Notes From Underground

Sometimes world leaders and CEOs ramble and say things that reverberate for longer than intended. Two things in particular are echoing in the canyons of poorly thought-out ideas: President Barak Obama’s comparing the military potential of ISIS to A HIGH SCHOOL JV BASKETBALL TEAM. Then, there’s the CEOs OF AMERICA’S HEALTH INSURANCE AND HOSPITAL INDUSTRY, ALONG WITH THE BIG PHARMACEUTICAL COMPANIES, APPEARING REGULARLY AT WHITE HOUSE CONCLAVES TO ACTIVELY SUPPORT THE AFFORDABLE CARE ACT, PROCLAIMING AS THEIR RATIONAL: IF YOU ARE NOT AT THE TABLE THEN YOU ARE ON THE MENU.

Now the same CEOs reappear on the same CNBC and Bloomberg television shows explaining why their firms’ EQUITY VALUES ARE COLLAPSING ALONG WITH PROFITS. We should have no sympathy for the health care companies who now find themselves as the main course because it appears that the menu was based on DU JOUR AND PRIX FIXE pricing. Fixed prices in a capitalist system are a flawed model. NOW IF THE FED ONLY UNDERSTOOD THE RAMIFICATIONS OF INTEREST RATES THAT ARE FIXED IN A DYNAMIC SYSTEM.

***This week has taken on great importance as the ECB and the Bank of Canada meet to decide their current interest rates; Janet Yellen testifies before the Joint Economic Committee on Thursday; and UNEMPLOYMENT DATA is released on Friday. Oh, lest we forget, OPEC also meets on Friday. It is easy to see how explosive this week can become and yet all markets are trading in a very subdued, non-volatile state. Why? Because the power of CHEAP MONEY appears to overwhelm all sorts of geopolitical concerns. The FED‘s anticipated rate hike is considered of limited impact compared to the expected enhanced liquidity injections from the ECB. The global financial markets are listening to ECB President Draghi and believe that Thursday’s meeting will possibly result in a lowering of interest rates and maybe an increase in QE purchases by either raising the level from 60 billion euros a month or else extending the duration of the program to March 2017 from September 2016. Either way an additional amount of liquidity is expected to be added.

In my opinion, the ECB may lower the negative interest rate on ECB DEPOSITS to NEGATIVE 40 BASIS POINTS because the present rate of -20 is not low enough for the ECB to purchase  the two-year debt of many European sovereigns. (There are currently EIGHT countries have two-year yields below -20 basis points and by the ECB’s rules that debt cannot be purchased so a drop  in the rate will allow the ECB access to an increased pool.) An outright increase in QE purchases will anger the Germans while a drop in the official deposit rate to NEGATIVE 40 will be where the German two-year is presently trading. The Germans are very angry about the plan for a European-wide bank deposit guarantee program currently circulating in Brussels. Germany is worried that the plan as proposed would expose German taxpayers to bank failures in other EU countries on loans made before the rules take effect. German Finance Minister Schaeuble wants bank shareholders and bondholders to be responsible before German taxpayers.

Something is very rotten in the state of European politics and the Germans are growing uncomfortable with the present state of the power of the ECB. As Chancellor Merkel’s poll numbers decline, Draghi will have to be very careful not to place more pressure on the German Chancellor while German voters voice greater concern about ultra-low interest rates, financial repression and the increased costs of settling Syrian refugees. Remember, with interest rates at ZERO around the globe, geopolitical events become magnified as the central banks have very little room to respond to economic and political crisis.

***There was a very significant headline in the weekend Financial Times: “France bows to Obama and backs down on climate ‘treaty.'” French President Hollande was hoping that the UN-sponsored climate conference would result in a significant global agreement on carbon emissions, an agreement that would be legally binding not just toilet reading for bureaucrats and those trying to arrest a bout of insomnia. Such is not to be because the EMERGING NATIONS will not agree to limit their growth with expensive, alternative, renewable energy sources. India and others will not by saddled with policy to deal with problems created by their previous colonial masters. Many nations are aware that President Hollande is desperate for any political victory in attempt to push back against the popularity of Marine La Pen’s National Front.

Mr. Hollande will be dealt a setback with the failure of a lack of a binding climate accord, which will result in a new intensified bombing campaign in Syria. Hollande is a wounded politician and desperate for any type of apparent victory. The world becomes far more dangerous everyday. More to follow.

Tags: climate change, ECB, health insurance, Janet Yellen, Mario Draghi, negative deposit rate, nonfarm payrolls, Obama, Obamacare, QE

This entry was posted on November 29, 2015 at 7:12 pm and is filed under ECB, Europe, France, Germany. 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.