Deflation has returned to Europe and that can only mean one thing: More official action to boost the economy.
Consumer prices fell by 0.2% in February, pulled down by the plunging cost of energy. That's the first time inflation has turned negative since September last year.
Equally troubling the European Central Bank and its president Mario Draghi will be the drop in "core inflation" to 0.7% from 1% in January. That measure strips out energy prices, which tend to bounce around month to month.
Economists believe Draghi will fire another bazooka at financial markets when the bank next meets on March 10.
"Pressure is mounting on the ECB to deliver a major package of measures," said IHS chief economist Howard Archer.
When the central bank last discussed interest rates in January, Draghi made clear the ECB would pump out more money in March if necessary. He cited a deteriorating outlook for the economy due to uncertainty about global growth, volatile markets and geopolitical risks.
Since then, Japan has introduced negative interest rates to boost an economy that is now shrinking again, and China has told its banks they're free to lend more cash in the hope of supporting growth.
Closer to home, the refugee crisis is slowly undoing decades of European integration, and Britain is gearing up for a vote on whether to leave the EU -- a decision the G20 said Saturday would "shock" the global economy.
Here's what Draghi could announce on March 10, and one weapon he's likely to keep in reserve:
1. Buy more government bonds
The ECB began buying government bonds and other assets at a rate of 60 billion euros ($65 billion) a month in March 2015. It is likely to buy even more in the future. The rate could rise to between 70 billion and 90 billion euros a month, according to economists.
It may also buy bonds for longer than planned. The current program is due to run at least until March 2017 -- Draghi could extend the minimum duration by six months.
Central bank asset purchases, often known as quantitative easing, in theory encourage investors to pump more money into the economy by reducing the returns they can make on government debt.
2. Cut interest rates again
Interest rates for the 19 eurozone countries are already at record lows, and they seem certain to go even lower.
The rate paid on cash that banks deposit with the ECB could be cut to minus 0.40% or even minus 0.50% from its current level of minus 0.30%. Negative rates are a way of penalizing banks for not lending to firms and households.
But they're already hurting bank earnings. So the ECB may try to limit the pain by introducing a tiered rate that reduces the penalty on normal deposits, while introducing more negative rates for truly "excess" deposits.
3. Buy corporate bonds
The ECB could extend quantitative easing to include bonds issued by companies and bonds. That would be an effective way of pumping more money into the economy but would likely be hugely controversial, particularly in Germany where the existing asset purchase program has already been challenged.
"We see this as a measure the ECB would take in a deep crisis, but not in the modest market turmoil now," said Berenberg chief economist Holger Schmieding.
I guess I really need to stress this more often because it's so hard for people to get their heads around the value of this strategy because, in the first 5 years - it simply doesn't seem that sexy. Even if you make a steady 20% a year for 5 years, you go from $100,000 to $120,000 to $144,000 to $172,000 to $207,000 to $250,000 and there will be many points along the way when the market is going against you or when you have a friend tell you their guy has them up 50% that year or whatever and that's TEMPTATION which you have to avoid.
Anyway, home runs put fans in the seats and, for hedge funds and VCs, they bring in the investors but home run hitters also tend to lead the league in strikeouts as well - as you have to commit big to swing for the fences. That's fine in baseball, because after you're wiped out they give you another turn at the bat but it's not fine for individual investors, who spend a lifetime building their investment savings and can't afford to have it wiped out, right?
One thing people tend to forget about Berkshire Hathaway is that they made $17.4Bn from the companies they actually run and "only" $6.1Bn in their stock portfolio. Nothing is better than having a steady flow of income and that allows Berkshire to take the occasional risk in the market, without worrying about seriously impacting the company's future if it doesn't work out. It also allows Berkshire to ride out market downturns with more cash coming in to press "losing" bets on the way down.
In Buffett's recent letter to shareholders, he mentions that the company's growth really took off in the 90s BECAUSE he moved away from the investing model and more into the ownership model. At PSW Investments, we never thought otherwise but, as Buffett notes, he learned from experience and we, in turn, learned from Buffett.
If the market, however, goes up 50% then your 70 becomes 140 and your 30 is maybe 15 and that's 155 and you are only slightly ahead of the S&P but we'd rather make 50% in good years and 5% in bad years than go up and down like a yo-yo. Of course, that's when we're wrong - sometimes we get it right in either direction - as we have for the past two years.
