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The Beginning Of The End Of The Cult Of Draghi

Tyler Durden's picture




 

Excerpted from Doug Noland's Credit Bubble Bulletin,

Mario Draghi has ascended to the status of the world’s most powerful central banker. Amazingly, he leapfrogged even Ben Bernanke back in the Summer of 2012 with his machismo “do whatever it takes.” Along with the BOJ’s Kuroda, the ECB grabbed the QE baton from the Fed and haven’t looked back. Unlike Kuroda and Yellen, he’s a “market guy,” even serving a stint as a Goldman Sachs vice chairman and managing director.

Market participants began falling out of love with Mario Thursday. Until then, he’d been the central banker equivalent of the Wall Street darling growth stock CEO that reliably always beats earning estimates. For the first time, Draghi was a major disappointment. Only two weeks ago he confidently assured the markets he had the quarter (oops, the meeting and QE growth) in the bag.

November 20 – Financial Times (Claire Jones): “Mario Draghi has dropped his clearest hint yet that the European Central Bank is about to inject more monetary stimulus into the eurozone economy, brushing aside staunch opposition from Germany’s powerful Bundesbank. The ECB president said yesterday that ECB policymakers would ‘do what we must to raise inflation as quickly as possible’. The remark echoed a promise Mr Draghi made during the region’s debt crisis in 2012 to do ‘whatever it takes’ to save the single currency.”

Thursday’s wild market reaction to Draghi recalled the many instances over the years when growth stocks were obliterated on an earnings miss. How many times have we heard some variation of, “How could the stock drop 15% when earnings only missed a penny? This is an obvious market overreaction!” Usually, however, those selling down 15% don’t regret exiting. The single penny earnings miss tends to be a harbinger of worse things to come. It often marks an inflection point in the “story” – the beginning of the end of the game. With company management no longer able to “manage” predictable earnings growth, the sophisticated players and momentum speculators want out. While down big on misses, at least there’s usually big trading volume to accommodate sellers.

Draghi has been playing a dangerous game. He shot from the hip in 2012 and then forced his radical policy course down the throats of the ECB governing council. He stoked a historic Bubble in European bonds and equities, then essentially dared the ECB hawks (certainly including the Germans) to crash the party. Over recent years he’s become the Alan Greenspan of global central bankers: The hero and clever maestro. Mario the policy and market genius. In the nineties, the speculator world was content to bet on the Greenspan market backstop. These days, why rely on Kuroda or Yellen when Super Mario’s got your back.

Along the way, he’s attracted quite an adorning crowd – or at least a crowd of Crowded Trades. Euro devaluation has been one of the greatest ever gifts to financial speculation, ensuring the euro short has become one massive Crowded Trade. ECB QE and the resulting historic collapse in euro-zone yields have spurred Crowded Trades throughout European bonds and equities. Draghi’s “whatever it takes” has been an albatross around the necks of the Swiss National Bank, ensuring ultra-loose monetary policy and a Crowded Trade short the Swissy. Similar pressures on the Scandinavian central banks have ensured similar consequences. Only God knows the amount of leverage that has accumulated throughout European fixed income. For that matter, how much liquidity (and leverage) has flowed from Europe into U.S. securities markets? How much to Eastern Europe and EM more generally?

I have serious issues with contemporary central banking. Somehow, it has become accepted policy to openly manipulate and inflate securities markets. It’s the role of central bankers to dictate “market expectations,” just as over the years they’ve seen a crucial role in shaping so-called “inflation expectations.” Crucially, monetary inflation these days feeds “inflationary expectations” throughout securities markets. And as “money” has continued flowing into global market Bubbles, central banks have lost only more influence on inflationary dynamics in real economies.

In the face of Trillions of QE over recent years, commodity prices have collapsed and general consumer price inflation throughout much of the “developed” world has drifted downward. Global central bankers have nonetheless adopted Draghi’s “whatever it takes” to ensure “inflation” reaches their “mandate.”

After the August “flash crash” – global market dislocation – central bankers again convinced the markets that they were willing and able to do “whatever it takes”. And as energy and commodities have come under further pressure (along with consumer price indices), expectations grew that more shock and awe was on the way. It’s a fool’s errand. Draghi, Yellen, Kuroda and others talk “inflation mandate” and markets hear endless “money” to inflate securities markets. And the more global Bubbles have inflated the more emboldened financial players have become of QE Indefinitely.

Draghi promises to ‘do what we must to raise inflation as quickly as possible’ – and then delivers no increase in the size of monthly QE purchases. There was no awe – only shock. Tellingly, markets cared little about negative rates or an extension in the QE program. Flashing indications of latent market vulnerability, participants were demanding more “money” and they wanted it now. Draghi’s Friday talk of a “no limit” ECB balance sheet must have Weidmann and responsible members of the ECB at their wits end.

It’s the nature of monetary inflations that there’s always a need for more. Throughout history, it’s been ‘just one more round of ‘printing’’ or ‘just one more year and then we’ll rein things in’. But things spiral out of control – and there’s a lot of currency with a lot more zeros. It can end in hyperinflation, at least when monetary inflation is afflicting the real economy. Today’s strange variety is inflating securities market Bubbles. It will end with Bubbles bursting and confidence collapsing.

Integral to the bursting Bubble thesis is that policymakers are losing control. Granted, such analysis has about zero credibility when markets are in melt-up mode. But perhaps the markets’ response to Draghi is a forewarning.

A headline from Friday’s Wall Street Journal: “Crowded Trades Collapse: U.S. stocks, bonds and the dollar all tumble as popular trading positions are hit by the ECB.” And Friday evening from the WSJ: “Macro Hedge Funds Caught Off Guard by ECB’s Move.”

I’m sticking with the view that unstable markets will continue to pressure de-risking and de-leveraging. With currencies moving 3% in a session and the bond market succumbing as well to wild volatility, it seems obvious that players will have to respond by ratcheting down risk and leverage. It remains a self-destructive backdrop with way too much “money” chasing limited securities market opportunities. Popular trades now come with unfavorable risk versus reward.

I believe global markets are back in high-risk territory, and fragilities wouldn’t be as extreme if global policymakers had allowed an overdue market adjustment to run its course back in August.

Markets rallied on notions of QE forever, while the fundamental backdrop continued to deteriorate.

The commodities rout has worsened.

 

Brazil has taken a turn for the worse.

 

Meanwhile, fragilities continue to fester in China. Efforts to stabilize a faltering Chinese stock market Bubble have stoked even greater bond market excess. Authorities are cracking down hard on the securities industry with troubling ramifications for faltering financial and economic Bubbles.

 

Here at home, an acutely imbalanced economy beckons for (an inauspicious) “lift off.”

 

The geopolitical backdrop turns more alarming by the week.

And now, with only about four weeks left in the year, inflated confidence in global central bankers has sprung a leak.

 

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Sat, 12/05/2015 - 13:38 | 6880229 Noplebian
Noplebian's picture
'The Beginning Of The End Of The Cult Of Draghi'

We need to destroy the cult of central banking, full stop. These people are just the useful idiots pedalling the snake oil!

http://beforeitsnews.com/conspiracy-theories/2015/12/road-to-ww3-time-to...

Sat, 12/05/2015 - 13:41 | 6880254 stocktivity
stocktivity's picture

Never mind this shit. Kim Kardashian gave birth to a baby boy. That's one of the top news stories on google right now. Only in America.

Sat, 12/05/2015 - 13:45 | 6880260 Noplebian
Noplebian's picture

Very sad, but unfortunately not in the least bit surprising....just what would we do without our daily dose of narcissistic dysfunction!

 

 

Sat, 12/05/2015 - 13:50 | 6880269 gezley
gezley's picture

Ah that's nice. They got her to the hospital OK then?

 

https://i.ytimg.com/vi/Cx9plu0GPVg/hqdefault.jpg

Sat, 12/05/2015 - 13:57 | 6880288 xyzcracker
xyzcracker's picture

Do they know at which age it will transform into a girl?

 

Do they have a boy name - and a girl name?

Sat, 12/05/2015 - 14:51 | 6880458 Peter Pan
Peter Pan's picture

Which crevice did this baby come out of?

Then again she only enjoys this "popularity" due to the IQ of the general populace.

Sat, 12/05/2015 - 13:43 | 6880256 JRobby
JRobby's picture

When you imagine the sheer lack of intelligence and creativity our leaders display, all 17 goals would be seen as attainable if there were a lot less humans on the planet. They always take the easy way, always.

Sat, 12/05/2015 - 15:06 | 6880499 Butter_cup
Butter_cup's picture

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Sat, 12/05/2015 - 13:38 | 6880240 JRobby
JRobby's picture

what a horrible loutish planet this is. the dominant species consists of sadistic morons, faces bearing the hideous lineaments of spiritual famine swollen with stupid hate. hopeless rubbish.”
  William S. Burroughs, My Education: A Book of Dreams

Sat, 12/05/2015 - 13:57 | 6880276 falak pema
falak pema's picture

haha! The markets are panicking that Draghi's "whatever it takes" may be a pea shooter when the big white one looms on the horizon.

What Markets? Its a closed club of incestuous dervishes doing a print to infinity ritual dance. He prints 1, they --the market players-- print 10 ! What moar is there to say?

And the Oligarchy makes money sleeping in the Caymans,  on HFT "cant lose" plays done on their account by the PDs; "too big to fail/nail/jail" cabal, protected by the SUpreme and Congress's frothy creme de la creme.

0.1 % going to 0.01 %, thats the market trend.

Sat, 12/05/2015 - 14:02 | 6880305 besnook
besnook's picture

remember the days when everyone denied the existence of the plunge protection team? ah, the quaint old innocent days of yore.

Sat, 12/05/2015 - 14:13 | 6880331 Insurrexion
Insurrexion's picture

Power it's self has for a long time produced nothing but the signs of its resemblance.

And at the same time another figure of power comes into play due to the collective demand for signs of power -- a holy union is reconstructed around its disappearance.The whole world adheres to this more or less in terror of the collapse of the political.

And in the end the game of power becomes nothing but the critical obsession with power -- obsession with its death, and obsession with its survival which increases as it disappears.

Sat, 12/05/2015 - 14:16 | 6880336 dogbert8
dogbert8's picture

"Granted, such analysis has about zero credibility when markets are in melt-up mode."  That's the rub, isn't it?!  While I ascribe to the notion that all this money printing will not end well, it seems to end just fine after every prediction that it will not end well.  Question is:  when do we go from zero credibility to something greater than zero?  Or, will bankers be able to keep this going ad infinitum?

Sat, 12/05/2015 - 14:18 | 6880342 THE DORK OF CORK
THE DORK OF CORK's picture

His job is to maintain the euro role . That is to make expensive (from a energy perspective ) stuff cheap in euros And to make cheap stuff (from a energy perspective ) expensive He is following the logic of finance capitalism perfectly. Look , a months rain fell on Ireland last night and yet they wish to charge us a arm and a leg for scarce water.........Transport energy as a % of total TFC will again reach its crisis peak of 2007 this year (43 % of total) The more artificial friction he can create the better for our owners.

Sat, 12/05/2015 - 14:24 | 6880366 Youri Carma
Youri Carma's picture

QE isn't about inflation it's about bailing out the TBTFB.

Sat, 12/05/2015 - 14:33 | 6880396 THE DORK OF CORK
THE DORK OF CORK's picture

To keep  the european market ( wage slavery)  together his monetary policy must try to keep stuff such as aviation fuel cheap relative to cashflow and local products expensive ( because of tax / Usury)

First he destroyed it Italy

Now it's Europe.

Always and everywhere the friction of commerce is kept as high as possible to achieve the political goal.of european cohesion.

 These bankers have destroyed local commerce for a long long long time.

Previously in countries such as France the feudal trade relationships of the region's was broken up and concentrated in Paris.

This is a very old story.

ThE logic of usury means total destruction. 

Sat, 12/05/2015 - 14:37 | 6880414 Peter Pan
Peter Pan's picture

Mario is going to end up like Thomas Midgely, the guy who invented CFC's and the use of lead in petrol. In his early 50's he contracted polio and being a genius he invented a pulley system to help himself get out of bed. Something went wrong and the system he himself invented one day strangled him.

Let there be no doubt that this will be the fate of Draghi.

Sat, 12/05/2015 - 14:59 | 6880480 the grateful un...
the grateful unemployed's picture

the market is putting the words in Draghi's mouth. Draghis Thur/Fri reversal was necessary to keep the markets liquid. Draghi is no maestro, the whole episode proves that. He listens to the markets, and the markets tell him what they want to hear and the markets are run by computer algorithims.

Its a bit like your car telling you what it wants go here, go there, (did you think the GPS was there for you or you were there for the GPS?)  the markets are no longer accessible by human beings. there is the rub

Sat, 12/05/2015 - 15:15 | 6880531 tarabel
tarabel's picture

 

 

I can see the day when people get into their shiny new cars, the doors lock, and the vehicle drives them to the dealership because they're late on their payment. To the cop shop because they have some unpaid parking tickets.

But never to the border because they are illegal aliens.

Sat, 12/05/2015 - 15:12 | 6880523 tarabel
tarabel's picture

 

 

All hat. No cattle. People who listen to him are getting hungry.

Sat, 12/05/2015 - 15:12 | 6880526 maneco
maneco's picture

Deluded "Super" Mario Thinks He Can Control the Economy and Markets: https://www.youtube.com/watch?v=ptew2ZXeYGg

Sat, 12/05/2015 - 15:21 | 6880557 THE DORK OF CORK
THE DORK OF CORK's picture

Again the monetary goals are political rather then economic.

Destruction of national supply chains is therefore a success in his little book.

Sat, 12/05/2015 - 15:33 | 6880580 DragonWings
DragonWings's picture

well... you can have hyperinflation if people had access to money. So relax, we are broke... do not worry, we cannot be more broke than broken!!!

Few guys have most of the wealth bubble. So technically it will be more of a war of interests on who gets wiped out among the rich guys. It will be nasty...

;-)

 

PS just make sure you can grow your own potatoes in the backyard and have lots of buckets to collect rain water unless you have a water stream near by... in that case you do not need the buckets...

:-D

Sat, 12/05/2015 - 16:32 | 6880780 U4 eee aaa
U4 eee aaa's picture

I love it when these CBers have their bouts of madness. That's when Mr. Market walks in and slaps them across the face

Sat, 12/05/2015 - 17:03 | 6880868 andrewp111
andrewp111's picture

It is very simple why Draghi couldn't boost QE. The IMF just cut the reserve percentage for the Euro from 39% to 30% when the Yuan is included.  He has to maintain confidence in his currency, or else it would crash to unacceptable depths.

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