Now that the next and final phase of unorthodox monetary policy, i.e., helicopter money, has had the blessing of both Mario Draghi and Ben Bernanke, and is virtually assured, there are three questions: how to trade it; where will it be implemented first (and certainly not last), and how will it all end.
We covered the first part, how to trade it, late on Friday, courtesy of a Deutsche Bank report titled, don’t laugh, “Helicopters 101: your guide to monetary financing“
The next question then is: who will be (un)lucky enough to draw the first straw. The answer, according to DB, will be the same bank that as we shockingly reported at the end of January, was peer pressured into NIRP by Davos bankers, the Bank of Japan.
Global monetary policy is at a cross-roads. Japan’s experience this year demonstrates the limits of central bank policy with the bank running out of government bonds to buy, negative rates reaching their limits and inflation expectations having almost completely unwound their Abenomics move higher…. with Japan fast approaching the limits of its existing policy response to deflation, developments need to be followed closely for signs of the next global policy innovation.
Well, “policy innovation” sure is a polite way of putting “last ditch monetary idiocy” (the same idiocy which we predicted all the way back in March 2009 will be the ultimate endgame) but besides that we agree with Deutsche Bank: Japan will be the first nation to unveil helicopter money. After all, if it isn’t monetary or Keynesian experimentation, then simple demographics will destroy the nation… unless the Fukushima fallout doesn’t do it first.
Finally, how would helicopter money failure look like? Here are some ideas from DB’s George Saravelos:
A “successful” helicopter drop, defined as generating higher growth and inflation expectations but without a permanent overshoot of the inflation target, should lead to higher and steeper yield curves, a weaker currency (at least initially) and higher equity valuations.
This notwithstanding, it is important to emphasize that there are alternative equilibria too. At one extreme, if the policy is not perceived as sufficient in size and impact, then the supply/demand imbalances in fixed income may be exacerbated (less issuance and debt outstanding) without a corresponding move higher in inflation expectations. This would lead to a market reaction similar to the one that followed the BoJ cut to negative rates earlier this year: lower yields, weaker equities and a stronger currency. At the other extreme, if the long-term commitment to the inflation target is challenged and central bank credibility is lost, long-dated yields would spike higher, capital flight would ensue and risk assets would substantially underperform.
In other words, at one extreme, if the market perceives the policy as a failure, credit risk and demand/supply imbalances are likely to dominate, putting even further downward pressure on yields. At the other extreme, if the policy is perceived as a loss of monetary discipline, inflation expectations would spike, leading to an aggressive re-pricing of yields higher.
Simply said: too little, and the deflationary vortex will swallow all; too much, and yields will explode. DB continues:
A “successful” helicopter drop may therefore be easier said than done given the non-linearities involved: it needs to be big enough for nominal growth expectations to shift higher and small enough to prevent an irreversible dis-anchoring of inflation expectations above the central bank’s target. Either way, the behavior of the latter is the key defining variable both for the policy’s success as well as the asset market reaction.
Which brings us to DB’s politically correct conclusion: “under the assumption of policy “success” without fears of hyperinflation, we would conclude that bond yields rise“… the same success which DB also says “will be easier said than done”, which then means, drumroll, that the dominant outcome will be one in which “fears” of hyperinflation are justified.
In which case, please go ahead and sell your gold to Goldman: the vampire squid has repeatedly said it will buy everything you have to sell.
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