Notes From Underground has been concerned that 2017 would be the year of Europe as the ECB’s quantitative easing policy and NEGATIVE interest rates would be an issue for many of the elections taking place this year. The Dutch, French and Germans will hold parliamentary elections. Those following the mass media will be focusing on immigration while NFU will continually seek to underline the importance of the repressive financial policies of the ECB. It is this narrative we will use to take the pulse of potential upheavals to the status quo. There is no doubt that the opposition to President Draghi is growing. In a threat to the Empress of Europe, Angela Merkel, received news that her coalition partner, SPD, has overtaken her party in the polls.
This is very early but the anger against the ECB caused German Finance Minister Wolfgang Schäuble to raise his concerns over the ECB‘s negative interest rates, and more importantly, the QE program. A Financial Times article, “Schäuble Blames ECB For Euro That Is ‘Too Low ‘For Germany,” quotes the German finance minister, who said, “The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position. When ECB Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus …. I promised then not to publicly criticize this policy course. But then I don’t want to be criticized for the consequences of this policy.”
THIS IS A VERY IMPORTANT POINT because it reflects a break from the unity of Draghi’s effort to smash the financial repression of the Bavarian Burghers. As the politics of Europe are in flux and pressure builds on the established elites, Mario Draghi will bear the brunt of blame. The problem will be that the ECB‘s balance sheet has compounded the terrible burden of debt by accumulating the sovereign bonds of many questionable borrowers.
The BIS has long argued against a zero risk weighting for all sovereign debt as clearly each nation in Europe has a different risk profile. All the Italian bonds bought during the last 18 months and the only support to Italian debt is the ECB acting as a buyer of last resort, and growing its balance sheet in the process. Even FRENCH 10-YEAR OATS have declined substantially in value leaving the ECB with greater losses. Yes, the ECB has a printing press but if fears of a full-blown credit crisis arise in Europe, the massive amount of debt held by large global financial institutions will create a seizure that will render Lehman a mere tremor. Draghi knows he has the financial system captured by the ECB’s growing balance sheet.
As Draghi postured in his speech on February 2: “Trust that all countries will comply with the rules that they have set for themselves so as to reduce their mutual vulnerability. And trust that all will enact the necessary reforms to ensure structural convergence, so that complying with those rules becomes easier, and SHARING RISKS DOES NOT CREATE PERMANENT TRANSFERS BETWEEN COUNTRIES.” It is the issue of transfers that will become a piece of the political discussions in Germany.
For transfers from German citizens to their European BRETHREN is an issue of taxation without representation. The political landscape is fraught various debt bombs, which could explode anytime during the next 18 months. The fallout will be GLOBAL and not merely a regional concern. Price your asset classes accordingly.
***In reaction to the European news about German concerns for ECB policy, the European bond market were in turmoil as the German 10-year yield dropped 5 basis points and Italian 10-year yield rose 12 basis points. Even the French yield rose 6 basis points as Fallion’s problems and Le Pen’s announced presidential campaign scared investors. Be very patient in selling Italian and French bonds because the ECB is scheduled to BUY 80 Billion of EU-area debt in a short February month, thus the ECB has genuine firepower to hurt short sellers. U.S. bonds had a significant rally as global investors were seeking havens. GOLD and SILVER received BIDS as investors moved money from European financial institutions.
The DAX was under pressure all day even as the U.S. equity markets held relatively firm. But if Germany is to be the target of ECB inflation then German corporate assets with high dividends will provide a “safe” harbor for German investors. Be patient and let some of the immediate angst subside and look for opportunities within the fear caused by bouts of chaos. Interestingly, the DOLLAR did not go BID today so it seems the presidents comments about currency valuation is trumping some of the traditional havens. The YEN is performing in line with the issues raised by Ford CEO Mark Fields and is now four percent higher since the automobile manufacturers meeting at the White House. Say goodbye to the border tax.