European Central Bank

Mario Draghi has no more magic bullets left...

Awareness about the concept of money is making a comeback. Gone are the decades in which the global citizenry was fooled to leave this subject to economists, governments and banks – a setup that has proven to end in disaster. The crisis in 2008 has spawned debate about what money is, where it comes from and where it should come from.

The EIA released a report this week that showed that there would be little effect on gasoline prices if the U.S. government lifted the ban on crude oil exports. In fact, gasoline prices could even fall because refined product prices are linked to Brent much more than WTI, so more supplies on the international market would push down Brent prices. The report lends credence to the legislative campaign on Capitol Hill to scrap the ban, a movement that is picking up steam. On the other hand, although few noticed, the EIA report also said that the refining industry could lose $22 billion per year if the ban is removed. So far, many members of Congress have been reluctant to weigh in on this issue for exactly that reason: it pits drillers against refiners, both of which are powerful political players.

• Jobs Report Could Seal the Deal on Rates (WSJ)
• The Jobs Report and the August Curse: Jobs Day Guide (BBG)
• Migrants hold out on Hungarian 'freedom train'; Orban says millions coming (Reuters)
• Migrant Crisis Divides Europe (WSJ)
• German industry orders fall in July on weak foreign demand (Reuters)
• Alibaba’s Jack Ma, Joe Tsai to Borrow $2 Billion Against Shares (WSJ)
• U.K. Retailers Post Worst Sales Decline Since Financial Crisis (BBG)

The REAL RISK currently is not missing some of the upside if the bull market does begin to resume, but rather catching the downside if this correction turns into a full-fledged bear.

For years, many had mocked both European and US stress tests as futile exercises in boosting investor and public confidence, which instead of being taken seriously repeatedly failed to highlight failing banks such as Dexia, Bankia and all the Greek banks, in the process rendering the exercise a total farce.  The implication of course, is that regulators, thus central bankers, openly lied to the public over and over just to preserve what little confidence in the system has left.  Now we know that this is precisely the policy intent: as Reuters reports citing a paper co-authored by a Bundesbank economist, "banking supervisors should withhold some information when they publish stress test results to prevent both bank runs and excessive risk taking by lenders."

In other words: lie.

Given “highly accommodative” policy almost everywhere, and so little gained; it isn’t a good sign particularly after eight incessant years of it and the lagged effects from the renewed “dollar” wave still to be withstood. Every year was supposed to be “the year”, but 2015 was a surefire lock according to orthodox versions. The real difference, unlike past years, is that everything is going wrong so far just as predicted by the “strong dollar.”

· The final US Nonfarm payrolls report before the September FOMC rate decision takes centre stage this week after developments in China last week dampened expectations for a Fed rate lift off

· The ECB rate decision and press conference is this week’s main event in Europe, with some analysts forecasting an extension to QE by the end of the year

Over the past several years, the two-day Jackson Hole symposium had garnered a particular prominence among economists and market watchers as this is where various key inflection points by the Fed were hinted, leaked or announced, including QE2, QE3 and the taper. This year, however, the gathering of central bankers in Teton County, will be less exciting due to the absense of the most important central banker in the world: Janet Yellen, which means the highlighter will be Vice-Chairman Stanley Fischer when he speaks tomorrow at 10:25pm  which will be a key event given the recent market turmoil.

It seemed like finally China's relentless and increasingly futile attempts to have a green stock close would work: interest rate cuts, liquidity injections, direct stock interventions, even threats on the Prime Minister's head, and just to make certain moments before the close news very deliberately broke that government funds are buying large financial stocks, especially state-owned banks, to support the index, in the latest clear signs of government support, the Shanghai Composite seemed on pace to end an unprecedented series of consecutive tumbles which have dragged the composite down nearly 1000 points, or 25% in one week, and then... red close, with the SHCOMP down 1.3% to 2927, and a stunned China watching in horror as the central bank and government lose control, and everything they throws at the biggest market bubble of 2015 does absolutely nothing.

"The Goldman blowback is a particularly challenging subject to understand and analyze. Taken to extremes, criticism of the firm, which was founded and built by Jewish Americans, smacks at times of anti-Semitism. Fed officials don’t want to fall into the trap of ostracizing qualified people merely because of their association with the firm or its Jewish roots."

- John Hilsenrath

• Oil moves nearer six-year low on Japan data, oversupply (Reuters)
• Commodity Slide Spurs Treasuries as Emerging Markets Extend Drop (BBG)
• Because 7 years is "just right" - BOE Official Says Don’t Wait Too Long on Rates (WSJ)
• How Medicare Rewards Copious Nursing-Home Therapy (WSJ)
• Millennials Are Developing Parents’ Taste for Jaguars, Cadillacs (BBG) ... and even more debt
• Mexican Billionaire’s Firms Swept Up in U.S. Probe of Citigroup (BBG)

With everyone now focused on what China's daily Yuan fixing will be ever night, there was some confusion why last night the PBOC decided to devalue the CNY by another 1.1% to 6.4010, despite its promise that the devaluation would be a "one-off" event, taking the 3 day devaluation to just about 4.5%. However, subsequently in a press conference, central bank vice-governor Yi Gang said that the PBoC will continue to step in when the market is ‘distorted’, that there is no economic basis for the Yuan to fall continuously and that it will look to keep the exchange rate ‘basically stable’. The Vice-Governor also said that the PBoC will closely monitor cross-border capital flows and that reports suggesting the Central Banks wants to see the currency depreciate 10% are ‘groundless’. Which is ironic considering after just 3 days, the PBOC is already half the way there!

The bail out is a cynical ruse, not to benefit Greece as a whole, but to benefit the banks and other creditors (the ECB and the IMF) who should take their medicine and move on. The one thing keeping the whole blighted euro project in place is an arrogant denial of the facts. A loss of political face now is a small price to pay for a much better outcome that will disadvantage far fewer people than the disorganised chaos into which Euroland will descend if the current bunch of lunatics are not put back in the asylum. Is this a Europe we want to be part of?

To help remind readers of what happens when the entire world engages in wholesale currency war, here is a complete list of all the recent FX interventions, courtesy of Stone McCarthy.