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What the ECB Can Actually Do... Not Much
The markets are continuing their short squeeze, Euro-phoria induced lunacy. As a quick reminder the S&P 500 is up nearly 5% while many European indexes have rallied double digits (Spain's Ibex is up an unbelievable 17%!)
In light of this, we need to take a look at the facts, because much of this feels too much like 2008 (at that time the S&P 500 rallied 7%, 11%, even 18% based on various "interventions" all of which turned out to be duds).
Regardless of what Draghi said, what exactly can the ECB do?
Technically, the ECB can buy sovereign bonds on the market.
However, it hasn't done this in 17 weeks. The reason? Germany wouldn't stand for it. Draghi seems to believe he can start doing this again now.
Whether this is truth or Draghi is bluffing is very difficult to tell. Germany has fired back several times that it's not in favor of this policy. The Bundesbank's President
even went to far as to say this move would be against "democracy."
If the ECB moves without Germany's approval, things could get ugly very fast. The reason is that Germany is the true backstop for the EU. And if Germany says "nein" then the markets will call the ECB's bluff.
And let us not forget that the ECB bought sovereign bonds throughout 2011 and still lost control of the bond market several times:
So more sovereign bond buying from the ECB is not the "fix all" everyone thinks it to be. Moreover, with over 25% of its balance sheet already comprised of PIIGS debt, additional sovereign bond buying by the ECB would bring its own solvency into question.
Also, and this is key, EVERYONE is ignoring the fact that the ECB said it would potentially buy bonds only IF countries met strict conditions AKA austerity measures.
Having seen this game play out in Greece for over two years, it's clear that this policy would only accelerate a collapse in Spain and Italy's economies.
So I would not be betting heavily on more bond buying from the ECB solving things over in the EU.
A secondary item would be for the ECB to buy bank bonds in concert with the bailout fund the ESM or the EFSF.
These options are also problematic. First off, the EFSF is essentially tapped out with only €65 billion in firepower left (after the €100 billion Spanish bailout). So scratch that option.
As for the ESM, it has not even been ratified yet! (Germany has held up its ratification in courts until September 12 2012).
On top of this, Spain and Italy will contribute 30% of the ESM's funding. So they're going to be bailing themselves out!?!
OK, let's calm down and assume that Spain and Italy don't have to do this (impossible given the way the ESM is structured). If you remove Spain and Italy from the funding mix it means that Germany and France would have to shoulder 66% of the ESM's funding.
Neither Germany nor France have that kind of money (66% of €700 billion). Even if they did, for them to be on the hook for this would mean both countries getting downgrades.
But what about the ESM working with the ECB to prop things up?
Once again the issue comes back to Germany which is against it. Indeed, Finance Minister Wolfgang Schauble has said the ESM doesn't need a banking license (which rules out the ESM buying bank bonds) while German officials in general have voted against increasing the ESM several times and have said the ESM shouldn't be used to buy sovereign bonds.
Thus, by simply working through the facts and the math, we find that this entire rally is based on hopes and delusions... neither of which will manifest in real money for Spain or Italy.
Indeed, the only thing that could potentially save Europe would be for Germany to agree to backstop everything and monetize all debts in one form or another with the ECB's help.
The odds of this are less than NONE. Angela Merkel is up for re-election next year. There is NO WAY on earth she'd engage in a policy that would result in Germany losing its AAA status (which this policy most certainly would do).
On top of this, Germany doesn't have the funds to do this. It's already on the hook for nearly €1 trillion in backdoor bailouts of the EU. And it's now fast approaching the dreaded Debt to GDP ratio of 90%.
So there is literally NO option that could save Europe at this point. We can get verbal interventions and symbolic gestures (such as Draghi's "bazooka" threat), but the fact of the matter is that the capital needed to prop up Europe simply doesn't exist in the EU or anywhere else for that matter.
On that note, we’ve recently published a report showing investors how to prepare for this. It’s called What Europe’s Collapse Means For You and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.
This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com
Good Investing!
Graham Summers
PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.
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Although sometimes Graham is repetitive, I like his style of writing and he's funny too. For me it also seems that he has experience with pit trading.
Obviously nobody can call exactly the next move, but unlike other analysts he does make his calls. I saw his track record and he has been resonably good for a discretionary trader. And the rule of thumb is: "when the crowd gets in, it's time for you to get out". There is also a common belief amongst traders that markets have to get rid of "weak hands" before starting a major move. We also have to consider that expectations for money printing are probably already discounted in the latest rally. So I think he's somewhat right. After all, which big surprise can the FED or ECB come up with this time?
To my mind the only question is how much time would it take for general market participants, i.e., the "crowd", to realize this, even if he's right. Probably, I would say, the full realization happens only at the bottom of the next major leg down. So far they are still on ecstatic state I think.
It appears the plan to make one world government is coming together nicely. Much like a fresh recruit in the military, you must first 'break-down' the old man to create the new one in your own image. This evolution is following a course that is like watching a train wreck in slow-motion: you know it's gonna happen and you have no power to stop it. So what do you do? Try to make hay while the crop is still viable? At what point does drought become famine?
Did you ever look at the first line of the ECB balance sheet?
No, I guess you didn't.
http://www.ecb.int/press/pr/wfs/2012/html/fs120807.en.html
Yes, Gold.
And so Mr.Summers, there, right infront of you is your non-existant capital just waiting to prop up Europe...
M2M party bitchez.
Cheers!
@spotgoldprice
It gets confusing when Europe (geographical area), the European Union (27 nation states) and the Euro (common currency for 17 of those nations) are thrown together.
Europe as a geographical area will not end. The currency Euro is the rift between economic targets and economic performance and is only one part of the problem.
The European Union is managed by bureaucrats at least four levels removed from the base that is supposed to benefit from this conglomerate structure.
When one sees the European Union as a serious mismatch - like failed conglomerates - then one has to consider breaking it up, but the non-elected bureaucracy has other plans.
Get this dumb fucker off of ZH!
Yeah but he's more persistent than a herpes infection. At least Rubber Scrota had the dececncy to bugger off and not return.
So I've read these posts from Graham Summers, and I disagree with a point. Until this printed cash makes its way into the hands of the general population via bank lending, the hyper-inflation event won't happen. Until that time...and I don't think its happening this month...i need to make some more scratch trading treasury futures.
http://govttrader.blogspot.com/
I agree with you...all these bailouts and bond issues are a huge circle where it goes from government to bank to government back to the bank. The banks CANNOT lend because it hurts capital reserves at a time when they are trying to bulk up for Basel and because there is NOTHING that isn't 3x more risky than it was 5 years ago. The sad fact is that there are very few good new ideas, no loans for building housing and so the only loans a bank would want to make that had a decent chance of being paid back is for infrastructure fixes but only if you could be sure the government actually used it for that purpose. In a world of 0-1% growth, there really isn't much of a chance for all this money to spill out on Main St. until memories fade and banks get silly again, and they will because let's face it, without silliness, bonuses stay low and growth will hamper re-election chances so the game will be how effectivley Central banks are able to throttle the silliness but we are at least 5 years away from that worry.
Re So there is literally NO option that could save Europe at this point.
Whoa - not so fast!
Enter Stage Left - Deus Ex Machina: Austrian Corporal with funny little moustache - "Is that a Bratwurst stuffed down your lederhosen, or are you just pleased to see me again?"
Nah, this time they'll just unleash the islamic armed gangs...Party's over Europe, just another Asian peninsula.
He forgot about Ben. Ben is always an option...
Ben could buy 1/3 of a trillion dollars worth of Greek islands for the US Navy. Perhaps that would tide Greece over for a year at best until they ran out of money again. And what does Spain have to sell the US. Hot women?
Bernanke has 40 different words to hide in snakeoil his solo policy option at his disposal, to get out the printer
he's just announced another mangling of the English language, saying he's "going to develope more policy options for his tool box"
there's only one possible explanation for this announcement, he's got another string of words from Goldman Sucks Dept of Snakeoil to mask the latest round of printing
if Bernanke gets a pitchfork up his arse when revolution comes, someone give him an extra one for pure contempt for the spoken word ..slimebag
The UN under Corporate Control: Increasing Influence of Major Corporations/Business Lobby Groups within the UN
In Europe, the head of the European Central Bank, Mario Draghi, is facing a formal inquiry by the European Union (EU) ombudsman because of his membership in a well-known international banking lobby group.
On Jul. 24, the ombudsman’s office announced that it was launching the investigation following allegations that Draghi’s membership in the so-called Group of 30 “is incompatible with the independence, reputation and integrity of the ECB”.
The EU has been the subject of multiple complaints, because, according to civil society groups, many of its agencies allow a revolving door to admit and dispatch senior executives who bring corporate agendas to democratic fora.
One of the leading critics of this policy, the Corporate Europe Observatory (CEO), a multinational and public policy watchdog group, claims that many “senior European decision-makers leave office and go straight into lobby jobs, or (alternately) lobbyists join the EU institutions.”
In such cases, Olivier Hoedeman of CEO told IPS, “The risk of significant conflicts of interest is great, undermining democratic, public-interest decision making.”
According to Hoedeman, CEO “is working with the Alliance for Lobbying Transparency and Ethics Regulation to challenge the revolving door and to demand that it is effectively regulated”.
CEO was the first group to complain about Draghi’s membership in the Group of 30, whose members include heavy-hitters in the international banking sector like William C. Dudley, former managing director at Goldman Sachs and former president of the Federal Reserve Bank of New York.
European activists and analysts have been growing more anxious about the influence of private investment banks on public financial policies, especially as the European sovereign debt continues to spiral out of control.
As CEO put it, “Given the euro crisis, the huge bailout operations of big banks, and the on-going debate on how to regulate banks in the light of the financial crisis, it should be obvious that safeguards are needed to ensure that the President of the European Central Bank remains independent.”
CEO argues that Draghi’s participation “in a closed, club-like structure with representatives from big international private banks could damage the integrity and reputation of the ECB.”
Indeed, Goldman Sachs’ links to numerous present officials at ministries of finance and other state agencies in Europe are extraordinary and worrisome. In a recent debate in Berlin, sociologist Wolfgang Streeck, director of the prestigious Max Planck Institute for the Study of Societies, denounced what he called “the diarchy in financial capitalism.”
Streeck said that European democratic states are presently suffering under the dictatorship of the deregulated financial markets, controlled by corporations like Goldman Sachs, while at the same time, most of their institutions are led by former executives of those very same corporations.
A salient example of Streeck’s thesis is the current, non-elected Italian head of government Mario Monti, who was the international adviser to Goldman Sachs from 2005 until 2011. In Goldman Sachs’ own words, Monti’s mission was to provide advice “on European business and major public policy initiatives worldwide.”
Given that Goldman Sachs and similar investment banks are pivotal in managing the sovereign debt of numerous European countries, it seems almost absurd that they are simultaneously preparing speculation schemes against the solvency of those very same states.
Following the announcement that the EU ombudsman had launched an official investigation into Draghi’s professional past, CEO has urged him to step down as president of the ECB.
In a letter addressed to Draghi, the group wrote, “Any president of the ECB has to make it absolutely clear that he or she is not under the influence of the financial lobby at any time.
In particular at this dramatic point in the history of the EU, with the euro crisis and an ailing banking sector – recipient of trillions of euros in aid – it is completely unacceptable if doubt can be cast on the independence of the Bank’s president from the financial lobby.”
http://nsnbc.wordpress.com/2012/08/09/the-un-under-corporate-control-increasing-influence-of-major-corporationsbusiness-lobby-groups-within-the-un/
people hate on this guy, but hes up 36% YTD..
@dr dickus
Baed on what data?
If he is a good money manager and investor, he is likely losing a lot of business due to a wrong-footed communicating style
If he is a slam-dunk great investment advisor, maybe he should get some editing and marketing help ... maybe hire that Ilene Carrie on ZeroHedge who edits the excellent posts by Phil's Stock World, quite the opposite of the Graham Summers - Phoenix Capital approach
Tho it would be indeed interesting if Graham's approach that inspires snarky comments, actually brings in more inquiries and business, than Phil's more well-received approach, ha!
Ilene works for multiple clients ... and has also used her posting privileges to put some junky stuff on ZH from clients other than Phil ...
« Ilene Carrie: Ilene has been working as an editor for Phil's Stock World and Stock World Weekly, and for other financial writers. Ilene's background is in science (M.S. in pathology), law (J.D, practiced law for several years), finances and editing. »
You are being much too reasonable. If he were such a slam- dunk investment advisor he would be living it up in a Swiss Villa and being chauffeur driven to 3 star restaurants rather than spraying around bullshit on this website.
A euro collapse might lead to loss of Germany's AAA-rating?
It's the "David Copperfield" wealth effect. It looks good until you look behind the curtain.
The EU will continue to huff and puff and bluff until Germany says "FUCK IT".
The last straw will be the massive bond buying/money printing that will save the deadbeats and make a few EU bankers richer.
What will stop are the meetings at 5 star hotels to discuss "austerity" for everyone else as the euro won't be accepted as payment.
Oh, those places will line up around the block in order to give away rooms to these people.
hey it took chicken little 5 hrs to show up today..get out of here!!
yeah incredible: more dog crap, and served at 24 hour intervals.
when Graham says Europe is really (really) going to blow before the "end of summer" what he really (really) means is that he'll string-out the hysteria for another 9 months past the deadline... as he did last week
we were all hoping he'd fall on his sword but no such luck, the broken record rabbiting goes on ..and on ... (oh joy)
and when Graham says Europe now has "no policy options left" he obviously didn't read Testosteronepits (Wolfy's) article earlier today that says both the ECB and German Bundesbankrupt have given the nod to the Greek central bank to (very illegally according to Da EU Constitution) print their own Euros
so another dead-cert of a deadline of Grahams is going to slide past
i can quite imagine Graham is never, NEVER late for meetings and if you are, he's absolutely fuking hysterical at you
When Graham says Europe is really (really) going to blow before the "end of Summers" ...
Fixed it for you.
you must be losing your ass.....
^^ Agreed.
What does he mean with the idiocy of "no option to save Europe?"
Not only is there an option, it's the obvious one that has been present since the incoherent birth of the EU.
Invoke enough human suffering to invoke massive warfare to invoke capitulation to invoke dependency upon the "leaders" to do something.
I realize this is Mr. Summers, but damn, there's only one page in the playbook. How could he miss it?
Activation Energy 101: "How to create a political mandate."
Apparently, they have the ability to let countries, such as Greece, print their own Euros. I think ZH covered this yesterday, some convoluted series of steps that basically masks the fact that Greece is straight up printing money. Found it:
http://www.zerohedge.com/contributed/2012-08-08/greece-prints-euros-stay-afloat-ecb-approves-bundesbank-nods-no-one-wants-get
Yes, but that is a pittance compared to what we are talking about here. The recent ECB-Greek Central Bank fooling around had everything to do with kicking the can just a bit further down the road (and allow for vacations, god forbid the Aug 20 deadline for Greece interfere with vacation time), but solves no problems.
There's one solutiion: there is no doubt the ECB can announce a massive QE of its own, and buy sovereign bonds, just like our Fed has done. But it will not cure the problem. Only delay the inevitable. Just as here. The question is who can keep printing to pay the debts, and hold out the longest and maintain confidence in their currency?
Summers may be repetitive, but he is hammering on the right issue.
Here is what will happen:
The EUR will devalue. But it won't disappear, or lose utility.
Ghordius so far has said it best (link to the comment below http://www.zerohedge.com/news/feds-gold-being-audited-us-treasury#commen... )
"it is well known that the bulk of Europe's sovereign gold is also contained deep under downtown Manhattan: we wish them all the best when they attempt to repatriate the physical when they need it, such as the day after the EUR finally collapses".
This is the other way round. First Nixon forbade repatriation on August 1971. Then europe had think through where all this was heading and concocted the EUR as a response to the situation, present and future.
This included expectations of future currency wars and great rounds of "competitive devaluations" in an environment that would make small currencies very, very fragile in view of huge waves of hot, speculative fiat looking for something to break for a quick profit. The CHF is already hiding under the EUR skirt, if this goes on we'll soon see other small currencies in some kind of trouble (the GBP's fate will also be very interesting). No financial pundit is currently ever thinking through (in the way of Bastiat) how this mess since 2008 would have looked like with 17 eu currencies all biting each other...
Ironically, the best way to get rid of the EUR would be the repatriation of the european gold, same as in 1971.
Fat chance. As long as the US Treasury/FED goes the fiat way and the USD is the global reserve currency (the two facts reinforce each other), I don't see how this "EUR collapse" could happen with an eurozone that is a net exporter, an ECB that values it's gold at market value and the European Fiscal Compact that is going to at least try to institutionalize nearly-balanced-budgets in the eurozone's future.
For all near-blind hate against all central banks that some here have, anybody looking seriously at the current situation should realize a few of those facts, that make btw the search for "understanding where the EURUSD is going" quite irrelevant, a mere short-term distraction. By now, we all have some proof that the ECB is really guided by the compromise between 17 national interests (yeah, call them mercantile, if you wish).
Parts of the gold markets are "getting it", eventually we'll talk here about "eurogold vs. usdgold", and more about "central banks FX reserves", etc.
And for all those that are expecting a "marriage of convenience" between the USD and the EUR - or even think this is a "grand plan": please remember East Asia's policies, expectations, demands (including SDRs), past currency manipulations and plans for the future. And how the current global trade flows function.
All I can think to add to what Ghordius wrote above (for now) is that the EUR is a supra-national currency, with no single nation in control of the issuance of currency (BIG difference between the ECB and the Fed, although it's clear the Fed is in collusion with the big banks).
Also, it uses the market price of gold to calculate it's reserves, with which it lends against. This gives it an enormous advantage over both a debt-based and a gold-redeemable currency.
This also has the effect of limiting the ability of any one Eurozone member from issuing unsustainable debt (Greece, Spain, et. al. are running up against this market limit right now).
This has the effect of in the long run, making the EUR the most stable of all transactional currencies in the world.
The USD could do the same, but to try and adopt the EUR model, it would create a price shock in gold (and the USD) that TPTB are clearly trying to avoid.
This IMO will result in the EUR becoming (at least in the West) the transactional currency of choice. Not a great store of value (unless you buy stable EU nation bonds, depending on the larger environment), but a superior medium of exchange than other currencies (owing to it's wide acceptance and greater stability).
Gold, bitchez.
Oh, and http://screwtapefiles.blogspot.de/2012/08/niceto-know-that-euro-is-in-su...
Cheers,
LowProfile