Goldman Asks, Is The Bundesbank "Ominously" Trying To Sabotage The ECB's QE?

Submitted by Tyler Durden on 06/17/2015 04:00 -0400
http://www.zerohedge.com/news/2015-06-16/goldman-asks-ominously-bundesbank-trying-sabotage-ecbs-qe
When the sell-off in German Bunds first got going, it looked like a temporary squeeze, with the largest position in the market – the ECB QE trade – coming under pressure after much weaker-than-expected Q1 GDP on 4/29.


However, as (Draghi mouthpiece) Goldman notes, there is something more than supply dynamics or ECB communications going on, as the Bundesbank (Buba) buying has fallen short of its purchases (in average maturity terms) from the very beginning. Goldman warns, ominously, this kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.
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Goldman previously argued that the weak activity reading rattled a market that had been operating on a core thesis of strong US growth. The resulting uncertainty caused Bund yields and EUR/$ to rise, with the DAX also selling off on the day. Since then, something more ominous has come into play...

One clue has been the communications ping pong from the ECB. On May 18, Executive Board member Coeure said “the rapidity of the reversal in Bund yields is worrisome,” citing it as another example of “extreme volatility in global capital markets.”

ECB President Draghi sent the opposite message on Jun. 3, saying “one lesson is that we should get used to periods of higher volatility,” followed on Jun. 10 by Executive Board member Coeure stating that “the ECB does not intend to counter [Bund] volatility in the short term."

Goldman took a dim view of all this in our last FX Views, even if a charitable interpretation is that President Draghi basically sent a dovish message on Jun.10 and simply didn’t want to signal "activism" in the face of short-term volatility.

After all, one goal of ECB QE ought to be to make Europe’s safe haven asset (Bunds) expensive, so that investors get pushed into risky assets like equities and the Euro periphery.

If there is ambivalence, it sends a harmful message to markets that, after all, are still new to ECB QE. This might be one reason why EUR/$ has held up, even as US data (payrolls, retail sales) have picked up.



There is something more than supply dynamics or ECB communications going on, something that has the potential to undercut the credibility of ECB QE.

As Goldman explains below, the Bundesbank has reduced the weighted-average maturity of its Bund purchases from 8.1 years in March to 5.7 in May, in contrast to the Eurosystem as a whole where this number has stayed around 8.0 years.

It's not like the Bundesbank is not spending its money (as we noted previously, in fact May - just as ECB telegraphed to its most valuable clients - saw purchases soar)..


but it is what it is spending it on, not how much that matters...

The ECB publishes monthly data for the outstanding stock of bonds bought under its QE program, together with a weighted average for the corresponding number of years to maturity. We use these data to calculate the average maturity of monthly buying by the Eurosystem (Exhibit 3).



This shows that the average maturity of ECB bond buying is around 8.0 years, in line with what Executive Board member Coeure said in his May 18 speech. However, while Italy and Spain see purchases that have an average maturity above that of the outstanding debt stock, Bundesbank buying has fallen short from the very beginning.

There are obviously many explanations for what is going on (see below).

But this kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.

After all, it was supposed to be low yields in core Europe into risk assets. If those yields now rise and become more volatile, such portfolio effects will be lessened.

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What Goldman is implicitly suggesting is:

Buba is intentionally focusing on shorter-dated maturities, unwilling to throw away its cash on the high prices that bond holders will demand for high cash coupon debt (when in fact the central bank should be price agnostic if it had truly "got ECB religion")

So is Buba really sabotaging Draghi?
Or is this a warning to Weidmann to stop being stingy with the bond buying?
Remember also, Goldman needs low-ish bond yields and low-ish volatility for its QE-driven weak EUR trade to pay off...

It remains our view that fundamentals will ultimately take EUR/$ lower in line with our forecast. That said, we see recent Bund volatility and what it means for the credibility of ECB QE as the first material challenge to our view.

So there's ulterior motives for this 'warning' whereever we look.
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Perhaps it is also the timing of such a note that implies a louder warning... with Grexit around the corner, those "expensive" long-dated Bunds are going to be even more pricey when Buba needs to step in and buy to prove contagion is not there.

Bundesbank Chief Says "Nein" To Cash Ban

Submitted by Tyler Durden on 06/17/2015 09:29 -0400
http://www.zerohedge.com/news/2015-06-17/bundesbank-chief-says-nein-cash-ban
Last month, the calls for a cashless society got a bit louder when Peter Bofinger, a member of the German Council Of Economic Experts and a prominent Keynesian economist in a land where sound money policies generally predominate, called coins and bills “an anachronism” that limits the influence of central banks. Bofinger’s comments come on the heels of a growing chorus of cash abolitionists including Harvard economist Ken Rogoff and Citi’s Willem Buiter. Why a cashless society you ask? Here’s a brief refresher:
The collective actions of the world’s most influential central banks have done wonders when it comes to inflating asset bubbles but have done very little to revive robust economic growth. In fact, far from smoothing out the business cycle and resuscitating DM demand, post-crisis monetary policy has actually had the exact opposite effect: it has set the stage for an even more spectacular collapse while simultaneously creating a worldwide deflationary supply glut. At this stage, a sane person might be tempted to call it a day on the monetary experiments, especially considering that the limits have been reached. That is, there are literally no more assets to buy and rates have hit the effective lower bound where rational actors will eschew bank deposits in favor of the mattress. But not so fast. The world could always ban cash because if you eliminate physical currency and force people to use a debit card linked to a government controlled bank account for all transactions, you can effectively centrally plan everything. Consumers not spending? No problem. Just tax their excess account balance. Economy overheating? Again, no problem. Raise the interest paid on account holdings to encourage people to stop spending.
On the heels of Bofinger’s comments we said the following: “Paging Mr. Weidmann, your countrymen are going Keynesian crazy.”
Lo and behold, Weidmann has indeed entered the debate and unsurprisingly, he is not a fan of the cash ban calls. FAZ has more (via Google translate):

Bundesbank President Jens Weidmann has advocated that cash despite technical innovations and digitization should continue to play an important role in payment transactions. "The Bundesbank does not believe to abolish the cash," Weidmann said on Monday in Frankfurt at the biennial held payments Symposium of the central bank. On the one hand, every citizen should continue to pay as he wants - "So cash or cashless" argued Weidmann. Secondly, monetary policy would be reasons that may be brought against the adherence to the cash, "standing on feet of clay."

By its second justification Weidmann resorted to the last often raised by critics cash-argument, in a world without cash monetary policy would work better. Underlying this is the idea that savers react to negative interest rates of the central and commercial banks, by removing their money from accounts and keep in the form of cash. If there were no cash, the negative interest rates would direct impact on the accounts of depositors. Because they can not just withdraw your money, they would consume more and invest instead - and thus stimulate economic growth.

Weidmann contradicted this argument sharp. On the one hand, a moderate negative interest would not necessarily "lead flight to cash" to.On the other hand - and this is much more important - going discussion on "real problem" over. The control and capital market interest rates are due to the subdued growth prospects "and a subdued inflationary pressures in the foreseeable future" at a low level. The expansive monetary policy of central banks is to be understood as a reaction to it. So the most important task was to tackle the cause of the weak growth in the euro area. "So if the weak growth is the crux of the problem, then it is necessary to overcome this weakness, rather than to operate daring acrobatics in the form of wanting to do away with the cash, so that the monetary policy seem even more expansive and cover long-term structural problems in the short term with cheap money can "Weidmann said.

So once the Keynesian cabal gets its way and abolishes cash, effectively weighing the anchor on negative rates and thereby making it possible to manipulate not only macroeconomic outcomes, but microeconomic ones as well, it appears those who still value their right to choose for themselves how and when they spend their money can at least move to Germany where Bubba will make one last stand against the insidious Peter Pan crowd.