Fitch: Losses on U.S. Subprime Auto ABS Climb to Six-Year High
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Global equities set a new record high and bond yields sank to fresh lows on Thursday as investors positioned for an extended era of cheap money ahead of the European Central Bank's looming bond-buying scheme.
There were also signs the euro zone economy may be turning a corner as consumer morale picked up in the bloc's largest economies and bank lending fell at a slower place.
The ECB plans to buy €60 billion ($67 billion) worth of government and corporate bonds every month until September 2016.
The decision to start purchasing public sector bonds was made in mid-January. The program is aimed to stimulate the economic recovery of the Eurozone and to decrease the risk of deflation.
At a press-conference following Thursday's ECB Governing Council meeting in Nicosia, Draghi said that he expects economic recovery in the Eurozone to "gradually broaden and strengthen."
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Since 2009, the Bank of England has used QE to try and revive the British economy. But evidence from the Office of National Statistics showed that the bank’s purchase of a third, or £375 billion-worth, of government bonds (or gilts) actually made the richest 10 per cent richer by hundreds of thousands of pounds. According to the Bank of England, QE in the UK delivered a massive boost to the wealth of the most prosperous 10 per cent of households in Britain while delivering relatively scant returns for the poorest.
Why, then, are so many central bankers so worried about low inflation rates?
One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it year after year. Another possibility is that the world’s major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions. And yet a third explanation is that central bankers want to keep interest rates low in order to reduce the budget cost of large government debts.
None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.
An interest rate cut from South Korea Thursday takes the number of central banks that have stepped up their monetary easing this year to 24 and that number is likely to rise, analysts say.
The bank predicted the lull in inflation would be temporary, however. It said in its assessment that prices would eventually start rising, spurred by low unemployment and rising incomes, though it did not say when that might happen. It chose not to modify the expansive bond-buying program it has been using to encourage inflation, keeping its target for purchases of government debt at 80 trillion yen, or about $660 billion, a year.
Mr. Kuroda was appointed Bank of Japan governor by Prime Minister Shinzo Abe in 2013, with a mandate to pull Japan out of deflation by whatever means necessary. He immediately ordered a sharp increase in the bank’s bond buying, then expanded it again late last year.
In part, this doubtless reflects growing investor fears about unusual risks in a world where little conventional policy ammunition is left to deal with, for example, another global recession. Yet, the longer that negative interest rates persist – and the lower they go – the bigger the risk of a fundamental shift in the operation of the financial system.
We may already be on the verge of witnessing restrictions on the provision of bank credit. Further out, it is just possible to imagine a world in which cash is king, with money stored in vast warehouses, and where we return to a world not so dissimilar to that which prevailed under the Gold Standard. Central bankers should be careful what they wish for.
GoghGoner wrote:With stimulus and deflation rising at the same time, you have to wonder what the endgame might look like...
Polish, Hungarian and Serbian policymakers also cut their rates earlier this month due to low inflation and the European Central Bank's bond purchases, which attract investors to the region's higher yields and support currencies.
But the prospect of pending interest rate hikes in the United States may put an end to easing in the region.
To be clear, the Fed was right to aggressively lower interest rates after the 2008 crisis. But continuing with zero interest rates and quantitative easing for seven years after the crisis is in conflict with the goal of increased employment and growth. By robbing individual savers and financial institutions of income, and artificially boosting asset prices, the Fed and ECB are unwittingly creating the circumstances for the next financial crisis.
The Fed and ECB should therefore abandon zero rates and quantitative easing and move to gradually increase interest rates to restore cash flow to the financial system. Mr. Bernanke and his former colleagues on the Federal Open Market Committee ought to recall Adam Smith's famous dictum that the “great wheel of circulation" is the means by which the flow of goods and services moves through the economy. If the Fed really wants to fight deflation and eventually hit a 2% inflation target, then we must embrace policies that make the proverbial wheel turn faster, not slower. We can do this by gradually ending financial repression and restoring balance to global monetary policy.
Diamond prices have tumbled almost 15 percent over the past 12 months and that has Nicholas Colas, chief market strategist at Convergex, eyeing a larger trend. (Tweet this)
"The reason all this intrigues me is not as a prospective shopper, but rather because the price of 'Commodity' diamonds is a very good case study in macroeconomic deflationary pressures," Colas said in a report for clients.
“This is a Chinese story,” said John Payne, senior market analyst with futures brokerage Daniels Trading in Chicago. “The more negative the data is out of China, the more it’s a bullish indicator [for copper], because of expectations” for additional efforts to pump up the economy, he said.
If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
ibid.Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion
It is a commonly held belief that the Fed’s low interest rates have been responsible for inflating stock market values. Because people with more wealth tend to own more stock, to the extent that the Fed has been the cause of higher stock prices, it has worsened wealth inequality. Similarly, low interest rates have meant low borrowing costs for large corporations with direct access to capital markets (through corporate bonds). This cheap money helps to boost corporate profits which, again, flow mostly to the wealthy.
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