Millennial Macro

Companies Get Paid to Be Junk in Europe "Yields plunged. Corporate-bond sales ballooned. Values became utterly distorted.  Investors are now literally  paying European companies to borrow . Sanofi, a French drugmaker, just became the first nonfinancial private company to issue debt that yields less than zero, according to Bloomberg News. Henkel, a German household products maker, quickly followed suit." "European central bankers don't seem too worried about these distortions. In fact, they seem eager to see those animal spirits return to generate growth. The ECB is considering  expanding its program , possibly to new asset classes.   The ECB may end up getting too much of what it wants. The Bank of America strategists warn against a rapid rise in leverage" "In the meantime, European central bankers seem to have created an Alice-in-Wonderland credit market that's infecting the rest of the world. It's sending investors into emer...

Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation "During private deleveraging cycles monetary policy will largely be ineffective if it is aimed at stimulating private credit demand.  What matters is not monetary stimulus per se, but whether monetary stimulus is paired with fiscal stimulus (otherwise known as helicopter money) and whether  monetary policy is communicated in a way that helps the fiscal authority maintain stimulus for as long as private deleveraging continues . Fiscal dominance and central bank independence come in secular cycles and mirror secular private leveraging and deleveraging cycles, respectively. As long as there will be secular debt cycles, central bank independence will be a station, not a final destination." Out of Many, One? Household Debt, Redistribution and Monetary Policy during the Economic Slump* One could, indeed, go further and regard the financial position of firms and households more generally as a po...

The following is a set of points to consider when thinking about how the Fed should conduct monetary policy going forward.  This is by no means an exhaustive list and is solely meant to stimulate discussion after a somewhat sleepy summer in the financial markets despite what was an intense international political backdrop.

In the prior post, The Dollar and Treasury Yields in Limbo: Three Possible Scenarios , I explored potential paths for how the global economy and financial markets could proceed in the intermediate term.  The main difference between the three outcomes depended on the market's perception of the Fed's reaction function.  Seeing as the market odds of a June rate hike have increased substantially following the release of the Fed's April meeting minutes , it felt necessary to further examine scenario 2 . 

From February 12th: Since last year widening high yield US credit spreads, falling global risk securities, commodities, currencies, and inflation expectations  have all coincided with shrinking global foreign exchange reserves.  This combination of factors has produced declining treasury yields as one would expect in a risk-off environment.    If the dollar were to break upward resistance in an ongoing bull run then those trends should persist as US securities continue to beat EM.  To see a return to risk taking, my expectation would be for all or most of those aforementioned trends (in bold) to bottom and reverse.  If the dollar were to break support and correct against a broad range of currencies, a reflation trade may be in order as inflation expectations stabilize and treasury yields rebound.  In this scenario the dollar squeeze would dissipate allowing EM to outperform US securities.  However, if the dollar were to correct or reverse...

This post is a follow up on last year's assessment of global markets .  By reading that entry as well as this one from June , you will notice that many of the themes often discussed today where very much present throughout the first half of 2015 (whether that may be the tightening of global dollar financial conditions to the correlation of certain global market price trends).  The question now is whether there are signs that the dominant price trends of the last few year are on the cusp of reversing or not.  

I wanted to expand on the following which derives from the the last blog entry,  The ZLB vs the Natural Rate: US Monetary Policy goes Global , "A more compelling argument can be made that an economy suffering a secular stagnation that arises from  perpetually depressed private investment must rely on a greater use of fiscal policy.  In such a state of the world, fiscal policy becomes imperative in generating enough aggregate investment and demand to ensure that all available resources, including labor, are put to productive use rather than imprudently sitting idle.  This is particularly the case if existing monetary policy tools fail to gain traction in reducing slack in the economy.  Unfortunately due to current political realities and ideologies, a more expansionary role for fiscal policy is often dismissed as a political non-starter.   If these assumptions prove to be true, then the decision to accept secular stagnation is a political choice ...