Notes From Underground: N-O-T-H-I-N-G … Thats What the ECB Means to Me

The wires are burning with the possibility of the ECB moving forward with a quantitative easing announcement. I would give it a 1% chance, or, in options pricing terms, A CABINET BID. It is too early for President Draghi to impose a QE plan for next month the European authority reveals its asset quality review (AQR), a stress test by any other name. The ECB would be wasting its ammunition until it sees how the market reacts to new information on the health of European banks and thus the European financial system. If the results are as dismal as I believe, Draghi will want to initiate his asset-backed security program so as to create a market mechanism for relieving the banks of their problem loans. The market maker for these ABS instruments will be the ECB as they will be the only buyers willing to pay inflated prices for NONperforming loans. High prices will need to be paid to keep the banks solvent for if the haircuts on the troubled loans is too large the banks will collapse.

Think in terms of the Treasury and FED paying ridiculous prices for AIG and other debt instruments in the midst of the Lehman crisis. The Draghi press conference will be important for Draghi providing more insight into an ABS program. NOW IT MAY BE THAT THE ECB CUTS RATES ANOTHER FEW BASIS POINTS FROM THE PRESENT 0.15% to 0.10 % a cut that the EURIBOR MARKET has already priced in with the Dec. 2014 contract already trading at 0.9987 or 13 basis points. A NO ACTION BY THE ECB would probably create a short-lived rally in the EURO. I will be trying to sell the EURO with a wish order roughly 80 to 100 points above the market–1.3230-1.3250. I will be cautious in my price because the market is very short the EURO and the ALGO NEWS READERS will push the EURO higher on no action.

The Bank of England will announce its intentions at 6:00 a.m. CST prior to the ECB and I expect no change from the Monetary Policy Committee. At the last meeting, Governor Carney had two members dissent in a desire to see an increase in the official bank rate. Since the last meeting the British pound has been under downward pressure so the committee may want to see how the recent weakness in the pound impacts the economy going forward. Also, the MPC may want to wait until after the Scottish Referendum on Independence from England on September 18. Before this week the market was certain that the “NO” votes were going to prevail but recent polls show a very close vote. The uncertainty to the results from a breakup of the U.K. are enough to keep the Bank of England leaving interest rates at 0.50%. Another problem for the British pound and the uncertainty emanating from the Scottish vote is that many people have been long pounds and short euros and the uncertainty about the referendum is causing an unwinding of the EUR/GBP cross, which could put a bid to the EURO in the short-term.

***On the geopolitical front, problems continue plaguing global markets and Europe. The Ukraine is causing some angst for investors as they fear the European actions to confront the Russians and Putin’s plans for eastern Ukraine. The idea that the EU is going to send a rapid deployment force in Eastern Europe is just nonsense. A European force would be a token gesture that would prompt Putin to expedite his plans. Putin could deploy a much better supplied and vibrant force far quicker than the Europeans and his supply lines are much shorter. In understanding the hollow threat from NATO and the EU I would invoke Bismarck’s comment about the British Army: “If the British Army landed in Europe, I’d get the Belgian police to arrest them.”

The Ukraine is not the beginning of a wider conflict for the U.S. has no real interests in the Ukraine that would spark a direct shooting event. Not one drop of NATO blood will be spilled in containing Putin. Europe on its own is powerless. The French did announce this afternoon that is was not delivering the ships to Russia, but the French government made sure to let its allies know that it was not cancelling the contract for failure to deliver would cause the French to pay more than a billion dollars for noncompliance. So from the Ukraine to the ECB it’s all bluff and bluster.

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10 Responses to “Notes From Underground: N-O-T-H-I-N-G … Thats What the ECB Means to Me”

  1. ShockedToFindGambling Says:


    I think ECB has to do something, tomorrow. Draghi raised expectations pretty high at Jackson Hole.

    Agree on no troops in Ukraine, but we’re going back into Iraq and Syria, as well. The Iraqi army can’t do it.

    Obama is not going to sit thru an American being executed every week.

  2. asherz Says:

    It’s not the ECB that would be the buyers for the ABS noxious flotsom, nor the Fed that became the owners of the jetsam from the 2008-9 financial meltdown. These institutions are the brokers and custodians of this paper which the poor taxpayers funded. Not allowing markets to do the repairwork of mispriced assets, with massive interventions, has caused gross malinvestment rarely seen before. Record low yields for bankrupt sovereign debt in Europe is delaying the inevitable failure of a system which if had been allowed ro self-repair, would in time have risen from the ashes, perhaps chastened enough to provide the conditions that would lead to a return to normalcy in their economies. The course chosen by Central Bank leadership, navigating in unchartered waters, is encouraging once again a state of moral hazard that will result in a Titanic systemic collapse.. The orchestra is playing, and the passengers are dancing. Full steam ahead.

  3. yra Says:

    Aherz–agree completely –the FED had to stop the meldown which it did but QE2 and Qe3 will go down as groping in the dark and creating financial risk to paraphrase Jeremy Stein

  4. yra Says:

    Shocked–he raised expectations in an effort to pressure the politicians to increase fiscal policy efforts for the ECB is tired–like Charles Schumer and the Fed–they cannot be the only game in town—see the increased pressure from the Italians and French for fiscal relief measures and a massive European wide plan for capital investment projects—I still believe it is too early to act

  5. Judd Says:

    One of the best pieces you’ve ever written!

  6. Michael Baker Says:

    spot on …Again !

  7. Ronald Ferrill Says:

    Could it be, and this is a wild 5 a.m. thought, (trying to make an excuse for potential derision headed my way), that what moribund economies around the world need is higher rates to stimulate growth? Have we reached a point where lower rates do nothing or cause a reduction in equity capital (companies just borrow to do buybacks)? It seems that the central banks are printing but buying their own baking so to speak, creating bloated central banks.

    not economist, just an interested, uneducated, bumpkin here…

  8. yra Says:

    Ron–that is the thinking of many well “respected “economists–there is certainly not one school of thought here except for those sycophants of the Fed who believe that because they halted the great deleveraging and thus a massive unwind of assets and a horrible collapse of an overleveraged financial system,created by them in many respects –that they are rocket scientists

    • Chicken Says:

      Which button will the rocket scientists push next, the one that allows them to sell non-performing assets at a huge loss to special interest groups who will then peddle that at huge gain?

  9. Chicken Says:

    Doing what it takes. Interesting gold rose with the dollar, “oversold bounce” perhaps or sudden European demand caused a brief rally?

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