WEBVTT - Carl Weinberg: ECB Steps Won't Work Amidst Sick Banks (Audio) 0:00:02.360 --> 0:00:05.760 Global business news twenty four hours a day. If Bloomberg 0:00:05.800 --> 0:00:08.880 dot com, the Radio plus Mobile act and on your radio. 0:00:09.160 --> 0:00:13.360 This is a Bloomberg Business Flash from Bloomberg World Headquarters. 0:00:13.480 --> 0:00:16.440 I'm Charlie Pellett. The Dow, the SMP, and NEZ stack 0:00:16.640 --> 0:00:20.160 all moving higher right now. The SMP five hundred, indecks 0:00:20.239 --> 0:00:23.400 up three points to twenty one o two. That is 0:00:23.400 --> 0:00:26.520 a gain of two tenths of one percent. We are 0:00:26.560 --> 0:00:29.360 brought to you by Van Eck Vectors e t f s. 0:00:29.440 --> 0:00:32.320 Expect more from your Immuni's trying to get tax exempt 0:00:32.360 --> 0:00:36.120 income by maturity and credit quality, all with low cost ETFs. 0:00:36.240 --> 0:00:41.080 Visit Vanick dot com slash communi van Eck access the opportunities. 0:00:41.520 --> 0:00:43.960 The SMP up three now to twenty one oh two, 0:00:44.120 --> 0:00:46.720 a gain there of point one percent. Dow Industrial is 0:00:46.800 --> 0:00:49.080 up twenty one also a gain of point one percent. 0:00:49.440 --> 0:00:51.760 As stack up ten a gain of point two percent. 0:00:52.200 --> 0:00:54.720 The ten you're up nine thirty seconds yield one point 0:00:54.800 --> 0:00:57.960 eight percent. Gold down a dollar forty the ounce to 0:00:58.040 --> 0:01:00.480 twelve thirteen, a drop of point one per cent. And 0:01:00.520 --> 0:01:03.520 crude oil little change down one cent now forty nine 0:01:03.960 --> 0:01:07.280 of arol. I'm Charlie Pollock. That's sub Bloomberg Business Flash 0:01:07.440 --> 0:01:09.200 Charlie Pello, Thank you so very much. Now we're going 0:01:09.240 --> 0:01:12.039 to dive into our daily e t F report, brought 0:01:12.080 --> 0:01:14.360 to you by Vanic Vectors. E t s expect more 0:01:14.360 --> 0:01:17.440 of your immunities target taxes and income by maturity and 0:01:17.480 --> 0:01:21.200 credit quality, all with low cost EPs. Visit vaneck dot 0:01:21.240 --> 0:01:25.640 com slash Muni van Eck Access the opportunities for this 0:01:25.680 --> 0:01:29.480 week turned to our own Catherine Cowdery. There are three 0:01:29.560 --> 0:01:32.360 single country e t s that are outperforming the broader 0:01:32.360 --> 0:01:35.240 market up as much as fort so far. They see 0:01:35.240 --> 0:01:39.320 here here's Bloomberg Intelligence analyst Eric bel tunis Peru is 0:01:39.360 --> 0:01:43.280 on fire. So this here because of gold, so believe 0:01:43.280 --> 0:01:45.600 it or not, Peru is the like forty five country 0:01:45.640 --> 0:01:48.040 in terms of GDP, but it's in the top five 0:01:48.040 --> 0:01:50.840 in golden silver mining. So it's been helped, you know, 0:01:50.920 --> 0:01:53.560 drastically by the uptick and gold and silver. And the 0:01:53.560 --> 0:01:55.960 thing with Peru is it's an emerging market, but it's 0:01:56.000 --> 0:01:59.040 so such a small country. It's really not represented in 0:01:59.080 --> 0:02:01.080 the big e M in the SES or et F 0:02:01.280 --> 0:02:03.480 as the I shares M s C I all Peru 0:02:03.600 --> 0:02:06.520 capted e T F is outperformed the broader market. It's 0:02:06.520 --> 0:02:10.000 attracted assets and now has two hundred eleven million dollars. 0:02:10.400 --> 0:02:13.120 Bel Tunis has some other examples of single country e 0:02:13.240 --> 0:02:15.960 t F that are rallying this year. The global x 0:02:16.080 --> 0:02:18.000 m s c I Grease e t F is up 0:02:18.000 --> 0:02:21.600 five point six percent and the global x MSCI Pakistan 0:02:21.720 --> 0:02:24.840 e t F has gained ten pc. That your Bloomberg 0:02:24.840 --> 0:02:31.360 et F report. I'm Katherine Cowdery. You're listening to taking 0:02:31.400 --> 0:02:35.440 stock with pim Fox and Kathleen Hay's on Bloomberg Radio 0:02:35.960 --> 0:02:39.280 taking stock of some global macro moves. We're going to 0:02:39.480 --> 0:02:44.080 start with the Eurozone, where the ECB's governing Council of 0:02:44.160 --> 0:02:49.160 Monterey conditions in the asset purchase program unchanged, but a 0:02:49.400 --> 0:02:53.359 lunch a lot of people to wonder on. Mario drags, 0:02:53.400 --> 0:02:57.480 the head of the ECB insistence that his stimulus program 0:02:57.560 --> 0:03:01.280 is home only half done, but also so what if 0:03:01.280 --> 0:03:03.519 its best effects are already spent? And why doesn't he 0:03:03.560 --> 0:03:06.079 get off the diamond move to do more. That brings 0:03:06.160 --> 0:03:10.400 us to my next guest. Carl Weinberg is a founder 0:03:10.440 --> 0:03:14.520 and head of High Frequency Economics and he joins us 0:03:14.600 --> 0:03:20.200 now so carl Uh, your point is that Mario Draggy 0:03:20.480 --> 0:03:23.600 is not doing as much as he could correct well 0:03:23.960 --> 0:03:26.280 at first high Kathley, and good to be on the program. 0:03:26.880 --> 0:03:28.880 I think what he's doing is not working and it's 0:03:28.919 --> 0:03:31.320 not being transmitted to the economy. So you can do 0:03:31.360 --> 0:03:33.200 as much as he wants, but he's not going to 0:03:33.240 --> 0:03:36.640 achieve his goal of getting inflation back to his desired 0:03:37.000 --> 0:03:41.920 rate of being just under two percent or thereabouts. What's wrong? 0:03:41.960 --> 0:03:43.640 Why is it not working? What should he do well? 0:03:43.640 --> 0:03:47.520 It's not working because banks aren't lending, and banks aren't 0:03:47.560 --> 0:03:51.360 lending because they're facing constantly rise in capital requirements under 0:03:51.400 --> 0:03:54.960 the new and ever changing regulatory environment they're operating in. 0:03:55.360 --> 0:03:58.839 So banks effectively remain under capitalized all the time. They're 0:03:58.880 --> 0:04:01.560 not in a position to increase their assets at risk 0:04:01.920 --> 0:04:04.680 if their ratio of capital to assets at risk is 0:04:04.720 --> 0:04:08.640 too low and they're having trouble raising capital. I think, also, Kathleen, 0:04:08.680 --> 0:04:11.080 it's just worth noting that it's not just me who's 0:04:11.120 --> 0:04:14.080 skeptical about what's going on. If you look carefully at 0:04:14.080 --> 0:04:17.479 the forecast from the ECB staff today, they published a 0:04:17.480 --> 0:04:20.800 new round of forecasts, and those numbers the only difference 0:04:20.800 --> 0:04:23.880 between them and the previous edition published in March is 0:04:23.880 --> 0:04:27.440 that in March they didn't include the increase in economic 0:04:27.480 --> 0:04:30.880 stimulus that was announced then, and these forecasts include that 0:04:31.000 --> 0:04:33.680 increase in quantitative easy and you know what, the two 0:04:33.720 --> 0:04:37.520 forecasts are functionally the same. Even the ECB staff says 0:04:37.560 --> 0:04:40.119 that amping up the size of the program and moving 0:04:40.160 --> 0:04:43.159 interest rates even more negative won't make the economy grow 0:04:43.200 --> 0:04:46.320 faster or get inflation closer to the desired rate. So 0:04:46.480 --> 0:04:49.200 they stop start buying some more corporate bonds. That's going 0:04:49.279 --> 0:04:51.520 to be good for whoever sells them, maybe, but not 0:04:51.640 --> 0:04:53.760 so good for the economy and the people of Europe 0:04:53.800 --> 0:04:56.920 who need this boost. Well, you know, if you ask me, 0:04:56.960 --> 0:04:59.000 and nobody ever did, of course, but if you ask me, 0:04:59.080 --> 0:05:01.760 this buying of corporate bonds really moves the ECB into 0:05:01.839 --> 0:05:05.360 dangerous territory in a number of regards. I mean, when 0:05:05.400 --> 0:05:08.640 they buy and sell sovereign bonds, they're affecting the entire 0:05:09.000 --> 0:05:12.360 uh lending structure of interest rates up and down across 0:05:12.400 --> 0:05:15.320 the board. But when they buy and sell corporate bonds, 0:05:15.360 --> 0:05:19.440 they're only affecting the spread between risky assets and safe assets. 0:05:19.480 --> 0:05:22.080 And now they're managing the price of risk, and that's 0:05:22.080 --> 0:05:26.440 a very very dangerous proposition. They also open themselves up to, 0:05:26.760 --> 0:05:29.120 I think some potential risk as to how they do it. 0:05:29.320 --> 0:05:31.799 I mean, whose corporate bonds are they going to buy? 0:05:31.960 --> 0:05:34.280 If there are two competitors in an industry and they 0:05:34.320 --> 0:05:37.000 buy the bonds of one and not the other, or 0:05:37.040 --> 0:05:40.240 buy them in differential sizes by whatever metric, then the 0:05:40.240 --> 0:05:42.640 one that bought to the lesser extent can claim that 0:05:42.680 --> 0:05:46.000 they're being discriminated against by the ECB. And boy does 0:05:46.040 --> 0:05:49.120 that open up a Pandora's box of trouble. So where 0:05:49.200 --> 0:05:52.000 is this going, Carl? What's going to happen? Uh? Is 0:05:52.000 --> 0:05:54.440 the economy is so to me very mixed in Europe. 0:05:54.440 --> 0:05:56.400 I know Germany is doing better, but some countries are 0:05:56.400 --> 0:05:58.880 not doing well. Spain is doing better. Is there a 0:05:59.000 --> 0:06:01.800 risk of a backslidding the recession? Is it just going 0:06:01.839 --> 0:06:04.200 to be sort of flat where it is? Because this 0:06:04.279 --> 0:06:05.920 is going to mean a lot for where those European 0:06:05.920 --> 0:06:08.240 bond yields go, where the equity markets, and certainly where 0:06:08.240 --> 0:06:11.000 the currency rates go. Well, you know, Kathleen, they're all flat, 0:06:11.080 --> 0:06:14.920 including Germany. And while everybody was what was was awed 0:06:15.000 --> 0:06:18.320 by Tuesday's employment report for Germany. You know, for every 0:06:18.400 --> 0:06:20.960 German that was taken out of unemployment by the growth 0:06:21.040 --> 0:06:23.760 of the economy, there were five immigrants who got jobs. 0:06:23.960 --> 0:06:27.920 All right, they're hiring low wage workers at subsistence wages 0:06:28.120 --> 0:06:30.520 whould have to come to Germany and work and be unemployed. 0:06:30.560 --> 0:06:33.880 They're not taking Germany's Germans out of unemployment. Three of 0:06:33.920 --> 0:06:36.839 the last four retail sales reports, which by the way, 0:06:36.839 --> 0:06:40.560 we're also reported on Tuesday, we're down. And four of 0:06:40.640 --> 0:06:44.719 the last five industrial production reports have been contractions. And 0:06:44.760 --> 0:06:48.039 we're going another industrial production report next week. So the 0:06:48.040 --> 0:06:51.000 whole Euroland economy is flat. And the reason it's flat 0:06:51.080 --> 0:06:53.679 is there's no credit. And the reason there's no credit 0:06:53.960 --> 0:06:57.200 it's not the ECB's fault. It's well, it's not the 0:06:57.440 --> 0:07:02.039 fault of ECB monetary policy. It's fault of being unwilling 0:07:02.080 --> 0:07:05.520 to fix the banking system properly, to recapitalize it, as 0:07:05.560 --> 0:07:08.080 we did in the United States with our tarp uh 0:07:08.200 --> 0:07:10.400 and let the banking system get on with this business 0:07:10.400 --> 0:07:13.640 from a newly rejuvenated capital base. I'm glad you say 0:07:13.680 --> 0:07:15.720 that the economies are impressive to you, because I look 0:07:15.760 --> 0:07:17.680 at these numbers two and I keep saying. When I 0:07:17.720 --> 0:07:19.960 read some of the things, I read like, where does 0:07:20.000 --> 0:07:22.360 everybody see all this strength? But anyway, let's talk about 0:07:22.440 --> 0:07:26.000 Japan because another big, big story this week is Prime 0:07:26.000 --> 0:07:29.480 Minister Abe announcing the delay of the increase in the 0:07:29.560 --> 0:07:33.960 national sales tax rate that would have taken effect next spring. 0:07:34.000 --> 0:07:36.560 Of course, you and I car remember when they raised 0:07:36.600 --> 0:07:38.800 it and helped cause recession a couple of years ago, 0:07:38.840 --> 0:07:40.720 the same thing. So he seems to have made the 0:07:40.800 --> 0:07:43.120 right decision. But there's a lot of politics involved here. 0:07:43.440 --> 0:07:47.320 There's a lot of politics involved. There are national elections 0:07:47.320 --> 0:07:49.640 for the upper house of the Diet coming in July, 0:07:50.160 --> 0:07:52.600 and clearly one way for the LDPD get votes is 0:07:52.680 --> 0:07:56.120 to postpone attack pike that they themselves have threatened to impose. 0:07:56.200 --> 0:07:58.560 And I think that that's part of what's going on. 0:07:59.000 --> 0:08:01.880 I think overall are very disappointed in their economy, which 0:08:01.880 --> 0:08:06.200 suffers from dual problems. The first problem is a cyclical 0:08:06.240 --> 0:08:09.760 downturn in the economy. Inventories relative to cells are the 0:08:09.840 --> 0:08:12.400 highest they've been any time in the post war period 0:08:12.640 --> 0:08:16.000 other than during the two thousand and eight financial crash 0:08:16.280 --> 0:08:19.800 and the two thousand and eleven earthquake crash. High inventories 0:08:19.840 --> 0:08:22.400 are a clear warning signal that the economy is headed 0:08:22.400 --> 0:08:25.440 into a recession. And then that recession comes along at 0:08:25.440 --> 0:08:29.720 declining secular trend. They're depopulating, and with the population shrinks 0:08:29.760 --> 0:08:33.240 because baby boomers age and now start to die off, 0:08:33.640 --> 0:08:36.640 then GDP has to go down, and he can reverse 0:08:36.679 --> 0:08:39.920 that secular trend. He can combat the inventory cycle a 0:08:39.920 --> 0:08:42.960 little bit, but his really Japan's outlook is really doomed 0:08:42.960 --> 0:08:46.480 by its demographics and by its overhanging debt burden. Well, 0:08:46.679 --> 0:08:48.520 you've said for a long time they had to restructure 0:08:48.559 --> 0:08:51.079 that debt to move ahead. Is that still your view. Well, 0:08:51.080 --> 0:08:53.360 they're going to have to restructure their debt whether they 0:08:53.400 --> 0:08:55.560 like it or not. At the end of the day, 0:08:55.600 --> 0:08:59.079 a shrinking population with a still rising debt burden now 0:08:59.200 --> 0:09:02.040 rising even fair ter because of the sales tax deferment 0:09:02.360 --> 0:09:05.560 al right, is going to lead to decreasing levels of 0:09:05.679 --> 0:09:09.520 income per capita for a shrinking number of people, and 0:09:09.559 --> 0:09:11.200 they're just going to have to give up more and 0:09:11.240 --> 0:09:14.160 more of their income to service the debt until something breaks, 0:09:14.360 --> 0:09:18.960 and that time is probably within sight, although not necessarily imminent. Carl, 0:09:19.000 --> 0:09:23.040 Let's take a quick look at the UK because the 0:09:23.120 --> 0:09:26.040 pounds have been trying to rally, having a tough time 0:09:26.080 --> 0:09:29.800 once again. Polls are showing that the vote for the 0:09:29.880 --> 0:09:32.800 leave camp is pulling ahead of the remains side when 0:09:32.800 --> 0:09:35.840 it comes to the UK leaving the year Zone. Yeah, 0:09:35.880 --> 0:09:38.240 well I think that, you know, the Brexit is kind 0:09:38.240 --> 0:09:40.559 of a wild card in all of this. However, the 0:09:40.640 --> 0:09:42.600 vote turns out the UK, I think it's going to 0:09:42.640 --> 0:09:45.720 suffer some retribution from Europe. You know, it should. London 0:09:46.000 --> 0:09:51.040 and the rebellious Island the financials capital for the continental 0:09:51.480 --> 0:09:54.160 financial affairs. I think we'll see a move to push 0:09:54.200 --> 0:09:56.839 Paris and Frankfort as the new financial center of Europe 0:09:56.840 --> 0:09:59.080 to the detriment of the city, and they'll probably be 0:09:59.120 --> 0:10:02.000 trade in other kind the political pushbacks as well. But 0:10:02.080 --> 0:10:05.040 the UK economy is also hurting because of the drop 0:10:05.080 --> 0:10:08.880 in global commodity prices. All those petro dollars and commodity 0:10:08.880 --> 0:10:11.760 dollars that came into London, that built the tall towers, 0:10:11.800 --> 0:10:15.520 that brought the town homes in Belgravia, that spend all 0:10:15.520 --> 0:10:18.359 the money on high streets. You know, all that investment 0:10:18.400 --> 0:10:20.400 and consumer money that comes from the Middle East and 0:10:20.440 --> 0:10:23.360 the Emerging World has been cut by two thirds by 0:10:23.360 --> 0:10:26.679 this drop in commodity prices, and that's leading to a slowdown. 0:10:26.760 --> 0:10:29.080 We see it in the construction index which was just 0:10:29.240 --> 0:10:33.080 updated today, and certainly industrial production is failing as well. 0:10:33.400 --> 0:10:36.920 So the UK is headed into economic trouble without regard 0:10:36.960 --> 0:10:39.160 to what it does on Brexit, and the Brexit just 0:10:39.280 --> 0:10:42.880 modulates that trouble. I'll also add Kathleen for Sterling that 0:10:42.960 --> 0:10:45.880 their current account deficit is the largest that's ever been 0:10:45.920 --> 0:10:48.680 as a share of GDP almost six percent, and that's 0:10:48.679 --> 0:10:51.480 not good. That's a big risk to Sterling taking us 0:10:51.520 --> 0:10:54.880 around the world. A nice macro view of the e 0:10:55.120 --> 0:11:00.360 cpral Weinberg is convinced that whatever they do, until they 0:11:00.480 --> 0:11:03.599 fix their bad banks, the economy is not going to 0:11:03.720 --> 0:11:08.480 grow and if anything, the danger of a downturn persists. Carl, 0:11:08.520 --> 0:11:12.079 of course, is chief economist and founder of High Frequency Economics. 0:11:12.160 --> 0:11:13.480 This is Bloomberg Radio.