Notes From Underground: WHO’S IT GOING TO BE, HIM OR ME?

This seems to be the question of the day as the markets awoke to the RUMORS of the ECB CAPPING RATES. As I wrote last night, the rumors were running wild about the ECB using different strategies to put a ceiling on short-term debt (90 days to 3 years for Spain and Italy). No genuine plan was offered just several possibilities as it seemed that President DRAGHI was floating trial balloons about ECB intervention via an unlimited ECB/ESM buying of “misaligned” sovereign debt. The EUROPEAN SOVEREIGN DEBT MARKETS responded to the weekend stories by initially rallying the ITALIAN DEBT FUTURES AND SELLING GERMAN BUNDS IN A MAJOR RELIEF RALLY.

However, by the end of the day the Italians 10-YEAR NOTE had erased most of its gains and the German bunds recovered most of its losses because a story was released from the BUNDESBANK that it would not support the initial rumor that was attributed to an article in the now highly regarded DER SPIEGEL. The BUNDESBANK spokesman was questioning the legality of unlimited bond purchases so the market basically called it a draw and waits further confirmation of the ECB’s intentions.

Tonight, the other EUROPEAN MOUTHPIECE, or as one my readers (HAT TIP KM) calls him, the Hilsenrath of Draghi, Ambrose Evans-Pritchard, has a piece in the London Telegraph, claiming that the initial Der Spiegel story was correct about mass bond purchases. The story also says that Jorg Asmussen, Merkel’s hand-picked member on the ECB’s executive board, is in favor of mass bond purchases so as to prevent a disintegration of the euro. Two weeks ago,  German Finance Minister Schaeuble laid the groundwork for mass ECB BOND INTERVENTION BY PROCLAIMING THAT THE MARKETS HAD ERRED IN THE PRICING OF SPANISH SOVEREIGN DEBT AND THEREFORE THE ECB AND OTHERS NEEDED TO CORRECT THE MISPRICING BY BUYING MASSIVE AMOUNTS OF DEBT. The Schaeuble  statement opened the gates for President Draghi to become aggressive in rhetoric and actions. It seems that a German domestic political battle is playing in the board room of the ECB.

As the Bundesbank raised its voice in opposition, the German government of Merkel is responding through its allies. The theme of mispriced debt has now been extended to the Draghi rationale about doing all that is possible to avert a EURO breakup. In Evans-Pritchard’s article, “Germany Backs Draghi Bond Plan against Bundesbank,” Mr. Asmussen is quoted as saying that the surge in Club Med bond yields over recent months “REFLECTS FEARS ABOUT REVERSIBILITY OF THE EURO, AND THUS A CURRENCY EXCHANGE RISK” (emphasis mine). In this regard readers of NOTES know well that Mr. Asmussen is wrong, very wrong, as the higher rates on periphery debt are a result of SOLVENCY RISK and not currency risk. Because the views of Merkel’s man on the ECB executive board are so very wrong, we can definitely look for the old Bundesbankers, Issing and Schlesinger to respond to the Draghi and Asmussen attempt to circumvent the rules of the EU and ECB.

Bundesbank President Weidmann can also be expected to provide a response to the ridiculous comments of Asmussen. Evans-Pritchard goes on to make two very important points about the stance taken by Mr.Asmusssen:

  1. The Daily Telegraph can confirm the Der Spiegel reports that the ECB are examining plans to CAP SPANISH AND ITALIAN RATES 
  2. “While the ECB can, in theory, enforce its policy by majority vote, it would be hazardous to do so against German opposition.” Pritchard quotes Raoul Ruparel from open Europe. ‘Asmussen was hand-picked for the role by Merkel. It means that Draghi has managed to crack what seemed like a solid wall.'”

So many questions remain. After tonight’s Daily Telegraph column, will the real European John Hilsenrath please come forward? If Evans-Pritchard is the major mouthpiece as well as a fine journalist RISK ON IN A WORLD OF UNLIMITED ECB BUYING POWER.


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4 Responses to “Notes From Underground: WHO’S IT GOING TO BE, HIM OR ME?”

  1. PBL Says:

    “risk on” if u can buy with other peoples money.

  2. Zach Abraham Says:


    Great work this week – nobody weaves the economic/political/central bank dynamic better than you when it comes to analyzing the macro picture. You approach your analysis from the point of view as a trader dealing with what’s in front of him rather than an unpractical analyst perspective.

    If markets begin tilting toward the idea that Draghi has “managed to crack what seemed like a solid wall” of German resistance, I would expect that German debt prices (especially Schatz and BOBL prices) would begin to adjust dramatically lower – much lower and faster than the rise in yields we experienced last week. Further, as you have mentioned in prior Notes, I would expect capital to flow out of what seems like a very overvalued French Oat market – which trades like a safe haven benefiting from liquidity distortions in the FX market (SNB having to do something with their pile of Euros). You mentioned earlier in the week that “the Gold” would be something to keep on the radar and we certainly saw a technical breakout in Silver today and Platinum last week. I would expect that the precious metals complex would obviously continue to firm if the market begins to price in a world of “unlimited ECB buying power.”

    My question to you: if the ECB were to introduce some sort of rate cap policy for the periphery or something similarly dramatic, is this something that disapproving Bundesbank members and or German politicians could send to the German Constitutional Court for a vote of Approval or Denial? – wouldn’t granting the ECB unlimited unsterilized bond buying power be deemed by many as a breach of the original EU Treaties?


  3. yra harris Says:

    Hey–RO is of course with other peoples money.The combined power of hedge funds ,ctas and the ETF crowd is all about combined risk with OPM —and don’t forget the phenomenal returns of public union pension funds—OPM to the rescue.Oh,and now Bernanke and Draghi use the ultimate OPM

  4. yra Says:

    Zach–thanks for the support and you are 100% correct on where the German battle will go.The issue is does Draghi/Schaeuble/Merkle rush to get this in action prior to the the GCC decision so as to lock the game in place and make it a disaster to unwind–I believe that this is the ultimate issue at this point—how fast does Draghi move in lieu of the GCC–that is why we will probably see the old war horses of the Bundesbank begin to neigh

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