Carl Weinberg: ECB Steps Won't Work Amidst Sick Banks (Audio)

a gain of two tenths of one percent. We are brought to you by Van Eck Vectors e t f s. Expect more from your Immuni's trying to get tax exempt income by maturity and credit quality, all with low cost ETFs. Visit Vanick dot com slash communi van Eck access the opportunities. The SMP up three now to twenty one oh two, a gain there of point one percent. Dow Industrial is up twenty one also a gain of point one percent. As stack up ten a gain of point two percent.

The ten you're up nine thirty seconds yield one point eight percent. Gold down a dollar forty the ounce to twelve thirteen, a drop of point one per cent. And crude oil little change down one cent now forty nine of arol. I'm Charlie Pollock. That's sub Bloomberg Business Flash Charlie Pello, Thank you so very much. Now we're going to dive into our daily e t F report, brought to you by Vanic Vectors. E t s expect more of your immunities target taxes and income by maturity and

credit quality, all with low cost EPs. Visit vaneck dot com slash Muni van Eck Access the opportunities for this week turned to our own Catherine Cowdery. There are three single country e t s that are outperforming the broader market up as much as fort so far. They see here here's Bloomberg Intelligence analyst Eric bel tunis Peru is on fire. So this here because of gold, so believe it or not, Peru is the like forty five country in terms of GDP, but it's in the top five

in golden silver mining. So it's been helped, you know, drastically by the uptick and gold and silver. And the thing with Peru is it's an emerging market, but it's so such a small country. It's really not represented in the big e M in the SES or et F as the I shares M s C I all Peru capted e T F is outperformed the broader market. It's attracted assets and now has two hundred eleven million dollars. Bel Tunis has some other examples of single country e

t F that are rallying this year. The global x m s c I Grease e t F is up five point six percent and the global x MSCI Pakistan e t F has gained ten pc. That your Bloomberg et F report. I'm Katherine Cowdery. You're listening to taking stock with pim Fox and Kathleen Hay's on Bloomberg Radio taking stock of some global macro moves. We're going to start with the Eurozone, where the ECB's governing Council of Monterey conditions in the asset purchase program unchanged, but a

lunch a lot of people to wonder on. Mario drags, the head of the ECB insistence that his stimulus program is home only half done, but also so what if its best effects are already spent? And why doesn't he get off the diamond move to do more. That brings

us to my next guest. Carl Weinberg is a founder and head of High Frequency Economics and he joins us now so carl Uh, your point is that Mario Draggy is not doing as much as he could correct well at first high Kathley, and good to be on the program. I think what he's doing is not working and it's not being transmitted to the economy. So you can do as much as he wants, but he's not going to achieve his goal of getting inflation back to his desired

rate of being just under two percent or thereabouts. What's wrong? Why is it not working? What should he do well? It's not working because banks aren't lending, and banks aren't lending because they're facing constantly rise in capital requirements under the new and ever changing regulatory environment they're operating in. So banks effectively remain under capitalized all the time. They're not in a position to increase their assets at risk if their ratio of capital to assets at risk is

too low and they're having trouble raising capital. I think, also, Kathleen, it's just worth noting that it's not just me who's

skeptical about what's going on. If you look carefully at the forecast from the ECB staff today, they published a new round of forecasts, and those numbers the only difference between them and the previous edition published in March is that in March they didn't include the increase in economic stimulus that was announced then, and these forecasts include that increase in quantitative easy and you know what, the two

forecasts are functionally the same. Even the ECB staff says that amping up the size of the program and moving interest rates even more negative won't make the economy grow faster or get inflation closer to the desired rate. So they stop start buying some more corporate bonds. That's going to be good for whoever sells them, maybe, but not so good for the economy and the people of Europe

who need this boost. Well, you know, if you ask me, and nobody ever did, of course, but if you ask me, this buying of corporate bonds really moves the ECB into dangerous territory in a number of regards. I mean, when they buy and sell sovereign bonds, they're affecting the entire uh lending structure of interest rates up and down across the board. But when they buy and sell corporate bonds, they're only affecting the spread between risky assets and safe assets.

And now they're managing the price of risk, and that's a very very dangerous proposition. They also open themselves up to, I think some potential risk as to how they do it. I mean, whose corporate bonds are they going to buy? If there are two competitors in an industry and they buy the bonds of one and not the other, or buy them in differential sizes by whatever metric, then the one that bought to the lesser extent can claim that they're being discriminated against by the ECB. And boy does

that open up a Pandora's box of trouble. So where is this going, Carl? What's going to happen? Uh? Is the economy is so to me very mixed in Europe. I know Germany is doing better, but some countries are not doing well. Spain is doing better. Is there a risk of a backslidding the recession? Is it just going to be sort of flat where it is? Because this is going to mean a lot for where those European bond yields go, where the equity markets, and certainly where

the currency rates go. Well, you know, Kathleen, they're all flat, including Germany. And while everybody was what was was awed by Tuesday's employment report for Germany. You know, for every German that was taken out of unemployment by the growth of the economy, there were five immigrants who got jobs. All right, they're hiring low wage workers at subsistence wages whould have to come to Germany and work and be unemployed.

They're not taking Germany's Germans out of unemployment. Three of the last four retail sales reports, which by the way, we're also reported on Tuesday, we're down. And four of the last five industrial production reports have been contractions. And we're going another industrial production report next week. So the whole Euroland economy is flat. And the reason it's flat is there's no credit. And the reason there's no credit it's not the ECB's fault. It's well, it's not the

fault of ECB monetary policy. It's fault of being unwilling to fix the banking system properly, to recapitalize it, as we did in the United States with our tarp uh and let the banking system get on with this business from a newly rejuvenated capital base. I'm glad you say that the economies are impressive to you, because I look at these numbers two and I keep saying. When I read some of the things, I read like, where does

everybody see all this strength? But anyway, let's talk about Japan because another big, big story this week is Prime Minister Abe announcing the delay of the increase in the national sales tax rate that would have taken effect next spring. Of course, you and I car remember when they raised it and helped cause recession a couple of years ago, the same thing. So he seems to have made the right decision. But there's a lot of politics involved here.

There's a lot of politics involved. There are national elections for the upper house of the Diet coming in July, and clearly one way for the LDPD get votes is to postpone attack pike that they themselves have threatened to impose. And I think that that's part of what's going on. I think overall are very disappointed in their economy, which suffers from dual problems. The first problem is a cyclical

downturn in the economy. Inventories relative to cells are the highest they've been any time in the post war period other than during the two thousand and eight financial crash and the two thousand and eleven earthquake crash. High inventories are a clear warning signal that the economy is headed into a recession. And then that recession comes along at

declining secular trend. They're depopulating, and with the population shrinks because baby boomers age and now start to die off, then GDP has to go down, and he can reverse that secular trend. He can combat the inventory cycle a little bit, but his really Japan's outlook is really doomed by its demographics and by its overhanging debt burden. Well, you've said for a long time they had to restructure

that debt to move ahead. Is that still your view. Well, they're going to have to restructure their debt whether they like it or not. At the end of the day, a shrinking population with a still rising debt burden now rising even fair ter because of the sales tax deferment al right, is going to lead to decreasing levels of income per capita for a shrinking number of people, and they're just going to have to give up more and more of their income to service the debt until something breaks,

and that time is probably within sight, although not necessarily imminent. Carl, Let's take a quick look at the UK because the pounds have been trying to rally, having a tough time once again. Polls are showing that the vote for the leave camp is pulling ahead of the remains side when it comes to the UK leaving the year Zone. Yeah, well I think that, you know, the Brexit is kind of a wild card in all of this. However, the vote turns out the UK, I think it's going to

suffer some retribution from Europe. You know, it should. London and the rebellious Island the financials capital for the continental financial affairs. I think we'll see a move to push Paris and Frankfort as the new financial center of Europe to the detriment of the city, and they'll probably be trade in other kind the political pushbacks as well. But the UK economy is also hurting because of the drop

in global commodity prices. All those petro dollars and commodity dollars that came into London, that built the tall towers, that brought the town homes in Belgravia, that spend all the money on high streets. You know, all that investment and consumer money that comes from the Middle East and the Emerging World has been cut by two thirds by this drop in commodity prices, and that's leading to a slowdown.

We see it in the construction index which was just updated today, and certainly industrial production is failing as well. So the UK is headed into economic trouble without regard to what it does on Brexit, and the Brexit just modulates that trouble. I'll also add Kathleen for Sterling that their current account deficit is the largest that's ever been as a share of GDP almost six percent, and that's not good. That's a big risk to Sterling taking us

around the world. A nice macro view of the e cpral Weinberg is convinced that whatever they do, until they fix their bad banks, the economy is not going to grow and if anything, the danger of a downturn persists. Carl, of course, is chief economist and founder of High Frequency Economics. This is Bloomberg Radio.