Notes From Underground: Draghi Comes Clean — He’s a Confidence Man

Standard dictionary definition of a CONFIDENCE MAN: “A SWINDLER WHO TRIES TO GAIN THE CONFIDENCE OF THE VICTIM IN ORDER TO DEFRAUD.” In a speech given by ECB President Mario Draghi at a Deutsche Borse reception in Germany, he mentioned the word CONFIDENCE many times. Draghi admits that there is little that the ECB can do to resolve the problems of the world economy but the Bank can continue to do a great deal to revive the economic prospects for the European Union. The ECB needs to continue to keep liquidity flowing in order to support the EU financial system. Draghi succinctly states: “The KEY ELEMENT IS CONFIDENCE. CONFIDENCE IN GROWTH, CONFIDENCE IN STABILITY, AND CONFIDENCE IN THE FUTURE OF THE EURO AREA.ONLY BY BUILDING CONFIDENCE CAN WE TURN THE ONGOING CYCLICAL RECOVERY INTO A ROBUST, STRUCTURAL RECOVERY.”

The entire speech is an effort to deflect criticism of the ECB and is very much from the Bernanke and Yellen boiler-plate speeches of “stop complaining because it would have been worse without the dramatic and unconventional measures that were taken to ensure against the liquidation of the financial system.” The idea that low rates punish savers–yes, low rates lead to reduced savings on safe assets but what is important for savers,”… is what their assets can actually buy–i.e. real returns–and how their overall portfolios are performing. And it turns out  that on this metric, the situation isn’t nearly as bad as it’s often thought to be.”

Unfortunately, President Draghi fails to inform us about who it is that experiencing real rates of return of savings. It can’t possibly be Germany where two-year notes yield a NEGATIVE 41 basis points and inflation is certainly above 1 percent. The speech is riddled with platitudes but fails to take into account the damage done to the German citizens in order to bail out the EU debtors. But the bottom line is that the ECB’s MANDATE is not inflation but a mere confidence game. If I was a Bavarian Burgher I would stand a better chance playing three card monte in Central Park.

As an aside, President Draghi noted that there is no impending financial crisis as bank balance sheets are the strongest in years. “Capital ratios for euro area banks have risen  from around 8% in 2007 to close to 14% today. In other words, the risks are currently falling,not rising,” he said. This is more of the confidence game as it seems that European banks have not received the message. Deutsche Bank stock made all-time lows today in DOLLAR terms (but not euro terms) as it closed below the lows made in February 2009. To make the problem even greater, GREEK 2-YEAR NOTES ROSE TO 15%, having increased by 6.5% since the beginning of the year. There is something amiss between Mario and the facts on the ground. My confidence is waning.

***The most important news item of the day was buried on page six of the Financial Times: “BOJ KURODA SEEKS CHINESE CAPITAL CONTROLS.” This is significant for a Governor of a major central bank to openly suggest the imposition of “stringent capital controls to help stem massive outflows of hot money from China and stabilize hot money….” Governor Kuroda seems concerned that if the Chinese YUAN continues to weaken it will cause problems for the Eastern Asian economies and put pressure on other central banks to pursue policies of currency weakness. Japan would have to embark on more QE to deal with Asian depreciation and it appears that Kuroda-san is reticent about buying more JGB’s. It seems Kuroda wants the Abe administration to continue its structural reforms, which have fallen far short of its stated goal.

It seems many central bankers have tired of more QE as it appears that the vast monetary purchases have had limited success. It is heresy for a central banker to prevent the “free flow of global capital.” When IMF Director Lagarde was asked if she agreed with Kuroda, she dodged the question according to FT reporter, Chris Giles. Ms. Lagarde  simply said:”I think the massive use of reserves is not a good idea.” It may be an idea for the Chinese central bank to employ the services of the great Con Man Mario Draghi [.In an effort to get a better grasp on the Chinese impact on Asia read this weeks Barron’s round-table, especially the wisdom of two global macro giants, Felix Zulauf and Jeff Gundlach.]

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19 Responses to “Notes From Underground: Draghi Comes Clean — He’s a Confidence Man”

  1. the american limey Says:

    nice work Yra. I am “beginning” to get how this all works thanks to your way of putting things. Thank you for taking the time. I did read the Zulauf article but am having to chat with my chum Sherbin to determine the best way to play the concepts. Seriously, nice work.

  2. asherz Says:

    Mario reminds one of “Professor” Harold Hill, in the hit musical, “The Music Man”. He sells the poor people in the small Iowa town on an illusory concept .
    “Seventy-six trombones led the big parade
    With a hundred and ten cornets close at hand.”

    and then disappears.

    And who can forget Chuck Prince, CEO of Citigroup who famously said, “”As long as the music is playing, you’ve got to get up and dance.” just before his ship began sinking.
    Well the QE song has been tried and tried again without success but it will surely work the next time. What did Einstein call that?

    As the Bard said,
    “If music be the food of love, play on,
    Give me excess of it; that surfeiting,
    The appetite may sicken, and so die.”

  3. kevinwaspi Says:

    “What low interest rates are doing…is stimulating the economy and especially the demand for durable goods, like cars,” Mr. Draghi said, in an apparent reference to Germany’s large auto industry.

    “Let me start with the economy, and a basic fact: the United States of America, right now, has the strongest, most durable economy in the world. We’re in the middle of the longest streak of private-sector job creation in history. More than 14 million new jobs; the strongest two years of job growth since the ’90s; an unemployment rate cut in half. Our auto industry just had its best year ever. Manufacturing has created nearly 900,000 new jobs in the past six years. And we’ve done all this while cutting our deficits by almost three-quarters.” President Obama, January 12, 2016

    No comment.

    • the american limey Says:

      YEP, we’re the biggest manufacturer of buggy whips on the planet thanks to legislation and unions. Consider this, I have been lobbying Chicago to put in a monorail to Pilsen for two years now like the Skytran system GOING INTO ISRAEL!!! no chance.

      I wanted to build a new house out of containers NO CAN DO because they are a FIRE HAZARD ( they burn at 7000).

      Can’t use PEX for plumbing I suppose I am lucky I can use electricity in the fine soviet state of Chicago. It’s great to create manufacturing jobs but why not consider training people to create inner city factory farms using the Kratky method using some of the derelict buildings? How about giving people time off to learn how to code AND manage selling their own apps? In short we are ill prepared for a situation where a person’s labor is not worth anything to anyone thus causing significant social tension. This will only get worse until someone decides to stop this protectionist bollocks and start telling the truth without regard to political correctness.

      The only good thing that has happened to me today is that I was reminded that my beloved wife managed to piss off Director Lagarde within seconds of meeting her.

  4. Sophocles Sophocleous Says:

    The world is a messed up place. Thankfully we have such wonderful central bankers who have found the solution: Armageddon.

  5. Alex Says:

    Just wondering Yra, when Lagarde was working as a lawyer in Chicago in the 1980s did you used to bounce around town with her after work, drinking, partying etc? Was she part of your crew?

    • yra Says:

      alex—are you confusing me with Dominique Strauss-Kahn—was a young father of four driving carpools and trying to accumulate knowledge to promote my Praxis–the theory and practice of global monetary flows—-sleep was not a priority

  6. yra Says:

    asherz–is this a cryptic response to the Wells Fargo Wagon bringing the energy sector debt or the role of Lagarde as Mariam the librarian in which she controls all the books

  7. housman2013 Says:

    Ira…….I’m enjoying your posts , but wonder if you could help me understand how European rates remain well below US equivalents. What am I missing? Would have liked to see El Erian speak to that when he was on the other day

  8. Chicken Says:

    So China wants to devalue the Yuan but doesn’t want shorts to bet against the Yuan, did I get that right?

  9. the american limey Says:

    how many bets on dovish fed bump up 2sd to SPX 1940 tomorrow. Come on chaps ( not the sterling transfer guys) place your wagers. I’m wondering if someone breaks ranks and says “an ill favored east wind is blowing and we are overtly overmasted ( nb speedwell)” wouldn’t it be nice if FOR ONCE they didn’t play Sir Humphrey’s and came clean.

  10. Blacklisted Says:

    Why have I never heard a talking head or analyst recommend the Fed go back to buying corporate paper to stimulate the economy, instead of buying govt bonds that obviously doesn’t help?

  11. Financial Repression Authority Says:

    […] LINK HERE to the article […]

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