This afternoon I had the privilege of being on Bloomberg TV, with anchors Scarlet Fu and Matt Miller. I was joined by an old market friend Bob Sinche.
We had a lively discussion (what did you expect?) on two issues. The first was on the ECB. At his press conference earlier today, Draghi indicated that the question of extending QE and tapering was not discussed. Bob argued that this was disingenuous. Of course it is being discussed, even if not at today's meeting. He suggested that many on the governing council do not want to extend the asset purchases. The reason it was not formally discussed was because it is controversial.
I had a different read. Of course it was not discussed because the decision would not be made for two months. There is no need to discuss in October what may be decided in December. It is not the ECB's way. The information set that the central bank has in December will be different than today, including updated staff forecasts.
However, it a couple of points seem clear to me. First, Draghi noted that inflation is still not in an uptrend. This is an important point since boosting inflation is the chief goal of QE. Bob, I think, is right, that there are other goals, like the size of the central bank's balance sheet, but also the transmission mechanism. Draghi has linked the decision on ending the asset purchase to the ECB's mandate. It defines price stability as inflation close to be below 2%. It stands at 0.4%.
Second, Draghi said that the risks to growth are on the downside. This to is part of the case he is building to extend the asset purchases beyond March. The clip of this segment can be found by clicking here.
The other discussion was about the behavior of Baby Boomers. Bob took the position that Baby Boomers are driving the asset prices higher, and they are boosting their savings. Low interest rates, so the argument goes, have to boost the quantity of saving because the return is so low.
I come from a different perspective. First, I am not comfortable talking about elevated asset prices as inflation. It is not the same thing as medical services, rents or food prices rising. Higher bond prices mean lower yields. To people who borrow money that is not inflation; that is a lower mortgage or car loan. Only half of American households own equities. You are a smart investor and our portfolio equity portfolio increased by 6% this year. Is that inflation? Rising inflation eats away at the purchasing power of money. Does rising equity prices do that? And, by the way bond yields have falling not rising in recent months.
I do not know how to talk about savings without talking about the disparity of wealth and income the US. Savings is also highly concentrated. The biggest buyers of equities in the US are not the Baby Boomers but companies buying back their own stock. Typically, as people get into their 60s, they are not boosting savings as much as drawing their savings down.
The participation in the labor force has fallen partly as people (weighted toward men) retire early. This is also part of the story. Lastly, I note that the US current account deficit, which is the difference, economists tell us, between the country's savings and investment, is rising. We know from the GDP figures that investment is weak, so the widening of the current account deficit suggests that as a whole, savings is falling faster than investment. The clip to this discussion can be found here.
Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800, as traders lack directional impetus amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold ends Q1 2024 at record highs, what’s next?
Gold is sitting at an all-time high of $2,236, lacking a trading impetus amid holiday-thinned conditions on Good Friday. Most major world markets, including the United States are closed in observance of Holy Friday, leaving volatility around Gold price highly subdued.
Ripple's move above this key level could trigger nearly 50% rally for XRP
Ripple price has overcome a critical resistance level and flipped into a support floor on the weekly time frame. This development happened while XRP tightly consolidated for roughly 250 days.
US core PCE inflation set to ease in February on month as Federal Reserve rate cut bets for June mount
The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in February. The revised Summary of Projections showed that policymakers upwardly revised end-2024 core PCE forecast to 2.6% from 2.4%.