Tomorrow the ECB announces its next view on the European economy and the central bank’s unveiling of its efforts to keep DISRUPTING GLOBAL BOND MARKETS. Currently, the ECB is purchasing 80 billion euros a month in “quality” assets in order to meet its self-created mandate to bail out EU sovereign governments and the banking system. SINCE DRAGHI’S JULY 2012, “WHATEVER IT TAKES” speech, the ECB president has become the overseer of MONETARY and FISCAL POLICY. Yes, the unelected, unaccountable central bank chief has seized control over the European economy. The media and Brussels elite don’t notice as long as interest rates are repressed even lower and the current European remains in power. Wall Street applauds all things Mario as it sustains the global equities on a sea of liquidity. The ECB has successfully repressed yields on all sovereign debt because the globalization of finance ensures that all yields are relative as pension funds and insurance companies chase returns.
This is the current state of global finance as the markets await the ECB announcement. THE MARKET CONSENSUS calls for no change to the -40 basis point deposit rate and for the large asset program to be held at its current monthly rate of 80 billion euros a month. It is no surprise that I differ from the consensus. I believe that Presidente Draghi will increase the monthly purchases to at least 90 billion but leave the rate at -40. Here’s my rationale:
I believe that Draghi is in a hurry to load the ECB balance sheet with assets in an effort to preclude Germany and the Bundesbank calling a potential halt to the program as Germans grow angrier over the issue of “WHO GUARANTEES THE ECB” because, as Mick Jagger sings in “Sympathy For the Devil,” why after all it is YOU and ME say the good Bavarian Burghers. The faster the ECB balance sheet is increased the more difficult it becomes for the Germans to thwart a stealthily created and harmonized EU fiscal authority. The Germans have blocked the creation of a synchronized banking resolution authority as they don’t wish to inherit the non-performing loans of Italian banks and other legacy bad debt on the books of many European domestic banks.
The Financial Times reported on the ECB’s corporate bond purchases. It is revealed that the ECB is not “… sticking to the very safest part of the market. They have bought bonds issued by Volkswagen and Glencore (NOTE: I own Glencore stock), two companies that for different reasons were caught up in turmoil last year. And some of the companies such as Lufthansa and Telecom Italia, are considered junk by one ratings agency. To further make the case of the distortion being foisted upon the GLOBAL DEBT markets: The ECB has purchased NEGATIVE-YIELDING CORPORATE DEBT — 158 have a yield to maturity of less than zero. All bonds are eligible as long as they pay more than the central bank’s deposit rate of negative 40 basis points. The ECB has bought bonds across various sectors: telecommunications, electricity, oil and gas, autos and chemicals.
This ties back to an issue that I have raised about the financing of the building of the HINCKLEY POINT NUCLEAR PLANT. This is a 20 billion euro project that the French firm EDF has been trying to finance. The ECB will be a ready and willing buyer of the bonds of a French energy firm 85%-owned by the government. The ECB currently exists beyond the reach of any sovereign accountability. For how long we do not know but it makes Mario Draghi a man in a hurry. Mario, BUY NOW, BEFORE YOU HAVE TO PAY LATER. The recent data release from the German ZEW reflected a substantial drop in German economic sentiment. Mario Draghi needs to seize the day.
***If my conjecture is right, the DOLLAR rally will be sustained and the recent move in the dollar index above the 200-day moving average will be substantiated, but as we approach the FOMC meeting, it will put pressure on the FED to keep U.S. rates on hold for Stanley Fischer acknowledged that the FED does measure the DOLLAR in its weighting of global headwinds. The ECB’s moves will prevent the FED from being “data dependent.” Mario Draghi’s SILENT COUP makes him not the “most interesting man” in the world but the most powerful by default, or the preventing of the illusion of default.
***Tomorrow I will be on with Rick Santelli at 9:40 CDT. In case we discuss the issues of a reinstatement of Glass-Steagall (I never know where Rick will go as we do everything impromptu), I am reposting a May 2012 blog regarding my views on the law, which is still very relevant. Please read as it is devoid of the silly discussion put forth by paid banking lobbyists. I will offer to debate any and all of the hired guns that are dragged out to fill the echo chambers.