Article / 27 July 2016 at 8:42 GMT

Daily Shot: The consequences of cheap money Team / Saxo Bank
  • House prices are still on the rise in the US and so are homebuilder shares
  • Current GDP trajectory is now ahead of the 2001 recovery
  • A great deal of the  €2 trillion Eurozone monetary base is held at negative rates 
  • Some investment grade corproate bonds yield below -40bp (the ECB's cutoff rate)
By Walter Kurtz*


1. We begin with the United States where house price inflation eased somewhat but remains above 5% per year. As discussed before, with wages growing at roughly half that rate, housing appreciation needs to slow further to be on a sustainable path.
2. US new home sales rose to an 8-year high in June, materially beating consensus.
new home sales
New home sales growth was uneven, with a big spike occurring in the $400k-$500k price range.
3. Shares of US homebuilders outperformed over the past couple of weeks on tight housing inventories (as discussed yesterday) 
homebuilder shares
Broadly, while this US recovery is extremely slow, it has also been a relatively long one. As a result, the current GDP trajectory is now ahead of the 2001 recovery, which by this time was already in contraction mode. 
GDP growth in post-crisis time
1. Switching to the Eurozone, the ECB consolidated balance sheet hits a new record (almost €3.3 trillion). 
ECB balance sheet
2. Related to the above, the Eurozone monetary base now exceeds €2 trillion. A great deal of these balances is held at negative rates in the ECB Deposit Facility. 
base money
 3. Negative yields in the Eurozone are increasingly showing up in corporate bonds. Some investment grade bonds are even yielding less than -40bp (the ECB's cutoff rate).
Corp Bonds In some ways, this could be viewed as "helicopter money" because by buying corporate debt and pushing yields into negative territory the central bank allows firms to make money in their interest expense account.
1. Now on to the UK, where the British pound implied volatility continues to decline. The market is increasingly discounting the risk of a material pound depreciation from current levels.
2. UK mortgage approvals fell to the lowest level in 15 months in June. The July figure will be key in determining how badly the market has been hit. 
UK mortgage approval
3. According to the FT, markets now price in a 97% probability that the Bank of England will cut rates in August. In a way, the market is forcing Mark Carney's hand (not cutting could severely tighten financial conditions)
Switching to Japan, UBS says that "falling market-based inflation expectations in Japan signal a need for [more] quantitative easing." 
UBS on Japan
2. According to UBS, however, it is quite possible that the Bank of Japan may delay further easing until September. Such a delay could create a bit of a panic in the currency markets, sending yen soaring and igniting "risk-off" sentiment globally. 
UBS on Japan 2
Whatever the BoJ ends up doing, we already know that Tokyo is boosting fiscal stimulus. 
Finally, we often hear financial planners talk about an 8% growth expectation in US equities (because that has been the trend historically). Future expectations, however, should be tapered down in the current environment - materially.
Turning to Food for Thought, we have 3 items today:

1. While US crime rates have broadly been declining, homicides are up in a number of cities.  
2. According to the WSJ, "self-driving cars are forecast to cut accidents [which already have been declining for years] by 80% by 2040".  
3. Donald Trump's "America First" campaign is apparently not very popular outside the United States - except in Russia.
 — Edited by Clemens Bomsdorf

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.



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