Six months ago the world woke up to learn that the Syriza Party had been elected in Greece. It was a dream for some and a nightmare for the European ruling elite. Yes, there is a ruling elite that is very similar to what C. Wright Mills wrote about America in the 1950s. This is not conspiratorial but rather a sociological commentary and the ruling elite is not beholden to an electorate but operates with a sense of noblesse oblige. The Brussels eurocrats are in the image of Plato’s Philospher King, only there are too many Kings all believing themselves to be the most capable ruler. For two years I have written about that the European leaders feared REFERENDA more than anything for direct democracy was an affront to the wisdom of the self-anointed elite. The European project was too important to be left to the capricious voters.
***NOTE: On late Friday, Greek Prime Minister Alexis Tsipras announced on Friday that the Greek people will be voting on the latest aid proposals on Sunday, July 5, saying he would advocate a “no” vote. The ECB has frozen any further emergency liquidity assistance (ELA) to the Greek banks. As a result, Greece has imposed capital controls and the banks will remain shut on Monday. (Also, the euro is already down 1.7% to 1.1014 as trading opens in Asia.) Given the drama unfolding, I’m reissuing a post from February 4, where I discussed the new Greek ruling party and what it would mean for the Troika, Greek relationship.
Be prepared for further statements from Europe’s elites, especially Mario Draghi, who has pledged to do whatever it takes to preserve the euro.
In quoting the great Yogi Berra, the reference could be the daily algo-driven headlines of the Greek drama. It could also be the issue of a data-dependent Fed and will rates be raised in 2015. Or it’s some very successful and knowledgeable investor bloviating about the correct valuation for the stock market.
While all these issues have been filling the pages and airwaves of the financial media, what I am primarily referring to is a speech given by former Governor Donald Kohn at Widener University in April 2004. Titled, “Monetary Policy and Imbalances,” it is a speech that Chair Yellen OUGHT to present to all current FOMC voters. I will list several points that Fed Governor Kohn raised in 2004, warning of the ill-effects of the FED maintaining interest rates at an ultra low level of 1 percent for too long.
More of the same from the mouth of the FOMC. Monetary policy has replaced fiscal policy as the “only game in town” and this has ENABLED Janet Yellen to be the final arbiter of all things in financial valuations. The concept of the dual mandate has morphed into a triple mandate as the turmoil of the global financial system weighs heavily upon the Fed’s ultimate decision to raise interest rates a mighty 25 basis points. Ms. Yellen sits upon the throne of financial power wielding a trident as she decides the fate of a “global sea of liquidity.”
It is difficult for the global markets to maintain a continued concentration on the fallout from the Greek credit crisis. The markets have spent five years trying to discern what the impact will be from either a default and the Greeks leaving the Euro and thus the EU. The last few days of trading has to make the European authorities nervous as the rising specter of the Greeks actually pushing the exit button becomes a genuine possibility. (Or at least the Greeks want to impress upon their creditors that it is a tactic they are not afraid to utilize.) The fear of a country actually choosing to EXIT has led to yields on Italy, Spain, Portugal and Ireland to rise dramatically. The 2/10 yield curves have steepened as investors are lightening up on the peripheral nation bonds. (The ECB seems to have been sidelined for the last few days as the bank preserves its capital for possible more volatile situation.)
In late April I wrote a blog post titled, “Why Bill Gross Is Right and Wrong.” I noted that Bill Gross’s call on selling German bunds was inherently correct but the French OATS–the French 10-year note, would be the more profitable sale. The yield differential at the time was 23 basis points but with the news out of Europe on Friday, the differential widened to 38 basis points. The area of concern for me is that with Germany maintaining twin surpluses–trade and budget–the ECB QE program would enhance the demand for German assets in a world of diminishing supply. The French budget and current account deficits, as well as a trade deficit, means the underlying fundamentals of the French economy are much weaker than Germany’s.
Last Wednesday, ECB President Mario Draghi warned the traders and investors in sovereign debt and other credit markets that great volatility would be the cornerstone of activity and the market would have to learn to deal with it. The problem with this scenario is, I believe, that the ECB is the progenitor of most of the violent price movement. Remember, the ECB QE program means that the Frankfurt bank has a great deal of fire power to move markets–to the tune of 60 billion euros ($72 billion) a month, which was close to what the FED was purchasing at the height of its QE program. Traders and investors have no heads-up as to when the ECB will be buying and therefore subject to being stopped out of trades at any time.
Woke Up Got Out Of Bed, Dragged A Mouse Across My Desk … I read the News Today Oh Boy …
French Official:Obama Said Strong Dollar Is ProblemU.S. Official:Obama Didn’t Say Strong Dollar Was A ProblemWhite House Denies Obama Said Strong Dollar A Problem
Mr. Santelli interviewed me today and the topic evolved into Christine Lagarde and the IMF. The conversation was based on previous blogs as we discussed IMF culpability in the Greek debt crisis. The Santelli Exchange is linked below (click on the image). Also, I would advise reading the comments on the previous blog, especially the words of wisdom from University of Illinois finance professor Kevin Waspi.
As we reflect on the various speeches delivered over the last week there appears to be more questions than answers to the issues that weigh on the markets. Mr. Draghi was the one central banker that had the courage to ponder the issue: What if central banks have misjudged the strength of consumers and the effort to bring DEMAND forward to energize the economies of the developed markets may be flawed? Again, drawing upon the Draghi speech to the IMF on May 14:
“Secondly, there are always distributional consequences to monetary policy decisions. When monetary policy acts to stave off disinflation by lowering interest rates, this has inevitably a distributional effect by reducing the interest income of savers and lowering the debt burden of borrowers. But such interest rate cuts are necessary to raise aggregate demand by encouraging firms and households to bring forward spending decisions–that is, they discourage excessive savings and incentivize investment by lowering the cost of finance.”