On Easy Global Monetary Conditions, Chinese QE and Brain Health and Saturated Fat!

From: aditya rana
Date: Sat, May 31, 2014 at 1:38 PM
Subject: On Easy Global Monetary Conditions, Chinese QE and Brain Health and Saturated Fat!


Prophecies of imminent crises abound – whether it is talk of deflation in Europe, the failure of Abenomics in Japan, the bursting of the China real estate bubble, or an impending conflict between Russian and the Ukraine. However, the likelihood of any of these fears being realised in the near-term are low, particularly given that the world continues to be awash in central bank supplied liquidity. This is occurring despite the tapering of QE in the US and the ECB having reduced its balance sheet over the last eighteen months with the repayment of LTRO loans. Gavyn Davies, Chairman of Fulcrum Asset Management, wrote an interesting note in the FT which illustrates this peculiar phenomenon. To summarise:

-Following the US announcement of tapering last summer, monetary conditions in the US tightened considerably as bond yields rose. In addition, the PBOC started tightening monetary conditions to squeeze the shadow banking sector, the ECB refused to ease despite the increase in deflationary risk, and the BOE was expected to raise interest rates to curtail the housing bubble in the UK.

-However, the fear of a global tightening of monetary conditions did not come to pass as global financial conditions eased again during the first half of the year and are currently at their easiest levels since the start of the financial crisis in 2008 (see chart below).

-These indices ("FCIs") includes a broad variety of indicators which include short rates, long rates, credit spreads, equity valuations, exchange rates and house prices and therefore capture most of the transmission channels through which monetary policies work. A 1% easing in the index (in the US) is expected to result in a 1-1.5% increase in real GDP growth in the following year.

-China has clearly reversed its tightening bias since late 2013, by about 2.0%, to ease stresses in the property and shadow banking sectors.

-Monetary conditions in the Euro area have remained very easy , primarily due to a collapse in bond yields in the peripheral countries and expectations of ECB easing in June leading to lower Bund yields.

-Monetary conditions in the US have eased despite the tapering of QE, mainly due to a fall in bond yields. While the slower economy in the first quarter might have played a role, it seems that the market is getting increasingly concerned about "secular stagnation" and the resulting expected lower equilibrium level of real interest rates.

-Weighting the country FCIs (for two indices – Goldman and Bloomberg) by their respective nominal GDPs, provides insight into global monetary conditions (see chart below). It points towards significant easing this year, at levels close to the lows in 2007.

-It is clear that investors should pay attention not just to the "exit" talk by central bankers, but what they are actually doing and its impact on financial market expectations.

The above note highlights the importance of looking through the noise (duly propagated by the media) at the underlying data which can provide important clues to understanding market action. In addition to the imminent easing action by the ECB next week, the Chinese are also likely to embark on a variant of QE as reported by Standard Chartered and Soc Gen (via FT Alphaville):

China QE:

-The China Securities News (CSN) – which is overseen by the central bank – lays out ideas for how China might conduct monetary easing:

-More “re-lending” by the PBOC to banks, and a possible cut in official re-lending rates

-Targeted RRR cuts, for instance for banks operating in central and western China.

-PBOC buying of bonds issued by the Ministry of Finance, or by entities building railways and social housing

-Easing of banks’ loan-deposit ratios in some areas.

– The third point is a radical proposal – using the central bank’s balance sheet to buy bonds issued by official entities is equivalent to quantitative easing.

-The reasons the PBOC might go for some new form of Chinese QE are twofold:

-First, the traditional tool for base money injection – FX purchases by the central bank – has declined. The PBOC has started to reduce its FX intervention since the FX band widening in March, leading to lower FX purchases. As a result, the authorities need to look for alternative tools to boost money supply.

-And second, it appears that China has settled on a strategy of stimulating some parts of the economy and stifling others. A more targeted easing is apparently in effect.

The impact of the easing in global monetary conditions has been mainly felt in the relative outperformance of EM assets as the following chart illustrates. Stay long risk assets, particularly in Europe, EM and Japan.

Better Brain Health with Less Saturated Fat

While the relationship between diets high in saturated and trans fat and heart disease is well known, the negative impact of such diets on the brain is less well established but new research points towards a possible link:

PRCM, May 2014: Reducing consumption of saturated and trans fats reduces the risk of Alzheimer’s disease and dementia, according to a review published this week in Neurobiology of Aging. Researchers examined the diets and brain health of 19,792 study participants.

Researchers found that higher saturated fat consumption increased the risk for Alzheimer’s disease, dementia, and cognitive decline. Trans fat intake showed risk, but data were mixed.


Here’s to keeping a healthy mind by eating a diet of primarily whole grains, vegetables, legumes and fruits!




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