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By Tyler Durden

Now that not only Mario Draghi but also Ben Bernanke have joined in the loud and growing chorus of “economic experts” debating the arrival of the monetary paradrop and suggesting that that helicopter money “may be the best available alternative“, it is just a matter of time before helicopter money is actually implemented, “maybe not today, but in the next recession” according to Deutsche Bank.

And it is the same Deutsche Bank that provides a handy primer how to trade (or frontrun as the case may be) this now inevitable and terminal monetary policy.

From DB’s George Saravelos, “Helicopters 101: your guide to monetary financing“

Market implications

The starting point of understanding asset moves should be the type of policy response as well as its effectiveness. Here we assume an aggressive form of stimulus large enough to generate an increase in inflation and growth expectations – for instance, a one-off write-down of debt owned by the central bank as well as large-scale fiscal stimulus financed by the issuance of zero-coupon perpetual bonds bought by the central bank. We assume that the market perceives the policy as “successful”, namely that both growth and inflation expectations rise. Under this scenario, we would expect the following:

Bond yields should rise and the curve should bear-steepen. Our colleagues in fixed income last year published a framework on understanding the drivers behind long-dated yields.26 We list the components of the 10-year yield below and the anticipated impact:

Taking all the factors above, the ultimate effect on yields is ambivalent, depending on the interaction between falling credit risk, rising demand-supply imbalances (downward pressure on yields) versus higher growth and inflation expectations (upward pressure). At one extreme, if the market perceives the policy as a failure, credit risk and demand/supply imbalances are likely to dominate, putting even further downward pressure on yields. At the other extreme, if the policy is perceived as a loss of monetary discipline, inflation expectations would spike, leading to an aggressive re-pricing of yields higher.

On balance, under the assumption of policy “success” without fears of hyperinflation, we would conclude that bond yields rise, driven by the long end.

• The currency should weaken, but may eventually strengthen. Real yields have proven one of the most important drivers of currency moves in the post-crisis years, so the effect of helicopter money on FX will likely depend on their direction. The large depreciations in both the euro and yen over the last few years were driven by large downward shifts in real yields (charts). The effect of helicopter money on real yields is ambivalent, as outlined above. We assume that inflation expectations would dominate over growth, at least initially, with a central bank commitment to keep nominal rates low for long also helping. Eventually higher growth and tighter policy could lead to a stronger currency, however. Other frameworks suggest that currencies should at least initially weaken as well. The monetary approach to exchange rate determination concludes that the relative supply of money between two economies ultimately …read more

  Source: How To Trade The Coming Helicopter Money: Deutsche Bank Explains

      

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  Posted April 15th, 2016 in Uncategorized.