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A Hint From Draghi on the Euro?
So Mr. D spoke and said nothing at all. Those that expected a "big stick" from the boss at the ECB are very disappointed. The initial market reaction to this dud is a down move in equities and the Euro while Italian and Spanish yields soar. Given the high expectations Draghi set the market up for, I can’t imagine a worse outcome.
I read through the (very carefully worded) press release looking for something. There are few sentences that have me wondering. The first comes from the summary section where Draghi says:
decisive and urgent steps need to be taken to improve competitiveness
Okay, that sounds nice. But what does Draghi mean when he says “competitiveness”? Does he mean between Spain and Germany? Maybe.
One way to achieve the competitiveness that Draghi seeks, is to further punish the Spanish economy, and push unemployment higher (it’s now 24%) in a desperate attempt to push unit labor costs down. That would be an insane approach. Spain is already on its knees. Pushing the economy further into depression is not going to help at all. Also, a process like this would take years before the pain is converted into some gain.
Draghi used the word “decisive”. To me, this word implies something that might be considered a “game changer”. A multi year depression is not decisive, It is slow death. It is also politically unacceptable. Spain (and Italy) are not going to accept that they must have a depression to save France and the rest of northern Europe.
A step that would be “decisive” would have to be on the currency front. This gets us back to the talk of bringing back the Peseta (and the Lire), or some form of two tiered Euro. But I don’t think Draghi was suggesting that there would be a Euro breakup at this time in history. He was very clear on this when he said:
The euro is irreversible.
He also confirmed (to me) that there ways no "Euro breakup" in his mind when he made clear that the ECB/SMP would be buying more Spanish bonds at some point in the future. If there were a two-tiered Euro, the portfolio losses at the ECB/SMP would be enormous. The losses would be larger still if more purchases are made.
I conclude from all this that the probability of some kind of currency reshuffle within the Euro Zone is not in the cards at this time. But I’m still confused how Draghi thinks he can achieve the “urgent” improvement in competitiveness. There might be a clue from Draghi in the press release. I thought these words were odd:
Downside risks (to the economy) also relate to possible renewed increases in energy prices
Huh? What’s this about? Does Draghi know something about energy prices that I don’t?
In the statement, Draghi makes it clear that the Euro area is slowing. He also is no dope, he knows full well that the USA, S. America, India and most of Asia are also slowing down. There is nothing in the global economic mix today that would suggest that energy prices are going to rise anytime soon. So why would he make a point about it? Even more curious is why he would repeat his warning in the next paragraph when he speaks about the risk of rising inflation:
Upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term.
What is the one thing that Draghi could do that would cause energy prices within the Euro Zone to rise? The answer is he could cheapen the Euro versus the dollar. Absent a global increase in the price of crude, the only thing that would cause energy prices to rise in the EU would be a significant depreciation of Euro versus the dollar (and the Yen).
If Draghi was really serious about the “competitiveness” issue, then he would certainly be looking for a cheaper Euro that would “decisively” and “urgently” address a fundamental flaw of the Euro. It is dramatically overvalued.
We know that the Germans hate all the monetary options that Draghi would like to use in his war with the bond markets. Things like more bond buying, LSAPs and QE are not going to happen because of German opposition. However, the titans of German industry would jump for joy at the prospect of a 20% devaluation of the Euro. Merkel is up for reelection and she desperately needs those titans on her side. She also needs to have some improvement in the domestic economy. More workers making BMWs and VWs are just the ticket for Angela.
There is one other piece in this puzzle. What would the USA have to say about a plan that would cheapen the Euro versus the buck? On that score, I do wonder about the meeting last week that Timmy Geithner had on an island in the middle of the North Sea with those EU "deciders."
If the Euro were to weaken it would be a body blow to the US economy. It would be exactly the type of situation where the US Fed would act. A “decisive” effort to depreciate the Euro would give Bernanke the excuse he needs to put a big QE package on the table.
I was very surprised that Ben chose to “do nothing” yesterday. I wonder if this is not all being orchestrated behind closed doors. Ben needs the ECB to act first, and then he will quickly follow suit with an action plan of his own. This could happen between the scheduled meetings.
Is this far-fetched? I admit it is, but I don’t see any other options on the table. A significant change in the EURUSD rate is not out of the question.
I would not be long the Euro for a bit, just in case. And yes, I’m talking my book. From a week ago (Link):
I bet all of my recent FX gains on a short EURUSD option strategy. I missed a big blip that got the Euro above 1.2400, and ended up with a fill a bit over 1.2300.
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Junker if I'm not mistaken. or was it Trichet? help here, I hate quotes that don't get proper attribution.
Correct, Junker. Eurogroup Head Confirms "It Has Become Serious", As He Is Back To Lying
Attempt at you own peril to extract microshades of meaning from the utterances of persons like Mr. D.
Learn a few Zen koans instead, it will be better for your psyche.
This will easily be resolved when gold is set free and IT acts as the Store of Value. At that point savers can save and printers can trash their currencies into the Lowest Boschian levels of Hell and all will rejoice.
What has the monetary system come to when the only redeeming alternative is to trash currencies and make them less valuable?
THIS is the primary problem we have in the world today...THIS!!!
For now we are stuck....print... and savers eat dog food if they can still afford it; stay the printers hand and the masses stand idle because there is no commerce.
War with Iran for 500 Alex
That would be a good excuse for an emergency increase in the US debt ceiling.
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Bottom Line: no matter what, all they can do in the EU with the EURO is PRINT
In fact this goes the same for the US, UK, and EU....A.K.A = the WestBloc Nations
I kinda think all the hoopla that goes on is to distract people from the Fact that they "could" go ahead and Print as much as they want to...but this Paper couldn't be used for Payments with the EastBloc.
I think its about time to go ahead and add the Two/2 Decimal Places that make $1.00 US = to $100.00, and with Europe in the bind its in, they could do the same....coulda been the Plan all along. It looks better with the EU doing it with us, instead of the US doing it by itself.
Keep in mind the way it would work. Mortgage and Student Loan debt would remain Fixed at the Current Dollar amount, but Payable in the New USD's. This eliminates these 2 major problems, the Banks get Immunity in return, and our Foreign Debt becomes Payable at 1/100, 1%, of Current amount. Remember, all a USD is, is a UNIT, a UNIT is whatever you want it to be
don't know how but I got a fill today at 1.26...woo-hoo! Does Knight do forex? maybe they'll bust the trade...
Say what? He just blew up the EU today! "would you like some Sade with your masochism." I know I would! Anywho we can all agree "if Knight Trading doesn't end above 5 bucks a share by the close of trading today...
All Central Banks can devalue. If all devalue, the only winners are the busy-workers doing the devaluation. Just another set of deck chairs on the Titanic.
Well, maybe one other purpose. To entertain children of the future if there ever is an Economics Museum. Central Banks = Dinosaurs.
The winners are those who get the money first. Think banks. They get to spend it before inflation hits.
The real question is - How much does the Bernank lose on his currency swaps if the Euro fragments into separate currencies or institutes a two-tiered system?
Covering up the credit crisis by boosting Keynesian government spending, the zero interest rate policy (ZIRP), and increasing the supply of money through quantitative easing by the Federal Reserve does not the address our real fundamental economic problems of high debt levels, lack of demand, declining employment, absence of income growth and the structural problems of the insolvent banking system.
President Obama’s solutions to the credit crisis over the past four years have made our real economic problems worse. Doing more of the same is insanity. The US needs new leadership.
Doing more of the same is insanity.
It's not insanity, it's genius. Pulling off the biggest looting scheme in human history while making everyone think they'e just a bunch of incompetents. Yep, that's genius.
It's only a flesh wound.
Not far fetched at all. It occured to me that draghi was overloading his ass with his mouth knowing the germans weren't likely to ride to the rescue putting the monkey squarely on the back on the bernank. Whatever happens at the fed will be initiated by actions aimed at saving EU leadership face if not the bullshit farce that is the EU outright.
With the passage of audit the fed, the bernank knows time to act is against him on more fronts than just salvaging the global central bank control effort through prolonging the EU ponzi.
May we live in interesting times, curses.....................
So Bruce, what does Switzerland do in the face of a 20% further Euro devaluation? Self destruct maintaining the peg?
Shit itself. Anyway, if they keep the peg going for long, it will only be a matter of time before somebody decides to test the peg, like Soros did with the GBP in the 90's.
We're not in the same position as the British were back in hte 1990s. They tried to keep the Pound up - it was OVERvalued . We're trying to keep the Franc below it's fair value (purchasing power parity + safe haven premium) which is much easier.
Until the SNB has more Euros than Francs...
He has been told war with Iran is coming soon. Get LONG some crude calls.
Crude will not be in demand *if that rumor is true.
So, there's to be a coordinated devaluation that will be sold as a heroic US response to the rudderless fire ship that is the EU?
Sounds about right as the end result will be indistinguishable from:
Preserve the state apparatus at all costs.
In real terms the governments' bills will then be lower and your's will be higher.
Ha ha-ha!....ever get the feeling that you've been cheated?
This would explain Draghi's "Opposite Day" observation that it would be best not to short the Euro.
Doesn't seem so far fetched to me, if we are now at the point where individual QE's performed by central banks have less and less effect, it only makes sense that they would attempt to cordinate them together for a bigger bang
Devaluing the Euro still doesn't solve the Inter-European competitiveness issue. The only thing that does that is for Germany to leave the Euro, which would also take the euro down by at least 20%, maybe 30%.
You could leave the competitiveness "issue" in place, but then southern Europe would become, how can we say it, the German word for "serf".
" Leibeigene "
I agree with your first statement, but if Germany leaves the euro, there will no longer be a euro.
There is no solution to this problem. It's the same as trade between US and China. One sided trading can't go on forever.
Kid, I disagree with your thoughts that the euro can't survive w/o Germany. The benefits of a common currency are real, the structure of having germany and the latin block (which to me includes France) in the Euro is unsustainable. France, Italy and Spain's trade with each other would greatly benefit from a strong DM, making VW's, etc, far more expensive than local products. They could do it, and print as many Euro's as they wanted devalue their debts.
I bet all of my recent FX gains on a short EURUSD option strategy. I missed a big blip that got the Euro above 1.2400, and ended up with a fill a bit over 1.2300.
I was busy coding. Didn't get in on the stop hunt pop, but I got in around the same time on gold. Worked out great. I'm out now.
To code or read ZH. That is the question.
I bet he leaves.
No more effective then the next LIAR IN WAITING.
I've been convinced, for a while now, that TPTB in the U.S. desperately want the euro to collapse before things collapse here. I think they believe that somehow this will give them some cover and make the abject failure of the Fed and treasury seem less pathetic.
In any race to the bottom the last to arrive wins.
bingo... look at the deleveraging cycle/credit bust... cash 4 gold... bank failures bought for pennies on the dollar... short sale/foreclosure heaven... the last asshole with a pile of cash wins.
The problem with this theory though, for sovereigns, is when the folks across the pond figure out the game and don't take kindly to it... I can't fathom that foreign governments are going to take our dicks in their asses too lightly... although, at some point, it's fair to call it consensual. And, frankly, I think the rest of the world is presently trying to figure out whether they actually like it.
It's ALL bad...
I tend to think that it will be the collapse in Europe which will signal the coming collapse in the US. Let's see what happens.
Draghi, a long-term member of the international Jewish banking cabal, knows that the IranWar is close upon us. No more than days or weeks away. That'll do a sustained spike on "fuel" prices and finish both the Euro and the dollar. They'll collapse in perfect harmony. So he talks and talks and talks...while awaiting the death-blow. Just like we comment and comment and comment. It passes the time.
That would be a pretty stupid plan, as the real exposure of US banks to the Euro is unknown. Then again they are stupid.
Is the debt measured in euro or in dollar?
If I live in Europe lean some dollars at 1.23 and I would like to repay in dollar, a stronger Euro (>1.23 then) would be my advantage.
The answer is he could cheapen the Euro versus the dollar.
That is obviously working if that was the goal. What a genius plan!
Bruce has left out any and all mention of what the reaction in Asia would be to a 20% devaluation of the euro followed by a corresponding action by the Fed with QE/USD targeting ...
Japan would see an exchange rate of 60.00 and possibly the final straw to break the back of their export economy. Ditto Korea, Singapore,Thailand.
China would be facing declining exports, increasing unemployment and runaway inflation - they are going to be in a pretty pissy mood if the euro and the USD drop 20% in value.
Going full warp drive in a race to devalue currencies?
What is the appropriate long/short play for global economic collapse?
barliman
What is the appropriate long/short play for global economic collapse?
That shiny yellow stuff is supposed to be pretty good.
And it seems to be shortlived, as nearly any action of the ECB.
Fascinating that Ambrose Evans-Pritchard's take on Draghi today, is quite different than the ZeroHedge groupthink and even BK's comments ... and the terrific Evans-Pritchard is, I think, quite right.
Draghi is ready to do QE and bond-buying on a massive scale, soon, at the ultra-severe-crisis point that is not long away:
Evans-Pritchard writes:
« Wow, the ECB really is preparing to hit the nuclear button.
Mario Draghi has activated the ECB's monetary policy, risk, and market committees to draw up drastic plans.
This will include open-market operations – ie bond purchases – that may be "unlimited" and may be "unsterilised" (ie QE net stimulus).
The missile is being loaded. The launch trigger is being cocked (if you cock such things).
Markets have tanked because they don’t get instant gratification, but I rather suspect that they have missed the point. »
'Draghi Delivers'
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100019312/dr...
<sigh> AEP is always looking for some hidden thing that could break the EUR. Whatever he writes, it is always about "the EUR must die". It reminds me the "this Jesus must die" refrain in the JC Superstar movie.
here the youtube 1973 version (still the best) http://youtu.be/L2RNecC68vk
"FOOLS, you - have - no - perception, the stakes we are gambling with are frightenly high! We - must - crush - it - completely, so like gold before it, this euro must die."
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His argument all hinges on his "Over to you, Mariano Rajoy. Now you must fall on your political sword, sacrifice your career for the EMU cause, and request a formal rescue for Spain to set this whole process in motion."
cockup is an option...
Bruce, I think that you're reading way too much into Draghi's statements.
It's just my opinion, but for all reality is concerned, Draghi could come to the podium and slowly unwrap and eat a Snickers bar, smile for the cameras, and retreat to his lair, and this act would have the same meaning and affect.