By Jeffrey Snider

Early in the morning on October 7, 2016, during Asian trading the British pound experienced a flash crash. Driven down 6.1% in a matter of two minutes, it left the rest of the markets stunned. The usual whispers of a “fat finger” abounded, as did the recognition of how unabated computer traded sell orders were quickly offered and executed.

Just a week prior, however, the German 10-year bund yield had plunged to a record -21 bps in “yield.” Mainstream commentary that at every turn gives each central bank the benefit of the doubt has never been able to come to terms with actual bond market NIRP. On the same day, Germany’s federal 2-year would price at -72 bps in “yield.” It left the bund curve at the important 2s10s for a compressed 51 bps.

The bund curve being negative that far out plus flat on top meant everything bad about perceived global liquidity. No way declared the media, not with the Fed’s balance sheet expansion undertaken years before and the ECB’s then having been expanded. If the pound flash crashed, then it must be Brexit or some other unrelated idiosyncratic factor that wouldn’t amount to much.

We are left to believe that a lot has changed since then. In between, there was another round of reflation as well as late last year more than a little madness about a looming inflationary impulse cresting on the power and economic energy of globally synchronized growth. You would be forgiven for thinking Germany’s bond market has completely erased its 2016 stigma.

Only in one very narrow sense did it; Germany’s 10s are no longer negative in yield. Flipping to the plus side again, it was one of the driving forces behind the inflation hysteria. If Germany’s bunds are improving, then it seemed possible this reflation could be real.

Possible is not probable, however, and far more was made of the plus sign than ever should have been. In context, Germany’s bond market has barely moved from late 2016. Like US$ swap spreads that have decompressed, there was only ever marginal difference off the worst of the “rising dollar” lows despite so much time adding up in between. That’s the real factor people should focus on; this clear lack of conviction and symmetry, meandering instead toward a small relative improvement in market indications.

In other words, inflation hysteria was doomed from the start. Real recoveries are “V” shaped (like reflation #1), not “L.” And if there was a lot of German to it, and there was, Germany should have led the transition from far flung hope to clear rebound. After all, conversation surrounding Europe’s so-called booming economy is grounded in interpretation of Germany’s contributions to it.

If you’re going to be hysterical about inflation, at some point there has to be some. It can’t have decelerated for any additional length of time. Europe’s overall HICP inflation rate jumped to 2%, the ECB’s monetary policy target, for February 2017 riding the initial rise in oil prices off the February 2016 “rising dollar” bottom. Since, a period of now thirteen additional months including the latest estimates for March 2018, it has only slowed.

Given Germany’s bond market, there shouldn’t have been any surprise as to that trend. There was never any real hysteria, only a whole lot more made out about the sign switch in the bunds 10s than was ever actually specified.

The ECB, predictably, is confused about all this but hints that it will begin exiting anyway. And why not? Despite €2.34 trillion in LSAP’s (large scale asset purchases) to date among its big three programs, there isn’t the slightest imprint of them on markets or economy. On or off doesn’t matter. Their effects are strictly psychological, and even then almost entirely a product of uncritical mainstream media acceptance.

If there was to have been a monetary channel between QE and the rest into the real economy, Europe’s banks would have been it. But, as noted earlier with the forced early departure of Deutsche Bank’s latest CEO, it doesn’t matter what the central bank does only what banks do in the aggregate.

Modern eurodollar money is the very product of complexity. Balance sheet capacity is the Webster’s definition of it. But to make money inside this system you really can’t do so by getting smaller. Yet, the current climate demands only that. It brings about a chicken and egg sort of problem; banks need opportunity derived from a real rather than imagined recovery; to get that recovery requires banks to engage in risky practices of the old byzantine variety.

Lending in Europe has been rising since April 2014. Big deal. It’s another case of making more out of positive numbers than reality does. Far more relevant to the economic case, which is ultimately all that matters, European lending in February 2018 (the latest data) is practically unchanged since January 2009 despite the kitchen sink thrown at the problem.

During that time in between, we’ve been told several times that everything was changing often with great emphasis on how the latest monetary experiment would be the definitive one; only for the last one to be somehow brushed aside as if its failure to register anywhere along these lines didn’t matter.

It is that failure that actually matters most. It’s not really difficult to quantify, as you can plainly see above (and below) how nothing the ECB does makes any difference. What’s more alarming, and more difficult to assess, are the gigantic costs of these mistakes piling up over so much time – and what harm is further caused when such massive and sustained failure is forbidden as a legitimate topic of political discussion.

There also needs to be some appreciation for now difficult it has been to get at the heart of the real issue, all the while the world tears itself further apart (fragmentation in money as well as politics):

From a political or “elite” standpoint, this disconnect is somewhat understandable if entirely unsympathetic. It’s not just that Economists claim there is little or nothing wrong with the economy, even those who otherwise relate to the struggle of workers fail to identify and explain the reason for that struggle.

To get closer to the truth, we have to run in a direction that seems entirely backward, or at least wholly inappropriate upon first issue. It is exceedingly difficult to believe in the cause of the problem when that is, among many similar things, Deutsche Bank not making enough money.

Yet, here we are, Europe’s so-called boom and the inflation hysteria it briefly nurtured laid bare as the latest nonsense craze in the recognizable series. The ECB doesn’t matter; how much money Deutsche Bank can make, as it now replaces another CEO, does. They can’t make any because there is no recovery, and therefore no opportunity. It’s all risk, which is why Europe’s NFC’s (non-financial corporations, the very important supply side of the economy) can’t get any additional bank funding even though the central bank has bought up a ridiculous €148 billion in just corporate bonds from Europe’s banks.

Just prior to the Chinese yuan’s downward spiral in January 2014, a related outcome of restrained balance sheet capacity globally, Germany’s 10s yielded 2%. Even at the height of this latest recovery frenzy, the yield achieved no more than +79 bps; meaning that after almost a year and a half since that bottom in 2016 the 10s were still far closer to it than they ever were to January 2014. True hysteria.

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