Let’s look forward to the most important news event: The March 10 ECB meeting.
Super Tuesday has come and gone. Bill Dudley and Lael Brainard have softened their outlooks on U.S. growth and inflation. The G-20 has passed into oblivion. Japanese JGBs were auctioned at a negative yield as investors acquiesced to paying the government for the privilege of owning its DEBT. The Middle East crisis is on the verge of an escalation of the multi-faceted conflict in Syria. Throw in the refugee situation plaguing the European continent (and the fact Germany is seeking debt relief for Greece if it is willing to become a holding pen for Syrian refugees) and it seems that we ought to be singing Barry McGuire’s EVE OF DESTRUCTION. BUT THIS NEWS PALES RELATIVE TO THE RUMBLE IN FRANKFURT NEXT THURSDAY.
The markets have geared up for the expectation that the ECB–under the guiding mouth of President Mario Draghi–will have to embark upon an INCREASE IN LARGE SCALE ASSET PURCHASES as well as A FURTHER DROP IN NEGATIVE RATES. THE PROBLEM FOR DRAGHI IS BUNDESBANK PRESIDENT JENS WEIDMANN. The Germans are not on board for any more monetary stimulus and just last week, German Finance Minister Schaeuble warned about further government stimulus financed by increased deficit spending and more debt. The problem for Draghi is that inflation is receding well below the 2% mandate, which he has avowed to hold fast to. More inflation is a palliative to the overwhelming debt burdens plaguing European banks, corporations, consumers and governments. At the December 3 ECB meeting, President Draghi failed to meet the markets’ expectations for increased liquidity via enhanced QE. The EURO rallied and equity markets sold off. President Draghi has been the savior of the EURO but was able to fend off the Bundesbank by having the support of a very politically strong German Chancellor, Angela Merkel.
However, Angela Merkel’s popularity is waning and three days after the ECB meeting there are regional elections in Germany. The Greens and the anti-European AfD party (of the extreme right persuasion) will contest the strength of Merkel’s political power. IN MY OPINION, Mario Draghi will have to press whatever advantage he has in an effort to meet his beloved inflation mandate. The December 3 meeting revealed FIVE ECB board members opposed Draghi on imposing a more robust liquidity addition. There will be a renewed battle between Draghi and Weidmann.
How far will Draghi push against the intransigence of the German financial establishment? The battle lines are being drawn. Draghi is trying to bail out the highly indebted European peripheral nations (Italy, Spain, Portugal, Greece, France etc.) by transferring a huge amount of sovereign debt onto the ECB’s balance sheet for which Germany and a few others will have to be the ultimate creditor. Currently, the ECB rules stipulate that an asset purchase plan based on a capital key sets the percentage of each nations debt that the ECB QE program mandates to buy:
Germany 25.6%; France 20.1%; Italy 17.5%; Spain 12.6%; Netherlands 5.7%; Belgium 3.55; Austria 2.8%; Portugal 2.5%; Finland 1.8%; Ireland 1.6%; Slovakia 1.1%; and all the others a combined 5.2%. The bottom line is that the ECB balance sheet is loaded with a great deal of suspect paper issued by nations with high GDP/public debt ratios and the yields of the 10-year notes are well below comparable levels of U.S. 10-year Treasuries. Just another reason for the German electorate to be in a cantankerous and irritable state of mind. Get ready to rumble.
Tags: Angela Merkel, ECB, Euro, Germany, Mario Draghi, QE
March 3, 2016 at 3:52 am |
Sleepless Nights
Central Bankers generally try to coordinate their activities but occasionally there are disagreements in fundamental policy. The Bank that wields the biggest stick is of course the US Fed, In which direction will Yellin &Co. push the ECB in their forthcoming meeting?
Both Stanley Fischer and Bill Dudley hinted at what keeps them awake at night in their recent speeches.
Fischer discussed the Fed’s Congressional mandates of price stability and maximum employment. He then went into the subject of market volatility. Although saying that unpleasant markets aren’t always reflective of reliable economic predictions, the market gyrations of the first part of 2016 is clearly on his mind.
Dudley said that a further fall in market and survey-based inflation expectations would be “worrisome”, as doggedly low inflation could eventually become entrenched in investors and consumers’ outlooks. Notice which group came first.
I have maintained that the Fed has had a third mandate all along which may be THE prime consideration in their monetary policy, i.e., a rising or stable equity market.
The use of the word “volatility” has always meant rapid and short term fluctuations up or down. It has come to mean only one direction, down. You didn’t hear the word used in the 200% rise from 2009 very often. But a 10% drop this year has the Fed becoming very nervous. Look for interest rates to remain low for as long as we can see accompanied with excess liquidity, giving the marching orders from the Fed to the ECB. Will Weidmann and Schaeuble push back successfully? My guess is no. Kick the nightmares down the road.
March 3, 2016 at 10:00 am |
Asherz–great post as it adds important context –thanks
March 3, 2016 at 10:37 am
Trump appears to be a fly in the ointment, is it safe to assume the FED answers to a political master?
Or is Trump being setup as a fall guy to take the blame for spectacularly failed and rigged monetary debacle?
China appears to be in dire straights, hard to comprehend bullish comment so obviously not comprehending something.
While Mexico is being PEMEXed to death….?
March 3, 2016 at 10:31 am |
“The bottom line is that the ECB balance sheet is loaded with a great deal of suspect paper”
A great amount of it appears to be German and increasing at a greater rate than any other? This policy appears to miss the target, surely Germans don’t want their debt bought, this suppresses local rates.
Or is it, DB is the most levered to junk thus a back door deal is required?
March 3, 2016 at 10:46 am |
Chicken—the german amount is set at 25.6 % is the set amount so the ECB is buying 74.5% of the proverbial other and it is alos ridding the financial markets of the needed good collateral to lubricate the short term funding markets–so I disagree with the point and it calls the question of why the QE policies wind up hampering the funding markets
March 3, 2016 at 11:34 am
Good point re: absorbing “safe debt” Yra, The funny game of percentages is slippery.
March 3, 2016 at 6:10 pm |
I hope those central bankers read Bill Gross´ latest letter…
March 3, 2016 at 7:48 pm |
Gross has reduced himself to bozo status over the past couple years, I’m thinking.
March 4, 2016 at 6:45 am |
Green AB—as you know we have struggled with Gross over theyears especially over his bund call but this one I agree with but in my sense this is old news
March 4, 2016 at 9:06 am
You´re right Yra – it´s not news. But i still hope that central bankers come to their senses. They already destroyed the saver. Now they´re doing the same to the banks, insurance companies and pension funds. With no clear benefit on the lending side. You can´t create demand, force banks to lend, when there´s nobody who wants to borrow / is creditworthy.
Over here in Germany Bavarian Sparkassen (regional banks. english translation might be “thrifts”) are actively discussing to withdraw money from the ECB and put in safes instead, because it would be cheaper. I mean it might not happen right away, but you can sense desperation.
March 4, 2016 at 9:31 am |
Green AB articulates what should have been obvious to the Bernankes and Draghis who claim to have learned the mistakes of their predecessors of the 1930s. They are now applying their untested lab experiments in the real world and keeping their fingers crossed. However they neglect to factor in another key component of the Great Depression economy, that is, the “pushing on a string” syndrome. After the near death experience for the banks 8 years ago, and an awfully weak economic recovery paid for by massive debt creation, lending and money velocity remains at a standstill. Egged on by the brilliant Paul Krugman, they believe that more of the useless placebos being injected will work the next time in their laboratory. Lon Chaney will emerge at the end in the form of Frankenstein, chasing away the boys and gal in their white coats back to their classrooms.
March 6, 2016 at 12:09 pm |
Asherz– and green AB–absolutely strong discourse and again proves that we struggle for dialectic and not validation at NOTES—pushing on a string is something that many espouse but fail to comprehend what Schumpeter was driving at—the banks are in a mess and we haven’t even discussed the destructive force of Bail-in as pushed forward by Djisselbloem in the Cyprus debacle–not you want to fine me for having cash while you want me to provide an insurance policy for the big banks and I am not even receiving any insurance premium for doing so—I wait for the newest MOUTH of Omaha to way on this concept of the public insuring the banks while having to pay an upfront fine for the privilege of doing so—uh oh etter get GEICO
March 6, 2016 at 2:52 pm |
Yra- Mentioning Schumpeter is germane to what is the rapid evolution of what has become of our economic system, once the envy of the world. The last bubble was kicked off by the National Homeownership Strategy over 20 years ago, egged on by Bill Clinton, Jesse Jackson, George W. Bush, the bankers, Fannie and Freddie and countless others. Its failure, has put another nail in the Capitalist 200+ year experiment. Schumpeter predicted that Capitalism would collapse on its own weight by the hamstringing entrepreneurship, the lifeblood of this system, replaced by Socialism. We now see over-regulation, making starting a business a difficult task, and too big too fail financial institutions, bigger than ever as prime examples of crony capitalists, supported by billionaires from Nebraska who game the system.
The Fed’s creation in 1913 was a result of the Panic of 1907. A good thing? The SEC came about because of the Great Depression. Do we have truly free markets? Dodd/Frank, the response to the Great Recession, (Chris Dodd was a client of Countrywide Financial and Barney Frank was a major supporter of “Affordable Housing” and a major supporter of lowering lending standards at FNM and FRE) has in fact solidified the big banks power and weakened the regional banks, that were the providers of capital to Schumpeter’s Creative Destroyers, the entrepreneurs. Where do we go from here?