I have been doing more media coverage of political economic discussions and I am proud and honored to be a part of Gordon T. Long’s laborious work for the Financial Repression Authority. Much of what is discussed on the podcast has been a constant theme in Notes From Underground and my ubiquitous discussions with Rick Santelli. I would like feedback from readers about setting up such a format in which an interactive video effort would allow the give and take of real-time Q&A. It is a fairly long (43 minutes) so turn down Joe Buck on Fox ‘s World Series coverage and listen to the discussion. Take notes and put forth questions as to further the discussion that makes NOTES worth writing. As a long-time Cubs fan I am enjoying the recent high-level play of the young stars but am saddened for all the Cub fans who have not been able to experience the joy of seeing the CUBS in the world series. Oh well, as the world turns on a dynamic model.
The Mario Draghi brought forth a new and improved standard of “truth obfuscation” at Thursday’s ECB press conference. When Draghi answered a question about the ECB basing its policy on politics he answered: “We are not in a political game.” In his “perception” there is NO POLITICAL WAR BETWEEN THE ECB AND ITS MEMBER NATIONS. This is of course unadulterated nonsense as everything the ECB does is political. During the ECB’s initial state of decision-making, then-President Wim Duisenberg said, “WE HEAR BUT WE DO NOT LISTEN.” The ECB claimed it pays attention to political discussion but its policy is set by objective criteria. Duisenberg brought proof to the nonsense of objectivity as the ECB kept its interest rates ridiculously low to aid the Germans in their cost of financing German unification and making the implementation of the HARTZ IV labor restructuring easier to easier to absorb for the German government. Duisenberg’s policy of negative real yields put severe pressure on the EURO as it dropped in value from its initial price of 117.5 to 82.5 which created credit problems for all of Europe but the Germans. As usual, it raises the question, WHOSE EURO IS IT?
President Mario Draghi takes center stage tomorrow and as usual the press conference will be critical. The ECB official announcement is at 6:45 CDT with the presser 45 minutes later. The consensus is for no change in rates or the current 80 BILLION EUROS in large-scale asset purchases. I would argue that if Mr. Draghi wishes to increase the ECB balance sheet tomorrow HE OUGHT TO INCREASE QE to at least 90 BILLION EUROS. But ought does not imply WILL. The past week has brought severe criticism of Draghi and the ECB from two of the most prominent monetary authorities in Europe. First, Gillian Tett had an article in last Friday’s Financial Times titled, “Investors Are Ill Equipped For Our Unfathomable Future.” Tett reports on the views of Axel Weber, who should have been the President of the ECB, instead of Draghi. Weber said the banking system is much stronger today than for many years. But, Axel warns that financial markets are much more unstable than the banks. Markets are not free markets “because of heavy government intervention.”
On Friday, Chair Yellen delivered a speech at the Boston Federal Reserve Conference, “At The Elusive Great Recovery: Causes and Implications for Future Business Cycle Dynamics.” Her speech was titled, “Macroeconomic Research After the Crisis.” My short response to the questions posed by Janet Yellen have been answered by many NON-FED economists and most prominently by Richard Koo in his great work on BALANCE SHEET RECESSIONS. My sense is that the FED is an insular organization and pays little note of those outside its Ivory tower. Yellen’s second question was: “Whether individual differences within broad groups of actors in the economy can influence aggregate economic outcomes–in particular, what effect does heterogeneity have on aggregate demand?” Now, GET REALLY SCARED:
Back from the spiritual cleanse and I chatted with Mr. Santelli today about volatility as the prairie fires of global politics causes great angst and HEADWINDS for markets. There was nothing new for readers of Notes From Underground as we have weighed and measured many of the issues plaguing the global markets. In this post, I want to call attention to a couple of pieces that appeared in the press Monday night and Tuesday morning. The front page of Tuesday’s Financial Times had a story, “Deutsche Received Special Treatment In The EU Stress Tests Via ECB Concession.”
Increased volatility is not debatable. It will be the outcome of the uneasiness of global politics. It seems that the present state of affairs reflects the vast chasm between those who have benefited from GLOBALIZATION and those who have seen their lives and incomes being disrupted by a world experiencing dynamic change. Brexit was a vote of the nationalists versus the Davos crowd, or those seeking the comfort of the world they know versus those who have profited mightily from the first mover advantage of being prepared for the post Berlin-wall global economy. The central banks’ efforts to prevent a massive liquidation of global assets and harm that would have befallen the global economy as left many participants in a state of financial repression.
Everything that I blogged about last night appeared on the financial markets’ radar screens today. The non-issue of Deutsche Bank suddenly became an issue as investors became worried about the collateral that they were holding at Deutsche Bank. It was not “locusts” that caused the market to become concerned about Deutsche’s solvency but rather depositors and prime brokerage accounts that feared for their capital. Compounding the DB story was the rise of the price to hedge against a Deutsche Bank default, as well as the infamous COCO bonds that many European banks issued in an effort to enhance their capital ratios in deference to the Basel rules. You could purchase some of the Deutsche COCOs today for an effective yield of 12.7% but if the COCO bondholders are bailed-in, the COCOs will cease paying interest and the DEBT will be automatically converted to equity, thus further diluting existing shareholders.
The reverberations from Merkel’s Boner will be systemic in nature. The more I think about the ridiculousness of Chancellor Merkel’s ill-advised comment about not financially supporting Deutsche Bank, the greater my fear of a cataclysmic credit event. According to a recent Zero hedge piece, DB has many trillions of derivatives on its books. Yes, it is notional value but as we learned with Lehman notional value is irrelevant when counterparties to Deutsche’s SWAPS and other credit derivatives demand their collateral back. In today’s shadow banking environment, the rehypothecation of credit through securitized instruments compounds the problems of a default or bankruptcy.
It seems that 108 years is enough time to pass to relive history. For those who are not sports fans, Merkle’s Boner is a famous mistake made by New York player Fred Merkel, who didn’t touch second base and was called out erasing the “fact” that the New York Giants had beaten the Chicago Cubs. The major GAFFE led to the Cubs beating the Giants and the CUBS moving to the World Series where they defeated the Detroit Tigers for their last World Series championship only 108 years ago.