Article / 03 February 2014 at 15:26 GMT

Fear not Japanisation but Hungarisation instead

Chief Economist & CIO / Saxo Bank

 • ECB poised for return to emergency mode
 • IMF lashes Hungary big time
 • ECB seen cutting rates, deposit rate could go negative

By Steen Jakobsen

This is the week of the European Central Bank (ECB), or rather, it’s the week where we probably get to see it return into emergency mode as an emerging markets (EM) crisis, deflation and continued high unemployment seems to have shocked our central planners to the core.

We could not have had a worse start to the year than the January just past. The ECB, the International Monetary Fund (IMF) and the World Bank all increased their growth projections in January and before the ink on their press releases was even dry, the EM markets started tanking. Talk about an inverse indicator! So get this: the IMF, World Bank and ECB go directly from increased growth forecasts which said the recovery was coming to a state of crisis alertness. Will this persuade them to revisit their models? Hardly……


I have seen the future…..Well almost. I have seen where we could end if this paralysis continues. The thing to fear is not Japanisation, but rather Hungarinisation. Hungary has a government and policy hell bent on reducing its fiscal deficit, its methods being increased direct and indirect taxes, meddling with the independence of the central bank, under-investing and forcing its banks to pay levies in the name of securing their customers from the pain of risk taken entirely on their own devices. Yes, please read IMF’s Chapter IV report from March 2013 and exchange Hungary with EU in each sentence: IMF Executive Board concludes 2013 Article IV Consultation.

 Here is the IMF recommendation for Hungary (read: Europe)

 IMF Hungary  
Source: International Monetary Fund


·        It’s scary!  Fiscal consolidation — tick.

·        Strengthen Fiscal Council (Read Fiscal union & Banking union)  — No significant measures were taken…

·        Contain financial sector risk and bank resolution — Several initiatives to help the banks often without consultation of voters, EU treaty, still under discussion overall.

·        Structural reform — No major structural reforms.


Hungary Article IV consultation is the least diplomatic and openly critical report I have ever read from the IMF, or to put it bluntly, the IMF is not at all happy. But it begs the question why is the IMF picking on Hungary when clearly all of its recommendations are being ignored by the EU as a whole. Is that why the IMF and the EU are increasingly at different ends when we talk about crisis resolution and talks? This was most recently illustrated by this headline in The Wall Street Journal: Top officials held private meeting on Greece bailout.

I can recommend reading the full IMF report to understand where Europe will end if nothing changes.


ECB will cut 15 bps and move to negative deposit rates 

The ECB will cut rates this week, seems to be consensus. I see 15 basis points and a potential move to negative deposits rates, and a new discussion on the leaked proposal from the Bundesbank on stopping sterilising bond purchases: Bundesbank would favor end of ECB sterilization.

 Consensus is a 15 basis points cut and no change in deposit. Inflation slump tests ECB’s readiness to act.

 Trading wise I personally think this is the biggest sell signal in the last three years:

·        EURUSD at an average of 1.38/1.4000 guarantees both deflation and recession.

·        Deflation risk should be met by monetary easing according to Economics one-on-one (That it doesn’t work is another thing).

·        Unemployment is stubbornly high and growth is merely showing a dead cat bounce before the EM crisis and Asia growth slowdown starts to hit European exporters.

·        EM crisis is new since last ECB meeting. I think even the ECB realises the impact on export-relative prices.


Fed and central banks

The key event in February, except for the ECB meeting, is to hear Fed new chairwoman Janet Yellen testifying before  Congress on February 11 and 13.  

Watch out for Yellen’s priorities, which are likely to be more on employment than inflation.

Source: Reuters


We are also in the world of central bank moving paradigm: 

·        1940s to 1970s we were in the Gold standard

·        1980s to 2000s we are in inflation targeting

·        2010s to ? will be about employment targeting

The move to an employment focus is socially understandable, but at the same time scary! Show me any book on economics that tells you monetary policy, the primary remit of any central bank, can impact employment levels medium- and long-term, please? You will not find any.

The move for central banks to an employment focus also means the end of traditional central banking.  Tracking a new diluted goal, employment, which is not impacted by monetary policy, means the central banks are the new paradigms of new economic leaders, and the old leaders, politicians are at best impotent and at worst irrelevant. Democracy is under pressure from the neglect of politicians and also by policymakers overreaching in their belief in being able to correct an inevitable Schumpeter moment. Taking the cyclically out of a business cycle leaves only businesses with no one to sell to — a true Hungarisation. 

EM crisis

I have written plenty about the EM crisis over the last month or two, but do realise that this crisis is now entering phase three, the final wave. The first crisis was the US housing and banking crisis, which spilled over to a European debt crisis, and finally now in 2013, but starting in 2012 it has become a full EM crisis. There is more to come and Gavin Davies does an excellent job in his FT blog today:  The  EM’s “fragile 9” must save themselves. The headline says it all, and the EM countries need to realise that it is not Fed’s tapering that have them in trouble, it’s their lack of reform and economic openness.

The crisis may take a break this week as we await ECB and Yellen's speech next week, but as in Europe, the problems remains whatever the rhetoric.



Macro core view:

Fixed income: New low in yields by Q4-2014/Q1-2015.

Equities: Top in place in Q1 – correction globally of 20-30 percent.

FX: Stronger US dollar from end of Q1 as global growth gets adjusted down. USDJPY to fail on 105.00 (94/95 test), CNYHKD to weaken, Fragile Five will perform poorly (plus Russia).

Commodities: 2014 will be an OK year for commodities as deflation in H1 will be replaced by higher core inflation end of year. Aluminium, Copper, long-term value here. Like Gold to 1500.



Europe – 50/50 risk of deflation. Export volumes will tank in Europe. Asia including and excluding China will continue to cool off. World growth will be 2 percent not 3 percent. 

Asia – Dramatic change of priorities away from growth to consolidation and rebalancing.

US – Sub-par growth on lack of housing demand, a subtle change higher in unemployment and maxed out consumers.

Africa – Expect a bad year. Export volumes falling.



I've changed overall risk exposure so now I am:

 Equities: Net small long through DAX calls – took profit on downside today.

 FX: Short EURUSD, short USDJPY, short GBPUSD, and now small short USDTRY through options, long AUD options, and looking to sell NZD and buy CAD.

Commodities: Short Natural Gas, Gold, Copper. Long Corn.


Performance INDEX: 116

benlouro benlouro
very good. makes sence to me
Yura Yura
Like Gold to 1500.


Commodities: Short Natural Gas, Gold, Copper. Long Corn.

Which right?

By the way.

No one understand gold (c) Ben Bernanke.


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