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Helicopter Money – Let It Rain?
STRICTLY CONFIDENTIAL \\ NOT FOR DISTRIBUTION
A S T E L L O NN O T E S N o . 2 2
2016
2
A reality check survey of 2,500
individuals across Europe
KEY THOUGHTS
1
Hyperactive and easy monetary policy has failed to deliver both a revival of global growth and the return of inflation expectations to
target levels
It has in practise led to asymmetric wealth distribution through inflation of asset prices
This comes at the expense of true price discovery in asset markets and increasingly deflationary behaviour by market participants and
corporate decision makers
The market continues to believe that central banks will fail to achieve their mandated objectives (e.g., inflation)
Helicopter money is increasingly being contemplated in major economies; e.g., Switzerland will hold a referendum in June 2016
regarding an unconditional minimum pay of CHF 2,500 p/m p/citizen
Little has been written about the impact of negative rates and helicopter money on the behaviour of the average household
Astellon Capital has conducted a proprietary survey, polling over 2,500 individuals in Germany, Italy, France, and Spain
Main conclusions:
Only one in three consumers/households knows that QE exists
Passing on negative interest rates by banks to retail depositors would likely lead to bank runs
Negative rates (and bank runs) would lead to hoarding of physical cash or alternative forms of savings, not increased consumption
Helicopter money would on the other hand increase consumption in all countries irrespective of income levels
Disclaimer: For the avoidance of a doubt, Astellon Capital is not a proponent of excessively easy monetary policies such as QE, negative interest rates or helicopter money
Quantitative Easing (QE) to Quantitative Failure (QF)
2
HOW MUCH “MORE-OF-THE-SAME” POLICY, DESPITE ITS FAILURES?
3
650+ rate cuts globally since Sep-08
(every 3 trading days)
US$8 trnof negative-yielding government debt
outstanding globally
63% / 67%of the time inflation was below the
ECB/Fed target of 2% since 2008
Lowest interest rates in
5,000 years
US$21 trnincrease in world market cap (MSCI) since 2009
€80 bn ≈ €300 per capitaECB purchases per month equivalent per head in the EU
US$5.5 trnof G5 central bank balance sheet expansion
5x NIRP negative interest rates in Japan, Switzerland,
Eurozone, Denmark and Sweden
THE FED OVERESTIMATED THE RECOVERY EVERY YEAR FOR THE LAST DECADE
4
14.0
14.5
15.0
15.5
16.0
16.5
17.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US Actual Avg forecast in 2007 Avg forecast in 2008
Avg forecast in 2009 Avg forecast in 2010 Avg forecast in 2011
Avg forecast in 2012 Avg forecast in 2013 Avg forecast in 2014
Note: (1) Average of two forecasts during the year (February, July)Source: Federal Reserve, BEA
Real US GDP (2005-2015): actual vs Fed forecast (1) (US$ trn, 2009 constant prices)
Actual
ECB ESTIMATES ARE TOO OPTIMISTIC EACH YEAR AS WELL
5
Real GDP Euro area (1) (2005-2015): actual vs ECB forecast (2) (€ trn, 2010 constant prices)
8.8
9.0
9.2
9.4
9.6
9.8
10.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Euro area actual Avg forecast in 2007
Avg forecast in 2008 Avg forecast in 2011
Avg forecast in 2012
Note: (1) Actual Euro area composition changed: Euro 12 in 2006, Euro 13 in 2007, Euro 15 in 2008, Euro 16 in 2010, Euro 17 in 2013, Euro 18 in 2014, Euro 19 in 2015
(2) Average of four forecasts during the year (March, June, September, December)
Source: Eurostat, ECB
Actual
MARKETS IMPLY THAT INFLATION WILL CONTINUE TO BE WELL BELOW 2% TARGET
6
ECB balance sheet total assets in €m (left axis) vs EUR 5yr inflation swap and core inflation (right axis)
ECB inflation target: 2%
Source: Bloomberg, Astellon Capital
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
500
1,000
1,500
2,000
2,500
3,000
01/2005 01/2006 01/2007 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 01/2015 01/2016
ECB total assets EUR 5yr inflation swap Eurozone core inflation
03/2015
Launch of ECB QE 1
Inflation target of 2%
INFLATING ASSET PRICES THROUGH MONETARY POLICY: OBJECTIVE ACHIEVED
7
QE impact (1) on Eurostoxx 600 since November 2008 Citi Credit Spread Pure Europe Total Return Index
121% (50%)
72%
--
20%
40%
60%
80%
100%
120%
QE impact No QE impact Overall gains
Source: Astellon Capital, Bianco Research, Bloomberg
(1) Updated as of 22 Mar 2016: period has been divided into times when QE was
operational at either the Fed or ECB and periods when it was discontinued
80
90
100
110
120
130
140
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
November
2008
QE 1 starts
Aug
2010
QE 2
starts
Aug
2012
QE 3
hinted
Oct
2014
QE 4
rumours
Jan 2015
European
QE
Source: Astellon Capital calculations, Bloomberg
HELICOPTER MONEY ALREADY BEING TESTED OR CONTEMPLATED
8
Summary of Helicopter Money initiatives
Country Description Status5-yr GDP
CAGR %
Unemployment
rate
Switzerland
CHF2,500 a month to adults and CHF625 to children
Estimated costs of CHF208bn p.a. (gross) and CHF25bn p.a. (net) as it substitutes existing
subsidies/welfare contributions
Referendum in
June 20161.6% 3.6%
Finland
Government provides €20m for trial of 2 years. Three options considered:
• Full basic income: €800 per month
• Partial basic income: €550 per month, with existing insurance-based benefits
• Negative income tax
Final report in Nov
2016
Launch in 2017
0.0% 9.4%
Canada
(Ontario)
Previously trialled in Dauphine Canada 1974-1979 and was proved to reduce poverty
Pilot programme currently being developed for 2016 Launch in 2016 2.1% 7.1%
Netherlands
(Ultrecht, Tilburg,
Groningen,
Wageningen)
4 options being considered:
• A pure version with no strings attached
• Require recipients to volunteer a certain number of hours
• A mix of the first two with a higher payout for volunteers
• Only pay people who are not working
TBD 0.6% 6.9%
United Kingdom
Supported mainly by Labour Party
Think tank RSA suggested between £244 to £618 a week (to replace welfare state) depending on
age group
TBD 2.1% 5.3%
FranceAn economics feasibility study for universal basic income is being developed under a
parliamentary working commissionTBD 0.8% 10.4%
Source: Eurostat, IMF
Astellon survey on negative rates and helicopter money
A reality check across Germany, France, Italy and Spain
9
ASTELLON PROPRIETARY SURVEY TO ASSESS IMPACT OF HELICOPTER MONEY
10
Respondents by country: Survey questions asked:
1,006
518
524
511
Germany France Italy Spain
Total number
of
respondents
= 2,559
Do you know that the ECB spends €80bn p/m to buy
sovereign debt in Europe, equivalent to €300m per head?
If your bank began to charge you money for having a
deposit, at what fee level would you leave your bank?
If you decided to withdraw your money from your bank,
what would you do with it?
If the ECB gave you €300 per month, what would you do
with it?
SUMMARY OF SOCIO-DEMOGRAPHIC PROFILES OF RESPONDENTS
11
Age Gender
Annual income Household size
39%
44%
17%
18-34 35-54 55+
48%52%
Male Female
60%26%
2%
12%
<40K 40K-100K >100K Not sure
68%
31%
1%
1 to 3 4 to 6 >6
ONLY ONE IN THREE CONSUMERS KNOWS THAT QE EXISTS
12
33.0%34.4%
45.0%
37.0%
67.0% 65.6% 55.0% 63.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Germany France Italy Spain
1. Did you know ECB spends €80 billion every month to buy sovereign debt of different countries in Europe?
Yes
No
PASSING ON NEGATIVE RATES TO CONSUMERS WOULD RESULT IN BANK RUNS
13
24.8% 25.1%
33.2%
14.9%
75.2% 74.9% 66.8% 85.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Germany France Italy Spain
2. If you need to pay to save with a bank, would you leave?
Unwilling
to pay
Willing
to pay
BANK RUNS WOULD LEAD TO ALTERNATIVE SAVINGS, NOT CONSUMPTION
14
66.8%
54.6%57.6%
63.7%
27.5%38.2%
38.0% 33.1%
5.7% 7.2%4.4% 3.2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Germany France Italy Spain
Savings Investment Consumption
3. If you decided to withdraw from your bank, where would you keep your money?
Note: Respondents could select multiple answers so results were scaled down to add up to 100%, on average respondents selected ~1.6 different answers to this question
HELICOPTER MONEY WOULD (AT LEAST) INCREASE CONSUMPTION
15
52.5% 51.1%48.6%
44.7%
19.1%23.2%
21.9%24.0%
13.1% 8.9%12.8% 16.8%
8.8% 10.7% 10.0%9.2%
6.5% 6.1% 6.7% 5.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Germany France Italy Spain
Consumption Savings De-leveraging Investment Labour reduction
4. If you received a cheque of €300 per month, what would you do with it?
Note: Respondents could select multiple answers so results were scaled down to add up to 100%, on average respondents selected ~2.0 different answers to this question
GERMANS WERE SPLIT BY INCOME BUT IT SHOWS NO STATISTICAL DIFFERENCE
16
1. Did you know ECB spends €80bn every month to buy debt? 2. If you need to pay to save, would you leave your bank?
3. % of respondents that would put some cash in other forms
of savings if they left their banks
4. % of respondents that would increase consumption if €300
per month was given by ECB
100.0% 100.0%
0%
20%
40%
60%
80%
100%
Under EUR 40K Above EUR 40K
Consumption
100.0% 100.0%
0%
20%
40%
60%
80%
100%
Under EUR 40K Above EUR 40K
Saving
25.3% 24.3%
74.7% 75.7%
0%
20%
40%
60%
80%
100%
Under EUR 40K Above EUR 40K
Will never pay Willing to pay
32.8% 33.2%
67.2% 66.8%
0%
20%
40%
60%
80%
100%
Under EUR 40K Above EUR 40K
No Yes
Disclaimer This document has been prepared by Astellon Capital Partners LLP (“ACP”) for persons reasonably believed by ACP to be of the kind to whom ACP is permitted to communicate financial promotions pursuant to the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended, to give preliminary information about the investment proposition described herein (the “Fund”). It is a confidential communication to, and solely for the use of,
the recipient. Astellon Capital Partners LLP is authorised and regulated by the Financial Conduct Authority.
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