Macroeconomics by Davide Buccheri

The European Central Bank is arguably the second most powerful central bank on the planet after the Fed. As such, its impact on the world economy should be substantial. However, the ECB has often struggled to reach its objectives. These failures have pushed it to adopt some unorthodox monetary policies whose effects in the long run are yet to be seen. Here, I look at some interesting data, which suggests that the ECB possibly never had the economy under its control and was just a passenger all along. Targeting Inflation The main objective of the ECB monetary policy is to keep a stable rate of inflation of around 2%. Looking at the historical CPI in the Eurozone, the ECB arguably failed in this objective in the past, with inflation closer to 1% and on a relatively stable downtrend. A more interesting way of looking at inflation and monetary policy is to analyse the implied inflation of inflation-linked treasury bonds and see how this changed when policy rates were altered.

As the economy appears to be weakening and the S&P 500 is at an all-time high, it is useful to see how the different sectors within the index have performed since the last downturn. This becomes even more relevant when considering that the S&P 500 appears to be overvalued compared to the real economy, as I've already explored in another analysis . Historically, the best performing sectors will be the ones to suffer the most: Technology in 2002 and Real Estate and Financials in 2008. As usual, there will be a myriad of fundamental factors that investors will try to use to justify why those sectors have performed so well. This does not change the fact that, because of the mathematical realities of how we measure financial metrics, everything will tend to mean revert in the long run. Sector performance Using data from S&P, it is possible to see how the different sectors have performed since 2009. It is easy to see how two sectors have outshone all others

Money supply in Europe has been in an astonishing uptrend for the past 20 years now, driven by extremely expansionary monetary policies. The latest innovation in this field was introduced in late 2013, when the ECB announced that it was ready to cut interest rates into negative territory. More recently, the incumbent ECB President, Christine Lagarde, has signalled her intentions of further lowering rates. However, this move might be short-sighted and potentially pushing the ECB further into a corner from which it is becoming extremely difficult to get out, without massive market turmoil. Policy objectives First of all, it isn’t at all clear how negative rates would help the ECB pursuing its monetary policy objectives. The ECB has as its main target price stability above all. This is quantified as an inflation rate below but close to 2%. It is debatable whether the ECB was successful in its objectives so far, as “close” is a vague term. The yoy monthly inflation rate a

For years we’ve now lived in an environment of falling rates. Both in the US and Europe, central banks have repeatedly slashed interest rates in an effort to kick start the economy. However, these policies also have an effect on valuations: a shrinking discount rate inflates the value of securities. In a previous analysis , I showed how the S&P 500 is currently at a level significantly higher than what the GDP growth rate suggests is reasonable. Here, I try to provide a possible explanation for this deviation, by estimating the effect that these expansionary policies might have had on the valuation of the index. Due to the nature of the topic, a lot of assumptions will be needed, such as the use of a pricing model. Nonetheless, the findings are remarkably in line with what economic fundamentals suggest and quite intriguing. Trend in yields The chart below was obtained using data from FRED St.Louis and shows the trend in the yield of the 10-year constant-maturity Treasury Bond