James Grant, the founder of Grant’s Interest Rate Observer, calls interest the “universal price”...

 ... because it performs so many roles. For a start, it constitutes the capitalisation or discount rate without which valuation is impossible.

Infflation is back, and along with it a widespread obsession about the future direction of interest rates. This is hardly surprising. In the past, a dose of tight money has brought prices under control. However, interest’s role in ensuring price stability is just one of its many functions. Our neglect of those other functions explains why the financial markets are in such a jumpy state today.

James Grant, the founder of Grant’s Interest Rate Observer, calls interest the “universal price” because it performs so many roles. For a start, it constitutes the capitalisation or discount rate without which valuation is impossible. As every business student learns, a company’s present value is calculated by discounting future cash flows.

 “Anticipation is always at a discount”, said the Scotsman John Law in the early 18th century. The Austrian economist Ludwig von Mises observed that if humans did not value consumption in the present over the future then an apple in a hundred years’ time would be worth the same as an apple today: an evident absurdity.

We have witnessed much such absurdity in financial markets in recent years. After the global financial crisis of 2008 central bankers reduced short-term interest rates to zero, and even lower in Europe and Japan. Longer-term rates declined too. 

The collapse in discount rates justified a great inflation in asset prices. The valuations of companies whose cash flows lay in the distant future benefitted most. Easy money pushed up property prices in many cities around the world.

Very low borrowing costs can help keep chronically unprofitable enterprises alive. So-called zombie companies were first observed in Japan in the late 1990s around the time when the country’s central bank reduced its policy rate to zero

American companies have availed themselves of low-cost credit to spend trillions of dollars buying back shares.

Investors may now regret having lent to over-leveraged companies and governments. Over the past decade, however, they had little choice. The era of ultralow interest rates induced a desperate scramble for yield.

Now interest rates are rising and asset prices are coming down.

Edward Chancellor Reuters 30 June 2022

https://www.reuters.com/breakingviews/its-time-rediscover-importance-interest-2022-06-30/

Edward Chancellor’s “The Price of Time: The Real Story of Interest” will be published by Penguin on July 7.

The ghost of Takahashi haunts Abenomics

Edward Chancellor examines the similarities between Japan’s current economic situation and that of the 1930s

FT 31 March 2013

https://englundmacro.blogspot.com/2016/07/korekiyo-takahashi-and-helicopter-money.html

James Grant, ZIRP and Helicopter Money

https://englundmacro.blogspot.com/2015/09/james-grant-zirp-and-helicopter-money.html

A simple model for inflation that Jerome Powell should understand

Federal Reserve chairman Jerome Powell today acknowledged that he doesn’t understand inflation. See below.

This is somewhat alarming given the fact that the Fed’s is given operational independence to ensure price stability.  If Powell doesn’t have a model for understanding why should the Fed been independent?

Lars Christensen 29 June 2022

https://marketmonetarist.com/2022/06/29/a-simple-model-for-inflation-that-jerome-powell-should-understand/

Börsen 30 juni 2022

 

Som lägst var OMXSPI nere på indexnivån 727,48 vilket var nytt årslägsta

 Facit under årets sex första månader blev minus 29,2 procent.

The S&P 500 fell more than 20%, marking its worst first half of a year since 1970.

The Dow just booked its worst first half since 1962. 

https://www.marketwatch.com/story/whats-next-for-the-stock-market-after-the-worst-1st-half-since-1970-heres-the-history-11656503671

Markets Had a Terrible First Half of 2022. It Can Get Worse

https://www.wsj.com/articles/markets-had-a-terrible-first-half-of-2022-it-can-get-worse-11656734432

Riksbanken har beslutat sig för att höja styrräntan från 0,25 till 0,75 procent

Vad gäller Inflationen spår Riksbanken att denna kommer ligga kvar över 7 procent under resten av 2022.  

DI 30 juni 2022

https://www.di.se/live/riksbanken-hojer-styrrantan-till-0-75-procent/

OBS att 0,75 procents ränta inte är hög.

Den är låg. Långt under den förväntade inflationen.

“whatever, it’s fake.”

  When investors realised that lending to Greece was way riskier than lending to Germany, they freaked out. Borrowing costs for European governments diverged. The euro tottered.

Super Mario saved the day with his power ballad “whatever it takes”.  However, this third solution relied on easy money, meaning it was temporary.

“whatever it takes” would rapidly become “whatever, it’s fake.” 

Facing record euro-area consumer inflation, at 8.1%, the ECB will raise interest rates by 25 basis points next month. Lord help us. 

What, then, should the euro do? 

 The euro is a downside risk. It is a potentially unsafe, unsound, and unnatural experiment. 

Rather than long-term prosperity, the euro might have enabled little more than unsustainable debt burps in the Palazzo delle Finanze. That suggests shrinking, and a smaller fiscal club. Or just ending it altogether.

 If it looks like the single currency will implode, the ECB Berlin may step in to save the single currency. Welcome to a massive United States of Europe.  

Alternatively, if it looks like the euro may implode, Brussels Berlin may kick some other capitals out. Welcome to either a smol United States of Europe, or none. 

One currency to rule them all? Or one currency to fool them all?

Edward Price FT Alphaville 30 June 2022

https://www.ft.com/content/6e1b4292-6619-46bb-85c3-38b5f659e105

Edward Price is a former British economic official and current teacher of political economy at New York University’s Center for Global Affairs.

Varför betalade ECB 1.800 miljarder kronor för att rädda euron?

Rolf Englund 15 augusti 2007

https://englundmacro.blogspot.com/2007/08/varfr-betalade-ecb-1800-miljarder.html

Frida Bratt

 ”Vi vet att konjunkturen kommer få en smäll av centralbankernas räntehöjningar, och därför handlar oron nu mycket om den sämre konjunkturens inverkan på bolagens förväntade vinster”, säger Frida Bratt, sparekonom på Nordnet.

Köplistan hos nätmäklarna Nordnet och Avanza toppas av Ilija Batljans krisande fastighetsjätte SBB, för andra månaden i rad.

”SBB genomgår nu en förtroendekris på aktie- och obligationsmarknaden, efter bland annat ifrågasatta värderingar och tidvis märklig kommunikation. Men från privatspararna är förtroendet fortsatt högt”, säger Frida Bratt.

DI 30 juni 2022

https://www.di.se/nyheter/branda-sparare-litar-pa-batljan-tar-hem-vinst-i-juniraketer/

– Det är lätt att känna att man vill trycka på säljknappen, men risken är då att man inte riktigt kommer in igen, säger Nordnets sparekonom Frida Bratt.

SvT 24 januari 2022

https://www.svt.se/nyheter/ekonomi/lista-det-ska-du-gora-om-borsen-faller

The next recession will be marked by a severe stagflationary debt crisis

Central banks will eventually wimp out and accept higher inflation – followed by stagflation – once a hard landing becomes imminent, because they will be worried about the damage of a recession and a debt trap, owing to an excessive build-up of private and public liabilities after years of low interest rates.

In typical plain-vanilla recessions, US and global equities tend to fall by about 35%.  But, because the next recession will be both stagflationary and accompanied by a financial crisis, the crash in equity markets could be closer to 50%.

Nouriel Roubini Project Syndicate 29 June 2022

https://www.project-syndicate.org/commentary/stagflationary-debt-crisis-by-nouriel-roubini-2022-06

 

Börsen 29 juni 2022

 

Lagarde “We need to do what we have to do, which is to bring it back to 2%, and we shall do so.”

Bloomberg 29 June 2022

https://www.bloomberg.com/news/articles/2022-06-29/ecb-gets-inflation-whiplash-with-spain-at-10-germany-slowing

Federal Reserve Chair Jerome Powell made that clear that the real concern is that the US might be facing sustained higher inflation well above the Fed’s 2% target.

Bloomberg 29 June 2022

https://www.bloomberg.com/opinion/articles/2022-06-29/never-mind-peak-inflation-fed-s-powell-wisely-eyes-the-long-term

Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked

 When Wall Street collapsed in 2008, triggering the global Great Recession, various explanations were offered: regulatory capture by financiers who had replaced industrialists in the capitalist pecking order; a cultural proclivity toward risky finance; failure by politicians and economists to distinguish between a new paradigm and a massive bubble; and other theories, too. 

All were valid, but none went to the heart of the matter. So, what is really going on? 

My answer: A half-century long power play, led by corporations, Wall Street, governments, and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice:  Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked.

For 50 years, the US economy has sustained the net exports of Europe, Japan, South Korea, then China and other emerging economies

The lion’s share of those foreigners’ profits rushed to Wall Street in search of higher returns. 

On the back of this tsunami of capital heading for America, the financiers were building pyramids of private money (such as options and derivatives) to fund the corporations building up a global labyrinth of ports, ships, warehouses, storage yards, and road and rail transport.

When the crash of 2008 burned down these pyramids, the whole financialized labyrinth of global just-in-time supply chains was imperiled.

To save not just the bankers but also the labyrinth itself, central bankers stepped in to replace the financiers’ pyramids with public money.

After two decades of a central-bank-supported bonanza of soaring asset prices and rising corporate debt, a little price inflation was all it took to end the power game that shaped the post-2008 world in the image of a revived ruling class. 

So, what happens now?

The West’s authorities now face an impossible choice:  Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked.

Yanis Varoufakis Project Syndicate 22 June 2022

https://www.project-syndicate.org/commentary/inflation-is-result-of-empowered-financial-markets-by-yanis-varoufakis-2022-06

The US current-account deficit, the crux of my fundamental case against the dollar, has deteriorated dramatically over the past two years...

 ... from -2% of GDP in the first quarter of 2020 to -4.8% in the first quarter of 2022, with the just-reported data for early 2022 revealing the second-sharpest quarterly deterioration since 1960.

America’s current-account deficit hasn’t been this large since mid-2008 in the depths of the global financial crisis.

Surprisingly, domestic saving has since rebounded

good reason to believe that interest rates would remain uncomfortably low.

As a result, the US current-account adjustment would be increasingly concentrated in the sharp depreciation of an overvalued dollar. 

(But ...)

Stephen S. Roach Project Syndicate 27 June 2022

https://www.project-syndicate.org/commentary/why-post-pandemic-dollar-strengthened-not-weakened-by-stephen-s-roach-2022-06

The markets are right to worry about a higher risk of recession

Having rightly worried about the Fed both underestimating the threat of inflation and failing to evolve its policy stance in a timely manner, markets now feel that a late central bank scrambling to play catch-up risks sending the US economy into recession.

Mohamed El-Erian FT 29 June 2022

The risk of a flip-flopping Fed | Financial Times (ft.com)

An overheated housing market important reason why the Fed is raising rates

 The Fed needs to remove the heat from demand without prompting an accident among mortgage financiers.

The key question now is whether the sector can be brought into some kind of even keel without causing an accident along the way. And which parts of the financial system might be the most vulnerable.

Just as money market mutual funds developed to allow investors to avoid paying for deposit insurance, as they would have to do on funds held in banks, so non-bank financial institutions have been able to seize yet more business that would once have been done by traditional lenders. 

Most non-Americans will only have heard of two; and very few Americans will have heard of all of them

John Authers 29 June 2022

https://www.bloomberg.com/opinion/articles/2022-06-29/housing-market-disquiet-grows-with-price-data-mortgage-tremors

Englunds lag 3 (Inflation and the housing market)

Räntan (A) är vad som behövs för att stoppa inflationen.

Räntan (B) är den som gör att bostadsmarknaden kollapsar.

Om A är större än B har vi ett stort problem.

Englund: Englunds lag 3 (Inflation and the housing market) (englundmacro.blogspot.com)

Leverage and Deleveraging

https://internetional.se/leverage.htm

Rutger Arnhults ägarbolag M2 har 18,5 miljarder kronor i lån

 I M2 finns en salig blandning med bolag där Castellum och Corem är dominerande.

Att både belåna fastigheter och ägarbolaget var en fantastisk affär när kurserna rusade. 

Men hävstången fungerar även åt det andra hållet 

Värde är en sak, men det viktiga är ändå alltid kassaflödet.

Magnus Dagel DI 28 juni 2022

https://www.di.se/analys/nu-slar-dubbelbelaningen-tillbaka-mot-arnhult/

Börsen 28 juni 2022

 

Fed’s newfound hawkishness will start a recession? Summers thinks it will

There is a longer-term question that matters, too: Once inflation is finally brought under control, do we return to the post-2009 secular stagnation, or will there be a new paradigm? 

He sees the threat of recession, even with 10-year bond yields at just over 3%, as strong evidence that he is right that the U.S. and the world can’t cope with higher rates.

“The fact that such low rates seem to be causing a recession is quite prohibitive,” 

I differ I think secular stagnation is less likely,  and I think Western governments will be more willing to spend than in the aftermath of the 2008-2009 recession. 

James Mackintosh  WSJ 27 June 2022

https://www.wsj.com/articles/larry-summers-nailed-inflation-but-is-he-right-on-what-comes-next-11656343688

Inflation models that worked for decades broke down during the pandemic...

 ... and alternatives have yet to emerge

Economists have struggled to explain how inflation suddenly shot from around 2% before the pandemic to 8.6% in May.

Outside of a handful of individuals, economists have thus far devoted remarkably little attention to how their theories and models got inflation so wrong. 

This would be understandable if economists had only missed by a bit.  They didn’t. 

Inflation at the end of last year was more than double the median projection among economists surveyed eight months earlier and well above the highest forecast.

Greg Ip WSJ 15 June 2022 

https://www.wsj.com/articles/on-inflation-economics-has-some-explaining-to-do-11655294432

From Marxist Venture to Venture Capitalists: The Swedish Wage-Earner Funds

Rikard Westerberg Cambridge University Press:  23 June 2022

https://www.cambridge.org/core/journals/enterprise-and-society/article/from-marxist-venture-to-venture-capitalists-the-swedish-wageearner-funds-and-the-market-turn-19831994/A3EA6060B9A66F27C32D1CEDC065CC04

Socialists at the Gate /Timbro och dess föregångare/

Swedish Business and the Defense of Free Enterprise, 1940–1985 

Rikard Westerberg 

Dissertation for the Degree of Doctor of Philosophy, Ph.D., in Business Administration. Stockholm School of Economics, 2020 

https://englundmacro.blogspot.com/2020/11/socialists-at-gate-timbro-och-dess.html

Vårens rekordhöga temperaturer har närmat sig 50 grader i Sydasien

– Det är de högsta temperaturerna man har uppmätt sedan man började mäta för 122 år sedan.

Om en miljard indier skaffar luftkonditionering, vilket man vill göra när det är så här varmt....

SvT 28 juni2022

https://www.svt.se/nyheter/ny-rapport-storre-befolkning-bidrar-till-mer-varmebolja

In 2050, as much energy will be used for world air conditioning as the whole of China uses today to produce all its electricity.

https://englundmacro.blogspot.com/2020/11/no-weather-event-affects-power-system.html

Värmeböljorna vi ser nu är bara en början

Det skriver vetenskapsjournalisten Izabella Rosengren, aktuell med boken ”Hetta”.

SvD 27 juni 2022

https://englundmacro.blogspot.com/2022/06/varmeboljorna-vi-ser-nu-ar-bara-en.html

Major Financial Sector Laws Followed the 2008 Crisis

 Investopedia 26 June 2022

https://www.investopedia.com/ask/answers/063015/what-are-major-laws-acts-regulating-financial-institutions-were-created-response-2008-financial.asp

Windows-dator eller Mac?

Båda datortyperna har för- och nackdelar, men på vissa områden är Mac-datorer helt enkelt bättre.

https://pctidningen.se/dator/det-har-ar-mac-funktioner-som-vi-saknar-i-windows

 

ECB’s new tool may come up short

At the June 15 emergency meeting, the ECB announced it will reinvest maturing bonds “flexibly” under its pandemic emergency purchase programme (Pepp). But the mechanism for reinvestment is unclear. 

The second existing tool is Outright Monetary Transactions (OMT). Created during the 2012 debt crisis, OMT involves the ECB buying a country’s sovereign debt in the secondary markets — as long as that country has agreed to strict conditionality. It has never been used

ECB governing council has tasked staff with devising a new tool to address fragmentation. They hope to announce it at the next policy meeting on July 21. I fear it will come up short

To overcome opposition from northern European countries concerned about moral hazard and avoid legal challenges, the anti-fragmentation tool must have conditions

Italy has about €200bn in debt to roll over later this year and an additional €305bn next year.

Megan Greene Senior fellow at Harvard Kennedy School and chief economist at Kroll FT 28 June 2022

Crisis looms if the ECB’s new tool comes up short | Financial Times

Admitting to disorientation is a sign of honesty and realism

 Hedge fund manager Michael Burry issued a tweet Monday suggesting that the Federal Reserve may pause or even reverse its campaign of interest-rate hikes

What he’s referring to with the “Bullwhip Effect” is the deflationary effects of retailers holding too much inventory. The theory is that they will eventually have to drop prices to relieve themselves of the goods they have stockpiled.

In previous inflationary periods, the Fed had to boost interest rates above the rate of inflation to bring inflation down. That may not be the case this time. 

As laughable as it may seem, there may still actually be a transitory element to current inflation that was a function of quantitative easing, government spending and pandemic hoarding.

So, if Burry is speculating that the Fed may pause rate hikes, when would that be?

Bloomberg 27 June 2022

https://www.bloomberg.com/opinion/articles/2022-06-27/michael-burry-s-bullwhip-tweet-deserves-serious-attention

Michael Burry, the founder of Scion Asset Management who was made famous by Christian Bale in the movie “The Big Short,” suggested on Twitter that the “Bullwhip Effect” happening in the retail sector may lead to the Federal Reserve reversing rate increases and its Quantitative Tightening policy.

https://www.bloomberg.com/news/articles/2022-06-27/michael-burry-of-the-big-short-fame-warns-fed-may-alter-course

If inflation falls quickly, the Fed and others can desist relatively early. If not, then probably not. 

And if economic activity tumbles, or if the fall of  some domino sets off a systemic financial crisis, then the Fed may be forced to relent quickly. 

 If the market is right, the peak fed funds rate, not much above 3.5%, will barely be around for six months before the first cut. 

it’s startling that it normally only takes four months from the last hike to the first cut. That in part will be because the Fed realizes it has, in the current widely used phrase, “broken something.” 

Tooze’s summation of the BIS view is worth quoting at length:

In the current conjuncture, if you aren’t puzzled you don’t get it. This isn’t your common or garden slowdown. Admitting to disorientation is a sign of honesty and realism.

https://adamtooze.substack.com/p/chartbook-131-calibrating-the-polycrisis

Realistically, this uncertainty cannot be resolved for a while. We need to know how growth reacts to the newly tight monetary policy, we need to know whether inflation does come under control, and we need to know if any financial accidents happen. 

John Authers and Matthew Brooker Bloomberg 28 juni 2022

https://www.bloomberg.com/opinion/articles/2022-06-28/gaming-the-post-peak-rates-world-is-no-easy-task-for-markets

“from whatever it takes to whatever it breaks”

Investors and economists think policymakers will struggle to avoid imposing pain, from rising unemployment to economic stagnation.

https://englundmacro.blogspot.com/2022/06/from-whatever-it-takes-to-whatever-it.html

Värmeböljorna vi ser nu är bara en början

Det skriver vetenskapsjournalisten Izabella Rosengren, aktuell med boken ”Hetta”.

SvD 27 juni 2022

https://www.svd.se/a/0G29M0/sa-paverkas-vi-av-varme-blir-korkade-och-arga

https://www.bokus.com/bok/9789179651879/hetta/

Bland annat i Indien och Pakistan där värmeböljor med temperaturer över 40 grader i skuggan är direkt livshotande.  

– Det är mycket allvarligt. Om man har långvarig hög temperatur så kommer det bli svårt för människor att bo där, säger Deliang Chen.  

Halv miljard riskerar drabbas

Deliang Chen är en av författarna till den nyligen publicerade artikeln Future Population Exposure to Daytime and Nighttime Heat Waves in South Asia 

https://agupubs.onlinelibrary.wiley.com/doi/10.1029/2021EF002511

där forskare för första gången har studerat hur sambandet mellan extremvärme och tätt befolkade områden påverkar klimatkrisen.  

 SvT 28 juni 2022

https://www.svt.se/nyheter/vetenskap/ny-forskning-visar-fem-extra-varmeboljor-per-ar

Börsen 27 juni 2022

 

 Fastighetssektorn lyfte på måndagen – med SBB i topp. 

Carnegie och ABG noterade börsfiaskot Desenio

 Desenio som säljer affischer via nätet, noterades den 25 februari 2021 till teckningskurs 72 kronor och därmed ett värde på 10,7 miljarder kronor.

Två månader efter introduktionen ansåg Carnegies och ABG:s analytiker att kursen borde upp till 105 respektive 110 kronor, motsvarande ett värde på 16-17 miljarder.

På torsdagen handlades aktien strax över 2 kronor, en nedgång på omkring 98 procent.

DI 23 juni 2022 

Färska analytiker bakom köpråden på börsfloppen Desenio (di.se)

 

Can the Fed pull off a controlled slowdown of the housing market?

By the first quarter of the year the increase in American house prices over the previous two years, at 37%, was the fastest on record.

That rapid growth is a problem because it feeds into rents, which in turn contribute to headline inflation. 

Cooling a hot property market by just enough to quell inflation is one thing.  Deflating a bubble without popping it is another. 

The Economist 23 June 2022

https://www.economist.com/finance-and-economics/2022/06/23/can-the-fed-pull-off-a-controlled-slowdown-of-the-housing-market

 

Home ownership - the West’s biggest economic-policy mistake

It is an obsession that undermines growth, fairness and public faith in capitalism

A trillion dollars of dud mortgages blew up the financial system in 2007-08. 

But just as pernicious is the creeping dysfunction that housing has created over decades: vibrant cities without space to grow; ageing homeowners sitting in half-empty homes who are keen to protect their view;  and a generation of young people who cannot easily afford to rent or buy and think capitalism has let them down. 

As our special report this week explains, much of the blame lies with warped housing policies that date back to the second world war 

The Economist 16 June 2020

https://www.economist.com/leaders/2020/01/16/home-ownership-is-the-wests-biggest-economic-policy-mistake

https://www.economist.com/special-report/2020/01/16/housing-is-at-the-root-of-many-of-the-rich-worlds-problems

BIS: Leading economies are close to “tipping” into a high-inflation world...

 ... where rapid price rises are normal, dominate daily life and are difficult to quell, the Bank for International Settlements warned 

In its annual report, the BIS said these transitions to high-inflation environments happened rarely, but were very hard to reverse.

Chris Giles FT 26 June 2022

https://www.ft.com/content/b937e023-c86c-4b07-b40d-a3266d84f149

BIS Annual Economic Report 2022

https://www.bis.org/publ/arpdf/ar2022e.htm

BIS Annual Economic Report 2021 

https://www.bis.org/publ/arpdf/ar2021e.htm

The next bond market selloff is no more than another bad inflation report away

Despite an inflation rate in excess of 8%, futures show traders are betting the target federal funds rate won’t rise much beyond 3% from the current range of 1.50% to 1.75%. 

Powell said that by the end of the year, the Fed’s policy rate “will be pretty close to where some of the Taylor Rule iterations are.”

That’s 4.93% based on current estimates, or more than 3 percentage points above the current fed funds rate.

So, while traders rush to hedge for a recession that has yet to arrive, they forget that the fight against inflation is far from over. 

Jenny Paris Bloomberg 24 juni 2022 

https://www.bloomberg.com/opinion/articles/2022-06-24/bond-traders-are-reading-the-federal-reserve-wrong-yet-again

Jenny Paris is executive editor at Bloomberg News for global bond, currency and emerging markets.  She has previously worked at the Wall Street Journal and Dow Jones Newswires covering the euro zone crisis and as a managing editor for Asia equity markets

Aktiestrategen Molly Guggenheimer på Danske Bank tror att börsen går upp i sommar.   ”Jag tror vi har nått botten och att börsen står 10 procent högre om 3-6 månader”, säger hon.

https://englundmacro.blogspot.com/2022/06/ljus-i-morkret-aktiestrategen-molly.html

The present instruments to address euro fragmentation have important limitations

 The European Central Bank is faced with a dilemma.  It needs to tighten monetary policy in order to rein in unexpectedly high inflation and at the same time prevent fragmentation of financial markets across the eurozone.

Lorenzo Bini Smaghi FT 24 June 2022 

https://www.ft.com/content/7b9f7761-4b7a-4707-9252-d639ab9c3aee

The writer is chair of Société Générale and a former member of the executive board of the European Central Bank

Société Générale is France's third largest bank by total assets after BNP Paribas and Crédit Agricole.

Dow Gains More Than 800 Points

U.S. stock indexes rallied after weak economic data softened investors’ expectations of coming interest-rate increases

Rate-hike expectations edged down as investors priced in a higher probability of softer Fed moves in the months ahead. 

Markets now expect a rate cut in the second half of next year. 

WSJ 24 June 2022

https://www.wsj.com/articles/global-stocks-markets-dow-update-06-24-2022-11656055923

Traders are starting to price out any Fed action on rates beyond the December meeting, 

scaling back the additional tightening they expect and flirting with the possibility of cuts by in 2023. 

But they are still grappling with the question of what comes next if an economic downturn takes hold. 

https://www.bloomberg.com/news/articles/2022-06-23/stocks-set-for-steady-asia-open-amid-bond-rally-markets-wrap

The biggest story in markets at the moment is the fall in Treasury yields. 

The 10-year has gone from 3.5 per cent to under 3.1 per cent since last Tuesday. 

The simplest explanation is that recession fears are ascendant, and the market thinks the Federal Reserve will be able to stop tightening (or will be scared into stopping?) at a lower level than previously expected. 

The futures market is indeed pricing in a lower peak for the fed funds rate. 

Robert Armstrong FT June 24, 2022

A soft landing - possible but unlikely. Wolf and Dudley

The US Economy Is Headed for a Hard Landing

If you’re still holding out hope that the Federal Reserve will be able to engineer a soft landing in the US economy, abandon it.  A recession is inevitable within the next 12 to 18 months. 

Bill Dudley Bloomberg 22 juni 2022 

https://englundmacro.blogspot.com/2022/05/a-soft-landing-possible-but-unlikely.html

US breakevens for average inflation over the next 10 years

and for the five years starting five years hence.  

Both are now lower than they were in May last year — an extraordinary fact given the extent of the inflationary shock since then, and the new geopolitical drivers for inflation that have arisen this year. 

If you’re convinced that much higher rates of inflation are on the way, along with higher interest rates to combat them, then the market is still making it very cheap for you to bet on that outcome

John Authers Bloomberg 24 June 2022

https://www.bloomberg.com/opinion/articles/2022-06-24/markets-lose-central-bank-anchor-as-inflation-erodes-credibility

 

Börsen 24 juni 2022

Dow Gains More Than 800 Points

https://englundmacro.blogspot.com/2022/06/dow-gains-more-than-800-points.html

 

If interest rate increases slow the economy sharply but don’t reduce inflation quickly?

  “We can’t fail on this. We really have to get inflation down,” Mr. Powell said during the second of two days of testimony. 

“We’re going to want to see evidence that it really is coming down before we declare ‘mission accomplished,’ ” he told the House Financial Services Committee.

In the mid-1970s, the Fed raised rates aggressively but, in hindsight, backed off too soon and failed to break the back of high inflation, forcing stiffer action later.

WSJ 23 June 2022

https://www.wsj.com/articles/feds-jerome-powell-to-head-to-the-house-with-interest-rates-in-focus-11655976603

Central banks try to find the right response to a problem they did not think could happen

Chris Giles FT 23 June 2022

https://englundmacro.blogspot.com/2022/06/central-banks-try-to-find-right.html

The End of the Housing Boom

 From the US and UK to New Zealand and the Czech Republic, the world economy is facing yet another threat: the unraveling of a massive housing boom. 

Global monetary tightening is squeezing homebuyers, which could create a ripple effect that would deepen an economic slump.

To be sure, a 2008-style collapse is unlikely.  Lenders have tightened standards, household savings are still robust and many countries still have housing shortages. 

Labor markets are also strong, providing an important buffer.

Bloomberg 22 juni 2022 

https://www.bloomberg.com/news/features/2022-06-21/cooling-real-estate-markets-in-us-uk-risk-deeper-global-economic-slump

Börsen 23 juni 2022

 

Vid stängning hade storbolagsindexet OMXS30 handlats ned med 1,6 procent 

Stockholmsbörsen stänger på årslägsta inför midsommarhelgen

Point Properties, som ägs av fastighetsbolaget Fastator, kommer inte fullfölja ett förvärv av sex fastigheter från Diös Bildt Rosengren

 I Fastators styrelse sitter flera namnkunniga profiler som tidigare statsministern Carl Bildt och före detta S-ministern Björn Rosengren.

Femte största ägare är den tidigare M-ledaren Ulf Adelsohn. Vd är fastighetsprofilen Knut Pousette.

DI 23 juni 2022, 14:54

https://www.di.se/live/profiltungt-fastighetsbolag-drar-sig-ur-affar-med-dios-far-inte-finansiering/

Median US home prices zooming past $400,000

The national median listing price for active listings was $447,000 in May 2022, up 17.6% compared to last year, and an increase of 35.4% vs. May 2020

Renting has also become less affordable.  

Rents were up 12% nationally in the first quarter of this year, and higher in some metro areas.

MarketWatch 22 June 2022

https://www.marketwatch.com/story/these-5-charts-reveal-the-craziness-of-housing-market-during-the-pandemic-and-its-not-over-yet-11655915246

In Nevada and Arizona, Lake Mead’s water levels sank to an all-time low

endangering drinking supplies for nearly 25 million Americans. It was the US’s worst heatwave since, well, May. 

As heatwaves get longer, the US will eventually suffer one that lasts weeks. When that happens, says Klinenberg, the country’s aged electrical grids may not cope with rising demand. 

If grids fail, food will rot, residents of high-storey apartment buildings risk being trapped without elevators, and it won’t be possible to pump water to people living above the sixth floor.

Simon Kuper 23 June 2022

https://www.ft.com/content/48f20f75-92aa-40d5-8063-13a32fceac36

 

Central banks try to find the right response to a problem they did not think could happen

Some of the rise in inflation is still temporary, but much will need to be squeezed from economies without anyone knowing exactly how much pressure to apply. This means the dangers of excessive tightening are as great as continuing to do too little, too late.

In such a difficult world, no one should rule out recessions in the year ahead. The Fed is probably correct to raise interest rates hard, but the truth is that we really don’t know.

Chris Giles FT 23 June 2022

https://www.ft.com/content/f6cc9826-b31c-42d4-93da-8f71c9ddd32a

The May 2007 BoE annual report, endorsed by Lord King, then the Bank’s governor, said financial stability risks “appeared to be low”. 

It was almost the eve of the financial crisis. 

https://englundmacro.blogspot.com/2016/03/top-10-hits-and-misses-from-lord-kings.html

Banca Monte dei Paschi di Siena -The world’s oldest bank to cut 4,000 jobs

It will also close some 150 branches, bringing its network to just over 1,200 branches.

After the bank teetered near failure, Rome spent some EUR5.4 billion to nationalize it in 2017, equivalent to more than $6 billion at the time.

MarketWatch 23 June 2022

https://www.marketwatch.com/story/italy-s-monte-dei-paschi-plans-2-64-billion-capital-increase-to-revamp-business-271655969855

More about Banca Monte dei Paschi di Siena

https://englundmacro.blogspot.com/search?q=monte

Ljus i mörkret. Aktiestrategen Molly Guggenheimer på Danske Bank tror att börsen går upp i sommar

 ”Jag tror vi har nått botten och att börsen står 10 procent högre om 3-6 månader”, säger hon till Affärsvärlden.

https://www.dagensps.se/bors-finans/strateg-borsen-gar-upp-i-sommar-kopvarda-aktier/

 

Molly Guggenheimer

https://englundmacro.blogspot.com/2022/05/guggenheimer.html

Från våra ansvariga råder radio­tystnad om de problem som de skapat

 I stället ägnar de sig till exempel åt en extra semester­vecka, återbetalning för stora elräkningar, tävlar om lägsta bensin­priset, tävlar om extra pengar till dem med lägsta pensionen.

Våra politiker har ofta talat om att Sverige behöver en ny skatte­reform. Detta har hittills stannat vid fagert tal. 

Klas Eklund har nyligen presenterat utmärkta förslag för att täcka helheten.

Sverige har haft minusränta i åtta år. Resultatet är att börsen löper amok, priset på bostäder i storstäder är utan rim och reson. 

Göran Collert tidigare ordförande Förenings­sparbanken

Sverker Lerheden tidigare vd Tornet, filantrop

Lars Strandberg tidigare vd Spintab

SvD debatt 17 jumi 2022

https://www.svd.se/a/eEQpbR/debattorer-las-cervenka-och-gor-sen-om-skattesystemet

”Sverige är på väg mot en bostadskrasch”

Myndigheter och politiker har ungefär ett år på sig att agera innan de tvingas ta hand om en finanskris. 

Göran Collert, Sverker Lerheden och Roland Petersson SvD 28 maj 2018

https://internetional.se/houseprices.htm#1805coll

Börsen 22 juni 2022

 

There’s every reason to believe that we’ll fairly soon go back to an era of low interest rates

 Here’s a chart of the real interest rate — the interest rate minus the expected rate of inflation — on 10-year United States government bonds since the 1960s.

So, is the claim that the Fed was consistently setting interest below this natural rate? If so, where was the runaway inflation? 

In fact, until 2021, inflation consistently came in more or less at the Fed’s target of 2 percent a year.

But why was the natural rate so low? The immediate answer is the Fed learned from experience that it had to keep rates low to keep the economy from slipping into recession.

Since 2000, and especially since the global financial crisis, businesses have persistently been unwilling to maintain a level of investment spending that used all the money households wanted to save, unless interest rates were very low. This condition has the unfortunate name “secular stagnation”

What causes secular stagnation? The best guess is that it’s largely about demography.

Once inflation is back down to 2 to 3 percent, which will probably happen by the end of next year, the Fed will begin cutting again.

Paul Krugman NYT 21 June 2022

https://www.nytimes.com/2022/06/21/opinion/inflation-interest-rates-fed.html

Börsen 21 juni 2022

 

Kaliningrad

Moscow warns it will 'take actions' after alliance member blocks trains carrying goods to Russia's Kaliningrad territory

Lithuanian Foreign Minister Gabrielius Landsbergis said his country was simply implementing sanctions imposed by the EU. 

He said the measures implemented were taken after 'consultation with the European Commission and under its guidelines.'

Daily Mail 20 June 2022

https://www.dailymail.co.uk/news/article-10934333/Russia-warns-actions-against-NATO-member-Lithuania-blocking-sanctioned-goods.html

The secretary of Russia’s Security Council threatened retaliation in a growing standoff with the EU after Lithuania blocked transit to Kaliningrad

Russia “will certainly respond to such hostile actions” and appropriate measures will be taken soon

The government in Vilnius halted transit deliveries in line with EU sanctions barring the supply of steel and other ferrous metal products from Russia. The list will be expanded to include cement next month under a program of measures agreed in March.

Bloomberg 21 June 2022

https://www.bloomberg.com/news/articles/2022-06-21/putin-s-security-chief-goes-to-kaliningrad-as-eu-tensions-flare

I Litauen står dessutom Nato-trupper under tysk ledning som skulle svara direkt.

SvD 21 juni 2022

Ryssland hotar att anfalla Litauen | SvD

War tensions over Kaliningrad displace the ghosts of East Prussia

War tensions over Kaliningrad displace the ghosts of East Prussia | Financial Times (ft.com)

Nato, Narva, Kaliningrad/Königsberg, Financial Times och Carl Bildt

This blogg 26 Februari 2022

https://englundmacro.blogspot.com/2022/02/nato-narva-kaliningradkonigsberg.html

Wallenstam en av de senaste decenniernas största svenska börssuccéer

Men på bara ett halvår har nu aktien nästan halverats i värde.

DI 20 juni 2022

https://www.di.se/nyheter/fastighetsmiljardaren-varnar-for-fastighetskris-och-boprisras-en-tvarnit/

This time, the epicentre is Italy - not Greece.

 ECB’s support for the sovereign bond market has always been conditional on consistency with its mandate of price stability. It was the threat of deflation in 2012, and during the pandemic, which gave the ECB the all-clear to provide the limitless support required to halt a panic.

Inflation in Europe is a game-changer, and markets know this. 

Sovereign spread targeting by a central bank has never been done before.

The ECB will need to provide answers in the next few weeks, or markets will draw their own conclusions.

Eric Lonergan FT 21 June 2022

https://www.ft.com/content/7cfb85d3-c77a-496f-9934-450f2314d311

We’re witnessing the start of the second euro crisis

https://englundmacro.blogspot.com/2022/06/were-witnessing-start-of-second-euro.html

Russia cutting gas supplies to Europe has long been one of the EU’s greatest fears.

 This week it became a reality.

FT 17 June 2022

https://www.ft.com/content/2da439ba-87d8-4a48-80ca-b6452d48669a

Is Lithuania on the verge of dragging NATO into Ukraine war? 

Moscow warns it will 'take actions' after alliance member blocks trains carrying goods to Russia's Kaliningrad territory

https://www.dailymail.co.uk/news/article-10934333/Russia-warns-actions-against-NATO-member-Lithuania-blocking-sanctioned-goods.html

What Could Possibly Go Wrong? Real Estate It's all about leverage.

 When unleveraged investments fall, the people holding them lose some of their wealth. Relatively well-off people who hold investment assets are now relatively less well-off. 

When leveraged investments fall, companies and their lenders can go bust. The need to pay off the debt can prompt fire sales elsewhere. 

Bloomberg’s index of US office property real estate investment trusts, or REITs, is slightly lower now than it was 20 years ago, and almost back to the lows it hit during the worst of the pandemic in 2020 Chart

Typical 30-year mortgage rates are now a whisker below 6%, and approaching the pre-crisis high of 2006: chart

This is uncomfortably reminiscent of the conditions that triggered the global financial crisis.

 if there is one further pocket of speculation in the world that could cause damage when it bursts, it’s British housing, particularly in London.

John Authers Bloomberg 21 juni 2022 

https://www.bloomberg.com/opinion/articles/2022-06-21/property-is-the-crisis-risk-to-watch-as-stocks-enter-bear-market

Kanske EU tar till passerellerna för att kunna rädda Italien

Passerelle clauses in the EU Treaties: Opportunities for more flexible supranational decision-making

https://www.europarl.europa.eu/thinktank/en/document/EPRS_STU(2020)659420

Regeringen, samarbetspartierna och oppositionen anser att förslaget om att stats- och regeringscheferna ska kunna avskaffa vetot tillhör det mest svårsmälta i den nya grundlagen.

 Förslaget, som går under benämningen passerellen, bör helst förpassas till papperskorgen, är den samstämmiga svenska uppfattningen.

I går skickade statsrådsberedningen ett brev till ordförandelandet Italien där ståndpunkten klargörs. Plocka bort eller arbeta om förslaget lyder det svenska kravet.

– Om den inte slopas måste man hitta ett sätt att inte gå förbi riksdagen, förklarar statsminister Göran Persson som ”inte tycker om” förslaget.

SvD 22 oktober 2003

https://www.svd.se/a/ef32e524-458c-39da-a51d-af06938946ed/eu-lag-far-nej-av-regeringen

Övergångsklausul, eller passerell (franska: passerelle, övergång), 

är en klausul i Europeiska unionens fördrag som gör det möjligt för Europeiska rådet och Europeiska unionens råd att förenkla beslutsfattandet och lagstiftningsförfarandena inom unionen, utan att behöva tillämpa det ordinarie ändringsförfarandet för att ändra fördragen.[1] Övergångsklausulen infördes genom Lissabonfördraget, som trädde i kraft den 1 december 2009, och har hittills aldrig använts.

https://sv.wikipedia.org/wiki/%C3%96verg%C3%A5ngsklausul

Passerelle clause From Wikipedia, the free encyclopedia

 A passerelle clause is a clause in treaties of the European Union that allows the alteration of a legislative procedure without a formal amendment of the treaties. The use of a passerelle clause required unanimity of all member states although member states with opt-outs and those not participating in an area under enhanced cooperation may not have a vote. 

Unlike formal treaty revision their use does not require national ratification. 

Passerelle is French for a small bridge.

https://en.wikipedia.org/wiki/Passerelle_clause

Lagarde Restates ECB Hiking PlanChanges to the construction of the US consumer-price index have distorted comparisons

“Suffice to say that fragmentation will be addressed if the risk of it arises,” she told lawmakers. “And it will be done so with the appropriate instruments, with the adequate flexibility, it will be effective, it will be proportionate, it will be within our mandate. And anybody who doubts that determination will be making a big mistake.”

https://englundmacro.blogspot.com/2022/06/italian-banks-government-debt-risks.html

Fed's bank stress tests in 2022

Under the "stress test" exercise established following the 2007-2009 financial crisis, the Fed tests banks' balance sheets against a hypothetical severe economic downturn, the elements of which change annually.

The results dictate how much capital banks need to be healthy and how much they can return to shareholders via share buybacks and dividends.

Reuters 20 June 2022

https://www.reuters.com/business/finance/whats-new-with-feds-bank-stress-tests-2022-2022-06-20/

US banks’ ability to ride out downturn in spotlight as recession fears grow

FT 21 June 2022

https://www.ft.com/content/c4dda7ee-a5b9-4d33-b27c-06067a4a5f34

Big US banks should raise $200bn in capital now

Neel Kashkari FT 16 April 2020

https://englundmacro.blogspot.com/2020/04/big-us-banks-should-raise-200bn-in.html

Banks at IntCom

https://www.internetional.se/banks.htm

Den svenska skvalpvalutans usla facit

SEB:s valutaanalytiker bedömer att dollarn respektive euron borde kosta omkring 8 respektive 9,50 kronor

Nils Åkesson DI 20 juni 2022

Nice charts

https://www.di.se/analys/uselt-facit-for-den-svenska-skvalpvalutan/

Börsen 20 juni 2022

 

Italian banks' government debt risks: real or just deja-vu?

 A plunge in shares in Italian banks, sparked by rising government bond yields, has reawakened memories of the 2011-12 debt crisis and rekindled concerns over lenders' vulnerability to sovereign risks.

The sovereign-bank link, which became a "doom loop" of mutually reinforcing risks a decade ago, compounds problems for Italian lenders, which are down by a fifth this year, nearly twice the loss of the wider European  

Nudged by regulators to diversify sovereign risks, Intesa and UniCredit have cut domestic bond holdings to 70%-80% as a proportion of their core capital.

Reuters 20 June 2022

Analysis: Italian banks' government debt risks: real or just deja-vu? | Reuters

 Lagarde Restates ECB Hiking Plan

 The measure is meant to be finalized before the ECB’s Governing Council next scheduled policy meeting on July 20-21, people familiar with the matter have said. Lagarde said that work is under way, and declined to divulge details on how it’s supposed to function. 

“Suffice to say that fragmentation will be addressed if the risk of it arises,” she told lawmakers. “And it will be done so with the appropriate instruments, with the adequate flexibility, it will be effective, it will be proportionate, it will be within our mandate. And anybody who doubts that determination will be making a big mistake.”

 The deposit rate currently stands at -0.5%, having been negative since 2014. 

Bloomberg 20 June 2022

https://www.bloomberg.com/news/articles/2022-06-20/lagarde-restates-ecb-s-rate-hike-plan-as-crisis-tool-takes-shape

ECB Tool to Avert Debt Crisis 2.0 Takes Shape

https://englundmacro.blogspot.com/2022/06/ecb-tool-to-avert-debt-crisis-20-takes.html

Summer books of 2022: Economics Martin Wolf urval

An Economist’s Outlook: Essays by John H. Makin from a Transformative Era

The late John Makin was one of what seems a dying breed: a thoughtful, well-informed and open-minded conservative economist. 

 

The Federal Reserve from the Great Inflation to COVID-19 by Ben Bernanke

Can’t We Just Print More Money?: Economics in Ten Simple Questions

If you feel you should understand how economists think but have no idea where to start, this book is the answer.

Reshaping Capitalism to Save Humanity from Climate Catastrophe by Alessio Terzi

 

Unshackling India: Hard Truths and Clear Choices for Economic Revival 

by Ajay Chhibber and Salman Anees Soz

India will soon be the world’s most populous country. But will it also be a prosperous one? 

 Martin Wolf FT 20 June 2022

https://www.ft.com/content/636d4bcb-816f-485e-bff2-bb8dc6cefe22

Det har varit många tunga år för oss björnar

 Chart from John Authers Bloomberg 17 juni 2022

https://www.bloomberg.com/opinion/articles/2022-06-17/post-lehman-recovery-makes-contrarian-case-for-buying-stocks

A fascinating aspect of the financial markets is that long-term returns are driven almost entirely by math, while short-term returns are driven almost entirely by psychology. It’s useful to consider both.

Hussman Market Comment June 2022

https://www.hussmanfunds.com/comment/mc220601/

When the time comes to ask the question – “What triggered the crash?” – remember that this is the least important question. A market crash requires nothing more than a shift in investor psychology from careless speculation to even modest risk-aversion.  

 Undoubtedly, some “catalyst” will be found, but the mistake will be in believing that the collapse is caused by that piece of “bad” news. The important question to ask is “What drove the bubble?” That’s where the lessons are. 

John P. Hussman, Ph.D. President, Hussman Investment Trust July 2021

https://englundmacro.blogspot.com/2021/07/what-triggered-crash-hussman-funds.html

It’s often said the 2008 Lehman collapse and its aftermath typified the drawbacks of capitalism.

I don’t buy that for one moment.

https://englundmacro.blogspot.com/2021/08/its-often-said-2008-lehman-collapse-and.html

Ordning och reda även i Rom på sin tid

 

 Ur Catilinas sammansvärjning av Göran Hägg

“from whatever it takes to whatever it breaks”

Investors and economists think policymakers will struggle to avoid imposing pain, from rising unemployment to economic stagnation.

Whatever it takes?

The ECB has a challenge of a more existential kind.

FT 17 June 2022

https://www.ft.com/content/6532b026-e007-441b-b9dd-ffd5619504d7

 If history is any guide, the selloff might still be in its early stages

The S&P 500 is trading at 15,4 times its next 12 months of expected earnings, according to FactSet, just a hair below its 15-year average of 15,7.

David Kelly, chief global strategist at J.P. Morgan Asset Management, said  “I wouldn’t be surprised if within a year, we’re having a meeting where the Fed is considering cutting rates,”

WSJ 20 juni 2022

https://www.wsj.com/articles/stocks-historically-dont-bottom-out-until-the-fed-eases-11655594823?mod=hp_lead_pos2

ECB sought to stave off a resurgent sovereign-debt crisis with the promise of a new tool

Bloomberg 15 June 2022

https://englundmacro.blogspot.com/2022/06/ecb-sought-to-stave-off-resurgent.html

 

“I still think the Fed and most market participants are underestimating the gravity of our situation,” Summers El-Erian

 Risk of US Unemployment Needing to Climb Toward 6%

“I would be very, very surprised if we saw inflation come down to 2.5% without also having seen a recession,” Summers also said. 

The more likely scenario is that the recession won’t bring consumer-price gains “all the way down” to 2.5% -- “that’s why I think the central tendency is towards stagflation.”

Bloomberg 17 June 2022

https://www.bloomberg.com/news/articles/2022-06-17/summers-sees-risk-of-us-unemployment-needing-to-climb-toward-6

This is not a cyclical phenomenon 

It is a secular regime change forced on reluctant central banks by inflation that has got well ahead of them and threatens livelihoods, worsens inequality and undermines financial stability.

As it is late, this shift comes with a heightened risk of collateral damage and unintended consequences.

Mohamed El-Erian FT 20 June 2022

https://www.ft.com/content/77665e8d-e3bb-4fc7-8547-b368c8b90f47

 What is stagflation, and might it make a comeback?

A combination of inflation and sluggish growth brings memories of the 1970s

The Economist explains 16 June 2022

https://www.economist.com/the-economist-explains/2022/06/16/what-is-stagflation-and-might-it-make-a-comeback

Powell Burns Volcker

 Arthur Burns Federal chair from 1970‒1978.  

Burns made a rather dramatic (at least looking at it now) mea culpa speech in September 1979. 

“Economic life is subject to all sorts of surprises and disturbances—business recessions, labor unrest, foreign troubles, monopolistic shocks, elections, and governmental upsets. One or another such development, especially a business recession, could readily overwhelm and topple a gradualist timetable for curbing inflation. That has happened in the past and it may happen again.”

Here’s a chart of the federal funds rate in Volcker’s first term.

Note those near-vertical lines. These 50‒75 basis point moves people now consider “aggressive” are mild in comparison. The Volcker Fed had multiple hikes of 100 bps or more.

Volcker rewarded Jimmy Carter’s appointment by giving him an immediate recession going into 1980. Then they took fed funds 1,000 points higher in the second half of 1980, helping cost Carter the election and welcoming Ronald Reagan with an even deeper recession.

John Mauldin 17 June 2022

https://www.mauldineconomics.com/frontlinethoughts/gradually-worse

Powell, who became chairman in February 2018, kept on climbing, reaching 2.5% just before Christmas of that year.

At the same time, the Fed’s balance sheet began shrinking. In February 2019, it fell below $4 trillion for the first time since December 2013.

Will the Powell Fed be more like the Burns Fed or the Volcker Fed? We won’t know for sure until it confronts something much uglier than the current equity bear market. 

All we do know is that Powell has blinked before now — and in response to a 19% stock market correction in late 2018 and a president with a Twitter habit. Trump’s successor is not much of tweeter. But the market is already down further.

In April 1969, November 1971, April 1974 and February 1980, the rate hikes stopped not because the Fed had won its fight against inflation, but because GDP and employment were going down. 

Niall Ferguson Bloomberg 19 juni 2022 

https://www.bloomberg.com/opinion/articles/2022-06-19/niall-ferguson-fed-s-powell-is-blundering-on-inflation-rate-hikes

Volcker was less austere and more pragmatic than his reputation

Greg Ip WSJ 9 December 2019

https://englundmacro.blogspot.com/2022/01/volcker-was-less-austere-and-more.html

Volcker: “If I had known what was going to happen, I never would have done it.” 

https://englundmacro.blogspot.com/2022/05/volcker-if-i-had-known-what-was-going.html

ECB Tool to Avert Debt Crisis 2.0 Takes Shape

Europe does not face fresh sovereign debt crisis, says eurogroup chief

Since the region’s last debt crisis, the EU has bolstered its bank regulation with the creation of a pan-European supervisor and crisis-fighting infrastructure through a common resolution mechanism when lenders fail. The European Central Bank has new tools to buy government bonds. Lawmakers created a recovery fund backed by common debt during the pandemic.

FT 20 June 2022

https://www.ft.com/content/e1379996-223d-463a-9c96-b660776d9207

President Christine Lagarde told euro-area finance ministers Thursday that the tool will kick in if the borrowing costs for weaker nations rise too far or too fast

“Like its predecessors, the new ECB backstop will likely face legal challenges focusing on a possible violation of the prohibition of monetary financing, the principle of proportionality, and possibly the prohibition of privileged access,”

Bloomberg 17 June 2022

https://www.bloomberg.com/news/articles/2022-06-17/ecb-tool-to-avert-debt-crisis-2-0-takes-shape-as-market-on-edge

The dangers for the eurozone are all too real

Italy is one focus of concern with its low potential growth, large deficits and enormous public debt

Designing a new facility to deal with fragmentation risk is easier said than done.

The risk of a “doom loop” is higher in Italy than in the rest of the eurozone.

ECB bond purchases need to come with conditions attached. This is how the Outright Monetary Transactions facility was designed in 2012 but no government requested it because none wanted to accept the politically fraught conditions. 

Still, in order to pass legal muster, any new facility will need to include something along these lines.

Nouriel Roubini FT 17 June 2022

https://www.ft.com/content/ed4098c6-e808-45b6-bc4d-6c7fab4deb2c