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Thursday, September 18, 2014 1:17 PM

ECB's Targeted Lending Spree Starts Out As Flop; Modern Monetary Insanity

Following on the "success" of the ECB's LTRO (Long Term Refinance Operation) which did nothing to spur lending and everything to create the biggest sovereign bond bubble the world has ever seen,  ECB president Mario Draghi announced a TLTRO or Targeted LTRO on September 4.

The ECB's intent is to spur lending.

Lending Spree Short of Expectations

Today the Financial Times reports ECB’s Lending Spree Short of Expectations.

The European Central Bank’s first offer of cheap four-year loans has fallen short of expectations, dealing a blow to president Mario Draghi’s hope of sustaining the eurozone’s ailing economy by expanding the central bank’s balance sheet.

Banks borrowed €82.6bn through the first of the ECB’s Targeted Longer-Term Refinancing Operations, or TLTROs, one of policy makers’ big ideas to revive the currency area’s recovery. A poll by Bloomberg earlier this week showed economists, on average, expected banks to bid for €174bn of loans from a maximum of €400bn.

Analysts said the disappointing take-up would pile pressure on the ECB to embark on large-scale government bond buying, or quantitative easing, before the end of this year. With inflation as low as 0.4 per cent in the year to August, the central bank is struggling to hit its inflation target of just below 2 per cent.

The TLTROs allow banks to borrow at a rate just above the ECB’s main refinancing rate of 0.05 per cent until late 2018 so long as they meet targets for lending to businesses. If they miss the targets, they must pay the funds back in 2016.

The ECB will conduct another seven auctions, with the next TLTRO taking place in December. The central bank hopes the auctions, through which it will lend a maximum of €1tn over the next three years, will boost inflation and restart the region’s flagging economic recovery by spurring lending to smaller businesses.
Why TLTRO Won't Spur Lending

Banks may eventually take the money. Why not? The only penalty is they have to pay it back in 2016 if they don't lend it. But taking money, and lending (more than one would have anyway), are two different things. For now, banks did not even take a big bite at the money.

For an explanations as to why TLTRO will not spur lending, please see ECB Pulls Out Bazooka, Cuts Rates, Buys Assets; Will this Stimulate Lending?

Modern Monetary Insanity

Central banks ought to be worried about asset bubbles and asset deflation, not price deflation on ordinary consumer goods. Nonetheless, central banks target prices even though they cannot push price inflation where they want it! 

Asset deflation (more precisely loans that cannot be paid back as asset prices fall)  not price deflation is what will cripple banks. Yet by targeting consumer prices with monetary inflation, they bring upon asset inflation then asset deflation which is precisely what they should seek to avoid.

From this perspective, the ECB is hell-bent on making the problem worse. It's modern monetary insanity.

Mike "Mish" Shedlock

1:26 AM

"Precarious" Global Economy

It's not often I agree with the IMF on anything, but this time I do. The Global Recovery is Precarious, says International Monetary Fund.

The International Monetary Fund has warned that the global recovery is on precarious footing, as rising geopolitical tensions and the prospect of tighter monetary policy in the US risk dampening the outlook for global growth.

In a document prepared ahead of this week’s G20 meeting of finance ministers and central bank governors in Australia, the IMF said that growth in the first half of this year was weaker than it had predicted in April. The Fund signalled it is likely to cut its next batch of forecasts which will be released in October.

The Fund’s assessment is the latest sign that mounting tensions in Ukraine and the Middle East have worsened the prospects for the global economy.
Headline Agreement

I need to pause right there, with the obvious, because the IMF can see no further than what has already transpired.

“While the recovery is projected to regain some strength in the reminder of 2014 and 2015, it would be weaker than foreseen in the spring,” the IMF said.

The Fund expects growth to accelerate in advanced economies, with the US and the UK enjoying the strongest rebound. However, the outlook for the eurozone and Japan is more uncertain, as inflation remains below central bank targets.

Acceleration of Growth in Advanced Economies?

I strongly disagree. Germany is on "precarious" footing to say the least, and prospects for the US with a declining global economy are not so bright either.

While I agree with the headline, I disagree with the details as well as how we got here and what to do about things.

But yes, things are precarious, and I suspect, about ready to go over the cliff.

Mike "Mish" Shedlock

Wednesday, September 17, 2014 1:05 PM

Companies' Stock Buybacks at Biggest Pace Since 2007; Companies Rewarding Investors?

In yet another sign of market over-exuberance, the Wall Street Journal reports Share Repurchases Are at Fastest Clip Since Financial Crisis.

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.

The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.
Large Repurchases in 2014

Rewarding Investors - Not

Contrary to the above graphic (and common wisdom), companies do not reward investors by buying back shares at inflated prices. Companies bought back the most shares in 2007, right before the crash, and the least shares at the most opportune time in 2009.

In practice, insiders buy low and sell high, and pocket cash from options all the way up. Insider activity is exactly the opposite of how companies treat shareholders.

Mike "Mish" Shedlock

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