Big Storm Brewing - (Get ready for the Mega GFC - Debt bomb apocalypse)
Looks like the debt bomb could go off sooner rather than later due to the disparity between the US and Eurozone economies.
The Fed is increasing rates to avoid repeating the errors of the mid-Sixties - when it waited too long to snatch away the punchbowl and let loose the Great Inflation genie.
Consequently, the ECB has no choice except to reduce its bond purchases to zero by the end of the year, despite core inflation remaining at 1.1 per cent and the eurozone economy having slowed to stall speed. It is doing so under pressure from the northern "German" bloc who are concerned that the euro could fall off a cliff if the ECB continues with QE while the FED continues to hike rates.
The Bank of America says the ECB may bring forward the announcement to warn Italy's Lega-Grillini insurgents that there will be no monetary cover for their fiscal blitz. So if the ECB no longer buys Italy's bonds then who will? (Same goes for Greece, Spain, etc, etc...?)
The end of QE in Europe is doubly treacherous because it rips away the ECB shield for Italy, meaning Mario Draghi's "do whatever it takes" will no longer hold. However the more immediate risk is that the US economy continues to decouple from the rest of the world in a Trumpian fiscal blow-off, catapulting the US dollar higher.
The Bank for International Settlements estimates that offshore dollar debt - much of it borrowed by private companies in East Asia and Latin America - has jumped five-fold to $US11 trillion since the early 2000s. There is a further $US13 trillion in "equivalent" derivatives, three-quarters with a maturity of less than one year.
The nub of the matter is that a surging dollar forces global commercial banks to retrench and causes a liquidity squeeze through complex swap and hedge contracts.It is a toxic cocktail when combined with surging US interest rates as well.
Some $US9 trillion of global contracts are priced off dollar Libor rates. Emerging markets are now big beasts. The "blowback" from any crisis into the US economy would ultimately compel the Fed to retreat.
Powell has so far been insouciant. "We believe the Fed is essentially on 'autopilot'. Quarter-by-quarter rate hikes will continue until something 'breaks'," said Michael Darda from MKM partners. "Every global cycle since 1945 has ended the same way, whether the dollar is strong or weak. Each was "murdered" by the Fed. Is this time really any different?"
(20min delay)