Europe Frozen In Coldest Deflation Ever

A Frozen World

Everyone certainly knows about the blockbuster Disney animation film "Frozen" and its plot. Though we realize, rather humbly indeed, that we will never come anywhere close to Chris Buck's eloquence in personifying fictional fantasy, we nonetheless were able to connect the quaint dots of what was one of the most popular movies of 2013 & 2014, and that of the biggest stories of the global economy.

We liken Elsa to global oil prices; once the innocent commodity everyone vied for has now become the harbinger of disinflation and deflation, causing great pain and blowing a bone-chilling deflationary wind across much of the world. Anna (Elsa's beloved sister), which we liken to central banks, embarks on a journey of wanderlust and real purpose to try to rescue her dearest sister who has uncontrollably morphed into an Ice Daemon.
Once in the bliss of a dearest sisterhood with Elsa - like central banks were to elevated asset prices, Anna now frantically embarks on an unprecedented journey of uncertainties to save Arendelle from an eternal ice age - like central bankers are now embarking on extraordinary monetary programs to reverse the unintended consequence of their previous misdeeds.

Will Anna ever be able to save Arendelle from slipping into the ice age she has so dreaded? Can Elsa ever be stopped in her tracks and brought back to the warmth of her normalcy? Who will be the white knight in shiny armor in our present episode of pseudo make-believe?

We leave the this to the creative minds of our readers to figure out. Laughingly, as we type, the similarities between Frozen and the current wave of global deflation emerge, thawing the icicles that separate fiction from reality. Have fun!

Elsa, Princess of Arendelle, possesses cyrokenetic powers, with which she is able to produce ice, frost and snow at will. One night while playing, she accidentally injures her younger sister, Princess Anna. Their shocked parents, the king and queen, seek help from the troll king, who heals Anna and removes her memories of Elsa’s magic. The royal couple isolates the children in their castle until Elsa learns to control her powers. Afraid of hurting Anna again, Elsa spends most of her time alone in her room, and a rift develops between the sisters as they grow up. When the girls are teenagers, their parents die at sea during a storm.

When Elsa comes of age, the kingdom prepares for her coronation as queen. Among the guests is the Duke of Weselton, who seeks to exploit Arendelle for profit. Excited to be allowed out of the castle again, Princess Anna explores the town and meets Prince Hans of the Southern Isles; the two quickly develop a mutual attraction. Despite Elsa’s fears, her coronation transpires without incident. During the reception, Hans proposes to Anna, who hastily accepts. However, Elsa refuses to grant her blessing and forbids their sudden marriage. The sisters argue, culminating in the exposure of Elsa’s abilities in an emotional outburst.

Panicking, Elsa flees the castle, while inadvertently unleashing an eternal winter on the kingdom. High in the nearby mountains, she abandons her restraint, building herself a solitary ice palace, and unknowingly brings to life her and Anna’s childhood snowman, Olaf. Anna sets out in search of her sister, determined to return her to Arendelle, end the winter, and mend their relationship. While obtaining supplies, she meets an iceman named Kristoff and his reindeer, Sven, and convinces Kristoff to guide her up the North Mountain. On their journey, the group encounters Olaf, who leads them to Elsa’s hideaway.

Anna and Elsa reunite, but Elsa still fears hurting her sister. When Anna insists that Elsa return, she becomes agitated and her powers lash out, accidentally striking Anna in the heart. Horrified, Elsa creates a giant snow creature, Marshmallow, to drive Anna, Kristoff and Olaf away from her palace. As they flee, Kristoff notices Anna’s hair turning white and deduces that something is very wrong. He seeks help from the trolls, his adoptive family, who explain that Anna’s heart has been frozen by Elsa. Unless it is thawed by an “act of true love”, she will become frozen solid forever. Believing that only Hans can save her with a true love’s kiss, Kristoff races back with her to Arendelle.

Meanwhile, Hans, who is leading a search for Anna, reaches Elsa’s palace. In the ensuing battle against the duke’s men, Elsa is knocked unconscious and imprisoned in Arendelle. There, Hans pleads with her to undo the winter, but Elsa confesses that she does not know how. When Anna reunites with Hans and begs him to kiss her to break the curse, Hans refuses and reveals that his true intention in marrying her is to seize control of Arendelle’s throne. Leaving Anna to die, he charges Elsa with treason for her younger sister’s apparent death.

Elsa escapes and heads out into the blizzard on the fjord. Olaf comes across Anna and reveals Kristoff is in love with her; they then escape onto the fjord to find him. Hans confronts Elsa, telling her Anna is dead because of her. In Elsa’s despair, the storm suddenly ceases, giving Kristoff and Anna the chance to locate each other. Nevertheless, Anna, seeing that Hans is about to kill Elsa, throws herself between the two just as she freezes solid, blocking Hans’ attack.

As Elsa grieves for her sister, Anna begins to thaw, since her decision to sacrifice herself to save her sister constitutes an “act of true love”. Realizing love is the key to controlling her powers, Elsa thaws the kingdom and helps Olaf survive in summer. Hans is deported to the Southern Isles to face punishment for his crimes against the royal family of Arendelle, while Elsa cuts off trade with Weselton. Anna and Kristoff share a kiss, and the two sisters reconcile. Elsa promises never to shut the castle gates again.
— Plot of "Frozen", Wikipedia

Europe's Worst Deflation

 If 2014 December's -0.2% deflation wasn't bad enough,  January's -0.6% preliminary figure  should send chills down anyone's spine. This is the  worst reading ever  for the Eurozone, equaling that of the Great Financial Crisis of 2009; begging the question " how much lower can it go? "

If 2014 December's -0.2% deflation wasn't bad enough, January's -0.6% preliminary figure should send chills down anyone's spine. This is the worst reading ever for the Eurozone, equaling that of the Great Financial Crisis of 2009; begging the question "how much lower can it go?"

Just last week, the ECB ephemerally placated global financial markets by unleashing a €60bn/month (totaling €1.1trn till September 2016) QE program which was unthinkable just a few months ago. We have painstakingly documented the ECB's QE program, fancifully dubbed the Expanded Asset Purchase Program (EAPP). Specifically, we said what ECB president Mario Draghi really meant was the ECB wasn't going to end the €60bn/month on the stipulated September 2016 date. Many refuse to believe this, but today's deflationary vortex should serve as the final nail in Europe's cryogenic coffin.

 Unsurprisingly, a breakdown in January's prelim figure shows where the chill emanates from: Energy.  "Isn't cheap energy good for consumers?", one might quip. Certainly; but apparently not so for the trillions of Euros in bad debt still sitting somewhere on the books of many European banks . Good luck to creditors, because the ECB sure isn't going to monetize those liabilities anytime soon

Unsurprisingly, a breakdown in January's prelim figure shows where the chill emanates from: Energy. "Isn't cheap energy good for consumers?", one might quip. Certainly; but apparently not so for the trillions of Euros in bad debt still sitting somewhere on the books of many European banks. Good luck to creditors, because the ECB sure isn't going to monetize those liabilities anytime soon

Rather, as we highlighted, EAPP was actually an opened-ended debt monetization facility that would not be terminated until Eurozone inflation hits the mandated 2%. The Governing Council was very clear on its language, that the EAPP was designed to ease monetary and financial conditions with the ultimate goal of bringing broad inflation back to the magical 2%.

We, along with a few others, have been pounding the table asking "what will the ECB's latest round of QE do for the real economy?". Our two-worded answer: Absolutely nothing.

2015's Easiest Trade? Shorting The Euro

What it will do for the financial markets though, is nothing short of Nirvana for traders and investors alike. We strongly believe that the easiest trade of 2015 would be nothing more than shorting the Euro. For the record, we have been handsomely rewarded thus far, and expect more so as central bankers all around the world embark on yet another voyage into the twilight zone of Negative Interest Rate Policy (NIRP). Gone are the days of Zero Interest Rate Policy (ZIRP). Welcome to 2015, ladies and gentlemen.

 The markets aren't at all impressed with the ECB's  €1.1trn monetary Bazooka.  5-year inflation breakevens on Eurobonds have more more than erased all post-ECB QE gains, crashing more than 20bp  as of the 29th. Today's breakeven rate would have easily printed under 1.5% . Thanks for nothing, Draghi

The markets aren't at all impressed with the ECB's €1.1trn monetary Bazooka. 5-year inflation breakevens on Eurobonds have more more than erased all post-ECB QE gains, crashing more than 20bp as of the 29th. Today's breakeven rate would have easily printed under 1.5%. Thanks for nothing, Draghi

We are afraid to inform Draghi and his henchmen that they are now 2.6% shy of their goal. This deficit was a "mere" 2.2% last week when the official Eurozone December inflation (more accurately deflation) was -0.2%. With market-based measures of inflation expectations (inflation breakevens) erasing all post ECB QE gains, the market is totally not buying the central bank's omnipotence in triggering an improvement; even if it meant acting outside the ECB's prescribed mandate by monetizing Sovereign bonds, much to the chagrin of German politicians.

 If one of the world's, and certainly Europe's most resilient economy just experienced its coldest deflation since 2009, coming in at -0.5% in January, then probably nothing else stands in Elsa's way. Or is it?

If one of the world's, and certainly Europe's most resilient economy just experienced its coldest deflation since 2009, coming in at -0.5% in January, then probably nothing else stands in Elsa's way. Or is it?

Earlier today, Eurostat reported that Eurozone inflation for January chilled further by coming in at a staggering -0.6%, a -0.1% miss to the -0.5% expectation. This 0.6% deflation is the worst in recorded history since the single currency block was created in 2001. In short, Europe is in uncharted territory.

 Not all bonds are made equal. German Bunds have benefited extensively from the ECB's NIRP and EAPP, even as the DAX 30 index of German stocks trot to its own record highs. 30-year Bunds have never fared better in all of history -  creditors now pay the Bundestag 1% to lend it money for 30 years

Not all bonds are made equal. German Bunds have benefited extensively from the ECB's NIRP and EAPP, even as the DAX 30 index of German stocks trot to its own record highs. 30-year Bunds have never fared better in all of history - creditors now pay the Bundestag 1% to lend it money for 30 years

With every central bank scrambling to export deflation, and with the Saudis doing everything in their power to definancialize crude as an investment asset and destroy the US shale patch, it is probably no surprise that the ECB is utterly hopeless to prevent Europe from sliding into an all out deflationary contraction. Just a week or two into the ECB's largest ever monetary Bazooka, Europe is already loosing the war against slumping energy prices and rapidly decelerating economic activity, in rather embarrassing fashion. 

So far: Deflation 1 - ECB 0. And it isn't even halftime yet...

The WSJ chimes in on what is undisputedly any central banker's worst nightmare:

Last week, the ECB said it would purchase €60 billion ($68 billion) in public and private debt securities each month, mostly government bonds, starting in March and lasting until September 2016 in a bid to bring inflation closer to the bank’s 2% target.

Still, the longer consumer prices persist in negative territory, the more pressure the ECB will eventually come under to extend the purchase program. Officials have said it won’t end until they are confident that inflation is on track to reach their objective.

The program “will end only once we get a strong sense that inflation is converging toward 2%,” ECB executive board member Benoît Coeuré said in an Italian newspaper interview this week.

The latest drop in inflation was driven largely by falling energy prices, but also by declining prices for manufactured goods as businesses passed on some of the savings they have made on their energy bills. Food prices also fell, while prices of services rose more slowly than in recent months.

This trend will worry ECB policy makers, who want to prevent the fall in oil prices having “second-round effects” as other businesses cut their prices to gain market share and workers settle for lower pay rises. The ECB worries that households and businesses will grow accustomed to falling prices, and postpone some spending decisions in anticipation of a better deal later in the year, in turn leading to falls in output and further drops in prices.

Beyond the threat of a deflationary spiral, the decline in prices could, on the other hand, help boost consumer spending power in the near term, to the extent that falling prices are driven by lower energy costs.

If inflation falls deeper into negative territory and gets stuck there, it would raise even more doubts about whether eurozone debtor countries can recover without restructuring their debt that would spread more of the cost of cleaning up Europe’s crisis to creditor nations such as Germany.
— The WSJ

Is it just us, or can the world just not get enough of the magical story of Frozen? We certainly love Elsa and her dainty embellishments, supernatural powers, and endearing innocence. Until of course frostbite spreads lengthwise, as we blindly embrace the Princess just as her gnarly inborn demeanor manifests in most terrifying ways.