Goldman Sachs Group Inc. won passing grades on the Federal Reserve’s stress tests. By one measure, though, the firm’s results came close to falling below the Fed’s minimum requirement — a bit too close for shareholders who were counting on Goldman to return a healthy chunk of capital to them in the form of dividend payments and share buybacks.
The Fed said Thursday that Goldman has enough capital to keep lending in a severe economic downturn. Each of the firm’s key capital ratios stayed above the Fed’s minimum even at the low point of that hypothetical recession. One nearly fell short.
Under a severe recession, Goldman’s total risk-based capital ratio dropped to a low of 8.1%. The Fed’s minimum is 8%.
While the results were good enough to pass the first round of the Fed’s stress tests, they will factor into the regulator’s decision next week about whether to approve the bank’s plan for rewarding shareholders with dividends or potential share buybacks.
“It’s definitely something that is going to get attention, and lead some to wonder how big the capital return will be,” said Brennan Hawken, an analyst with UBS AG. “They’re barely squeaking by with some of these tests.”
A Goldman spokesman declined to comment.
Banks whose capital ratios dropped close to the Fed minimum may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday.
That’s exactly what Goldman did last year, when it tweaked its capital plan to win over the Fed.
Goldman didn’t disclose last year’s initial capital plan, and unlike many of its peers, it didn’t say what the Fed had approved. But analysts estimated the payout by looking at how much the proposed plans shrunk the firm’s capital ratios when they are run through a recession scenario.
Goldman’s initial request would have dropped the firm’s Tier 1 leverage ratio to 3.9% in a recession scenario, below the Fed’s minimum requirement of 4%. Goldman’s adjusted plan raised that ratio to 4.2%, the Fed said a year ago. A Fed official said Goldman was given approval to return slightly less capital than they had initially sought, The Wall Street Journal reported.
Goldman responded to this setback by trimming its balance sheet. It shed $56 billion in assets during the second quarter, or roughly 6% of its total.
At an investor presentation last month, Goldman chief executive Lloyd Blankfein noted the firm’s balance sheet had shrunk by one-fourth since the end of 2007.
“Our capital ratios and liquidity measures have improved across the board,” he said.
The firm’s actions appear to have improved some of its results in this year’s test.
At the low point of a hypothetical recession, Goldman’s Tier 1 common ratio, which measures high-quality capital as a share of risk-weighted assets, was 6.3%, above the 5% level the Fed views as a minimum allowance. Goldman’s Tier 1 leverage ratio was 5.4%, above the 4% Fed minimum.
Goldman has been a big buyer of its own stock. Last year, the firm repurchased 31.8 billion shares for $5.47 billion, and paid out dividends of $1.05 billion.
In 2013, Goldman bought back 39.3 billion shares, for a total cost of $6.17 billion.
Foreign banks fared well in the first round of the Federal Reserve’s annual stress test results released Thursday, but the bigger test comes next week.
The Fed is expected to reject the capital plans of at least two U.S. units of foreign banks when they release the full stress tests results on March 11.
While the Fed’s tests revealed foreign banks generally are well above the minimum capital levels required to “pass” the stress tests, the regulator is expected to find shortcomings in “qualitative” metrics, like the strength of a bank’s internal process for predicting and managing potential risks.
Banks must pass the qualitative portion as well as demonstrate they have enough capital to absorb losses in a crisis in order to receive approval from the Fed to boost the income they can return to shareholders via dividends of share buybacks.
Out of the seven banks owned by foreign firms that participated in this year’s test, the Fed found all of them have enough capital to continue lending even during a hypothetical economic catastrophe.
Most of the foreign banks posted results well above the Fed’s minimums. Santander’s Tier 1 common capital ratio, which shows high-quality capital as a percentage of risk-weighted assets, dipped to 9.4% — well above the 5% Fed minimum.
Deutsche Bank’s U.S. unit posted the highest Tier 1 common ratio of all 31 banks, dipping to 34.7% under the stress scenario. But Fed officials said the test only covered about 15% of the bank’s U.S. operations. That will change in the future, when the firm is expected to bring all of its U.S. operations under one holding company to comply with a separate Fed rule.
If the Fed flunks some foreign banks next week, it won’t be the first time. Last year, the U.S. units of Royal Bank of Scotland PLC, HSBC Holdings PLC and Santander scored above the minimum capital levels but failed for “qualitative” reasons like inadequate risk measurement.
Next year, two additional foreign-owned firms, Bank of the West and TD Bank, will take the test. After that, eight more are in line and many are scrambling to get prepared.
This is how a deal gets done: Valeant Pharmaceuticals International Inc. went from a standing stop to a signed deal to buy Salix Pharmaceuticals Ltd. for about $10 billion in a month, according to a regulatory filing Valeant made Tuesday. By not letting the grass grow under their feet, Valeant and Salix greatly increased the chances of a successful negotiation. The process is a stark contrast to Valeant’s failed hostile bid for Allergan Inc., which lasted the better part of a year as the two sides bloodied each other.
Before getting a call from Salix on Jan. 20, Valeant had signaled it would focus on growing its own business after losing Allergan. But Valeant immediately sprang into action after getting that call, and a confidentiality agreement went into effect that same day, according to the filing. Salix opened a data room two days later to give Valeant access to documents, and less than a week after that, the companies’ senior executives, investment bankers and lawyers gathered in a room for due diligence.
By Feb. 8, less than three weeks after the first phone call, Valeant’s chairman and chief executive put a $150-per-share acquisition proposal on the table, the filing said. Salix’s CEO immediately responded that he would take it to his board, which he said would want more.
Four days later, Valeant made clear it would insist things move fast or not all. Without even waiting for a formal rejection of the $150, it delivered what amounted to an ultimatum insisting that Salix’s board produce a counteroffer following its Feb. 17 meeting.
The deal was all but done by the day of that board meeting. According to the filing, Salix called to ask for $160 per share. “A few hours later” Valeant countered with $155, conditioned on completing the deal by the weekend. One more call on the same day and the two sides agreed on the final $158 price, subject to working out the merger agreement and final approval of the companies’ boards. A draft of the merger agreement had already been batted back and forth over the preceding six days, the filing said.More In Dealpolitik
There are probably reasons that helped the deal move so quickly. Salix had been through a couple of recent aborted M&A processes in recent months, so it probably was in a good position to quickly assemble due diligence materials and negotiate another acquisition agreement.
Plus, Salix seemed to have gained a handle on the inventory and accounting issues that reportedly undid its negotiations with Allergan last year. A little over a week after its first call to Valeant, Salix announced it would restate its financials to correct errors identified by its audit committee, and it filed those restated reports this past Monday. Once Valeant could be sure the accounting issue had been resolved, the deal could move quickly.
We haven’t yet seen Salix’s description of the merger negotiations, but it’s clear both sides wanted to move quickly in this deal. No doubt the lawyers and others had a month filled with sleepless nights. But if you want your best shot of getting a deal done, that is how you do it. Speed limits the risk that something will drive a wedge in one side’s interest in doing a deal and curtails the haggling that can risk derailing a deal.
In a speech delivered Thursday at a Goldman Sachs conference in Washington, D.C., Treasury Department housing finance counselor Michael Stegman repudiated the idea that the companies might be able retain earnings to build capital buffers, saying any change in their status would require new legislation. Currently, both companies pay all of their profits to the government each quarter. In order for them to build capital, Treasury would have to agree to change the terms of their bailout. That is clearly off the table.
Critics of the current conservatorship arrangement had recently seized on the plunge in first-quarter earnings at Fannie and Freddie, arguing that their lack of capital might leave the companies needing to once again draw on taxpayer support.
The recapitalization idea, however, has been floating around at least since last October, when Civil and Human Rights Coalition head Wade Henderson pushed for it in a letter to the Federal Housing Finance Agency.
Mr. Stegman pointed out in his speech that recapitalization also would come at taxpayer expense. The only difference is that a recap would be borne by taxpayers immediately while a backstop draw is a future contingency.
U.S. companies are diving into European bond markets. But some investors are going the other way.
Low yields on European sovereign debt, to which corporate bonds are pegged, are lowering borrowing costs overseas for U.S. companies. But some investors who have the flexibility to move money between U.S. and European markets say there are better buys in the U.S.
Investment-grade corporate debt in the eurozone is yielding 0.88%, according to Barclays data. Compare that to the 3.03% yield offered on investment-grade corporate bonds in the U.S. market.
The higher yields in the U.S., a rosier outlook for economic growth and a strong dollar has some investors favoring high-grade U.S. corporate bonds over the long term, even though the European Central Bank is set to begin a bond-buying stimulus program, which could lower European bond yields in the near term.
“The move will be to go to the U.S., where the yields are higher,” said Mark Cernicky, managing director for global fixed income at Principal Global Investors, which oversees about $333 billion in total assets. “The opportunity set is a little bit richer in the U.S.”
Mr. Cernicky said his firm bought some new bonds this week from Actavis PLC, which sold $21 billion in the U.S. market and was the second largest corporate offering on record. The bonds immediately increased in price when they began trading, rewarding investors who participated in the deal.
Lisa Coleman, head of global investment grade credit at J.P. Morgan Asset Management, which oversees $1.7 trillion, said her firm favored high-grade European corporate bonds over high-grade U.S. corporate bonds as of the end of last year. But in the first months of 2015, Ms. Coleman said her firm has been buying more U.S. corporate bonds relative to European bonds.
“We’ve had somewhat more limited participation in the raft of deals that’s transpired since the beginning of the year, because our bias has been focused on the U.S. market,” Ms. Coleman said.
To be sure, not all investors can shift their money out of European markets. Insurance companies, for example, routinely seek to offset future liabilities through their bond holdings, and would want to stick to European markets if most of their business is in Europe.
European corporate bonds have also outperformed their American counterparts. Since the end of June, investment-grade eurozone corporate bonds have offered a total return, including price changes and interest payments, of 4.792%. U.S. corporate bonds have returned 2.999% over the same period, according to Barclays data.
The outperformance of Europe’s bond market can be chalked up to divergent central bank policies in the U.S. and across the pond. The European bond markets have rallied on the ECB’s plan to start buying bonds this month, while investors in the U.S. largely expect the Federal Reserve to start raising rates later this year, a move that would hurt bond prices.
With borrowing costs so low compared to the U.S., bankers say they expect more U.S. firms to tap the European markets. Selling bonds overseas also allows companies to diversify their investor base, manage currency risks and could even lower yields on their U.S. dollar bonds.
The deluge of euro deals is continuing. Warren Buffett’s Berkshire Hathaway Inc. is raising €3 billion ($3.3 billion) on Thursday. The bond sale would follow up last week’s €8.5 billion ($9.4 billion) sale from Coca-Cola Co., which was the largest euro-denominated bond from an American company.
Warren Buffett gave investors a lot to mull over in his latest annual letter. Tucked in between some self-flagellation about his investment in Tesco PLC and a note on the Berkshire Hathaway Inc. annual meeting, however, were a few paragraphs that Mr. Buffett expected to attract more attention than they did.
Mr. Buffett believes this section, on stocks versus dollar-based investments, contains an important message for investors. The Berkshire chairman expressed surprise that not everyone had picked up on it.
Basically, his argument boils down to this: Inflation is a wealth-killer in the long term and people are better off holding a diverse portfolio of stocks than Treasuries and other securities whose value derives from the U.S. dollar.
He pointed out how, over the past 50 years, the S&P 500 index generated an overall return of 11,196% including reinvested dividends. The purchasing power of the dollar, meanwhile, fell 87% — meaning that it takes one dollar to buy something that could be purchased for just 13 cents in 1965.
This contrasting performance led Mr. Buffett to conclude that “it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries or bank CDs, for example – whose values have been tied to American currency.” He wrote that the same pattern was true of the preceding half-century as well.
The billionaire investor then goes after the dominant idea that stocks are riskier than cash investments because of their volatility – a lesson often taught at business schools based on assumptions that he says are “dead wrong”:
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
He concedes that short-term ownership of stocks is more volatile and therefore it makes sense for certain types of investors, such as banks, to tie stock-price movements to risk.
However, for most other investors, he recommends that they invest over a “multi-decade” horizon and look to build a diversified stock portfolio that brings purchasing-power gains over time.
Mr. Buffett also had a word of caution to investors regarding their own behavior, which can make stock ownership risky. High fees to money managers, active trading or using borrowed money can all cut into returns. He also echoed a piece of advice from his annual letter of the year before by suggesting that investors are better off buying a “very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well.”
[RELATED: Why You Owe Your Freedom to Jack Bogle]
As the section concludes, he assigns his shareholders some reading: Jack Bogle’s The Little Book of Common Sense Investing. The book’s average sales rank on Amazon.com has been about 3,000, but it’s shot higher since the Berkshire letter was released and it currently sits at 289.
Perhaps some people got Mr. Buffett’s message after all.
Investors are less bullish — and that could be good news for stocks.
According to a widely watched survey, bearish sentiment among investors rose for a second straight week to 23.4% in the week ended Wednesday. That’s the highest bearish read from the survey by the American Association of Individual Investors since the first week of February, when the S&P 500 began its 5.5% gain last month. But it’s still below the historical average of 30.5%.
The release of the survey comes on a day when the S&P 500 is fractionally higher after falling for two consecutive days. The two-day decline came amid concern a pullback may be warranted after stocks staged an impressive climb in February. Overly optimistic investor sentiment and elevated stock-market valuations have been reasons some market watchers have argued a slowdown is in store.
While valuations remain above historical averages due to rising stock prices and falling earnings expectations, the survey continues a trend of retreating bullish sentiment in recent weeks. Investor sentiment is often viewed as a contrarian indicator, where an optimistic reading can serve as a warning sign that the market is getting overheated and heightened bearish readings can signal buying opportunities.
In the latest survey, the investors who were neutral on the outlook for stocks also rose, hitting a level of 36.8%. That’s above the 30.5% mean.More In Stocks
Bullish sentiment, on the other hand, fell for a second week to 39.8%, its lowest print since the beginning of last month. Even amid growing pessimism, investors remain slightly more bullish than normal. AAII measures sentiment by asking investors what their expectations are for the stock market over the next six months.
Among the factors worrying investors are higher-than-usual valuations, poor earnings and guidance from companies, geopolitics, the drop in energy stock prices and the pace of economic growth. Oil’s plunge is a double-edged sword as some investors view it as a positive, insinuating cheaper fuel costs could lead to greater consumer spending.
The S&P 500 is 1% from its record close and the Nasdaq is on the cusp of eclipsing its all-time high set back in the dot-com days. An encouraging jobs report and solid wage growth Friday could be fuel for stocks to grind higher. The onset of Europe’s stimulus efforts Monday should be another positive for stocks.
Warren Buffett just tweeted for the sixth time.
The billionaire chairman of Berkshire Hathaway Inc., who boasts nearly a million Twitter followers even though he hasn’t used the micro-blogging site in a year, popped up in his followers’ feeds Thursday to help promote a new campaign from LeanIn.org.
Using the hashtag “#LeanInTogether,” Mr. Buffett sent out a picture of himself with Mary Rhinehart, the chief executive of one of Berkshire’s housing-products subsidiaries, called Johns Manville. He boasted that she is “successfully running a $2.5B company in a male-dominated field.”
The tweet appeared to be part of an orchestrated push on Twitter to call attention to a new initiative by LeanIn.org, a website launched by Facebook Inc. executive Sheryl Sandberg after the publication of her bestselling book of the same name. The book discussed ways women are held back professionally—and argued that women sometimes hold themselves back.
The #LeanInTogether section of the website urges men to “show the world you’re in for equality” and offered tips for men “for pushing back against gender bias in the office” and “to support your partner and children” at home.
Mr. Buffett has long been an active participant in efforts to promote equality for women in the workplace. He’s argued that much of his success is owned to being born male when and where he was, and said that his “floor” in life was his sister’s “ceiling.” And he has said that harnessing the full potential of women is key to ensuring America’s future prosperity.
In fact, his first foray onto Twitter came as part of an earlier promotion for his participation in Fortune’s Most Powerful Women Summit in 2013.
The market has generally been rewarding buyers, especially those that ink large deals, by bidding up their stock. Not so for AbbVie Inc.
The pharmaceutical company announced Wednesday night that it will buy Pharmacyclics Inc. in a $21 billion deal, and its stock is down 3.5% Thursday.
Investors appear spooked on several fronts, but mostly by the price tag. Sanford Bernstein analyst Geoffrey Porges explained the sticker shock by looking at its key drug Imbruvica that it sells through a partnership with Johnson & Johnson . Mr. Porges said that drug has yet to generate $1 billion in sales, but by his estimates, that drug would need to generate between $6 billion and $7 billion in global sales to justify the price AbbVie paid for Pharmacyclics.
AbbVie’s CEO Richard Gonzalez explained the price tag on a conference call Thursday morning by saying that the auction was “one of the most competitive” bidding wars he’s ever seen” and said he was happy with the value.
Adding to investors’ concerns about the price tag is that AbbVie beat out its rival Johnson & Johnson, which was seen as the obvious buyer. “JNJ, more than any other buyer buyer, would have been able to maximize the synergies by reducing the product’s support to a single commercial organization,” Mr. Porges wrote.
The deal is a huge windfall for Pharmacyclics Look at the sharp jump in its stock in the past year:
Chris Pultz, portfolio manager at Kellner Capital, called high price for Pharmacyclics “a little unexpected because they cited price as the reason for walking away from the Shire deal back in October” in an email.
Meanwhile, another investor pointed out that Shire’s stock, which traded down 35% after AbbVie said it was walking away from the deal, is now just 9% below its price back in October when the deal was still on. The investor said Shire’s shares have rebounded absent any change of control premium that was baked into the price when AbbVie was still its expected buyer.
Mr. Pultz said that AbbVie “loses a little credibility here in that they were so aggressive, and the deal will not be accretive for a few years. People will wonder why they were so quick to dump Shire.”
–Liz Hoffman contributed to this post.
Etsy Inc., the online marketplace for homemade goods, is planning an IPO. The firm, headquartered in a quirky office on the Brooklyn waterfront, filed paperwork with the Securities and Exchange Commission for an initial public offering Wednesday night.
The plan to go public comes a decade after the company was founded in a Brooklyn apartment. Here are eight things MoneyBeat found in its IPO filing:
1) It hasn’t turned a profit in the past three years… and doesn’t promise one anytime soon.
Etsy has incurred net losses in the past three years and doesn’t offer investors any reason to expect a profit in the near-term. The company said it expects operating expenses to “increase substantially” because of new hires, an increase in marketing, investments in its platform, and new services.
Those expenses are already on the rise. Etsy’s reported a net loss of $15.2 million in 2014, up from $796,000 in 2013 and $2.4 million in 2012. The wider loss came as the firm more than doubled its spending on marketing to $40 million last year.
Revenue, which Etsy generates by charging merchants fees to list their wares and then taking a commission from each sale, has also jumped in the past two years. But that growth is slowing. Revenue grew 56% last year, compared to 68% in 2013.
2) Costs could even rise more because of the company’s “adherence to our values” and “focus on long-term sustainability.”
The company’s financial performance could take a negative hit, Esty admits in the filing, because of its “adherence to our values.” Here are examples they give of what that might mean:
We may choose to prohibit the sale of items in our marketplace that we believe are inconsistent with our values even though we could benefit financially from the sale of those items;
We may choose to revise our policies in ways that we believe will be beneficial to our members and our ecosystem in the long term even though the changes are perceived unfavorably among our existing members; or
We may take actions, such as investing in alternative forms of shipping or locating our servers in low-impact data centers, that reduce our environmental footprint even though these actions may be more costly than other alternatives.
3) Accounting is tricky, but they’re trying to get better at it.
Etsy said it’s found two so-called “material weaknesses” in its internal control over its financial reporting–so far. Those weaknesses caused the firm to misstate its expenses when it initially calculated results in 2012, 2013 and last year. The company has now revised those results.
Etsy said it started building an in-house tax function in early 2014 and added a number of tax and accounts payable people, and is doing more to bulk up its internal reporting procedure, updating its systems, and more. Yet the company says it could find more weaknesses in the future.
4) Buyers are increasing, much faster than sellers.
The site counts nearly 20 million “active buyers” as of Dec. 31, which is more than double the buyer base two years ago. (To be active, they must have purchased something in the past year.) It counts 1.4 million “active sellers,” which is up 63% over the past two years.
While the total value of merchandise sold on Etsy approached $2 billion last year, the site’s average seller generated just $1,400 in revenue. That figure was up about 14% from the prior year. The average buyer spent just under $100, a figure that has held steady for the past three years.
The company said it needs to attract many more new buyers and sellers to fuel profits.
5) People are shopping–and buying–from their phones and tablets.
The filing shows that 53% of Etsy shopping visits came from mobile devices last year, up from 41% in 2013. Transactions from mobile devices accounted for 36% of total gross sales in 2014, up from about 30% the year before.
The company didn’t track sales on mobile devices before 2013.
6) Etsy set aside 5% of its shares for its community
The company said it will set aside 5% of the shares sold in the IPO for “our U.S.-based Etsy community and other individual investors.” Morgan Stanley , one of the offering’s underwriters, will run this.
7) Etsy’s digs might get really nice.
The company disclosed plans to spend $50 million to build out its new Brooklyn headquarters.
8) Etsy’s staff lunches sound pretty sweet.
The company said it hosts a twice weekly meal called “Eatsy” at its headquarters now and said it sourced food from over 40 local businesses in 2014.
We eat on compostable plates, and employees sign up to deliver our compost by bike to a local farm in Red Hook, Brooklyn, where it is turned back into the soil that produces the food we enjoy together. In this way, Eatsy goes into the very soil we live and work on. Eatsy is a metaphor for how I think about many aspects of our business and our relationship to the world around us: regenerative, mindful, interdependent, community-based and fun.
Apple investors shouldn’t worry too much about a delay for a larger-screen iPad – for now.
The shares ticked down Thursday following reports a 12.9-inch version of the iPad has been pushed back to later this year. Sources told the Wall Street Journal the delay comes from the company tweaking the design and features to make the device more palatable for enterprise buyers. In Apple’s last earnings call in January, CEO Tim Cook said iPads are used in nearly all the Fortune 500 companies, but are typically deployed to a small percentage of the workforce.
Apple – working with partner IBM – wants to change that. But analysts have been cautious so far about factoring an iPad resurgence into their numbers.
It’s notable that iPad revenues were already expected to be down by 15% in the current fiscal year, which ends in September, even before reports of the delayed tablet. However, analysts do expect iPad revenues to turn upward in the next fiscal year, so hopefully Apple has something big up its sleeve in time for that.
We’ll know that the European Central Bank’s quantitative easing program is working when eurozone bond yields start to rise.
So far, though, they’ve been on a relentless downward course with an ever bigger proportion of outstanding eurozone bonds posting negative yields. And with the ECB committed to buying €60 billion ($66 billion) of debt a month until at least September 2016–largely in the form of sovereign bonds–the downward pressure on those yields looks to be relentless. JP Morgan Asset Management’s economists estimate that the ECB will be buying nearly 40% more bonds than governments are expected to issue over the next year.
This seems entirely logical. After all, large scale purchases of an asset would normally tend to drive up prices and thus push down yields.
Yet as the Federal Reserve’s first two rounds of quantitative easing in particular showed, the decision to launch bond purchases tends to push up long-dated yields.
Why? Because the policy is designed to trigger economic recovery and rising inflation. And inflation is bond investors’ greatest enemy. That’s the paradox of QE. The better it’s expected to work the more long-dated yields should start rising as private investors dump the bonds for fear of having their holdings eroded by inflation.
That’s not to say rocketing yields would be a good sign. That might be evidence of a return to eurocrisis, especially if the the yield differential widened between German and peripheral bonds. But an across-the-board uptick of a couple of percentage points on the long end would definitely be a welcome indication that economies were returning to long-term health.
In the press conference that followed the latest ECB governing council meeting, ECB President Mario Draghi made a number of relevant points. Investors focused on the fact that the ECB would be willing to purchase bonds with yields down to the central bank’s deposit rate, which is -0.2%. Purchases are to start on March 9.
They seemed less interested in the economic good news–which is to say bad news for bonds. The ECB upped its GDP growth projection for the region to 1.5% for this year and 1.9% for next from 1% and 1.5% previously. And that inflation, while seen at 0% this year, is expected to come in at 1.5% in 2016 and 1.8% in 2017.
Is that because bond investors think that the ECB’s purchases will overwhelm economic effects? Or do they doubt that European Central Bank quantitative easing will actually prove to be effective because of the single currency regions more fundamental problems, not least government foot dragging on structural change, poor demographics and the absence of any mechanism to allow fiscal transfers?