It seems that the ECB president has for the moment prevailed in a similar way as his MIT cohort Ben Bernanke has been “successful” with his famed Portfolio Balance Channel. Remember, it was Jackson Hole speech of August 2010 in which Chairman Bernanke laid out his view about the importance of the PBC, which was previously referred to by Alan Greenspan as the “wealth effect.” President Draghi has steepened the Spanish and Italian curves by threatening to purchase short-term debt and thus driving the Spanish and Italian 2-YEAR NOTE YIELDS more than 300 basis points lower.
The effect on most equity markets has been dramatic as the DAX INDEX HAS RALLIED STRONGLY SINCE JULY 25, even as the GERMAN ECONOMIC DATA CONTINUES TO DISAPPOINT. In concert, the S&Ps are 90 HANDLES OFF THE LOW OF JULY 25, as the low that day was 1321.25. The impact of short covering coupled with the threat of massive ECB intervention has provided the thrust for a powerful rally, especially as DEVELOPED MARKET INTEREST RATES ARE BASICALLY ZERO.
Powerful equity rallies have rendered another QE by Bernanke and the FED NULL AND VOID. In Jackson Hole, look for Ben Bernanke to summarize and restate the importance of the last two years of FED POLICY and to justify it for the ability to halt the economic slide. He will then GENTLY turn the tables on Senator Schumer and tell Congress to get to work on the “FISCAL CLIFF.” Draghi and Bernanke will explain to politicians that they provided the UMBRELLA TO PROTECT THE GLOBAL ECONOMY, BUT IT IS NOW TIME TO PULL ON THE BOOTS AND CLEAN UP FROM THE CREDIT MESS. Have the storm clouds cleared? NO, NO, NO, but the rain IN Spain….
In the analysis piece in today’s Financial Times, “Autonomy Under Fire,” David Gardner raises an important issue about the negative impact the EU is causing on the domestic politics of Spain. The heavily indebted regions like Basque and Catalan are having their independence threatened as the central government looks to rein in the free spending ways of the fiercely self-governed regions. There are so many unintended consequences to the austerity push on the Spanish authorities that threaten the DOMESTIC TRANQUILITY. The EUROCRATS have upset the fabric of domestic politics for the UTOPIA of a supranational state but the individual states don’t wish to surrender sovereignty.
For Spain, as Gardner writes, “Devolution was created to solve the Basque and Catalan problem, but those problems are actually getting worse and the cost of all this is no longer affordable,” citing a senior government official, adding that there would be resistance to any rollback of regional authority. There is so much to the European mess that cannot be resolved in a mere sound bite. Yes, the yield curves have steepened but the heights of political uncertainty continue to grow. No wonder PM RAJOY is being so cautious about requesting sovereign aide tied to an increased austerity plan.
***Angela Merkel was in Canada yesterday and today. The purpose of the trip was twofold: 1. Promising the Canadians an expedient enactment of the FREE TRADE AGREEMENT between the EU and Canada; and 2. Asking for the Canadians to ante additional funds for an IMF BAILOUT PACKAGE FOR THE EU. Prime Minister Harper was eagerly awaiting the speed up of the FTA but gave a resounding no to Canada providing new funds for any EU bailout. The Canadian PM gave a definitive NEIN to Merkel’s request and told the German Chancellor that Europe still needs to do MORE before the Canadians would be willing to supplant the previous IMF contributions.
It is telling that Merkel is pushing for the G-20 to play a bigger role as it will allow her some backup as she confronts the dissonance of the German domestic political scene. The Germans and Lagarde are looking for protection from the storm and the market will be more than willing to use the IMF UMBRELLA to continue the bailout. When will the IMF come to utilize that GOLD HOARD IT OWNS AND ISSUE GOLD-BACKED BONDS. Time to discuss the REDEMPTION FUND AS PROPOSED BY THE FIVE WISE MEN.
***NEW YORK FED PRESIDENT BILL DUDLEY ON THE REFORM OF MONEY MARKET FUNDS: Interesting that the NY FED boss warns about the fragility of money market funds. In a BLOOMBERG piece, “FOR STABILITY’S SAKE, REFORM MONEY FUNDS NOW:William C. Dudley,” it appears the NYFRB is worried about a possible run on the MONEY MARKET FUNDS. Dudley wants capital buffers to meet any type of Lehmanesque event. It is the MMFs that supply the credit to financial markets and therefore any freezing up of the funds can cause contagion in credit markets. “Money funds finance 40% of the $480 billion commercial paper market and about one-third of the $1.8 trillion tri-party repo market….”
The FED PRESIDENT asks for any reform to include a hold back of any funds of a large redemption to insure a capital buffer. The first losses to a money market fund would fall to the people who pulled out their funds first as the held back funds would insure this. Dudley believes that such a holdback would make the large players more cognizant of the Money funds’ risk, thus create some type of systemic fiduciary. I am needing to JUXTAPOSE this idea with FDIC INSURANCE,where it is the BANKS who pay the upfront costs and not the investors. In Dudley/Schapiro’s reform package it appears they want the investors to directly bear the cost through a holdback period. HMMMM???? I think this will be a negative for the MONEY MARKET FUND BUSINESS and possibly disrupt the financial markets.
Tags: Ben Bernanke, Dax index, Gold-backed bonds, IMF, Italian 2-yr notes, Jackson Hole, Lagard, Mario Draghi, Merkel, money markets, portfolio balance channel, QE, Rajoy, S&P 500, Spanish 2-yr notes, William Dudley