Notes From Underground: What Was Learned From Draghi and Yellen

In reviewing the March 9 ECB and March 15 FOMC meetings, the press conferences emceed by President Mario Draghi and Chair Yellen revealed little but raised questions about serious issues confronting the world’s two key central banks. The ECB maintained its current policy and will scale pack monthly QE activity to 60 billion euros starting April 1 while keeping its deposit rate at NEGATIVE 40 basis points. Draghi bowed deep and heaped praise upon himself and his fellow board members by proclaiming that they saved the EU and the euro. Draghi said “without a single currency there could not be a single market.” It was Draghi’s July 2012 speech of “we will do whatever it takes” to preserve the euro, which saved the currency and logically means the ECB saved the EU.

Draghi’s counterfactual reminds me of former President George W. Bush’s “Mission Accomplished” speech. Hubris ought to be recorded by historians and not practiced by in office policy makers. It is far too early to know the outcome of the EURO and the EU project. In an effort to “save” the euro Mario Draghi has built a Tower of Babel debt edifice in which the ECB balance sheet is straining under the burden of accumulated sovereign debt from Italy, Spain, Portugal, Ireland, Greece and Germany (in addition to other debt instruments). The only way Draghi can continue purchasing questionable bonds is through the promise of repayment with the power of the printing press. It seems that Draghi has been able to create the “Dictatorship of the Printing Press.” As long as Brussels genuflects at the altar of the ECB–think of it as the only game in town–Draghi is the most powerful political figure in the EU.

Draghi will not change the present plan until the French elections are over and the defeat of Marine Le Pen has been certified. There are some analysts speculating that the ECB may move from negative interest rates before they end QE in January 2018. At first blush this seems crazy but if Macron wins the French Presidency, Draghi may look to aid his guardian angel Chancellor Angela Merkel. A less accommodative ECB will be a positive as Germans are tired of the extreme monetary easiness of the European Central Bank. If this conjecture gains traction it may lead to further selling of well-entrenched long dollar positions. This is something to think about as the French elections confront the self-satisfied global equity markets.

***The Yellen press conference revealed a far more dovish stance than the discussion of a possible three more rate hikes in 2017. MY CONJECTURE: Chair Yellen presented a far less strident tone than FED speakers presented in the weeks prior to the FOMC meeting. It seems that the FED had painted itself into the proverbial corner by precommitting to a MARCH RATE HIKE because it accepted the popular narrative of the Trump administration being able to enact a substantial fiscal stimulus plan, as well as a tax cut based on a significant reforms. BUT THE FED has awoken to the idea that Trump’s stimulus agenda is no sure thing, especially in the current fiscal year.

It seems as if the press conference revealed that Chair Yellen is “scared” of derailing the recent economic growth by raising rates preemptively to deal with a massive stimulus in the time of full employment. If I am correct, the DOT PLOT ought to be thrown on the bonfire of FOMC vanities. This seems to be the FED‘s new conundrum. Minneapolis Fed President Neel Kashkari gave ccredence to my hypothesis in his NO vote. In a Friday press release rationalizing his vote Kashkari seemed to raise the spectre of the FOMC being too worried about the coming stimulus. The Fed President maintained that the recent economic data DID NOT WARRANT a FED rate increase and it appeared that Kashkari actually answered the question raised by Bloomberg’s Kathleen Hayes.

The fabulous Bond Belle raised journalism to a higher level by asking the most pertinent QUESTIONS of the press conference, a set of questions that Yellen failed to answer but seemed to cause the Fed chair great distress. Yellen claimed that there was no detailed discussion of fiscal policy and there is great uncertainty ahead. It was Kashkari’s written response that made me question the Fed’s veracity about the role of fiscal policy. The equity, gold, bond and currency markets all rallied during the Yellen press conference giving support to an equivocating Fed. The first quarter is coming to a close and so many questions about the state of the global financial system remain unanswered, but one thing remains: Markets are far too serene about the risks on the horizons. It appears we were left with far more questions than answers.



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14 Responses to “Notes From Underground: What Was Learned From Draghi and Yellen”

  1. asherz Says:

    As Yellen has been painting herself into a corner, and Kathleen Hays asked directly pertinent questions, a rarity at these press conference, the “bond belle” as you so eloquently portray her reminded me of another bell, by John Donne.

    “”Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me, and see my state, may have caused it to toll for me, and I know not that.”

    “…know for whom the bells tolls; it tolls for thee.”

  2. David Richards (@djwrichards) Says:

    Rather than fret about phantom fiscal plans to justify a rate hike, aren’t the negative real rates and monsterous “everything bubble” more than sufficient for the Fed to justify rate hikes? The bubble that the CB’s everywhere have created is the most destabilizing threat for both prosperity and peace in the world today. The Fed hike should have been 50 points with more of same to come. The crashing Yellen-dollar screams so.

    • yra Says:

      David–I agree the FOMC should have raised quicker but that is not in the playbook of Yellen and comapny.They are so nervous about getting it wrong they will move slowly .The issue of the massive balance sheet that central banks hold is a theoretical certainty but in practice a great unknown and there in lies yet another conundrum

  3. Arthur Says:

    We’re robbing from the future to pay for the past, former Sen. Bob Kerrey says

  4. Rob Syp Says:

    Hey the Dollar index below 100 so thanks for bringing this market to our attention. And where have you gone 100 point moves in the Dow? Who knows how all the Trump initiatives will go but maybe he’ll at least be able to bring us some volatility.

  5. Chicken Says:

    I read in a recent report, the US is in need of well over $4T in infrastructure investment,

  6. frank c. Says:

    Ray Dalio of Bridgewater recently issued a report on the historical importance of elections/populism vs. fiscal/monetary policy.

    “Given the extent of it now, over the next year populism will certainly play a greater role in shaping economic policies. In fact, we believe that populism’s role in shaping economic conditions will probably be more powerful than classic monetary and fiscal policies (as well as a big influence on fiscal policies). It will also be important in driving international relations.”

    The full report can be found below.

  7. Dan DeRose Jr Says:

    Yra, If Draghi wants a long-lived EU, Martin Schulz may be the ticket. If he rolls back those labor reforms, it will help resolve the internal imbalance in Germany and thus the external imbalance in the periphery. Maybe the EU will even thrive in its straitjacket until the next crisis. Where would that put the euro?

    • yra Says:

      Dan—where does this go I have no idea but after the French election then Germany will move to the front and center and Schulz may help Merkel as he draws some support from the AfD—it is a long slog to the fall elections

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