Notes From Underground: Mario Draghi’s Circus

The ECB did exactly as expected, which was less than its deposit rate (if that’s even possible). President Draghi answered questions for an hour and said absolutely nothing except that risks were now weighted to the downside. The structural theme of his composed narrative was the concept of persistence and assessment. Draghi laid the need for continued ECB monetary ease on many factors inhibiting growth:

  1. German auto production slowing;
  2. actions are creating greater uncertainty due to tariff threats;
  3. China slowdown; and
  4. Brexit

One reporter criticized the ECB for being so far off on its economic assessments. President Draghi pointed to the four points above as hampering the ECB’s work because of the persistence of these uncertainties. The ECB research staff and members blamed the failure to boost inflation on lower energy and food prices. Draghi warned that if this downward price momentum were to last it would take longer to meet the self-imposed inflation target. The central bank assured the media and the world that it has a full toolbox in which it can create the liquidity to boost prices.

The bottom line is that the ECB will maintain a very accommodative  monetary policy until the persistence of the uncertainties stated above is ameliorated and business can ramp up capital investment.

The continued geopolitical problems coupled with the lack of a coordinated European  fiscal stimulus package is making economic assessment difficult. In his effort to obfuscate, Draghi did make a mistake: He blamed the slowdown in Europe on lack of fiscal stimulus while invoking the adherence to the growth and stability pact, otherwise known as the Maastricht strait jacket. Draghi tried to appease the Germans while criticizing individual governments (more magic).

Another Draghi misstep was the statement that European yield curves were flattening in response to the slowdown. I am posting three charts: They’re the French, German and Italian 2/10 yield curves over the last five years. Please, Mario, show me the flattening.

France 2/10 yield curve

Germany 2/10 yield curve

Italy 2/10 yield curve

The EURO currency weakened against all its major counterparts, which should have satisfied Draghi. Now it is time to do your work and watch the GOLD/CURRENCY ratios as another central bank has capitulated to the fear of Volcker’s non-existent deflation.

***This will be the last Blog for ten days as a I take a much-needed break. But as we saw Thursday, the White House sent out two of its advisers, Larry Kudlow and Wilbur Ross. The messages were antithetical to each other. Ross maintained that a China deal was not close, which undermined Kudlow. The Kudlow message on Wednesday was that a deal was possible while Thursday’s noise was about January jobs report being up a significant amount. Really? How does Kudlow know this? Again, there’s way too much noise coming from the White House in an effort to impact markets.

Coming discussions will look at the value of the Chinese yuan, and, very importantly, the role of President Erdogan’s Turkey. Turkey, the great NATO ally, has recently taken positions in direct opposition to the United States. It has sided with Russia in Syria while immediately undermining the Trump administration’s political stance against Maduro in Venezuela. This is an important geopolitical risk that is not appreciated by the markets. Enjoy your time but keep reading and sending questions.

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31 Responses to “Notes From Underground: Mario Draghi’s Circus”

  1. Chicken Says:

    My sense is Venezuelan public angst with Madero is growing.

  2. asherz Says:

    Kudlow based his prediction for robust new jobs on the jobless benefits number applications which dropped below 200,000 for the first time. He looks at this as a leading indicator for the employment number out next week. It doesn’t always follow however.Kudlow is an economic cheer leader for Trump policies. He is to CNBC, his former hangout, what Sarah Sanders is to the White House press corps (which is now in hibernation because of too many Jim Acostas. )
    Wilber Ross on the other hand is trying to hold back too much unrealistic China trade expectations which revived irrational exuberance in the market. Keep your eye on any agreement that does not include serious IP oversight. The rest is window dressing with promises that will not be kept. Remember, China is trying to overtake the US as the leading global superpower. That goal will prevent any serious trade agreements. They stole our F-35 plans before the ink was dry and they now have a copycat version. Not just Cartier watch knockoffs.

    Turkey, read Steven Cook’s response to the normally excellent analysis by Michael Moran of the Hudson Institute on Turkey becoming an important ally of the US. I challenged Moran on this recently as we see that Erdogan is on the opposite side of most geopolitical positions that the US takes. Erdogan is no Ataturk.

    Enjoy your winter break.

  3. AZRondo Says:

    Nice concise “Note”. I agree with Asherz, with one additional comment: Mr. Ross has a great deal of experience in/with China as an investor in large. He is skeptical for good reason in my opinion. What I’ve seen and actually experienced is that most other countries see Americans as bumpkins, ignorant, simpletons, and rather naive. I was once asked if I had gone to a private “academy” by a coworker from U.K. He was amazed that I knew things like classical music, opera, classical literature, as well as had a grasp of finance (while not a finance professional). Found the same in Japan and China, even Canada. (I was raised in blue collar family that to basic values – Exodus 20 and what Jesus told us to be and do).

    Re: Davos – my new found cynical favorite investment screen is to NOT invest, and look for long-term shorts of any company whose CEO wastes shareholders’ wealth attending that gathering of blathering elites. Bunch of private jet pets pandering to each other and telling us how to live without expelling carbon-dioxide… morons!

    How about Griffin paying $238 Million for a NYC penthouse+? If you are an investor in his funds, how many penthouses has he helped you buy?

  4. Rob Syp Says:

    Not only penthouse also most expensive residence in Illinois, bought 15 acres just south of Mar-a-Lago tearing down monster homes on ocean in Palm Beach and a very expensive pad in London

  5. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Lest anyone forget, Ross’ comments included another daft ‘rich guy’ admonition to out of work gov’t employees that they’ll get their money when the shutdown ends. He characterized that as IOUs with the “full faith and credit of the United States”, and he didn’t understand what the problem is because they ought to ‘just get loans’ to tide them over.

    WOW!! Possibly even more insensitive than Fearless Leader, which I didn’t think was even possible. I wonder how many banks Ross is invested in are extending loans to folks with no income?

    Re:Griffin: Where are the investors mansions?


  6. the bigman Says:

    Ah where to begin…. First don’t German auto buyers, Robert Lighthizer, Chinese consumers and the Brits realize that they are screwing up the great economics work that Draghi’s gnomes are producing. And how about these for bad guys- lower fuel and food prices. If these keep going down maybe I won’t have to get the bank loan Wilbur Ross suggested. Don’t forget those Italians- where is there fiscal stimulus? Oh yeah Mario took the punch bowl away. Draghi, Ross Trump Pelosi Schumer where have I seen these characters before? Oh yeah Looney Tunes on Saturday morning when I was a lad except Bugs and Daffy were far wiser and entertaining to boot. With life imitating art DC has become a comic book.

    • yraharris Says:

      Bigman—I know it is bad because you are not this sarcastic.They are wearing out the pragmatic thinkers and that is when it gets dangerous.Lighthizer is a very intelligent man and a powerful negotiator but I think the playbook is from the Woody Hayes era.

  7. Arthur Says:

    Ray Dalio (last book) adds that money printing is not necessarily inflationary, as proved the case in the last decade. ???

    • yraharris Says:

      Arthur–read the new Foreign Affairs piece by Larry Summers and Jason Furman—it will get traction as somebody get the cliff notes for the tv talking heads

  8. yraharris Says:

    Arthur—I know that John Authers,a journalist I hold in high regard,wrote this piece,,without reading the book ,I raise the question about the printing of money when you are the backbone of the global financial system.The debasing of a currency to ease the pain of debt when done on a global basis will destroy massive amounts of wealth —hence the idea that GOLD,GOLD,GOLD will be the preserver of wealth unless the YUAN offered an alternative in a fast enough fashion.This blog crushes a great deal of analytical data every day,week,month year and in my analysis the spreading of debt into many hands as Dalio advises did not diminish the GFC but actually made it worse.Alan Greenspan made the same assumption and it turned a potential US crisis into a massive global event.Greenspan was very wrong on the concept of risk spread through derivatives.GOLD/CURRENCY is critical especially because of the role of the dollar as the reserve currency–the exorbitant privilege for the US becomes the world’s exorbitant burden—-watch the YUAN

    • asherz Says:

      Yra- The YUAN as an alternative to the dollar as the reserve currency certainly is a major goal of Xi as he looks to challenge the US as the other world superpower. China’s Yuan has one good thing going for it, and one major impediment preventing that from happening.

      My theme for gold is that the world currencies have all taken the road to perdition in massive QE over the last decade. Central Bankers will continue to resort to their major tool whenever an economic slowdown appears and there is a scent of deflation. Draghi hinted at “All It Takes part 2” days ago , and the hoped for champion of a rational monetary policy, Jay Powell, affirmed his changed status from a Paul Volcker ll to the Cowardly Lion. Not only has he moved from three rate increases in 2019 to maybe one and I think none, but QT now is short for QUIET, an early end to that normalization program. Bernanke’s Sikorsky Black Hawk is always at the ready.

      China’s Yuan’s plus factor is that they have been accumulating physical gold in massive amounts in the last years. They do not admit to the correct amounts held as they don’t want to reveal this central monetary strategy. There are estimates that China holds as much as 20,000 tons, but no one outside their inner circle knows. Making the Yuan convertible into gold to settle trade imbalances is a good possibility at some point. Meanwhile Fort Knox has not been audited since 1953.
      The big impediment to the Yuan’s dominance is China’s debt, with a Debt/GDP of over 300%. Its major growth, which they even now admit is slowing, (who knows if the 6.6% 2018 growth number, the slowest since, 1990 is correct) has come from the real estate sector, with ghost cities and underutilization of existing projects abounding. Their banks would not pass a real stress test. It will be very hard to become an accepted reserve currency with China’s balance sheet.

      That’s why these trade talks with the US and China are so crucial. Not just to prevent the next global financial crisis, but how it affects the geopolitical challenge to the US that is being waged.

      You are right about GOLD,GOLD, GOLD. (What was Fridays action about?)

      • yraharris Says:

        Asherz—let me build on your point.The MMT crowd fails to acknowledge the role of the US Dollar as reserve currency.If the printing presses ran full speed and to infinity the destruction of global wealth because of massive dollar reserves being depreciated would cause tremendous global instability and push the world’s central banks into massive panic.This is not conspiratorial but the actual outcome of MMT that Ben Hunt just wrote a wonderful essay about .More and more people are criticizing the MMT and its potentiall dangers.I go back to my question to Jay Powell on June 27th,2016 at the Chicago Council on Global Affairs:Governor Powell, who and what stands behind the balance sheet of the ECB ?Powell–they have a printing press and then continued on for a short period—this was before he was Fed Chair.As I blogged soon after this—scared the crap out of me and made me nervous about Powell.I had changed my tune when he became Chair because he was willing to go where Bernanke and Yellen feared to tread—but now I believe the volte face is complete

  9. Arthur Says:

    How do you think Apple can fix its “China problem?”

  10. the bigman Says:

    Hi Asherz thanks for the data on China’s total debt to GDP This got me to thinking and I discovered that China’s total public and private external debt to GDP is only 15% compared to US 115% and Japan’s 74%(I am always reminded by a friend Japan’s debt is not so bad as it is mostly owned by the Japanese themselves). the total Chinese external debt is only a little more than 10% of the total US external debt. Using my friend’s argument does this fact mitigate the total debt to GDP issue?
    As far as Friday’s gold action, I have for years owned Franco Nevada(FNV) and follow it daily On Thursday I noticed an anomaly. Price of gold was essentially flat but FNV was 1.4% on no news. In fact gold price had been flat from close Friday 18th to the close on the 24th yet FNV was up 3% in the three trading days prior to Friday and went up another 2.5% on Friday
    I do not see similiar moves in GDX GDXJ or WPM and volume was not high in FNV but perhaps someone did know something. I have noticed this relationship on at least one other occasion.

    • Asherz Says:

      Hi Bigman,
      Good point on China having relatively low external debt. That means that most of their debt is owed internally.
      Now let’s say China with its high Debt/GDP defaults. What will be the political repercussions internally? Will the government be able to survive? Will riots in the streets result? Will workers and retirees put their savings into their government’s debt going forward? How will trading partners and local corporations (some partially foreign owned) react?
      Default is not a good thing regardless. Those who downplay the danger based on a low External Debt/ GDP may be underestimating how the scenarios play out?

  11. Chicken Says:

    The central bank circus is low quality entertainment, at best.

  12. Arthur Says:

    How Long Can Nicolás Maduro Hang on to Power in Venezuela? % probabilities

  13. Arthur Says:

    Interesting article: “Ice Age Thesis” by Albert Edwards (Societe Generale), investors should favour cash and gold…

  14. yraharris Says:

    IT AIN’T ROCKET SCIENCE–and finally someone honest enough to admit it—–BUT IT IS A LARGE BET

  15. the bigman Says:

    Okay I give up How do equities bonds and gold all go up on the same day?

    • Chicken Says:

      My belief is gold offers an alternative to Treasuries and the like. I also believe trading gold means you’re trading against three of the world’s best traders.

    • yraharrisy Says:

      The Bigman—–haven’t you ever heard of pennies from heaven.Equities and Gold were key the bonds rallied in my opinion as some believe that an easier Fed is bullish bonds ,while others perceive that a Fed pivot must be due to a slowing economy,thus no inflation threat and better get 2.75% now on a ten year while you can—but in my view the Trillion dollar question is how will the present deficit be financed if the economy is slowing—yes I am aware of MMT but still trying to come to terms with the concept of a perpetual money machine being the wealth creating mechanism–

      • Asherz Says:

        There has never been a case in history that a sovereign that is unable to service its debt, gets out of its problem by issuing more debt even with Powell’s printing press
        We will have QE 4 and 5 but ultimately a restructuring will be required .
        MMT is lunacy and all those brilliant minds will one day be blamed for the collapse of Capitalism and the ascendancy of so-called Democratic Socialism.

      • yraharris Says:


  16. yraharris Says:

    Asherz—right on target.There is discussion that warren Mosler is the brain behind the propagation of MMT—well there is lots to discuss in this realm and much of it begins with the failure of Herr Mosler from the Virgin Islands to include any discussion about the issue of the US Dollar role as the world’s reserve currency.In a weekend piece by high quality analyst and thinker,Eric Peters,he notes that the one valid criticism of MMT is this:”You either believe in an informed electorate or you don’t.”Seriously now I understand why Mosler lives in the Virgin Islands–yes I know it is the US Virgins but sense of an informed electorate is more then just understanding that social security and medicare are the third rail of US politics

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