In the famous 1951 sci-fi movie, an alien with a ROBOT has the power to threaten the entire Earth and bring human civilization to an end. The only words that can prevent the ROBOT (algorithms) from the total destruction of the world are: KLAATU BARADA NIKTO. Let’s hope that tomorrow ECB PRESIDENT MARIO DRAGHI has those same words at his command. There is so much riding on tomorrow’s ECB decision and the press conference that Mr. Draghi can bring financial ruin to the global money system. In all prior press conferences Draghi has been able to calm markets with mere promises of future actions. The game of securing time in an effort for improved economic performance is over.
The Swiss National Bank removed any sense of calm that Draghi previously provided and the market is demanding genuine action. In the many years of trading and investing I HAVE NEVER BEEN SCARED OF POLICY ANNOUNCEMENTS BECAUSE I COULD DEVELOP A GAME PLAN based on research and use of charts of price action to get a sense of potential outcomes. Tomorrow’s ECB decision has some many potential possibilities that it is too difficult to assign probabilities of market outcomes.
Complicating the situation tomorrow is the enormity of positions,as most investors are SHORT THE EURO in great anticipation of the ECB policy driving its currency lower through the use of a massive QE program. Not only are investors massively short the EURO but global funds are long European sovereign bonds in the hope of further compression of yields by continued central buying of debt instruments. Today–and everyday this week–there have been rumors of the size of the QE program and its make-up. The lead de jour with the greatest impact was that the ECB would begin to purchase 50 BILLION EUROS of bonds and other assets beginning in March through December 2016. This would calculate to about ONE TRILLION EUROS of purchases and bring the ECB‘s balance sheet back to its previous high threshold of THREE TRILLION EUROS.
This rumor was strong enough to cause the SPOOS, GOLD, and the U.S. Treasury market to rally, though the GOLD and TREASURY rallies faded by the end of the day. Mario Draghi may have over promised the markets through planned leaks in an effort to undermine the German intransigence about quantitative easing (aka large-scale asset purchases). If President Draghi fails to deliver it will be difficult for the markets to remain rational. The markets will not act like the report in “The Day The Earth Stood Still” (per Wikipedia): “In response GORT [the robot] relented from destroying the Earth and resurrected Klaatu from death.” For President Draghi, failure to perform on the issue of QE will lead to destruction of billions of dollars and euros because of built -up expectations.
What’s complicating the landscape for Mario Draghi is the SNB‘s action last week and the continued fall-out from the Swiss acting in contravention to the market’s reliance on the forward guidance of a respected central bank. Again, the market is heavily relying on the ECB‘s integrity so there is much to be scared about. Mario, KLAATU BARADA NIKTO.
***Other issues complicating tomorrow’s decision by the ECB:
- GOLD. The metal has rallied nearly 10 percent since January 1 in a very deflationary environment, which provides warning signs that global investors are disenchanted with central bank policy. This has been my argument for two years, that gold is not an inflation hedge at this juncture but a haven against central bank malfeasance and fiat currency. (See John Plender in today’s Financial Times.)
- BANK OF CANADA. The central bank “unexpectedly” cut its interest rate by 0.25 % to 0.75% and in stating the reason for the BOC decision, Governor Stephen Poloz said: “Given the magnitude of the shock to oil prices, there is an EXCEPTIONAL AMOUNT (emphasis mine] of uncertainty about the profile” for inflation. The BOC has joined the Danish Central Bank and the SNB in cutting interest rates to offset the fears of too rapid a disinflation.
- The German DAX and other European equity markets have rallied strongly in the last two weeks in anticipation of some type of aggressive action by the ECB. The equity rallies have been supported by the drop in European sovereign bond yields to record lows as Spain, Italy and Ireland all have 10-year yields below the Unites States. If Draghi disappoints European equities will drop and the yields on some of the peripheral bonds will rise in dramatic fashion.
The issue for the QE package and bond yields will be dependent on how much sovereign debt the ECB buys versus how much ASSET-BACKED SECURITIES (ABS). Remember, it was six months ago that Mario Draghi raised the issue of the ECB purchasing private bank non-performing loans in an effort to unclog the credit pipelines that fuel European credit creation. The ECB may mimic the FED‘s QE3 program in which the FED bought $85 billion a month evenly divided between U.S. Treasuries and MBS. Buying large amounts of ABS may be the more important element of the QE policy because it will allow the Germans to be placated as the national central banks will buy their own sovereign’s debt and the ECB will purchase the private sector. The purchase of private sector ABS will not be in violation of the EU treaty as it is not directly bailing out any nation.
There is so much to consider in regards to the ECB decision so again … I am scared. Heed my advice and not be a hero and let the market move in violent ways before committing to any strategy. Let us hope that calm prevails for Tomorrow Will Not Be The Day The Markets Stood Still. Mario, BARADA NIKTO.
Tags: ABS, Bank of Canada, DAX, ECB, Euro, Fed, Gold, Mario Draghi, MBS, QE, SNB, U.S. Treasuries
January 21, 2015 at 7:56 pm |
I generally like your comments and refrain from posting.
I am confused. In “The Day the Earth Stood Still”, the inhabitants of the universe outside of our World created a “race” of omnipotent robots. Why? Because those people were destroying themselves with perpetual war.
The robots were given irrevocable commands and powers to inflict supreme harm and destruction on their creators. In other words, the race of robots were keepers of civility. They maintained the peace.
Did a bunch of people with good intentions create our race of modern computer programs to keep law and order and maintain civility in the financial world. I don’t think so.
Have you lost your mind.
What did the SNB do: They stopped rigging the market. I guess, from your perspective as a trader, that is bad. Ms. Lagarde thought so – why wasn’t I “given the first call” – so that I could have called all of my friends and had them finance a long Swisse for me in my Swiss bank account.
For President Draghi, failure to perform on the issue of QE will lead to destruction of billions of dollars and euros because of built -up expectations.
Have you lost your mind:
Everyone knows that printing money will not help any economy. Money printing is a palliative to paper over derivative losses.
The best thing that could happen is absolutely nothing – let the speculators lose Trillions by the hundreds.
We others, mere mortals, with bullion and no debts, will be better off.
January 21, 2015 at 9:48 pm |
peter–there is nothing you posit that i don’t commiserate with.Your point is right on–that is my trader hat and not investment analyst—the only point i was trying to make is that traders OUGHT not have positions as the damage to traders being caught off has the potential to be huge–I will follow up today’s piece with a very cogent article in today’s London Telegraph by ambrose-evans-prtichard about an interview with Bill White–it is a sympathetic view with everything you write.And my views on how the central banks have destroyed the efficacy of the financial system have long been a theme of this blog
January 22, 2015 at 1:04 am |
I’m heading your advice Yra, it’s the only sound option out there unless one is a big Riverboater. .
If there’s one thing I’ve learned from the last 3 years of studying the markets it’s this – the safer, more profitable strategy is often to let the market make its wild swings (big figures, big announcements etc) and then really focus on the following day. Often the wild day forces everyone out (or tops & tails them) but then the safe move comes the next day when everyone in the market wants it (long) or doesn’t want it (short).
The most important and subtle part about waiting is the following day’s stops can often be far tighter which helps to defeat the nastiest equation in trading which is if you risk 50 ticks to make 3:1 you’ve got to make 150. But if you can risk 25 ticks (50% reduction) the 3: target is 75 ticks. That difference is so massive I can’t tell you.
That equation in my opinion is why it’s so hard to make proper money in this game, profits are not enough, anyone can make a profit, but to really make it in this game the profits MUST be large otherwise it’s hard to make any proper money overtime and you’re left scratching with the chickens.
January 22, 2015 at 2:15 am |
Yra I think the announced QE number could disappoint, but then in the Q&A Mario “the fox” will deliver on promises of significant future additional action (he has a proven skill there) so agree it could be a wild day on the EUR crosses. If I had to have a position, and as you wisely point out we don’t, I would be long EURUSD via options, and should it spike on announcement go delta 1 before the Q&A. Nothing happens in Q&A close the delta hedge and hang on.
January 22, 2015 at 6:41 am |
well, all rumors point to ECB QE. if so then I think it might very well be the starting point for RISING long term yields. sounds crazy? austerity would be dead as would fiscal sanity in the Eurozone. that´s a huge change of perception. and if Germany loses the battle with the ECB then it´s influence on fiscal policy in Brussels will weaken too. if the ECB follows through then we should have seen the lows in sovereign yields imo.
the ECB is sending a wrong signal, because there is no such threat as deflation in the Eurozone. core inflation is running at +0.8% , which is up from November and completely within it´s 12 month range: http://www.tradingeconomics.com/charts/euro-area-core-inflation-rate.png?s=euroareacorinfrat
i am very scared about inflation down the road. but thats a lengthy issue write about in another post.
January 22, 2015 at 6:57 am |
Everybody–good discussion and Green AB—your view from Germany also a plus –thanks.There is no doubt that the ECB QE is a equity trader dream but in the parlance of Bernanke and the Portfolio Balance Channel–how will it be received in Spain where unemployment is 23.7% as was released this morning—-stock owners get rich and the poor get children
January 22, 2015 at 7:26 am |
Stock owners get rich and Spain gets “Podemos”…I’m more negative about Europe than even during the euro crisis.
January 22, 2015 at 7:49 am |
Draghi takes whatever-Hooray!
The vacuity of QE and ZIRP in stimulating economic growth has been proven in the pudding of lethargic global growth rates. What has been left is another $7 trillion in debt and too much debt has been smothering growth possibilities and adding to downward disinflationary spirals.
Davis Malpass explains it pretty well in today’s WSJ.
http://www.wsj.com/articles/david-malpass-the-worlds-monetary-dead-end-1421885831?tesla=y&autologin=y
But yes, traders will get another shot of the their evanscent stimulent and lead to another temporary high while asset inflation detached from fundamentals will continue.
Long live the Central Bankers!
January 22, 2015 at 10:29 am |
The ECB has promised QE again, good for one more new index high?
January 22, 2015 at 3:58 pm |
I find these remarks to be apropos to the subject matter discussed:
http://www.lewrockwell.com/2015/01/bionic-mosquito/the-swiss-declare-war/
January 22, 2015 at 5:00 pm |
Peter–i have read all of those and in the big picture absolutely correct and Ihave discussed this long before they put pen to paper –for the last six months I have written several blogs about the insanity of the swiss policy–all that buying and let the Eur/Chf never got off the floor–made the point several times which is why i didn’t get caught short swissy–there is nothing there I disagree with–but yesterdays blog was me wearing my trader hat–
January 22, 2015 at 5:53 pm |
Yra,
If there is a profit to be made from the ECB purchase of assets, could a US Dollar-based person like me take advantage of that. I assume that I would have to hedge to Euros acquired to purchase assets. The fundamental question is what assets will be purchased. This is something I have limited experience in. I have no stomach to purchase the DAX with a P/E of 19, gambling that it will go to 25 (when the Euro falls to its historic low or lower of about 82 US cents).
In 1998, I made a contract with a Dutch boat build to construct a 100 meter yacht for a German client. The Dutchman refused to take foreign exchange risk and we made the contract in DM. We had the funds in US$ to pay for the boat, so we made out extremely well, as the contract value (in US$) fell during the executory interval of the contract. That “cost saving” helped us recoup our investment, when yacht was sold in 2010 (after my client died and the daughter inherited everything).