Notes From Underground: Draghi Channels The Rolling Stones–Time Is On My Side

It seems that Mario Draghi has taken the stance that he can hold off doing any further QUANTITATIVE EASING (QE) as he waits for the policies of the British, Japanese and the U.S. to generate enough growth to allow Europe to muddle through its problems for the next few years. President Draghi seems to believe that if the global economy can achieve a growth rate of 4% or more it will buy time for Europe to begin to correct some of its problems and at least put a halt to its economic downturn. The ECB has accepted the slide in the YEN in the hope that stimulating Japanese growth will alleviate some of the stress of the global economy. The Japanese economy has been a laggard for the last two decades, give or take a year here or there, and it was able to muddle though based on the growth of the rest of the world.

Since Draghi raised the issue of “doing whatever it takes,” the EURO  and European debt markets have rallied without any real action on the part of the ECB. So much so that some of the previous QE, the LTRO money, has been repaid removing some of the stimulus. The ECB wants to hold its powder for in case of a political situation that actually forces President Draghi to undertake an Outright Monetary Transaction (OMT). The German elections are scheduled for September and if the EU can muddle through this period and not be forced into any drastic action, it will keep the Bundesbank hard money crowd from attacking Chancellor Merkel. If Europe is to attempt a genuine effort at resolving its present malaise, it will need Frau Merkel at the helm in Germany.

As the ECB meets on Thursday, some analysts are predicting that Draghi will push some type of rate cut in order to weaken the EURO. From my perspective Draghi seems content to wait. He will need to see some resolution on the Italian election and being that the Italian and Spanish debt markets have steadied, there’s no need to rush into action. Reuters reported that European auto sales have softened again as registrations fell 8.5% in Germany, 12% in france and 17% in Italy. This is not new and pales in comparison to the problem of rising unemployment. If the world is willing to keep the European bond market steady and the euro on hold then there is no cause to irritate Bundesbank President Jens Weidmann. Let the rest of the world do the heavy lifting.

The world is not in a risk-on, risk-off paradigm as the equity markets rally even with a stronger U.S. dollar. Yes, Mario:

Time is on your side,yes it is
Now you can always say
That you want to be free
But  you’ll come running back
You’ll come running back
You’ll come running back to me
Just wait until after the German elections!
***Playing into the Draghi theme was the interview on CNBC this morning with the group of Stan Druckenmiller, Jeffrey Canada, Ken Langone and former FED Governor Kevin Warsh. It was CNBC‘s finest hour and Kevin Warsh summed up the role of Ben Bernanke and all central bank leaders when he said the job of the central bank is to play for time to allow policy makers to resolve the crisis. But in my mind bad politicians are like high-priced options … too much time decay.
***Tomorrow the Bank of Canada will announce its interest rate decision at 9:00 CST and consensus is for overnight rates to remain at 1%. I concur as the recent weakness in the Canadian dollar and the slowdown in the Canadian housing market will provide the BOC with the ability to stay on the present course. The Canadian 2/10 curve is holding toward a recent steepening trend so Governor Carney should be very content.
***The Bank of Japan will release its monetary decision and with the recent weakness in the YEN and the rally in the Japanese bond market
(JGBs) it will be able to maintain its current efforts at stimulating the moribund Japanese economy. One thing that is bothering me though is the recent FLATNESS in the Japanese 2/10 yield curve. In the midst of the YEN‘s recent bout of weakness I would have thought that the curve would have steepened since JGBs were sold in the face of excessive stimulus. But as those who have been short the Japanese Bonds well know “it ain’t necessarily so.” In fact, as the YEN has fallen the 2/10 curve has made six-year lows in FLATNESS with the differential narrowing on the 2/10 to 57 pips. This is something to watch as the curve flattening may prevent the YEN from momentarily halting its slide. This may be a result of the Japanese fiscal year coming to an end March 31 and possible year-end book squaring,but it is something we have to watch. Otherwise, the BOJ should be steady as she goes.

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4 Responses to “Notes From Underground: Draghi Channels The Rolling Stones–Time Is On My Side”

  1. realitythought Says:


    I always enjoy, appreciate, and learn from your articles. FYI I have finished the book you sent. My simple evaluation of the book was that any rules/laws the EU and its various sub entities make or have made do not really mean anything. Rules/treaties are routinely ignored and so the EU runs on some sort of seat of the pants short term response mechanism. I still don’t see how they get out of their situation.

    Totally unrelated to your article and my comments above, I have another issue that I have not seen discussed. Everyone seems to assume that we are in this “New Normal” go slow muddle along world economy and that with all the central bank liquidity will eventually allow us at some point to return to a more normal higher growth rate and all will be well with the world. My question is “What if this is wrong?” Just suppose as a possibility that the people of China realize they have purchased $7+TRILLION of empty unused stranded assets (not counting commercial and industrial) homes in a $8 Trillion GDP economy. If this comes into realization the world economy probably would seize up. What could the Fed possibly do to counter act this problem in its current weakened state?

    Thanks for listening, probably to much to respond.

    Samuel A Lincoln III (Sam)
    Cell # 801.860.4944

  2. kevinwaspi Says:

    Excellent as usual, especially the channeling of “Time is on my side”. Combining Draghi, Bernanke, and Abe, with the housing “boom” in China, I’d suggest “Central Planners” globally may be channeling another old favorite. Consider Emerson, Lake & Palmer’s “Karn Evil 9″. In part, I quote:
    ” Welcome back my friends to the show that never ends
    We’re so glad you could attend Come inside! Come inside!
    There behind a glass is a real blade of grass
    Be careful as you pass.
    Move along! Move along!
    Come inside, the show’s about to start
    Guaranteed to blow your head apart
    Rest assured you’ll get your money’s worth
    The greatest show in Heaven, Hell or Earth.
    You’ve got to see the show, it’s a dynamo.
    You’ve got to see the show, it’s rock and roll ….

    Right before your eyes, we pull laughter from the skies
    And he laughs until he cries, then he dies, then he dies
    Come inside the show’s about to start, guaranteed to blow your head apart
    You’ve got to see the show, it’s a dynamo
    You’ve got to see the show, it’s rock and roll…

    Soon the Gypsy Queen in a glaze of Vaseline
    Will perform on guillotine
    What a scene! What a scene!
    Next upon the stand will you please extend a hand
    To Alexander’s Ragtime Band
    Dixieland, Dixieland!
    Roll up! Roll up! Roll up!
    See the show!

    Performing on a stool we’ve a sight to make you drool
    Seven virgins and a mule
    Keep it cool. Keep it cool.
    We would like it to be known the exhibits that were shown
    Were exclusively our own,
    All our own. All our own.
    Come and see the show! Come and see the show! Come and see the show!
    See the show!

    I’ll leave it to you to assign names to the seven virgins!

  3. yra harris Says:

    Kevin—I should have banked with you all this years.Can’t beat a bank/professor citing one of ELP’s great ones

  4. yra harris Says:

    Simon–you ask the penultimate question.But the talmudic response would be another question—Would it be in China’sb est interests to take that route are just accept the global game as it is and hope that they can continue on the growth path they have been on and at some point be in a better position to counter the terrible policies of the U.S. at this point.This question was posed to Lee Kuan Yew in the new book by Graham Allison.

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