Open letter to Mario Draghi: Grow some cojones! If the onset of deflation scares you and other ECB members, why is it that you do not have the intestinal fortitude to enact the QE policy that you have pontificated about for the last 30 months? Either deflation is to be feared or it is a straw man that elevates the your self-importance. On November 21, Mario appeared to announce that the time had come for the ECB to begin a meaningful QE program, but December 4 brought no action, just words. President Draghi, the honeymoon is over and it is time to reveal the testicles that can give birth to policy. Mario, if the Germans won’t compromise point to the EUR/YEN cross at 149 and ask Jens Weidmann how German manufacturing is going to compete against Japanese high-end engineering.
The Japanese are also beneficiaries of lower oil prices but have a currency that has depreciated 11 percent since the BOJ initiated the newest QE program. (An interesting aside, the EUR/YEN failed to take out the high of 149.15 made on November 20, the day before Mario Draghi’s attempt at manhood.) The EUR/YEN becomes a very important barometer for the markets as the Japanese has made QE a mandatory response for the ECB.
The markets behaved as expected with the ECB‘s inaction. The euro rallied; the DAX fell; and commodities struggled (although GOLD failed to drop as much as expected). While I criticize President Draghi, my take away is this: WE CAN LOOK FOR A DRAMATIC STATEMENT FROM DRAGHI BETWEEN NOW AND THE NEXT MEETING FOR THE ECB HAS ALREADY PROVIDED SUPPORT FOR UNCONVENTIONAL MONETARY POLICIES. IT SEEMS THAT PRESIDENT DRAGHI LIKES DRAMA. IN JULY 2012 THE ECB PRESIDENT’S FAMOUS “WHATEVER IT TAKES AND NO TABOOS” CAME AT A TIME OF NO ECB MEETING. IF ECONOMIC DATA CONTINUES TO FAIL BE ALERT TO A DRAGHI PLAN OF ACTION. THE HOLIDAY MARKETS WILL BE HERE SHORTLY AND ANY ECB ACTION WILL BE GREATLY MAGNIFIED BY LESS LIQUIDITY. MARIO MAY BE SINGING CASTRATO BUT HE IS A WILY FOX.
During Mario’s press conference it was noted that there is a political part to all of this maneuvering but Draghi took the high road and maintained that the ECB has an inflation mandate and acting to realize its mandate is not a political action. He left the possibility of buying all assets classes except GOLD. I think the Swiss referendum would prevent the ECB from buying GOLD for it would be a slap in the face of the SNB. Again, Mario Draghi stressed that the EXCHANGE RATE is not a policy target but of course that is nonsense for if QE is done correctly the EURO will depreciate and the French and Italians will be momentarily content. The Italian BTPs saw yield rise as the ECB disappointed the peripheral bond markets.
***Quick look at tomorrow’s unemployment data from the U.S. and Canada: The U.S. nonfarm payrolls are projected at 230,000 with the rate remaining at 5.8 percent and average hourly earnings rising 0.2%. The surprise can be on the upside as seasonal hirings my be larger than usual as the Christmas season brings hopes of robust retail sales. A number over 300,000 would provide a boost to the DOLLAR while the recent strength in the equity markets may be priced in, especially in light of the disappointment from the ECB. If the U.S. data is stronger than expected look for yields to rise on the short-end of the yield curve in the light of speeches this week from Stanley Fischer and Bill Dudley maintaining that falling energy prices would not deter the FED from a mid-2015 interest rate hike.
The Canadian data is expected to show an increase of 5,000 jobs after a very robust October gain of 43,000. The Canadian unemployment dropped 0.3% to 6.5% in October so an increase to 6.6 is expected. The interesting point about Canada is that employment is gaining strength even as the energy sector is being battered by falling prices. The recent weakness in the Canadian dollar may be providing a boost to manufacturing and service sector exports. Large job increases in the auto sector will be deemed a positive for the U.S. growth story.
Tags: Canadian Dollar, ECB, Eur/Yen, Euro, Gold, Mario Draghi, QE, SNB, U.S. Dollar
December 4, 2014 at 8:10 pm |
the swiss referendum didn’t pass by, I think 70% how did it get on the ballot ? I guess the majorty of swiss are rich. just guessing not that smart like you all. I have a small understanding,
December 5, 2014 at 2:23 am |
Alan, the Swiss are probably just like 80% of the world’s population these days, both developed and undeveloped countries.
The only thing they’re really interested in is their smart phones. And the only thing they’re really worried about is ‘battery life’.
December 5, 2014 at 4:05 am |
The yen devaluation has been aimed primarily at the eurozone. If Draghi reacts with his own QE and succeeds in keeping Germany et al competitive, will everyone else cheer and give a thumbs up to the combatant with the biggest gonads ? Or are others who see their exports begin to shrink and unemployment figures rise react as well?
How will China, the U.S. react to these competitive devaluations and their impact on their economies? Will bloating CB balance sheets have no effect?
Short term this may work for the EURO but the history of begger-thy- neighbor is not a good one. Unintended consequences in the geopolitical sphere may also come into play.
December 6, 2014 at 9:07 am |
You nailed it! The smartphone is causing global markets to rise despite the exhaustive efforts of central bankers!
December 7, 2014 at 12:27 am |
Mr Harris, thank you for your excellent insights. You state “The markets behaved as expected with the ECB‘s inaction. The euro rallied; the DAX fell; and commodities struggled (although GOLD failed to drop as much as expected).” which to my interpretation implies the absence of QE is negative for commodities and gold. This goes against the reaction of commodities and gold to Mr Kuroda’s November 1st QE. Indeed the Fed’s QE ended October 31st appears to have been suppressive of commodities and gold, unlike its Q1 and Q2 programs. Why do you believe that in the case of the ECB, commodites and gold should react positively to any action from Mr Draghi? Many thanks.
December 7, 2014 at 8:53 am |
Costaselgreco–in my humble opinion,the commodity and equity markets would love to see a massive QE from Draghi for it would mean the German voice has been quieted and the liquidationists in Europe have been defeated in favor the the money printers.The DAX had a substantial rally on Friday as news leaks persisted about a potential QE program within the next six weeks.The Japanese QE program absolutely brought life to the Nikkei and the Gold/Yen has been a huge gainer.My thoughts on GOLD remain positive as long as the world’s central bankers remain committed to the fear of deflation for the ECB,BOJ,FED Riksbank et.al. will err on allowing massive money printing in order to prevent a redo of the 1930’s—there is a battle of fiat money versus metals going on in the world.As readers of my blog for the last five years know–in 2013 after the fear of a break-up of the Euro ended and confidence that inflation was not exploding,global investors began buying stocks and selling off safe haven assets.In February 2013 I was on Greg Hunter’s USA Watch and suggested this was beginning too take place and investors ought to seel some GOLD to buy equities as the all clear was being sounded—I got pilloried by those who treat gold as a religion but I stand by that view—I saw this as we will watch what happens when the ECB actually follows the path of the Fed and the BOJ—yes when the Japanese announce the newest round of QE and GPIF stock buying the Gold does break as stocks get a boost but after the weaker U.S. unemployment data on that Friday the gold turns and has a sizable rally—and the Fed’s end of QE does suppress Gold and other commodities but GOLD will have investment value as long as real yields remain negative—the talk of normalizing rates in the U.S. is just talk –for what does normalizing mean—a real yield of 2%–when I see that process truly begin I will toss gold aside .The Europeans will buy gold instead of putting it into bank accounts for fear of being expropriated–see Cyprus as Djielssblohm’s template.The hard asset classes and equities are both awaiting a QE program from the ECB–A question back to you and the readers—Gold closed higher on the week when it had three major pieces of negative news for the barbarous relic—1,Swiss referendum soundly defeated;2,lack of a new ECB QE program;and 3,strong U.S. employment data with a rise in the yield on the two year note—how was Gold able to rise above the power of those three setbacks?
December 7, 2014 at 11:14 am |
Yra, an answer to your question of gold’s resiliency this week-Gold is to Central Bankers as Kryptonite was to Superman. Draghi said last week that in identifying the QE asset purchases being considered, identified “all except gold”. QE is seen as the pharma to fight the deflationary scourge. Money creation is the oil that keeps the financial system pistons pumping.
Gold bullion has been the asset for millenia against which all other assets have been measured. In the US. it is likely that QE 3 was not the last. There is a perception beginning to take hold that gold is the currency that will survive either a deflationary whirlpool or an hyperinflationary whirlwind, either of which will make the fiat currencies in high sovereign debt nations lose their credibility. Gold has been inoculated in the last three years by being a most hated asset and by now its immune system is beginning to kick in. The idea that more CB debt will solve the problem caused by debt is beginning to be questioned. Japan’s low interest rates for a quarter century accompanied by multi-trillion yen creation, and is now entering its fourth recession in that time period, makes the QE pharma possibly seen as having a shorter shelf life than previously thought. Cracks in some EM FX and debt markets are signalling that the puchbowl is no longer a universally intoxicating elixir.
December 7, 2014 at 11:49 am |
Asherz–you make good points and I think the same thing but will wait for further events to unfold.The flattening yield curves –if they continue—will be provide a headwind to gold —but your points are well taken
December 7, 2014 at 12:36 pm |
The flattening yield curve may be indicating that the deflationary pressures of the 800 ton gorilla of national debts sitting on top of the global economies are not responding adequately to the QE programs. The CB response may be the Krugman advise of turning the faucets on even further. Historically the flat yield curve has not been kind to gold. However with the possibilty fiat currencies backed by imploding economies can make for an unusual denouement.
In aerodynamics headwinds are recommended for takeoffs. They may also work for precious metals in today’s uncharted economic experimentations being tested in Victor Frankenstein’s laboratory.
December 7, 2014 at 12:42 pm |
Asherz–and as I joke–the fed’s models are not rocket science as we saw on friday with the great success of Orion and the landing in the designated area—the Fed will have no such success no matter how complicated their models
December 7, 2014 at 4:57 pm |
“There is one circumstance that could cause the ECB to ease monetary policy in a major way and that would be if the economy of Germany starts to slow down. I think that is likely to happen in the next year (2015), and then you could see Angela Merkel prevailing on Mario Draghi to liberalize monetary policy.” via Byron Wien & The Smartes Man in Europe…
December 7, 2014 at 6:47 pm |
Yra, comments well taken, thanks. The market is expecting Jens Weidmann to back Fed style QE? Where does it get that notion? Even if Mr Draghi can legally side step the rules, a weak currency is not in Germany’s DNA and the present set up has worked well for them even with a strong euro. German industry appears to be determined to remove sanctions, so is this a contest of survival between Mr Weidmann and Mrs Merkel?
December 7, 2014 at 8:35 pm |
Costas–no where do I imply that jens Weidmann goes quietly into that good night—axel weber went quietly to a big job at UBS but Jens Weidmann seems to have more fire in his belly to protect the interest of the German taxpayer and saver
December 8, 2014 at 5:40 am |
Yra, don’t put all your eggs in one basket: Jens Weidmann
http://www.ft.com/cms/s/0/6b81b8f8-b431-11e3-a102-00144feabdc0.html#axzz3LIymm2MU
December 8, 2014 at 7:08 am |
Thanks Yra, I get where this is going then. If rising equity markets happen at the cost of a depreciating currency, should retail investors consider transferring cash in the bank to the equity market; ie to treat the stock market as if it were a cash deposit account? The VIX is trying to make it clear to everyone that there is no risk in owning stocks – although I’m not sure how reliable an indicator of risk it is when it can be influenced in the futures markets – but at least in Europe there is definitely still considerable risk in holding cash in the bank. With no interest to be earned and stealth depreciation in purchasing power, it seems the average deposit holder over here needs a change of perspective.
December 8, 2014 at 7:54 am |
costa– yes but in the U.S. this game may have seen its better days
December 8, 2014 at 1:14 pm |
My guess is the insider sell side have nearly completed unloading all their junk onto mom and pop.