President Mario Draghi takes center stage tomorrow and as usual the press conference will be critical. The ECB official announcement is at 6:45 CDT with the presser 45 minutes later. The consensus is for no change in rates or the current 80 BILLION EUROS in large-scale asset purchases. I would argue that if Mr. Draghi wishes to increase the ECB balance sheet tomorrow HE OUGHT TO INCREASE QE to at least 90 BILLION EUROS. But ought does not imply WILL. The past week has brought severe criticism of Draghi and the ECB from two of the most prominent monetary authorities in Europe. First, Gillian Tett had an article in last Friday’s Financial Times titled, “Investors Are Ill Equipped For Our Unfathomable Future.” Tett reports on the views of Axel Weber, who should have been the President of the ECB, instead of Draghi. Weber said the banking system is much stronger today than for many years. But, Axel warns that financial markets are much more unstable than the banks. Markets are not free markets “because of heavy government intervention.”
Weber said, “I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention.” The fact that Weber is the Chairman of the UBS Board of Directors gives his words greater credibility. Weber raised another point in relation to central bank intervention, that “these distorted markets are increasingly hostage to unfathomable political risk.” The central banks’ use of financial repression and domination of yields has increased financial risk in an age of great political uncertainty. Because of low returns and heightened political risk, Weber said “you can nowadays see the entire return that you expect for a year being wiped out for a single day move in the market.And that is an unprecedented situation.”
Following the Tett piece was a classic from Ambrose-Evans Pritchard in the London Telegraph titled, “Euro ‘House of Cards’ to Collapse, Warns ECB Prophet.” Otmar Issing, one of the founding architects of the monetary union, heavily criticized the ECB and the European Commission. Issing maintained that the political structure of the European Commission plays a major role in sustaining moral hazard throughout Euroland. He heavily criticized the ECB for bailing out bankrupt states through the QE program, rendering the stability and growth pact null and void. “The no bailout clause is violated every day.” The overall effect is created by the massive QE purchases sending all global sovereign yields to ridiculously absurd low levels.
Pritchard said, “Professor Issing is NOT a German nationalist. He is open to the idea of a genuine United States of Europe built on proper foundations, but has warned repeatedly against trying to force the pace of integration, or to achieve federalism” by the back door. BUT THIS IS EXACTLY WHY PRESIDENT DRAGHI WILL HURRY TO BACKDOOR A EUROPEAN BOND BY MAKING THE EU CREDITOR, GERMANY, RESPONSIBLE FOR AN EVEN FASTER GROWING BALANCE SHEET. The more DEBT piled onto the ECB’s balance sheet, the more difficult it will be for the German fiscal authorities to escape the EU debt trap. For President Draghi, speed is of the essence before the Merkel Cuckoo clock winds down.
Be patient tomorrow as the ECB press conferences have been the cauldron of volatility. Mario Draghi will attempt to assuage the Germans while placating the low-growth, debt-laden peripheral European states. As Bob Dylan sings, gotta serve someone. If Draghi actually adds to the QE, equities will rally, gold will rise, European bonds will put upward pressure on all sovereign debt and the EURO will be sold. The question for the EURO will be where will it close at the end of the day. What if the ECB meets consensus? Again, where the EURO closes will be the TELL. A “stay the course” from the ECB should give the EURO a bid. What is important will be for HOW LONG?