Alberto Gallo
@macrocredit
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CIO, Andromeda Capital Management
London, England
Joined October 2013
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The Silver Bullet | The Limits of Monetary Magic
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Tax lost from firms domiciled in the Netherlands, per year:
France: €2.7bn
Germany: €1.5bn
Italy: €1.5bn
Spain: €1bn
Dutch net contribution to EU budget in 2018: €2.375bn
(Sources: EU, Tax Justice Network)
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2K
4K
It is rare for central bankers to be blunt.
Huw Pill's "people need to accept" they're poorer is more than a slip of the tongue.
What central bankers are telling you, is they will not be able to do their job.
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ECB:
"Now, you asked me a question about the spreads: I would like to just observe that we are not seeing any such development. While yields have moved up, spreads have not widened in any significant manner. "
Markets:
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The UK is now de facto a periphery country: a government on the brink of collapse, constant sunshine and a good football team
#Brexit
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Some used to call them "PIGS" economies.
Euro Cup winners since introduction of the €:
2004 🇬🇷
2008 🇪🇸
2012 🇪🇸
2016 🇵🇹
2020 🇮🇹
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Leaders Standing up to Trump:
Cuomo NY
McAuliffe VA
Hollande FRANCE
Schauble GERMANY
Trudea CANADA
Sturgeon SCOTLAND
Endorsing him:
May, UK
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We now have a Divided Kingdom outside of a European Union.
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Which countries have been net contributors vs receivers of EU funds?
Surprising for some, 🇮🇹 has been a net giver, while the balance for 🇪🇦 has been flat.
Grants under the
#EUco
#recoveryfund
are far from a gift - but can be seen as a few years of contributions given back.
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In their typical playbook, populists sell people a dream, polarise anger at an enemy, and implement unsustainable economic policies.
The playbook usually results into a four-stage economic and political cycle.
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After getting transitory wrong, central banks will hold on to what credibility they have left. No one wants to be Arthur Burns.
Conclusions
- 🚫 pivot
- Volatility ⬆️
- Safe havens ⬇️
- Long/short > long only
- Credit > govies
- Real assets > paper assets
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Help
My friend is missing since Friday.
He suffers from memory loss and often believes he's David Cameron. RT pls
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#GreekCrisis
negotiations now a pure power play between German block, IMF/US & France/Italy
A country is being used as pawn in a chess game
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The five stages of inflation grief
1. Inflation risks are skewed to the downside
2. It's transitory
3. It's here but households won't notice price overshoots
4. It's supply-driven so we shouldn't overreact
5. We need to understand these various transmission channels better
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The Netherlands, leader of the frugal four, ranks 4th globally as a tax avoidance centre, with EU countries losing over $10bn in taxes.
Today's
@FT
editorial points out - too kindly - PM Rutte's fragile attempt to take the high moral ground:
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US 10yr inflation swaps (blue, rhs) at over 2.7% are now as high as they have been in a decade, while UK 10yr inflation at 4.1% is now at a multi-decade high.
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That moment when you realise
#Brexit
was only a way to shift power from the top-left to the bottom-right
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"Married or divorced, but not something in between. We are not on Facebook with 'it's complicated' as a status."
Luxembourg PM on
#Brexit
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I heard two debt sustainability analyses from taxi drivers in Athens.
And both make more sense than some creditors' arguments.
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- Inflation is a social and distributional conflict, as O. Blanchard has pointed out. Why should people accept being poorer when QE has made the rich richer? ()
- They won't. And governments will have no choice but to spend.
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Today, England plays Iceland. It's a small island with bad weather and a self-inflicted financial crisis, but I'm sure it can beat Iceland.
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"What's the limit?"
Many have asked this question, in relation to central bank balance sheets, as the ECB and Fed asset purchase programmes reach new highs.
Monopoly's Rule
#11
provides a useful, intuitive answer:
#QEinfinity
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Fed: neutral stance
ECB: discussing new TLTRO
PBOC: new stimulus
Bye bye Quantitative Tightening
Welcome back to
#QEinfinity
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GBP -14.5%
Inflation +2.4pp
Real wages growth rate -2.7pp
Investment -0.9% (Q4 '16)
Happy
#BrexitAnniversary
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The Vigilantes are back.
Markets will give a harsh reality check to governments who advertise make-believe policies, denying economic reality:
Turkey, Italy, Britain.
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There's no recession on the horizon. The jobs market is still going strong, and investors are again pricing too many cuts too quickly from central bankers.
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The US economy keeps rolling.
Financial conditions are loose.
There's no need for Fed rate cuts.
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2021 Q2: 2.6%
"Inflation is transitory"
2021 Q3 5.4%
"It's supply-chain bottlenecks"
2021 Q4: 6.2%
"We are not in stagflation"
2022 Q1: 7.5%
"The Russia-Ukraine war is exacerbating inflation pressures"
2022 Q2: 8.5%
"Inflation is peaking"
2023
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140
With persistent inflation and central banks constrained by persistent fiscal deficits and inflation, markets remain optimistically priced for a pivot.
But the pivot might not come. The RBA, which tried to pause twice, has just hiked again.
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140
Theresa May
Knew about the
#MuslimBan
Knew about the
#Tridentmisfire
But kept quiet
Now she keeps quiet about the cost of Brexit
#ResignMay
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#Brexit
box update
£/$ <1.3
FTSE250 -10%
4 funds suspended
0.5% bank capital spent
AAA rtg gone
Gilt 10y<0.75%
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Good morning from negative yield land, where a fifth of global bonds now trades below 0%
(Source: ICE/Baml)
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- Fiscal deficits will be persistent and drive demand, but also erode risk-return in tight government debt (e.g. France downgrade).
- Investors used to a goldilocks environment of low yields, low inflation and rising corporate profits will have to rethink their view of the world.
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UK tabloids are like the Pound: if you thought they couldn't reach a new low, think again.
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Keeping front-end rates high, while tapering QT, is like pulling the handbrake while pushing the accelerator pedal.
Long-end rates affect asset prices and large fixed income borrowers, as well as wealthy households.
Poorer households and smaller firms, instead...
6
23
115
Balancing price stability vs financial stability in a post
#QEinfinity
world is a difficult act.
“There is no trade off between price stability and financial stability", said ECB President
@Lagarde
in March.
That is true, until something breaks.
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Political risk premium is back in bond markets.
The consensus narrative for govt bonds has been: "buy because you won't get another chance as central banks cut rates"
Wrong.
We are in a higher for longer regime, and we will live with persistent inflation and persistent fiscal
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As discussed earlier, the combination of higher inflation per unit of growth suggests central bankers won't be able to get a goldilocks free-lunch soft landing, will soon have to choose between price stability vs financial markets stability.
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The United Kingdom (1707-2016)
The Divided Kingdom (2016- ...)
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The BoJ pause bought time for other central banks to curb inflation without excessive shocks. Ueda might be signalling the extra time is running out.
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The Bloomberg US Financial Conditions Index is at record highs.
Risk premia in stocks and credit are near all-time tights as commodities are breaking higher.
Meanwhile, the Fed says its policy is restrictive, after tapering Quantitative Tightening.
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Greece says no.
Germany says no.
One has cash-strapped banks, the other a lower euro that boosts exports
Who do you think will blink first?
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The difference between this year and the past decade is central bankers are no longer in the driving seat - inflation is.
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Turkey's economy is now heading towards phase 3 of the populist playbook: Erdogan's cannot kick the can with more debt/low rates - his only option is to blame foreigners.
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But the recent SVB, CS and FRC crises show us that after over a decade of low rates and low volatility, the financial system is fragile.
And that the solution inevitably involves some degree of government support.
What are the conclusions?
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Since Brexit
£ at 31-year low
10y yield record low
£100B wiped off FTSE
AAA rating lost
Factories leave
But, you got your country back
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Tax dumping/tax havens get defended in the name of economic liberalism. This argument keeps failing.
No-rules capitalism isn't capitalism.
It generates inequality, low productivity and eventually unhappiness. The old model is broken.
The EU exists to level the playing field.
Tax "lost" must be one of the most ludicrous concepts in history. As if those alleged tax revenues would have existed at all if the Netherlands was a high tax nation like others in the list.
The extractive and confiscatory view of business and taxation never cease to amaze.
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Raising the inflation target to 4% using the same QE tools is a bit like raising the highway speed limit up to 250km/hr when all you're driving is a Fiat 500.
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Who's still against Greece? And who supports Greece in Europe
#GreekCrisis
http://t.co/CuAyALC36g
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Bond markets in liquidation mode, probably driven by unwinds of leveraged strategies.
When these are over, there will be great opportunities for long-term investors.
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US/UK crisis shows extreme neoliberal economics have failed.
The world needs a more balanced model.
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GRIN: Greece stays in €
GREXIT: Greece exits €
GRINCH: Greece in €, Schaeuble steals Christmas
(RT
@charlesforelle
)
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10-year inflation expectations are higher following today's weak jobs report:
Covid/delta hits specific economic sectors (leisure and hospitality), the Fed reacts with a delay on tapering and lower for longer, and the result is more inflation down the line.
#QEinfinity
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22
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Since
#Brexit
£ at 31yr low
AAA rtg lost
Property buyers ask ~10% discnt
0.5% bank capital spent
FTSE250 -9.4%
Still tired of experts?
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#Greece
reminds us again of democracy & human rights while countries in far better situation (US/UK) go adrift.
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The 5-year German
#Grexit
"solution" requesting €50bn of Greek "valuable assets"
one word: enough
#Schaeublexit
http://t.co/pXYQCTG6zD
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10:03 *ERDOGAN: CENTRAL BANK INDEPENDENT, TAKES ITS OWN DECISIONS
10:09 *ERDOGAN: WE SHOULD CUT THIS HIGH INTEREST RATE
That was quick
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You now need €10 million to make an annual pension income of €60,000 pre tax and pre inflation, if you hold 30-year bunds
#QEinfinity
#FinancialRepression
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Fed terminal rates are now above 5%.
Rates can still go wider - but risk premia should take the lead now - as we enter the next stage of the anti-goldilocks era.
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16
79
For many years,
#Turkey
's government forced public & private banks to push credit to the economy, and sell Dollars to support the Lira.
Result: negative net FX reserves and a double-digit % GDP contingent liability on the sovereign.
Today, the first cracks are starting to show.
6
27
81
#Turkey
: Lira weakness comes back as policymaker continue to play with overnight markets without addressing fundamental problems: excess private leverage, fiscal deficit, unsustainable infrastructure investment, rising inflation vis a vis too low interest rates.
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JFK customs officer: what do you do?
Me: I'm an economist
O: so is the Fed gonna do QE4?
Me: maybe next year
O: should I buy stocks?
A: No.
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Surprise: even after 500bp hikes, interest rates are not restrictive yet, recent
@kansasCityFed
research says.
Why?
Inverted yield curves and insufficient quantitative tightening are part of the problem, as discussed in our latest
#SilverBullet
.
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The
@economist
is usually top quality.
On Italy's reform, their analysis is superficial, as its readers point out.
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After ten long years of stagnation,
#Italy
is growing.
Now, the country needs five key reforms to make it count.
- Justice system
- Education
- Bank consolidation
- SME financing
- Welfare and social mobility
On today's
@Corriere
@L_Economia
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The Magic Money Tree: how over $2 trillion investment strategies rely on short volatility and QE, and why some may be at risk of losing most of their value:
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Things no longer exist:
Dinosaurs
Audio cassettes
Positive risk-free returns
Discussing today
@BloombergTV
with
@flacqua
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#Brexit
reality check:
the rich who funded
@vote_leave
get corp tax cuts
the poor who voted leave get inflation, no EU funds and 'freedom'
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The “thing that’s not priced in” is that both inflation and interest rates will be much higher, for much longer, than the markets are willing to price.
via
@totemmacro
@FT
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Why are Fed hikes not working?
First, both corporates and households termed out their debt over a decade of NIRP. The average maturity of $ investnent grade credit is now 13 years, and >98% of mortgages are fixed. This means short end rates aren't effective.
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What should investors do in a market where there's nothing left to buy?
Central bankers have skewed the odds against investors. Our job is to rebalance them in their favour: in our latest
#SilverBullet
we explain how we can find value in a
#QEinfinity
market.
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How many civilians killed, hospitals attacked, neutral ships sank, before Europe gets serious?
Time to take off the white gloves.
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Britain saved 10,000 children in WWII.
Today, it has admitted a handful, with widespread complaints that they aren't all girls.
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