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!
Europe's Worst Deflation
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.
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.
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.
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.
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:
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.