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Quantitative easing now looks permanent

After a pause of a few months, the world’s leading central banks are “printing” money again to try to bolster their economies. Commonly known as quantitative easing or QE, the European Central Bank (ECB) resumed its programme just before the turn of the year. The backdrop is lukewarm growth, a looming recession in Germany, and persistent fears of Japanese-style deflation.

The ECB is creating new euros to buy bonds at a monthly pace of €20 billion (£17 billion). It is also signalling that QE has moved from being a temporary innovation to a permanent feature of monetary policy.

Meanwhile, the US Federal Reserve has also been running a new asset-buying programme, creating US$60 billion (£46 billion) a month since September. It insists for technical reasons that this is not QE, though many observers disagree. The Bank of Japan has been following a similar policy almost continually for the past decade, while there have been recent hints from the Bank of England that it might return to the fray for the first time since 2016.

At the Davos World Economic Forum, the managing director of the IMF has said that these interventions, along with many other countries cutting interest rates, amount to the “most synchronised monetary easing since the global financial crisis”.

In the process, the balance sheets of the leading central banks have ballooned to many times their previous size. As we shall see, it has given them a direct role in industrial policy that few people are even aware of.

Liquidity gets crunched

It was the economic crisis of 2007-09 that drove the European, British and American central banks to try QE. They reduced interest rates to unprecedented levels, but it did little to increase bank lending, consumption or investment. By the turn of the decade, they realised their economies were caught in a similar liquidity trap to Japan, which had been pioneering its own QE programme since the late 1990s. Nothing like this had been seen on a global scale since the 1930s.

So they began to create massive amounts of money to buy the bonds of governments, banks and other major companies. The idea was to drive up bond prices, which would at the same time drive down their yields or rate of interest. By doing this, long-term interest rates would be reduced in line with the cuts that the central banks had already made to short-term interest rates. This would make borrowing cheaper for those issuing the bonds, which would hopefully stimulate the economy.

Central bank balance sheets 2006-18

There has been much debate about whether QE has succeeded. It is often said that along with low interest rates, it has paved the way for a new speculative bubble in riskier assets, while not unlocking enough growth to have achieved a recovery. We have never returned to the growth levels of the 2000s, as shown below.

Global growth since 2000

Commentators like former US Treasury minister Lawrence Summers argue that instead of QE, governments should be spending our way to a stronger recovery by running higher deficits. But since there is little political will for this, others believe that QE is effectively the only game in town.

The ECB, which was fiercely criticised from within the institution for resuming QE, has pointed to the benefits from the previous programme. In particular, it claims to have improved corporations’ credit access and levels of bank lending. We could add that the concerns about speculative bubbles overlook the fact that a shift in demand towards riskier assets was precisely the objective behind QE.

Some influential commentators argue that QE should be used permanently, and the ECB seems to agree. The bank’s new president, Christine Lagarde, said in December:

We intend to continue reinvesting in full the principal payments from maturing securities purchased under [the QE programme] … for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The new industrialists

It is usually overlooked that QE has also led the central banks into an industrial role that is normally restricted to governments (except the Fed, which works hand in hand with the US Treasury in this regard). For instance, while over 80% of the ECB scheme buys government and other public sector bonds, a huge chunk still goes into corporate bonds and other assets. At the time of writing, the ECB holds €263 billion worth of corporate bonds – a very significant amount in relation to individual firms and the sectors in question.

According to the ECB, 29% of these bonds were issued by French firms, 25% by German firms and 11% each by Spanish and Italian firms. As at September 2017, the sectors they came from included utilities (16%), infrastructure (12%), automotive (10%) and energy (7%).

Why were those firms and sectors targeted? The selection criteria are not always clear. Unsurprisingly, the investments have raised some political criticism. Some have argued, for example, that the money should prioritise green energy firms and not the bonds of companies that trade in fossil fuels.

At any rate, these central banks are now in the business of picking winners and losers in the corporate world. They’re likely to be embroiled in this for a long time: even if they did abandon QE, they are buying assets with lifespans of over 30 years in some cases. As the Bank of Italy has admitted, the possibility of some of these companies going insolvent creates financial risks for the whole eurozone system.

It should be said that there are echoes of the past in these interventions. The likes of the Bank of England and Bank of Japan have been involved in salvaging firms or entire industrial sectors after economic downturns before. The Bank of England came to own a number of cotton mills in the 1920s, for instance, and then Rolls-Royce in the famous 1970s rescue. Another example is France in the 1950s, where the central bank became involved in choosing which sectors and companies to back under a scheme to distribute long-term finance.

The supposedly “unconventional” QE policies are therefore somewhat more conventional than is often admitted. We might like to think of central banks as technocratic institutions that merely enable the market, but not always. And the decisions about whom to prop up are being taken without any democratic input. For the situation to reverse and for the balance sheets of central banks to return to pre-crisis levels, it depends very much on whether we ever see a robust recovery. All we can say for now is that there are no signs of it yet.


IPO demand is strong for 2020, the heads of the NYSE and Nasdaq say

2020 is going to be a strong year for initial public offerings, according to the presidents of the New York Stock Exchange and Nasdaq.

“We are having a lot of meetings, a lot of interest, a lot of companies looking to tap the public markets in the first half,” Nasdaq President and CEO Adena Friedman told CNBC’s “Squawk Box” on Thursday from the World Economic Forum’s annual meeting in Davos.

“We have roughly 30 or so companies that have already filed with the SEC [Securities and Exchange Commission], many more that are talking to us and looking to list in 2020,” echoed NYSE President Stacey Cunningham on “Squawk Box.”

Although 2019 was the best IPO market since 2014, Cunningham noted, only a “handful got a lot of attention.”

2019 was plagued with some disappointing market debuts and failures. Some highly anticipated technology companies in the IPO stages, such as Uber and Lyft, and pre-IPO stages, like WeWork, made headlines for their lack of profitability. The public markets spoke and Uber and Lyft ended the year as some of the most disappointing public offerings.

“I think what we saw at the end of the year is investors asking questions they hadn’t really been asking before. Investors are looking for not just growth, but profits,” said Cunningham.

Lyft, Peloton, Beyond Meat, SmileDirectClub and Zoom all went public on the Nasdaq in 2019. Uber, Pinterest, Virgin Galantic, Chewy and Levi Strauss went public on the NYSE last year.

“Right now the pipeline of prospects, IPO prospects, is very strong, very interesting,” said Friedman.

Friedman said there is strong demand from both private equity held companies as well as technology companies. Biotechnology and financial technology companies also continue to be strong parts of the industry, Friedman added.

“The first couple that come out of the gate will really set the tone for the year,” said Cunningham.

“I think also the resiliency of the economy has been very strong and so you’re seeing that and I think that there’s more and more confidence coming into the markets,” said Friedman. “People feel like its the right time for investors to take that equity risk.”


The rich have had enough of negative interest rates. Some are pulling cash out of Swiss banks

Banks are meant to hold cash. But in Switzerland, some rich savers are looking for alternatives.

Swiss private bankers say that clients have asked to withdraw large amounts of cash so they can store it themselves, despite the country’s reputation as a secure and reliable place for wealthy investors. Some of that money may now be sitting in private safes and storage.

The unusual moves follow five years of negative interest rates. The policy, intended to keep the Swiss franc from appreciating too much, requires banks to pay to park money with the Swiss National Bank. In some cases, banks have passed a portion of the extra costs on to their most affluent customers.

Such policies are unpopular with clients who are used to earning interest on their deposits, not paying fees. Now, some are weighing more radical ways to protect their money.

“A lot of people [are] thinking about what they should do, and alternatives to this,” said Adriel Jost, head of economics at Wellershoff & Partners, a consultancy based in Zurich.

‘It’s your money’

Norman Villamin, chief investment officer for private banking at Switzerland’s UBP, said a limited number of clients have moved their cash into private storage. Some may have sold their business or a home recently, and “can’t deploy the cash all in one go,” he explained.

Similar requests have been received by bankers at the Swiss private bank Rahn+Bodmer Co., according to partner Martin Bidermann.

“We tell the client, watch out — it’s your money,” Bidermann said. Some have still moved ahead, he added.

Banks in Switzerland generally see charging customers to hold their cash as a measure of last resort.

“The bank will discuss with the client, if you do these other things with us that allow us to make some money, we won’t charge you,” Villamin said. “I do think the banks are going out of their way to try and find a way not to charge the large cash holders.”

Bidermann said he was aware of similar discussions with clients.

Still, some banks have been forced to levy charges on their biggest account holders after years of extraordinary monetary policy.

Negative interest rates, launched in Switzerland in 2015, have made it harder for the country’s banks to generate profit on loans and mortgages. Payments on excess reserves that need to be stored with the central bank have also caused pain.

Credit Suisse (CS) announced last year that it would apply a negative 0.75% interest rate to cash balances above 2 million Swiss francs ($2.1 million). This means that if an individual client or business holds 3 million Swiss francs ($3.1 million) with the bank for one year, they would be charged 7,500 Swiss francs ($7,750). UBS (UBS) also said last year that it would apply a 0.75% fee on cash balances above 2 million francs ($2 million) held in Switzerland.

Both banks declined to comment on whether they’d received requests from high net worth clients to take out cash.

No easy feat

Even if clients do want to withdraw large sums of cash, the logistics aren’t easy. First, a customer would need to come up with a storage and insurance plan.

Ludwig Karl, a spokesperson for Swiss Gold Safe, which rents safe deposit boxes in Switzerland and Lichtenstein, said that the company has seen increased interest in cash storage since 2015. But getting large amounts of Swiss francs out of a bank can be difficult, he observed.

Bidermann noted that once a client withdraws a significant amount of cash, they could struggle to deposit it again down the line. “Any bank would have questions” if a client arrived with 800,000 Swiss francs in cash five or 10 years from now, he said.

Swiss National Bank President Thomas Jordan has said that demand for cash hasn’t spiked since 2015. But data show that the number of banknotes in circulation has increased steadily since the 2008 financial crisis, which ushered in the era of low, and ultimately negative, rates. A spokesperson for the central bank said that low interest rates, along with the Swiss franc’s reputation as a safe haven asset, have played a role.

Notably, the number of 1,000 Swiss franc notes in use has risen faster than any other denomination.

In the topsy-turvy world of negative rates, cash isn’t the only asset to benefit. Ashok Sewnarain, CEO of IBV Vaults, which has a facility in Zurich, said that storing gold has been big business for him. Bidermann, meanwhile, said clients have wanted to allocate more money to reliable, dividend-paying Swiss stocks, such as healthcare giant Roche.

Pressure on Europe’s central banks to alter course is growing as investors scramble for security. In September, the Swiss National Bank said it would raise the amount that banks can store without being subject to negative interest rates. Even so, the Swiss Bankers Association, a trade group, issued a report the following month claiming that “negative interest rates no longer fulfill their economic purpose.”

The European Central Bank, which has had negative interest rates in place for the 19 countries that use the euro since 2014, has also faced calls to investigate the policy’s harmful side effects. Banks in Europe and the region’s pension funds have suffered as well.

President Christine Lagarde is expected on Thursday to announce the start of a review of the central bank’s strategy, including the tools it’s used to juice the economy in the past decade.

Before taking the reins in November, Lagarde said that European citizens would be “worse off” without negative interest rates, but promised to monitor their “adverse side effects” as ECB president.


California wants mandatory QR Codes for cannabis businesses

California is doubling down on plans to use QR Codes in its fight against illicit cannabis sales.

The California Bureau of Cannabis Control on Thursday proposed emergency regulations that would require state-licensed cannabis businesses to display their unique Quick Response Code certificates in their store windows and ensure they have the digital barcodes handy when transporting cannabis.

The proposed regulations come a month after California cannabis regulators launched a campaign in which businesses could voluntarily post a uniquely generated QR Code that, when captured by a smartphone camera, would display information such as the license status, address and location.

In 2019, California’s illicit cannabis market was estimated at $8.7 billion, according to Arcview and BDS Analytics, which track and analyze cannabis industry sales. California’s legal market sales were expected to top $3 billion.

“The proposed regulations will help consumers avoid purchasing cannabis goods from unlicensed businesses by providing a simple way to confirm licensure immediately before entering the premises or receiving a delivery,” Bureau Chief Lori Ajax said in a statement. “These requirements will also assist law enforcement in distinguishing between legal and illegal transportation of cannabis goods.”

The QR Codes are one aspect of a broader statewide effort — which has included raids, seizures, arrests and lawsuits — to crack down on illicit sales.

Members of the public will have five days to comment on the proposed regulations to the Office of Administrative Law and the California Bureau of Cannabis Control.

California launched regulated recreational cannabis sales in 2018, and the state quickly became the nation’s largest legal cannabis market. However, industry members say their businesses have struggled because of regulations that allowed municipalities to limit or restrict cannabis sales coupled with a deeply entrenched illicit market.


Ray Dalio: Cash Will Be Big Loser in Coming Years

Ray Dalio, co-chairman and founder of Bridgewater Associates, recently spoke with CNBC to provide a warning that, in his view, the biggest risk facing investors may be the declining purchasing power of cash. As he has repeatedly warned, in his view, the next financial crisis may be a dollar crisis and people who think that they will be able to ride out the next recession by holding cash (or bonds) could be in for a rude awakening.

Some excerpts from Ray Dalio:

“The question is also ‘What do you jump into when you jump off of the train?’ And the issue is, you can’t jump into cash. Cash is trash… They’re going to print money… What you have to do is have a well diversified portfolio… You have to be global and to have balance… And I think that you have to have a certain amount of gold in your portfolio. You have to have something that’s hard.”

“There are three monetary systems that happen. The first is, in the old days, it had intrinsic value. You’d carry around gold coins. Then we came up with the idea of banks or central banks. And what they do is they create certificates, what we call notes, that are claims on those banks. And we print many more certificates than there is money in the bank. That’s a linked system. So we did that, and we broke that in 1971. Then we have a fiat monetary system, which means that you can print whatever amount of money you want. So we are in that part of the cycle, bigger picture… The depreciation of the exchange rate and the printing of money, I think, over the next few years is going to be the biggest thing…”

“I know this is going to be the headline of gold. I want to emphasize that a bit of gold is a diversifier… I know I am going to come out of (this interview) like ‘Ray Dalio is wild on gold’ and that’s not exactly true. But cash is trash…”

For investors that are worried about the next recession, the trillion dollar question is whether that recession will occur in a declining inflation environment, like the Great Depression and all Western recessions since the early 1980s, or an increasing inflation environment like the late 1960s and 1970s. If it’s the later, the rising inflation (and depreciating currency) can make holding typical safe haven assets like cash and bonds a big loser. Ray Dalio seems to believe we are headed for the later.