Notes From Underground: Wednesday, 6:45 CST … Our Day Begins

There are so many issues plaguing Europe right now, and surprisingly, Brexit is not the most significant. On Wednesday morning — yes, Wednesday — the ECB announces its rate decision and it is expected that rates will remain unchanged,  with the main refinancing rate at zero. The only possible news will be that the ECB actually engages in a tiered financing. This would mean that some banks would get relief from the -0.40% rate that the ECB charges banks to deposit cash at the central bank. There have been rumors that the ECB was planning on raising interest rates in the hope that boost for some European domestic rates would help lift the equity valuations of some profit-stressed financial institutions.

BUT DO NOT INTERPRET A TIERED SYSTEM AS THE ECB RAISING RATES AND IS CERTAINLY NOT HAWKISH. The algos may construe such a headline in that manner but it would be an error. A tiered system might lift European stocks as the severely depressed bank stocks have been a huge drag on several European indices.

The DRAGHI circus performs at 7:30 CST as the Magician of Frankfurt attempts to work the press with the prestidigitization of obfuscation. The European economy has slowed but it would be difficult for Draghi to reverse course and begin a new round of QE as it would lead to a LOWER EURO, which would certainly raise the IRE of President Trump. But the light is at the end of the tunnel for President Draghi because his term expires October 31, 2019.

Draghi wants to hold things together for his successor, Jens Weidmann. Draghi will get the usual questions about the current weakness in Europe, the negative effects from the China/U.S. trade dispute and why hasn’t there been more fiscal stimulus from European policy makers. As usual, Draghi will admonish the eurocrats for failing to establish a  greater synchronized fiscal system, as well as not creating a centralized bank insurance scheme. Round and round we go.

The threat of U.S. tariffs on European exports will keep Draghi’s hands tied on monetary policy. Trump is searching for reasons to punish German Chancellor Merkel and French President Macron. And as was discussed yesterday, Robert Lighthizer is riding shotgun.

Now, let’s return to idea of Bundesbank President Jens Weidmann becoming the next ECB president. The rationale is simple. The politics of monetary policy emanating from Brussels has seen to it that there has been a Dutch, French and Italian bankers serving as ECB president, but never a German. In 2011, we at NOTES FROM UNDERGROUND wrote profusely about the mistake Chancellor Merkel made by surrendering to French President Sarkozy by not pushing for German banker Axel Weber to head the central bank. The argument continues to be relevant: You will get greater German cooperation with a German in control of Europe’s money. The French have always feared that a German would push for HARD MONEY at all times in accordance with the strict policies of the BUNDESBANK.

The problem for Europe was when the French GOT THEIR TURN, the former head of the Bank of France, Jean Claude Trichet, proved more German than any Bundesbanker. Trichet had historically been a HARD MONEY advocate when he was president of the Bank of France, invoking the policy of “LE FORT FRANC.” Now that the ECB’s balance sheet has exponentially grown, a German will be needed to make the Burghers of Bavaria more comfortable with future developments of ECB policy.

Make no mistake: It is the German credit card that sustains the EU system. When the 2012 sovereign debt crisis was wreaking havoc on interest rates, Draghi’s pledge to do whatever it takes to save the EURO would have been empty except for the German guarantee. French President Macron wishes to believe he is the keystone to the European system but that is pure French fantasy. The struggles between France and Germany are genuine and rotate around French global desires and German financial concerns.

On Tuesday, U.K. Prime Minister Theresa May visited Macron and Merkel at the Élysée Palace in Paris. The backdrop is French but the power is German. Macron is anguish to punish the British by making harsh demands for leaving the EU, while the Germans are trying to entertain a less draconian approach because of the pain that German manufacturing and its supply lines will suffer on a NO-DEAL BREXIT. It matters not what the French want for if the Germans say NEIN to Macron’s demands then that will be the outcome.

The world would suffer greatly if Germany were to question the entire EU project. The failure of German financial support for the ECB would create a global financial collapse. The ECB printing press is only as good as the German paper on which it prints. Mario Draghi knows this and has grand designs on creating a EUROBOND by folding the ECB’s balance sheet into a unified debt instrument as it is SUPPOSEDLY adhered to the requirements of the mandated CAPITAL KEY. This is Draghi’s desired legacy but of course it would depend on the Bundestag and the German Constitutional court in Karlsruhe signaling their approval. This is the critical issue for Europe. But Wednesday’s ECB press conference, in the spirit of Ludwig Wittgenstein, a meaningless statement.

***There’s so much in tonight’s post, I’m going to save my musings on two articles for future posts. First there was Robert Kagan in Foreign Affairs titled, “The New German Question; What Happens When Europe Comes Apart?” Then there’s an article by Ambrose Evans-Pritchard titled, “German Elite Call For Radical rethink of EU’S Brexit Strategy.” Both pieces are and will be discussed in our quest for profitable outcomes. (Remember, we seek outcomes and not faith-based arguments.) The important trade to monitor will be a look at the European sovereign bond differentials.

Long-time readers of NOTES know my arguments about being short French debt but not German. We will also discuss this in full. The German/French 10-year spread has narrowed to 35 basis points as investors search for yield in some dangerous places.
***Do yourselves a favor and listen to Futures Radio’s Anthony Crudele interview Jim Rogers. It is amazing how much wisdom Anthony is able to extract from Jim.

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3 Responses to “Notes From Underground: Wednesday, 6:45 CST … Our Day Begins”

  1. Trader1 Says:


    If EU growth continues to slow and Germany wont allow their “credit card” to be used for a Eurobond – then what?? How can the EU get GDP growth higher without Germany giving more in some form??

    (I’m looking at it through the lens of Britain trying to exit EU and they still have their own currency- If Britain is stuck in the EU……..)

    • yraharris Says:

      Trader1—this is the question that we all need to consider.The Brits are looking for time to see how Europe plays out and Macron is seeking to make it as painful as possible in an effort to dissuade any other nation leaving the EU.A few years ago we saw and experienced how far Brussels would go as they thwarted the will of the Greeks and the Italians by getting rid of Berlusconi and parachuting in Mario Monti who was never able to win an election.Macron knows that France is in big trouble if the Germans ever decided not to underwrite the costs of the EU and certanly the ECB—Draghi’s legacy is making it so the Germans can never say NEIN for the effective outcome would certainly be a global financial crisis—this is the Draghi/Soros plan in creating the desired eurobond through synthetic measures by building a massive balance sheet based on the statutory capital key.If the EU project fails and we do not know the timeline for look how long the Brexit drama has played out—at times of existential decisions time is nothing as Sartre and Heidigger would probably inform us—

  2. Chicken Says:

    Thanks Yra, Looking at this from every imaginable perspective, I keep coming back to PhD debt – for “Piled higher and Deeper”.

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