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.
Tags: ECB, Fed, Mario Draghi, QE, U.S. Dollar
July 20, 2016 at 2:45 pm |
Yra- Your May 2012 blog re Glass Steagell should be required reading for every Fed governor. My guess is most understand your point but they are beyond the point of no return. With over a quadrillion dollars in derivatives, much with the too big to fail banks being counter parties, it will not take much more than one match to be lit for the shot that will be heard around the world. Banks like DB or JPM are now too big to SAVE because of their derivative exposure.
With the equity markets in a melt-up phase (seventh day in a row for new all time highs) fueled by company buybacks and estimates being beaten after they had been lowered,the air-conditioners in the Eccles building has been turned up as the rooms seem to be getting pretty hot. The Brexit vote has the burghers thinking about the their ATM machine being abused by Mario as the system is approaching the overdose phase. They may not want to continue sharing the syringe anymore.
The crackheads have taken over the asylum.
July 20, 2016 at 4:27 pm |
Asherz—where is Alan Bates when we need him to star in the movie.I throw open the challenge to openly debate any and all “experts” read lobbyists for the market response to Glass -Steagall is evident.As long as you have FDIC insurance Glass-Steagall is mandatory
July 20, 2016 at 4:10 pm |
Yra-
As Asherz says, it’s a melt-up. And I agree with you that Draghi is going to tread lightly in the rate area after the recent gripes for the Euro-zone banks,.. and that makes QE expansion more likely.
Which is the irony of more free money that flies into equities because there is no risk-free return anywhere based on what the central banks have done… and it doesn’t matter where the liquidity is generated, it still ends up in the US equities because they are the only one that makes sense.
So Draghi and the others are fueling the US leadership of the equities bubble while their markets struggle.
And the other line from Mick that probably fits as nobody seems committed to stopping Draghi is “Time is on my side.”
July 20, 2016 at 4:57 pm |
Yra- You may have noticed that surprisingly the Republican platform just introduced bringing back Glass-Steagall. Across the aisle Lizzy Warren favors it as well. Add Sanders. So if you have the right and left taking similar positions on this issue, there is a shot. Your tying it to FDIC insurance are the teeth to make it work.
The lobbyists will work overtime, but if common sense and a bi-partisan effort shepherded by a Paul Ryan push it, it might become law.
You and Santelli should keep plugging it to the CNBC audience.
July 20, 2016 at 5:01 pm |
Asherz–agreed .Wonder how many pizzas are being delivered to Sullivan-Cromwell
July 20, 2016 at 5:32 pm |
Yra- Rodgin Cohen lunches on caviar.
July 21, 2016 at 12:40 am |
I have to agree with Alan that all Draghi and company are fuelling U.S. equities. I had this view for last year but had thought that it was over with the drop in the market at the beginning of the year and the dip in ISM below 50. Both have turned up. Any thoughts Yra on ISM?
July 21, 2016 at 6:27 am |
Dear readers—TODAY’S SANTELLI HIT HAS BEEN CANCELLED —SORRY FOR THIS BUT SO IT GOES.MUST BE A COUP BEING PLANNED AND BROADCAST FROM SOMEWHERE
July 21, 2016 at 8:50 am |
Assuming the ECB is accumulating corporate debt, this eventually translates to a potential source of income?
Bushfire! 🙂
July 21, 2016 at 6:19 pm |
A reminder from Adam smith (CAPS mine) as I am in the process of reading for the first time. I find this apropos to today’s economic times. Apparently History not only rhymes but occasionally repeats itself…
“For in every country of the world, I believe, the avarice and injustice of princes and sovereign states, ABUSING THE CONFIDENCE OF THEIR SUBJECTS, have by degrees diminished the real quantity of metal, which had been originally contained in their coins. The Roman As, in the latter ages of the Republic, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. The English pound and penny contain at present about a third only; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixty-sixth part of their original value. By means of those operations the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and to fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal REVOLUTION IN THE FORTUNES OF PRIVATE PERSONS, than could have been occasioned by a very great public calamity.”
July 22, 2016 at 7:56 am |
Rockeye–great add to the blog and reflects on the depth of Smith as a moral philosopher.The echo-chamber likes the simplicity of Smith the free trader but he had much to say especially about warning against meetings like DAVOS–the quote which I have used many times in the blog.The recent discussion which has taken place about Glass-Steagall is another example of the spin from the opinion makers—Glass-Steagall was brought into being with FDIC insurance so if you repeal Glass then repeal FDIC insurance watch the owners of the megaphone squirm
July 22, 2016 at 5:22 pm
“if you repeal Glass then repeal FDIC insurance”
Surely you jest, this isn’t a two-way street but more like a one-way highway.
July 22, 2016 at 8:48 pm |
Yra, having read your piece after the ECB meet, what can I say but great call! I have a couple of questions.
(1) Why are the Germans surprised that they might end up having to own Italian NPLs, if fiscal harmonisation was one of the three objectives of the EU superstate. I mean, they werent tricked into it, right?
(2) What happens when Mr Draghi for whom I suppose “whatever it takes” must also imply “as long and as much as necessary”, ends up with everybody’s debt, i.e. european sovereign and corporate – and who knows whether eventually also includes US frackers debt? Does the ECB hold all this to maturity hoping to get it back – because surely they wouldnt be able to sell it back to the market?
All the best. Costas
July 25, 2016 at 7:23 am |
Costa–I think Alan Rorhbach had it pegged right–Draghi believes that “Time Is On My Side” but he fails to model the impact of the political fallout from his efforts to burden the ECB with ever more debt.The Sword of Domecles overhangs the entire EU project and as this weekend’s G20 meeting showed yet again—it is all the potemkin village of counterfactuals
July 23, 2016 at 4:26 pm |
I’m watching the movie the Big Short. It made me wonder with all the bond buying of the Central Banks, can they play the role of the mask in the following clip:
https://www.youtube.com/watch?v=SM4bszbdYGY
If the bonds go south what happens? As Yra asked, who guarantees the EB, the answer was to print money…
Seriously, what happens when the bonds that are bought go south? Can the Central Banks absorb what the private banks could not when the mortgages were not paid?
July 23, 2016 at 4:33 pm |
and I should say… again?