Part I: Mario Draghi, the master of obfuscation was at his best Thursday as he dodged MULTIPLE questions about the recent STRENGTH in the euro. Journalists were very well prepared and even threw back Draghi’s previous responses about how a 10 percent currency appreciation would lower inflation measures by 0.5 percent. But Draghi met each question with a, “Yes, we discussed it as some members of the ECB Board were concerned about the EURO and its impact on exports and import prices.”
Posts Tagged ‘PIIGS’
Notes From Underground: A Take On Mario Draghi in Two Parts
September 10, 2017Notes From Underground: Martin Wolf/Mr. Fantasy Lays Out The Road For Germany To Exit The EU
May 10, 2016In tomorrow’s Financial Times, one of the major sycophants of ECB and Brussels policy has raised his “voice” in castigating the Germans for being the source of all the EU’s current problems. Martin Wolf’s op-ed piece, “Germany is the Eurozone’s Biggest Problem,” is a criticism of the German export engine. And it seems to be another source for what appears to be a concerted effort to challenge Berlin’s intransigence over the need for budget austerity before fiscal stimulus. Wolf’s opening salvo against the Germans: “The financial crisis has given it a dominant voice in eurozone affairs. This is a matter of might, not right. Creditor’s interests are important. But they are partial, not general interests.”
My response to this is that Mr. Wolf sets up a straw man with this argument. The Germans MIGHT have evolved because without them GUARANTEEING the promises of President Draghi’s “whatever it takes” campaign to maintain the existence of the EURO, the entire EU project would have collapsed under the weight of its highly questionable ability to honor the debt of what at the time was referred to as the PIIGS: Portugal, Italy, Ireland, Greece, Spain.
Notes From Underground: Plus Ça Change, Plus C’est La Même Chose
January 7, 2015The translation of the French title says, “The more things change, the more they stay the same.” We at Notes From Underground thought it was appropriate as 2015 has just begun and we’re still consumed with the Greek tragedy, which we first wrote about on December 9, 2009, a little more than five years after we started blogging. (The old entry is also posted below.)
Notes From Underground: The Swedes Plumb the Interest Rate Depths
October 29, 2014First, I will say it again. QE3 is over and the Fed will maintain its “forward guidance” and be data dependent. The next bout of important data will be the U.S. unemployment release on November 7, which buys the Fed one more month of doing nothing. James Bullard painted the FED into a tight corner when he PANICKED and said the FED may want to refrain from removing QE3 while the SPOOs and other equity markets were at a 10 percent correction low. Bullard revealed that the Fed’s REACTION FUNCTION is the equity markets and of course Chairman Yellen’s concern about the lag in wages. The two key variables for the Fed have both been steady since the last meeting. The spoos are lower by 0.75 percent while the September unemployment report showed wage gains had no increase.
Notes From Underground: Sunday’s World Cup Final = Creditor/Debtor Bowl?
July 10, 2014There’s a little levity during a very stressful week of trading. Germany meeting Argentina in the World Cup final is symbolic of the battles being waged by the world’s central bankers. Jeremy Stein and the BIS view the threat of financial stability a potential concern of Janet Yellen and Mario Draghi. The world’s financial markets will be watching to see what style of play on the pitch prevails: The aggressive Argentinian speed or the more AUSTERE and supreme defensive style of Germany. In the spirit of global macro humor I ask these questions:
- Will presiding referee Thomas Griesa issue a RED CARD to the entire Argentinian team for defaulting on its debt?
- If the Argentinians get control of the ball will someone from Elliott Associates come and grab it as Griesa deems it an asset of the debtors?
- If Argentina prevails, will the trophy be confiscated and given to the intransigent creditors for sale on E-Bay?
- Will Griesa suffer the slings and arrows of outrageous fortune as he is deemed by FIFA to be a biased American judiciary with no genuine knowledge of the international beautiful game of debtor/creditor?
***The question to which we keep returning: ARE THE WORLD’S CENTRAL BANKS THREATENING THEIR CREDIBILITY? A corollary question: DOES THE FED UNDERSTAND ITS OWN FALLIBILITY? As yesterday’s FOMC minutes revealed, confusion reigns within the FED as to the strength of the real economy, especially in ways to measure the OUTPUT GAP of the employment data. How much slack exists in the labor pool to prevent a dramatic rise in wages is of paramount importance for the Fed’s “forward guidance” (and signaling to markets future FED intentions). The FED speaks with great confidence in its projections but if past performance is a guide investors should treat all Fed projections with skepticism. It was the highly regarded Ben Bernanke who maintained well into late 2007 that the housing slowdown was well contained and should pose no problems for the U.S.economy. Yet, the impact of the U.S. credit crisis was severe enough to effect banks and bondholders across the globe. The bottom line is that the FED is fraught with failings and for investors to treat all Fed releases as pearls of perfection should proceed with caution.
In an Financial Times piece published yesterday, Axel Merk wrote the following:
“Ms. Yellen told us that policy under her leadership is not rules based. As such, market participants have to rely on the Fed’s ad hoc assessment. And that is very much like reading tea leaves, as the Fed is looking at backward-looking indicators such as the most recent unemployment report. Forward-looking indicators, such as the yield curve, are less reliable as the Fed itself has actively managed gauges. That, in turn, forces market participants to try to read Ms. Yellen’s mind. Her statements make it clear that her focus is on keeping rates low to help promote job growth until inflation readings get enough over the targeted 2 percent level to warrant concern in her mind.”
So, again, the price of the FED‘s certainty can be found in a weak DOLLAR and ultimately strong precious metals. If Yellen and Bernanke admit to not understanding GOLD, I advise measuring your own fallibility and putting that into your projections.
***And now back to Europe. Readers of Notes From Underground have known that the European financial markets have never fallen off the radar as the rally in peripheral debt and certain European banks were deemed to be a fool’s paradise. Today’s news about Portuguese bank, Banco Espirito Santo, missed a bond payment sent chills through the market. Banks have never healed but have been recipients of the ECB‘s liquidity efforts. However, non-performing loans have continued to plague the balance sheets of many Spanish, Italian, and Portuguese financial institutions. (Yep, the PIIGS have returned to the headlines.) More importantly, if the ECB and the BIS continue to disagree about interest rates and financial stability, the BIS can inflict pain on Europe’s banks by pushing for sovereign debt to some type of risk-weighting, requiring the need for more bank capital. Banco Espirito Santo have only survived through the European debt crisis by loading up on Portuguese sovereign bonds. (That is, borrowing from the ECB at very low rates, buying Portuguese debt and earning the differential, all risk free.) If the BIS keeps pushing back against the ECB and the FED, more bank problems will arise.
***However, in the eyes of the French and Mario Draghi there was a positive result from the Banco Espirito Santo: the weakening of the EURO against most currencies. The move was not dramatic but did provide some respite from recent euro strength. THE KEY TO THE EURO MAY BE IN THE EURO/SWEDE CURRENCY CROSS. On July 3 the Riksbank slashed interest rates in an effort to keep the KRONER weak against the EURO (in my opinion). IF THE EUR/STOKIE TAKES OUT THE LOW OF THE CROSS FROM JULY 3 IT WILL BE A CRITICAL STATEMENT ABOUT INCREASING PROBLEMS IN THE EUROPEAN FINANCIAL SYSTEM. The range for the EUR/STOK on the day in question was: a high of 9.3580; a low of 9.1540 with a close of 9.2856. Today the close was 9.2340, which is lower, but the July 3 low of 9.1540 should become the critical number.
Notes From Underground: The IMF’s Role Has Become Too Subjective to be Objective
June 22, 2014One upon a time, the IMF‘s mission was to aid countries suffering balance of payments problems and dealing with the possible credit problems that would arise for over-extended nations. Recently, the Christine Lagarde-led IMF has acted in a more aggressive capacity when it became involved in the bailouts of the debt-plagued European peripheries. The IMF took a proactive stance in becoming one of the troika–ECB, European Commission, IMF–in an effort to stem the stress of Greece, Portugal, Cyprus (and possibly Spain and Italy). The IMF became involved not because Europe was lacking the funds but because the Germans were wavering as to how far the ECB should go in expending capital to bail out the so-called PIIGS. The European elites called upon the IMF to use its funding power to alleviate the pressure from Berlin’s demands that debtors undertake severe austerity in order to resolve the problems of recession and budgetary malfeasance. IMF Director Lagarde was very happy to open the IMF’s treasury to her comrade’s in arm: the European finance ministers. Remember, prior to Lagarde’s position at the IMF, she was the French finance minister.
Notes From Underground: Christine Lagarde Is Quietly Raising Her Voice
October 14, 2012The IMF took center stage during the last four days as its meeting in Tokyo became the central focus of the global macro world. As usual, the IMF communique promised much via the usual platitudes but as investors and traders we are left in the lurch as much is promised but no real substance is revealed. Probably the most important element in the communique is the line, “WE NEED TO ACT DECISIVELY TO BREAK NEGATIVE FEEDBACK LOOPS AND RESTORE THE GLOBAL ECONOMY TO A PATH OF STRONG,SUSTAINABLE AND BALANCED GROWTH.” Why is this simple statement so critical? In last week’s IMF-produced “World Economic Outlook,” it revealed that the IMF‘s model is probably flawed when measuring the impact of fiscal policy on economic growth.
Notes From Underground: Kelly’s Heroes or Bob Marley Redemption Song
May 30, 2012FINALLY. It seems that the world is waking up to the idea of putting to use the barbarous relic so despised by the financial gurus like Charlie Munger and Warren Buffett. A May 25 BLOOMBERG article by Brian Parkin and Jeffrey Donovan hinted at some type of debt-sharing plan: Not a Eurobond in a traditional sense but more of a collateralized debt obligation and a concept of a REDEMPTION FUND. The fund would take all sovereign debt more than the 60% of GDP level and deposit the excess paper in a central fund. The fund would be collateralized by the GOLD RESERVES of all the European nations–an amount more than 10,000 TONS OF GOLD. As the debt levels of the abusive nations recede–and taking back the maligned paper–the TROUBLED NATIONS COULD DRAW DOWN THE COLLATERAL.
Notes From Underground: The Meaninglessness of IOWA and Other Thoughts
January 4, 2012While the mainstream media desires to fill time it seems that Iowa has become less important this year as a barometer of the national mood. The agrarian sector of the economy is very healthy and with their stomachs full, the people of Iowa can ponder and think and be much more philosophical in terms of candidate selection. Rick Santorum can play to the high-mindedness of the social conservative agenda because in Iowa those voters have two loaves of bread under each arm. It is much tougher to be concerned about the ideological nature of life when you are fighting in a line to pick up an unemployment check or applying for a job.
Notes From Underground: Hey Germany, NEITHER A BORROWER NOR LENDER BE
December 14, 2011It is very easy to fall prey to the German view of the European debt crisis: Blame the profligate PIIGS for living beyond their means and borrowing to support a lifestyle based on leisure. There is of course great truth to this but it was the Northern European banks that lent the money in a ready fashion. The GERMAN and DUTCH current account surpluses had to be lent somewhere and with the Chinese and Japanese monopolizing the profligate lifestyles of the Americans, Germany turned to their European comrades. Belonging to the EURO and, thus, ECB zone of finance, Commerzbank, Deutsche Bank, Rabobank and SocGen all felt comfortable buying the AAA debt of Spain and Italy and of course the three little PIGs.