Tag Archives: Macro

The Difficulties of Implementing QE in Europe (CNBC Interview)

Interview at CNBC where I discuss:

The difficulties to implement Quantitative Easing in Europe.

The difficulties to implement Quantitative Easing in Europe come from the increased perception at the ECB and the EBA that a €1 trillion program could distort markets too much as in some cases the ECB would take 100% of supply.

. There is no liquidity issue: To start with, Europe already has more than €180 billion of excess liquidity according to the ECB March report.

. There is no deflation: Inflation at the Eurozone in April was 0.7% while EU was 0.8%. This is within the ECB mandate of “at or below 2% in the medium term”. CPI in April was 0.4% in Spain, and only Greece (-1.6%) and Bulgaria (-1.3%) show worrying signs.

inflacion eurozona abril 2014

. Bond yields are at historical lows. Bond yields in the periphery have fallen to the lowest level since 2005. Portugal and Greece are out of the bailout program and issuing paper.

eu bond yields


. ECB balance sheet is still elevated. At €2.2 trillion (2.5% capitalization) its balance sheet has fallen 20% since the peak but it’s still up 128% since 2005. The Fed balance sheet is $4.1 trillion (ECB 3.1 trillion translated in US$).


. Transmission mechanism to SMEs is improving. Lending to SMEs is up 34% in the periphery since March 2013.

Growth is improving (+1.4% in 2014) and the strong euro has not affected dramatically export growth all over the periphery. Current account deficits have arisen in Spain for example. The biggest issue the ECB faces is that 60% of EU exports are made within Eurozone countries, therefore currency is irrelevant. The second is that with current account deficits widening, imports would suffer a big increase in price, particularly energy components. This worries the ECB more than anything else.

However, all of the ECB is studying options of QE driven mostly to help boost the next leg of growth. “Of course any private or public assets that we might buy would have to meet certain quality standards,” said Jens Weidmann, in an interview with MNI.

. What to spend the QE money on?

The European ABS market is too small (€300bn-450bn) for a €1 trillion QE and the challenges would be high when buying sovereign debt in order to adhere to the mandate.

There are three options for the ECB: yield curves, regional differences and credit spreads, which would be targeted in the ECB’s version of unconventional monetary policies. Some of the measures are more akin to Credit Easing (CE) than Quantitative Easing (QE). It is

also apparent that the approach is more qualitative because if the ECB is to make purchases it will take into account valuations.

The ECB would choose from different options, which reflects the bank-based intermediation that dominates in the Eurozone, unlike in the US where the main focus of QE has been Treasuries and MBS. As a possibility, the ECB could choose a normalisation of haircuts on its collateral.

There is also the issue of the “no deflation yet” debate. The Bundesbank is worried about a CPI that reflects massive disparities and that a QE would bring higher inflation to small consumers and average medium income families. The ECB needs more time to see if there is really a price deflation issue. So far data suggests otherwise. No deflation, just disinflation due to overcapacity and previous bubbles.

Look at March CPI in most countries, but particularly in Spain considered at the highest risk of “deflation” by the IMF. Look at essential goods like fish (+3,2%), milk (+4,4%), fruit (+6,5%), legumbres (+3,2%), cheese (+2,2%), natural gas (+2,3%), electricity (+6%) education (+3,5%), insurance (+4,1%) water (+3,3%), or even tobacco (+3,4%), alcohol (+2,4%) or travel (+4,4%).


When you have invested (spent) hundreds of billions of euros in “industrial plans” and productive capacity, especially in energy, car industry, textile, retail and infrastructure, what we are experiencing is a reduction of prices due to competition between oversized sectors, an overcapacity of up to 40% in some cases. On the other hand, inflation exists in other elements, very relevant to the industry and consumption, such as energy costs.

The “alleged risk of deflation” is the excuse of governments to justify greater financial repression . Trying to create false inflation through rate cuts while citizens have less purchasing power, or through monetary stimulus plans when taxes rise leads nowhere. Look at Japan, 17 consecutive months of real wage reductions.


To reactivate the economy governments should return money to the pockets of citizens who have stoically accepted and paid interventionist policies and supported schemes and incentives that have led the EU to spend up to 3% of GDP to destroy 4.5 million jobs and sink the economy.

 The ECB is getting a lot of pressure to do something from governments and banks, and now even Germany seems to accept the high EUR is a danger… and if something is done it will have to be something big. But these issues above do matter –specially for the Germans advocating for internal devaluation exits to the crisis- and the risks are not small of causing massive distortions in an already booming market for high yield bonds and sovereigns.


 See more at: https://www.dlacalle.com/deflation-no-disinflation-the-consequence-of-interventionism/#sthash.Isz8PWji.dpuf


Important Disclaimer: All of Daniel Lacalle’s views expressed in his books and this blog are strictly personal and should not be taken as buy or sell recommendations

Gazprom-CNPC deal

Gazprom dealMap courtesy of Gazprom


30 year agreement to start in 2018

38bcm of Russian gas to be delivered to China annually (25% of Chinese demand)

Price: Estimated $350-400/mcm. The formula pricing (oil and a basket of oil products)

Capital Expenditure: $75bn (China’s share $20bn) – includes development of Chayanda and Kovykta fields; and construction of a 2,500-mile pipeline, a petrochemicals complex and a helium plant

Prepayment: $25bn (yet to be confirmed)

The estimated price of the Russia-China contract is $9.75/mmbtu (only $0.95/mmbtu higher than long term Europe contracts). This means that E.On, RWE and GSZ will find it difficult to lower their gas price-offtake agreements in the negotiations of their contracts with Gazprom.

The two sides were not actually negotiating a specific price per unit of gas, but rather a ratio of gas to oil prices. The numbers above likely assume prevailing oil prices, and actual realized prices over the course of the contract could vary significantly depending upon oil markets (according to Citi).

The contract signed targets a nominal volume of 38bcm. However, volumes could be expanded to 60bcmpa later on

Citi estimate the IRR of the project at 4.4% on an ungeared basis and 4.8% assuming 50% project gearing, lower than either Gazprom or Petrochina’s cost of capital, thus generating a negative NPV.

Important Disclaimer: All of Daniel Lacalle’s views expressed in his books and this blog are strictly personal and should not be taken as buy or sell recommendations

US: The Weakest Jobs Recovery On Record


US unemployment rate is at 6.2%…. or is it?

The US Labor Force plunged -806k to 155.421 million, up just +0.04% Y/Y (+0.73% Y/Y prior).

Most importantly, those Not in the Labor Force surged +988k to 92.018 million, which is the highest on record.

The Workforce Participation Rate fell to 62.81% in April (63.18% prior), the lowest since 1978.

The (U-6) “real” unemployment rate is 12.3%. (Source Boenning & Scattergood, US jobs data)

Additionally, according to the Bureau of Labor Statistics, 20% of all families in the United States do not have a single member that is employed.   62% of all Americans make $20 or less an hour at this point. The number of Americans receiving benefits from the federal government each month exceeds the number of full-time workers in the private sector by more than 60 million.


US fake unemployment


Nominal wage growth is also inexistent:


US wage growth


And no, the difference between unemployment and the decline of labour participation is not explained just by  “demographics” and retirements… at all:

Population participation


Meanwhile, debt reaches record level


CO2 … recovery or dead cat bounce?

CO2 recovery

Carbon has seen a decent bounce after the collapse back to €5.80/mt (albeit nowhere close to the highs of €20/mt seen a few years ago). Carbon is trying to climb back after the recent sharp correction. I commented a few reasons for the fall in prices here.  Now to the recovery…

What is driving prices higher?

. Kickstart of the carbon backloading plan, which sets aside 900m carbon certificates on a temporary basis. Backloading is implemented in 2Q 2014 after a 3-month scrutiny period and lasts until 2016. However, the 900 m certificates will be re-injected in 2019-20 again, so the oversupply is not addressed unless we see massive increase in thermal demand, which is unlikely given oversupply in generation and renewables rollout. As UBS points out “9GW of new efficient coal plants with marginal cost not higher than €30/MWh will enter the system by 2015, with a negative effect on dark spreads. In combination with declining power demand and renewables capacity growth (5 GW), we see little reason for a bullish view on generators”.

Market is very oversupplied, but the implementation of backloading has already started. So what we are seeing is a liquidity driven squeeze, not a fundamental shift in supply-demand. The most optimistic scenarios from analyst estimates see oversupply lasting until 2030 (UBS sees 2032).

Oversupply of EUAs has gone from 500 million metric tonnes in 2010 to 900 million metric tonnes in 2014 and despite backloading it is expected to double by 2020.

Mr Bostjan Bandelj a director at Belektron in Ljubljana said on Reuters that “Even as backloading seems a done deal, prices are under pressure from government auctions and sales of allowances from a special reserve by the European Investment Bank in the next months.”