“No Limits”

Markets rebounded late last week as European Central Bank (ECB) chief Mario Draghi delivered a forceful message after their monthly meeting that they had “no limits” to using tools and instruments to get their target of around 2% inflation.  That, in simple terms, is free money.  As we’ve seen since the GFC, financial markets love free money and so all rejoiced and went on a buying spree of assets still over valued even after the big drops in shares this year.  

In a perverse bit of irony, he talked up economic ‘growth’ being helped by the refugee crisis as it leads to a surge in fiscal spending, all of course debt funded off budget deficits.  It’s another demonstration of the terminal nature of this.  Central banks and governments need inflation to inflate away their debts.  To get that inflation in a world with declining growth they are resorting to monetary stimulus which, by definition, adds debt.  The ECB already has rates at just 0.05% and after Thursday night the writing is clearly on the wall that the ECB itself (as a number of Euro nations individually have done already) could introduce negative interest rates.

Many are calling this as the terminal phase of this credit cycle with late last week’s moves simply a ‘dead cat bounce’.  The universe has a way of putting limits on most everything.  History tells us there has always been and always will be a limit to credit based cycles.  It’s simple math.