Notes From Underground: The ECB and the Swan Song of Mario Draghi

We are coming to the end of Mario Draghi and the “Whatever It Takes” era. Remember, the head of the European Central Bank said he would do whatever it takes to preserve the EURO. This fealty to the currency has resulted in a -40 basis point deposit rate, a massive expansion of the ECB’s balance sheet via sovereign and corporate bond purchases.

The EURO has been weakened since it has been a beloved tool of the carry traders. The negative result has been that European domestic banks have been crushed as lending margins have disappeared and negative rates have resulted in net payments to the ECB from the banks. (Unlike in the United States, where the interest on excess reserves rate has resulted in the FED paying out interest premiums to its deposit-taking institutions.)

Now, we’re going to have to contend with Draghi’s presentation Thursday, his last before Christine Lagarde takes the scepter.

The EUROPEAN SOVEREIGN DEBT markets have been pricing out an uber-dovish Draghi as BUNDS, OATS and BTPs have all been in corrective mode. The consensus seems to be that the ECB will cut the deposit rate to NEGATIVE 50 BASIS POINTS while embarking on a new, open-ended QE plan of 25 billion euros per month.

The open-ended program will be presented under the guise of a robust FORWARD GUIDANCE, depending on how long it takes to reach the 2% inflation mandate. If Draghi gets aggressive on the monetary stimulus, look for something similar to the BOJ’s program: A qualitative quantitative easing (QQE), which would involve purchasing of equities in addition to bonds. If it is QQE then the monthly amount ought to be BIGGER as there are plenty of bank and financial stocks that the ECB could purchase, pumping liquidity into the financial system while supporting bank stock valuations, which have been decimated under negative interest rates. Note that the European Bank Stoxx index closed today at 8.77, just below the 200-day moving average at 9.01 (and on a six day rally).

Remember, back in 2012 Draghi said NO TABOOS so it’s plausible the central bank moves ahead with equity purchases. Draghi’s June appearance in Sintra, Portugal lends support to this hypothesis, especially when he said:

“Our capacity to react in this way was made possible by the flexibility embedded in our mandate–a flexibility that was confirmed by the recent ruling of the European Court of Justice. This not only affirmed that asset purchases are a legal instrument of monetary policy in the euro area, but emphasized the broad discretion of the ECB in using al our tools in a necessary and proportionate way to achieve our objective.”

If Draghi takes an aggressive stance via QQE, look for euro area bonds to rally, the EURO to initially sell off and GOLD to gain a bid. But I caution, wait for the press conference to see whether the ECB president mentions any increased fiscal stimulus coming from Brussels. Lagarde has been banging the drum for a large multi-nation fiscal stimulus program.

The idea takes on even more importance on Tuesday when White House adviser Peter Navarro in a CNBC interview brought up the need for Germany to undertake fiscal stimulus and infrastructure spending program. If Navarro is discussing such an idea it must be the latest rage in the White House.


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19 Responses to “Notes From Underground: The ECB and the Swan Song of Mario Draghi”

  1. ah Says:

    If he does mention the fiscal side YRA, do you expect the bunds to continue to sell off ?

    • yraharris Says:

      ah—I don’t know .One would assume that a massive fiscal stimulus would result in that outcome but analyze the structure of whatever program we are delivered—it is not simple now and as they try to placate the Northern Bloc it only gets more complicated.The sell off in the debt markets has already been fairly strong

  2. ymc770 Says:

    If you are correct with QQE predictions and stock purchases by ECB, then financial markets are turning into absurd. Markets will play along with ECB because no one wants to be the first to jump the Titanic.

    • yraharris Says:

      YMC—-turning into absurd?We are beyond the abyss of what people who look to markets as signaling mechanisms would consider theoretical or practical—as Rod Serling would maintain ,You Have Entered the Twilight Zone and the central banks have distributed the master cookbook,How To Serve Capitalism.

  3. asherz Says:

    QQE, fiscal stimulus, or any other program that continues to liquify the global economies is what lies ahead.. Whatever It Takes started by Draghi will become the watchword of all the central banks. With a 300% Debt/GDP ratio globally, inflating our way out of the morass leaves no other option to avoid a total collapse.
    The Draghi statement in SINTRA, brings to mind SINATRA’s “My Way”. All will take that path. The only protection for the holders of fiat currency is the millennial hard currency, the shiny precious metals.

  4. Eugene Chumak Says:

    Very true, I got used to CB bond market interventions so much that I consider this situation the new normal. I forgot what normal looks like. Thank you for the refresher.

  5. Jim's Mailbox :: Jim Sinclair's Mineset Says:

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    • yraharris Says:

      Sensei–you are of course correct but the absurdity of the ECB and all central banks is what I pointed out above via the Twilight Zone—ECB cookbook on HOw To serve Capitalism—-thanks Jim

  6. David Zampatti Says:

    I am lost for words to explain the thought processes going on by people who call themselves “leaders”. I would go so far as calling them morons. Negative rates ? who will deposit funds (hard won savings) to allow someone use these funds at zero cost. Where will a source of capital be if everyone is hiding means of exchange. Just look at Japan – Increased sales of safes!! Let the inefficient companies die, as they should, and this includes the banks. People will then look much harder at each bank before they dealing with them.

  7. Michael Tempe Says:

    Hello Yra
    Well, Mario did it again……Talk about Alice in Wonderland conditions.

    While gold is reacting positively, I am struck at how little the overall bounce in gold is considering the “kitchen sink” pronouncement by Mario that QQE will be unlimited in terms of time.

    As US stocks continue to rise, does Jerome think he can stay the course and not match ECB dovishness? Or, must he cut “a little” so as not to “fall behind” the ECB?

    Whatever else is happening, I continue to believe that stock market participants are unwitting frogs in Trump’s boiling cauldron as he continues to warm the waters for the “frogs” as they blithely “party on”, heedless to the reality that Trump lies every time he opens his mouth or tweets to get the desired effects of stock levitation.

    The complacency in stocks right now, imo, matches the similar complacency of one year ago….By almost every measure, stocks are more overvalued now than one year ago when you consider that earnings have moved lower, so we simply have expanded multiples to thank for this rally. Moreover, stock to GDP ratio of approximately 140% does not leave much upside for stocks.

    Will SP soar even higher here? Wouldn’t doubt it? But, at the same time, I think the risk/reward favors the bears in terms of the next major move being a sell off, not a blow off, once October realities hit that talks with China will fizzle while BoJo/Brexit continues to flirt with disaster.

    We shall see soon enough.



  8. Chicken Says:

    Is there a lesson to be learned here, Not sure what it is exactly but it seems so.

  9. Arthur Says:

    Michael Steinhardt… tell me, in 2 minutes, four things: (1) the idea; (2) the consensus view; (3) the variant perception; and (4) a trigger event. 🤔

  10. Judd Hirschberg Says:

    Yra you nailed the whole scenario.
    We in Judd’s room and PAX Group salute you!
    The conversations have been invaluable in in defining some spectacular winners!

  11. Don H Says:

    Thursday’s call: /GC IF Sellers cap/hold any bounce below 1538.50, then anticipate another down rotation; A bid back above 1538.50 wld be Bullish.
    /ES A hold above 2991.50 targets 3027. (They traded 5 ticks shy @3025.75 overnight).
    My .02

  12. Joe Says:

    With the talk of an interim trade deal, equities making highs and the metals and bonds correcting a bit, is there any chance the market nearly prices out a rate hike by Weds and Powell stands pat?

    • TraderB Says:

      FF and ED futures sold off a ton this past week. Get ready for the snapper! Wouldn’t be shocked to see ED futures up 20 ticks tomorrow evening.

      • TraderB Says:

        Yra- 5M barrels/day of production offline for 2-3 months is NOT a game changer in a world awash with crude oil, growing production, and shrinking demand. But I think there is a much bigger story here…

        Do you think Iran really ordered this strike on Saudi Arabia? Just because they are funding the Houthi fighters doesn’t mean they gave the order. Pompeo’s accusation is a big one. I don’t believe President Trump has formally accused Iran yet.

        If Iran really just bombed Saudi Aramco, isn’t that an act of war? Is this the beginning of a much bigger fight? I believe that is the question traders need to be pondering as we approach the open.

        You have often reminded us not to buy GOLD on WAR. In an environment where higher oil prices are a drag on the global economy (and interest rates are plummeting), I would think the table is set for the next big leg up in metals.

        Get ready for some wild volatility….

      • Michael Temple Says:

        With oil prices indicated to be up $5-10 when trading opens at 6 pm EST, I think outside markets will take it in stride after an initial bout of algo buying/selling, depending on the commodity in question.

        Bigger question to me is whether Saudi/US response is to escalate in a tit-for-tat with Iran ( the ultimate agents/supporters of this action). If so, possible game changer.

        We shall see what Trump and MBS decide to do?

        Is it too late to recall John Bolton?

        In the words of John McCain, will it be?

        “Bomb bomb bomb, bomb bomb Iran”?

        Just not sure that EDs and bonds reverse course dramatically after last week’s drubbing


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