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On Mario's Shock and Awe
Mario Draghi has achieved the impossible. A recap of yesterday's momentous developments:
- Mario was able to maintain "Radio-Silence" on the key elements of the plan he unfolded. As a result, he achieved tactical advantage when he unveiled his bold proposals. The global capital markets were both shocked and awed, and responded with unbridled enthusiasm.
- Draghi has presented a well thought out proposal. It addressed all of the issues that the markets and politicians were worrying about:
A) To appease the concerns of the citizens of Germany, Netherlands, Finland etc. the ECB support plan has stiff conditionality. This important step will, no doubt, assuage any concerns those citizens may have that their tax dollars might be at risk.
B) Mario was decisive. He did not fire a bazooka, he did not fire a howitzer. He fired the most powerful weapon known to a Central Banker. He said the "U" word. Unlimited market intervention was promised. With this one word, Draghi has eliminated any uncertainty on the outcome of the Euro and the EU.
C) Draghi boldly addressed the issue of subordination that has vexed the EU bond markets. The issue no longer exists. All sovereign bonds outstanding will now be treated the same in the event of default. There will be no "preference" provided to the bonds Draghi will buy in the market. Clearly, Mr. Draghi's prior experience with Goldman Sachs has paid off. His knowledge of the capital markets, and the "creativity" that comes from being an ex. Goldman banker, has given him the insight needed to eliminate the subordination issue.
D) Mario changed collateral requirements that will unglue the EU funding markets.
E) In a brilliant move, Draghi placated those old curmudgeons at the Bundesbank who have expressed concern on the inflationary front. Any bond purchases that the ECB makes, will be immediately sterilized. This single step eliminates the possibility of any inflationary consequences.
F) Taken together, the measures initiated by Draghi will allow the ECB to fulfill its promise of eliminating any impediments for monetary policy to be successfully "transmitted" to both Italy and Spain. The low interest rates in Germany will now be available to the citizens of the EU southern countries. The cheap money will fuel a broad based economic recovery.
So, do you like that rundown? That is the way the Draghi presentation is being spun by the media. More importantly, that is the way the market is "reading" the ECB actions. I think it is a complete crock-of-shit.
First off is the fact that absolutely nothing new was announced yesterday. What has been cobbled together by Super Mario is a rehash of of the SMP. Second, is that every detail of the new ECB steps was deliberately leaked to the market before Mario took the stage. How could a program that contains nothing new and and was previously disclosed, have had such a significant consequence to the capital markets? I don't get it.
A - Yes, there is conditionality to bond purchases. The condition for Spain to get support from the ECB is simple. All they have to do is get down on their knees and and beg. To get the bond market support, they will have to accept the austerity measures that Germany requires. The same measures that are now hated in Athens. It gets worse. Not only would Spain have to accept the austerity conditions from the north, the will be obligated to sign up for a full IMF bailout program.
Folks, this will not happen easily. Spaniards do not want Troika types running their government. They definitely do not want the IMF involved. There will be enormous blow-back in Spain to the draconian steps that will be demanded by the IMF. But that is nothing compared with the outrage that will happen in Italy.
B - Yes, Draghi did say the Unlimited word. And yes, that is important. The German citizens should be crapping in their pants over this. Unlimited means unlimited. Draghi can't back off on this promise, ever. He has dug himself a hole that is measured in the Trillions with this commitment. How can anyone promise "unlimited" action when there are always limits?
There will come a day when Draghi will be tested on his promise. There are two possible outcomes. (1) he lives up to his promise and the ECB absorbs a huge portion of the debts of Italy and Spain or (2) Mario blinks at the critical time, and backs off. Either way, that would be the end of the Euro system.
When Draghi said unlimited he bought the EU some time, but he made an all in bet. The consequences of an EU member leaving has now been raised dramatically. Mario has created an "all or nothing" scenario for the EU. When a member leaves, it will crash the entire system. Systemic risk in Europe has increased as a result of Marios' efforts. I don't think the markets (or the politicians) realize how high the stakes have become.
One further note on the "unlimited" issue. Mario clearly said that there is a big "but" to his promise. The obligation to purchase an unlimited amount of debt is conditional on the country involved meeting the "targets" that will be set by a Troika. We have never seen a country live up to the demands of the Troika yet. There is no reason to believe it will happen in the future. What this means is that when things really get tough in Spain, and they are unable to achieve the level of austerity demanded by the North, the ECB will stop its purchases. At that point the entire system will go up in flames. If bondholders believe that this will all work out, they will be disappointed. The bondholders that I know are not stupid. They will see through this obvious flaw.
C - I flat out don't believe Draghi when he says that any bonds purchased will become parri-passu (equal). He can say what he likes, but when the rubber meets the road, and there is a sovereign default, the restructuring will be done by by Brussels. When that happens (it will), the bond holdings of the ECB will be carved out. Private sector creditors will not be treated the same as the public sector.
As part of any bailout, Mario has insisted that the IMF will be brought in. Let me be very clear on this. The IMF is always Senior to pubic holders of debt. This means that the IMF will be Senior to the ECB as to the right of repayment. Do you get this German citizens? This means that Draghi has put you on the back of the bus!
There is a reason that governments and the IMF have always been treated as senior to other creditors. These types of lenders are not in it for the return, they are forced into lending as a result of a crisis. Tax payer money is at risk when cross-border bailout loans are made. Those types of creditors should have protection over commercial lenders who made a mistake. That has been the tradition in all sovereign bailouts over the past 100 years. Mario has broken new, and very dangerous ground with this step.
D - Collateral requirements have been a sticking point for the ECB. Not any longer. With a wave of his hand, Mario has said he will accept any junk collateral that is out there. Busted mortgage loans, crappy corporate assets and un-payable sovereign debt is now going to be eligible for financing at 100% of par at a dirt cheap price.
In the end, the people in Germany will own this crap. The cost will be staggering. I can't imagine how the German politicians, the Bundesbank and the German people can allow this to happen. They are getting fleeced by a guy from Goldman who has allegiance to Italy, not Europe.
E - I wait to see if the promise to sterilize all purchases of debt is delivered on. If this is done in small amounts (under E 200Bn) I think that it could be done in a sterilized manner. But there is little chance that it can be done in the Trillions of Euros that will be required. To live up to the promise of "unlimited", Draghi will have to print money. To think there are no inflationary consequences attached to the Draghi plan is just wishful thinking, or outright lies.
F - I don't think that the objective of eliminating the impediments that have clogged up the "transmission of monetary policy" has been met with Draghi's efforts. Quite the contrary.
For the ECB to implement the new measures for a country like Spain, the first condition is that there must be a crisis in the markets that forces the government to go begging. So now we must wait for a crisis to occur. This is the environment that allows for the smooth transmission of monetary policy? I would think not.
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I try to never to stand in the way of market sentiment. All of the signs point to the conclusion that the market is satisfied will what Draghi has delivered. The most conclusive evidence comes from the EURCHF market. For the first time in many months, the key cross rate is above the floor set by the Swiss National Bank. So Draghi has succeeded.
Me?, I think he has set the EU, and the rest of the world, up for a very big fall. Nothing he did will change the economics in Spain. More austerity for this country will not fix the problems, it will make the problems worse.
What Draghi did is buy some time. The only question is, "How much time?" My guess is that it will take three months before we are back in crisis mode.
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Draghi's getting nervous. The original chosen date for the establishment of the ESM is approaching fast and Europe is still nowhere near ready for it (politically and socially). The International Bankster Union want the ECB to be the Fed, identical in reach, identical in power and identical in influence. It was never any other way. If they can get the power they crave for the ECB (unlimited operations), the borders of Europe must eventually dissolve as sovereigns can be economically blackmailed into a single Union. One currency to force one legislature, a legislature that is controlled by the issuers of the currency: an unelectable cadre of member banks of the ECB.
Nothing new to anyone who haunts these corners of the internet, we've all known this for years. Draghi is simply telegraphing a more aggressive pursuit of the goal because the Commoners aren't groveling at the feet of the Lords as quickly as expected. What he fails to comprehend is that he and his bankster comrades have already lost this hand of poker and the longer they keep raising (instead of folding as they should) the greater the loss in the end. Because their entire operating model is one of parasitism rather than production and because we no longer enjoy the resource reserves per capita of old, the exponentially increasing quantity of fuel that banksters require to feed their Infernal Ponzi Machine places an increasing burden upon people that eventually exceeds the capacity to bear.
We've already seen this in the MENA and it's coming to the OECD within 20 years. Draghi and his pals are leading the world to war. Again. The best thing that can happen is that they fail sooner rather than later and it makes sense to embrace this failure with creative shock absorption rather than to fear it. The world functioned in the past just fine with greater origin-of-credit distribution. This insane drive to centralize is going the same direction as all other Grand Centralizations throughout history have: straight to hell.
And gold rocketed to $1740
There cannot be UNLIMITED buying of bonds because you will reach a point where liquidity dries up and there ceases to be a bond market.
@Big Ben
I think this is very different to printing in a national currency ......full blown monetization means the wealth will be destroyed and not adjusted as happens when a local economy prints local currency.
This could turn Europe into a third world place....but why are they doing this ?
it Is a complete non acceptance of how natural energy systems work.
Listen to Steve......
www.youtube.com/watch?v=MYnGAZl3pjs
the ECB does not print....it creates credit... perhaps enough credit to hang us all by creating a more fragile physical world without any redundancies.
To save the Euro Mario must destroy Europe ....just as he destroyed Italy.......they make the Fiat 500s in Poland now.....says it all really.
Draghi's plan would allow Spain and Italy to turn over their short term debt (provided the German Constitutional Court gives its OK and provided Spain and Italy are willing to agree to the "conditions" that have yet to be spelled out). Of course, the interest rates on their longer term debt would continue to rise over the next few years. But this wouldn't become a major problem for at least 6 months or a year.
The danger is that within a few years, the ECB might end up holding most Spanish and Italian short term debt. And if one or both of these countries then decide to leave the euro or default on their debt, the ECB would be left holding a lot of worthless bonds and would be faced with the ugly choice of full blown monetization or defaulting on the short term notes that it issued to sterilize the bond purchases.
I think Spain and Italy will agree to whatever conditions the Germans specify and then make weak and half-hearted attempts to adhere to them, knowing full well that their bargaining position will become stronger each time the ECB purchases another one of their bonds.
All in all, it is one more step down the slippery slope of full blown monetization. Realistically, I think the Germans are going to have to accept some significant euro inflation if they want to keep Italy and Spain within the EZ. But German politicans either don't realize this yet or don't yet dare to tell this to the German populace.
How is your shorting of Euro worked out, Bruce? I do not take seriously economic rumblings of people who do not understand how to make investment decisions.
What Draghi proposed is "indefinite" rollover of debt for those countries who
are willing to put constraints on issuing the new debt . That may very well work cause it provides an insurance for private bond buyers in a sense that there is an ultimate buyer on secondary market. Draghi does not monetize debt: he just provides conditions for interest rates stabilization.
Your analysis is a total and absolutely misleading bullshit.
Looking at Irish national accounts....
Y2006 : National debt interest paid to
residents : 826 million
Rest of the world :990 million
Y2011 : national debt interest paid to
residents :1,101 million
rest of the world : 4,067 million........
Ireland cannot create a post 1987 credit bubble , a post 1994 credit bubble or a post 2002 credit bubble to pay for external interest payments......it simply does not have the oil to waste on sovergin holders now as that is how external interest is paid to these bastards......creating credit bubbles.
You need fairy liquid to create bubbles ......no liquid , no bubbles , no bubbles , no "sovergin" interest unless you wish to slowly or not so slowly kill people off and extract the surplus.
Like in the Good old days.....The Great War they called it..... the Great war to bail out the BoE.
Is this the second Great war to bail out the ECB ?
Thank you Bruce for your insight, just another excellent post..
But they are not really the debts of Italy , Spain , Ireland or any nation......EMU Euro created a sort of half way house post 87 ,99 ,02 etc.......
Europe is not a nation state ...it is a market state construct with numerous cross border claims that make no sense as it grew up in a era where capital flows became greater then trade flows.
I have been looking at Irish energy balance sheets for some time ( I am a sad bastard really)
What has struck me was during the last EMU crisis period of 92/93 we reduced our cars regs for a period and reduced foregin travel..... it was. the last time we printed so we became a more national economy for a period before we became a even more extreme market state.......
But the wealth of that era did not disappear .... (where could it go ?) that is a falsehood ....... it was merely used more on a national level rather then wasted on pointless interconnections.......
JET KEROSENE USE IN iRELAND
1990 : 355KTOE
1993 : 454KTOE (EMU first crisis peak ?)
1994 : 386KTOE (this 1993/94 era was the last time we printed /devalued…..going abroad became more expensive)
1995 : 355KTOE (domestic boom …people yet to go holidays abroad ?)
1996 : 391KTOE (start of the externalising of credit “wealth” outside Ireland)
1997 :422 kTOE
1998 :444 KTOE
1999 : 550 KTOE BOOM
2000 : 708 KTOE
2001 : 859 KTOE
2002 :1,049 KTOE BOOM BOOM
2003 : 815 KTOE major correction ??( Very very large stock change of 216KTOe)…. also oil price rises perhaps affecting transatlantic traffic (maybe local factors – Shannon airports operations) rather then European services.
2004 : 1,077 KTOE
2005 : 1,125 KTOE
2006 : 1,278 KTOE (peak)
2007 : 1,159 KTOE
2008 : 1,261 KTOE
2009 : 1,155 KTOE
2010 : 1,072 KTOE
2011 : 900KTOE Big fall as the core Projects out its losses to the losers on the periphery (only a 16 KTOE stock change last year so its not a stat discrepancy)
What is clear from these figures is that these interconnections are sucking domestic demand from these peripheral economies .......The Irish don't drink much now - can you believe it ?
If we went back to a 1990 like semi national economy the money not spent on oil would flow back into domestic demand.......its the edge of Europe that is bailing out the core and their products , its not the core bailing out the edge.
I could give you similar figures for car sales in Ireland from 1988 to 94.......
I remember the summer of 1990 ...people were still leaving Ireland for work abroad ..... but what struck me on a Holiday down in a west cork seaside village which was a hangout for the richest in my Lilliputian town was the number of Volvos , Mercs , BMWs etc.........
It was completly out of place in the still poor Ireland of 1990.......what was happening was a waste of resourses.....soon after the Gulf war and the EMU crisis dropped car sales in the country...... the country printed.....domestic demand was restored.......but a gigantic credit bubble began to form again in late 1994 /1995 that never stopped until 2007....
Market states don't work......nation states work.
These travel connections are a product of the Euro age........they are just too wasteful...... all domestic demand is being sacrificed to peserve these connections and wasteful capital imports ...even in 1990 we had just 800,000 cars in this country ..... now its 1.8 ~ million
How is this increasing internal Irish wealth ?
Answer : it is not
It is waste to peserve the cores and domestic elites Euro dreams.
Ireland , Spain even Greece can restore domestic demand by stopping the leaking of Hard currency(going back to national currencies) ..........its as simple as that in many ways.
The Euro is not a national currency , clearly it will never work - Mario and the boys are just creating a bigger crisis....but for what purpose ?
"My guess is three months---" I'm guessing 40 days. The Train is running away faster now.
While I agree with most of your sentiment Bruce, I am fast coming around (as an investor) that rules don't matter anymore. This means:
1. Saying anything is okay and there will be no blowback - showing confidence is the key regardless of underlying facts
2. The ECB has become the Fannie Mae of Europe...what is the difference between $3T in garbage and $10T in garbage? Answer: Nothing but more time to spend more than these countries take in.
3. Inflation - remember no rules so if a particular piece (like food) becomes problematic, they will change the mix or eliminate the metric
4. These pronouncements keep young males in their homes playing video games and texting their friends with iphones because it has the appearance of something getting done. They have been brainwashed that their leaders care, know what they are doing, have urgency and people in the streets would hamper a recovery
Only when 5 or 6 countries in the EU enter Greece and Spains' Depression and people really start going hungry and take to the streets will this game end. At that point Germany and France have recapitalized their banks as best they can and withdraw from the Euro
4.
"At that point Germany and France have recapitalized their banks as best they can and withdraw from the Euro"
--
It seems to me that they're getting in deeper and deeper the longer they stay in. They're in for their portion of the sovereign (defaulting) bonds being purchased.
Hunger in the belly is what will bring this house of cards down fast.
Here in merica we have these wonderful SNAP cards that allow you to get all the processed cheezwhiz you can stuff in your gullet.
Food is where it's at and when people start going hungry, that's when the tide starts to turn. (Mother nature or inflation, won't matter, $15 cheezwhiz ain't gonna cut it)
the ECB support plan has stiff conditionality. This important step will, no doubt, assuage any concerns those citizens may have that their tax dollars might be at risk.
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So this is an article from The Onion right?
"No ex-ante quantitative limits are set on the size of outright monetary transactions," he said, using the formal term for ECB bond-buying programs.
Reuters.
The "CRAP" key word at the top about says it all.
Unlimited CRAP.
Draghi's appearance also showed desperation as if internal struggle within his mind had run him down. His appearance was not one of confidence.
His appearance was that of a criminal- he is an evil POS --a Goldman Sachs sociopath and thief - he should be hung by his balls and shot
Schlock & Jaw
= The last rabbit
In the end, the people in Germany will own this crap. The cost will be staggering.
There idiots are the same as ours. Paper pushing morons run the planet. Marx was right. Any lie will do.
Don't think the Germans will go for it, or will Ausrtia and the Netherlands. Finland may resist because of the collateral issue. Isn't there a Dutch election right about this time? The two opposition parties, who are anti-Euro, are leading the polls handsomely last time I saw the figures. Or did the boyz who run the world get to the German courts with either money or threats?
What Mario has done, perhaps intentionally, is to set things up, perception-wise, so that the Germans will look like the bad guys if their constitutional court turns thumbs down on his Ponzi scheme, just when all the participants thought they were winning--or at least getting out whole.
Bruce.
Why do you publish such basic common sense? I am 30 million ahead betting against draghi and you are limiting the game.
How? I'm losing my shirt betting against Draghi and Bernanke
For payment I only accept GOLD...
That's game over right there. The EU banks are bust b/c of leverage, now the ECB is bust ... because it takes on EU banks' leverage.
By pretending to be lender of last resort, the ECB eliminates the lender of last resort. (Oil prices stall as gold price bolts!)
Let the bank runs begin! (They've already begun, see 'gold price' above.)
+ 1 Steve, your green arrow wasn't working
by pretending to be lender of last resort, "the ECB eliminates the lender of last resort"
the ECB (and Fed, BoE, BoJ etc) becomes a bad Bank by taking them on(to their balance sheet).
Central Bwankers are in effect running to the black plague to get infected, ensuring systemic risk drives right into the heart of the system and destabalises everything, when nature, most half-awake humans and a free market would run from risk
one of the dumbest 'systems' ever devised
Bruce that is without doubt the clearest summary of the Mario plan I have yet to see.
Thank you. Great work.
Great Synopsis Bruce. How could people be so stupid as to think that unlimited bond buying would be anything but disasterous for an economy? Collateral? What collateral? Production. what production?
You cannot create wealth from thin air.
only it's not a plan ...it's padding, hot air and posturing
Mario hasn't got a plan, he hasn't got any authority to do anything until the headless chickens agree to something
...don't hold your breath
..and Brucie don't hang on central bankers every word
"...he achieved tactical advantage when he unveiled his bold proposals. The global capital markets were both shocked and awed..."
well i was bored stiff
....were we watching the same press conference Brucie?
not-very-super Mario was running on empty, padding out the time with hot air and trigger words to make him sound authoritative (cough) while the headless chickens (ryhmes with politicians) are flapping around the farmyard in no cohesive direction
a political farce in short
you'd think they'd know how to sort out a credit card bill by now, after 2 years ....but we are ruled by morons, our rational brains fool us into believing these cretins just couldn't be that stupid ...they are
I guess you did not read past the first para or two. It's okay, but if you did, you would see that I was just kidding you with that intro.
your last paragraph suggests un-super Mario presented enough substance in yesterdays exceptional example of a crone bluffing to fill the vacuum of there being no plan in place to move the Euro up against the Swiss Franc
i'd suggest his windbagging session moved nothing, more likely some major company with currency tucked away in safe Swiss Francs needed some Euros
even when Marios predecessor threw €billions at the Euro in 2011 its King Cnute effect lastest a matter of hours before drowning and disappearing without trace
if Trichet couldn't make an impact pissing away Billions i doubt Mario running on empty yesterday moved anyone (though i needed 14 Red Bulls to stay awake and listen in to the end)
...or the market/currency manipulation crooks at the BIS slipped up?
Re: "How could a program that contains nothing new and and was previously disclosed, have had such a significant consequence to the capital markets? I don't get it."
Bruce,
The only logical explanation is the market reaction was orchestrated in advance of the announcement (the same market reaction was after the bogus EU stress tests announcement – everyone knew the test results were nothing but lies, yet the markets had a similar violent squeezing the shorts reaction).
They just cannot afford to make an announcement and to get a lukewarm reaction or a selloff after the announcement; therefore, they made sure the markets would rally after the announcement (contacted Primary Dealers, Chinese, BIS, Fed, etc).
The primary dealers (MMs) knew in advance about this imminent orchestrated post-announcement markets spike. This is why the markets were ignoring all bad news and "refusing" to selloff prior to the announcement.
Cult of Reason
one either believes our political leaders rule the markets/economy or (more reasonably?) the markets/economy rule our leaders
was yesterdays continued grinding rally because bubble Ben and never-super Mario rolled out ...er, nothing?
when the economy tanks, markets tank and Bond markets tank, or their interest rates go skyward, you can bet your arse Ben, Mario and the other clowns come running
They cannot rule the markets/economy longer term, but they can easily juice the markets/economy up shorter term or to orchestrate short term market spikes.
Yes they can juice the markets (ie. throw money at it)
but as ZH has detailed very nicely, the effects half-life is under 24 hours on things like Bond interest rates etc.
like King Cnute cannot stop the tide politicians and central bwankers cannot stop primary trends, in the economy or in markets. If your economy is tanking there's nothing these toerags can do about it, otherwise Greece wouòd have been "saved" with tons of debt spending from where they are now, economic hell
The only sustained success to date is the Swiss Banks peg with the Franc. That's not going to last either
Either Droogy speaks for the masters of the universe and they have a different model than we do that includes their holdings as a sink capable of absorbing this transition to the intended global objective, or he's bluffing and we're all VSF.
I learned 1 thing from the Vietnam war. Dig, bitchez.
Bruce, you've been on a tear recently!
I took the "quiz" before looking at (your) answers.
I gave myself an A+ despite laughing out loud instead of answering D) and answering E) more simply by writing:
"sterilized" and "unlimited" are incompatible.
I spent some time in a jacuzzi last week in Pennsylvania with a visiting German family. They were confidant that the ESM would be approved, that Germany would provide resources to help save the Euro and that Merkel would survive. The opposite did not sit well with them.
Now when did I see the term unlimited before ?......oh yes, regarding Fannie and Freddie bailouts and the Xmas Eve 2010 US taxpayer massacre. My, how time flies !
Who's gonna be Soros/Druckenmiller to test what unlimited really means.
Here's my summary:
Disgraceful, but, exactly what to expect from a Goldman Sachs puppett!
"How much time?" My guess is that it will take three months before we are back in crisis mode."
My, my, my. Just past the American election...
Three months is an eternity to the algos. Three seconds is a long-term investment.
Draghi queen's "shock and awe" is just old dog shit wrapped in fancy gift wrapping adorned with gilded ribbons. I can't wait to find the cute puppy in there somewhere.
The IMF (Intentional MoFo's) is just as much a tool as the ECB. This Draghi-induced europhoria has a half-life of three days, IMHO.
This plan is intellectually dishonest and could be clouded with lies as Bruce points out. What I can't figure out is how Germany and wins. In either case, it'll cost Germany money which their tax payers will have to pay.
That's the problem. Like everyone else, they're between the proverbial rock and hard place.
Leave and their banks crash and burn.
Or they can stay and try to find some magical way to loan unlimited money to their insolvent partners (without printing it, wink wink).
Either way they're going to be in for some serious pain.