“We Were Inverted” “We Were Inverted”

As you may have already heard, I’m going to be leaving M&G later this year, after over 27 years here, most recently as the Chief Investment Officer for Fixed Income.  I’m off to do a Master’s in the History of Art, and so I’ll be back in full-time education, studying modernism in Germany between the two World Wars.

Over the last few years, discussions around bank consolidation felt like ‘Waiting for Godot’. This was especially true in Europe, where some banks were still restructuring, cleaning up their balance sheets and rebuilding their capital position. Outside of some sparse domestic M&A, distressed acquisitions (UBS/CS, SAN/Popular) and small bolt-on transactions, there was little of note.

We have written many times on QE (Quantitative Easing) and QT (Quantitative Tightening); however, we have never talked about QN. QN is the ultimate goal for central banks – but what exactly is it?

The ‘N’ in QN stands for Neutral. In a steady state of economic growth, money must be printed to facilitate inflation in the economy. In this steady state, there is a simple requirement to have enough money tokens in the system to achieve the desired growth in the nominal GDP of the country, which is defined as the combination of real growth and inflation.

Last month, BFF, a small Italian bank with €12 billion in total assets revealed that its regulator, the Bank of Italy, has requested it to “temporarily suspend profit distributions”, causing its stock to plunge by over 30%. Fortunately for bond investors, the limitation does not apply to interest payments on BFF’s AT1 instruments.