Notes From Underground

During the last 30 months I have enjoyed listening to the Draghi press conferences as the ECB has been entertaining while he deftly handled the questions from a cadre of astute European financial journalists. Yesterday was certainly an exception as President Draghi showed none of his usual light banter and seemed unduly stressed by recent rumors of deep divisions in the boardroom of the ECB governing body. Reuters, the medium  of the rumors of factionalization, was treated brusquely by Mr. Draghi when the reporter asked a question. The reporter wanted to know if the losses on any asset-backed securities (ABS) would be shared by the individual national banks or solely by the ECB. This was a very pertinent question because President Draghi insisted that the ECB was not becoming a “bad bank” by buying low quality assets from all the European domestic banks. The ECB president insisted that the ABS and other structured financial instruments in Europe were of much higher quality than the pools of subprime loans that almost collapsed the U.S. and global financial system.

Statistics about the percentage of defaulted securities were cited as proof about the quality of paper that the ECB would be buying. Unfortunately, for Draghi that argument is nonsense because the purpose of the ABS purchase program is to relieve domestic banks of non-performing loans similar to the zombie loans that have plagued Japanese banks for a very long time. President Draghi admitted that the European banking sector is a much more important intermediary in the European financial system than the role played by banks in the U.S. This, by definition, means that the ECB will be the bad bank as it purchases very questionable loans in exchange for euros. The default rate on bank loans has been low because financial institutions have been huge purchases of sovereign debt, which requires no reserves as they are deemed a zero risk asset. The banks have borrowed from the ECB at a few basis points, bought their sovereign debt and shored up their balance sheets without having to liquidate non-performing loans and thus taking a large loss on the weak asset … everything carried at book value.

All in all it was a miserable performance by the wily fox of Frankfurt reflecting that President Draghi is exhausted from battling Jens Weidmann and the hard money culture of the Bundesbank. In my humble opinion it is time for Mario Draghi to find out why the Germans are so  intransigent on QE when the world is dancing to the beat of easy money. In my humble opinion, the Germans desire control of the ECB. Why? Because they have a history of hard money and are leery of turning control of their capital to those desirous of easy money and lax credit standards. The French have always opposed Bundesbank control of the ECB but time is running out on previous political plans. Draghi should offer to resign in exchange for a massive QE program and Bundesbank President Jens Weidmann being elevated to the Presidency of the ECB.

Time is of the essence as the European economy is under siege from its competitors and the strain of currency depreciation by the BOJ and others. Draghi said in his press conference that risks continue for Europe on the downside but hoped that a global recovery would help alleviate some of the negative pressures that have plagued the European economy. The problems of Europe are mounting but time is running short as Europe’s citizens are becoming frustrated by continuing high unemployment. The politics of individual states are working against Draghi’s timeline. Please Mario, negotiate and resign. A 12 percent unemployment rate demands it.

***The market is expecting 235,000 nonfarm Payrolls for the U.S. this morning. The rate is expected to remain at 5.9 % and average hourly earnings (AHE) suggests a rise of 0.25 after remaining flat last month. Be patient because Chair Yellen is on record as being concerned about Labor Market Conditions Index (LMCI), which is composed of 19 variables. The labor participation rate will be important on Yellen’s dashboard so don’t react to the headline data, but of course wage rates will be important. From watching the stock market rally and the strength of the U.S. dollar I am GUESSING that the NFP will be a print of 300,000+. The market is in the mode of good news is good news and even with the Fed’s QE program ending, global liquidity is flowing and interest rates remain at the zero bound. For the moment he U.S. is paradise found.

***The Canadian data is due at the same time as the U.S. and the data is expected to be weak after an extraordinarily strong number last month. The Canadian economy experienced a jobs increase of 74,100 and a rate of 6.8% last month. Consensus is for a zero jobs gain and for the rate to remain at 6.8%. As usual, pay attention to Canadian manufacturing jobs. The Canadian economy is under stress from falling oil prices and thus jobs in the mining sector should be lagging but the recent weakness in the Canadian dollar may be a plus for the exporters of manufactures goods and of advanced technical services. Patience and prudence will be rewarded as the markets have had to digest a great deal of economic and political news over the last several weeks. There are many momentum positions on that could reverse quickly on any type of statistical aberration.

Tags: ABS, ECB, Fed, Janet Yellen, Mario Draghi, nonfarm payrolls, QE

This entry was posted on November 7, 2014 at 3:50 am and is filed under ECB. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.