of a downturn persists. Carl,
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  Speaker 1: of course, is chief economist and founder of High Frequency Economics.
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  Speaker 1: This is Bloomberg Radio.