Jean Claude's Three Straws

Tyler Durden's picture

Submitted by Alex Gloy of Lighthouse Investment Management

Will Trichet Be Removed Early?

Below is a list of the remaining events scheduled by the ECB before the end of the year.


It is a messy situation Trichet will be handing over to Draghi on October 31st. After the unnecessary rate hike in spring, what do you do:

  1. Cut rates in one of the remaining 3 meetings (see table), presenting Draghi with (almost) no room left to cut?
  2. Leave rates unchanged and risk being seen as a lame duck as the Euro debt crisis escalates?
  3. Agree to be removed early so Draghi can announce “his” first interest rate cut?

I am afraid it will be (3). The market will read it as a failure for Trichet and the Euro will get hammered.

And while the above is purely a thought experiment in outcomes and not probabilities, we superimpose it with the must read analysis we presented last week, from SocGen's Dylan Grice, on the options currently on the plate for the ECB, which has suddenly and quite dramatically taken center stage in the global central printing arena:

From SocGen:

Suppose that Italy or Spain get caught up in the whirlwind like Greece, Ireland and Portugal, as threatened to happen last month. Maybe the Italian political situation deteriorates, maybe Ireland defaults, maybe Greece will go revolutionary, or maybe an ill-advised wayward comment from an influential European politician will spook markets and send them into renewed tailspin. We don't know which of these will happen, if any. All we know is that these are some of the many plausible triggers for a further deterioration in this fragile situation.

Let's say one of those triggers is activated, leading to an intensification in the runs on the securities of eurozone governments and banks, probably Italian and/or Spanish, but who knows? In all likelihood, every bank will get further pummelled regardless. And let's also say that the panic is fuelled further by concern that Italy and Spain's multi-trillion-euro balance sheet banks are simply too big for their already fiscally strained governments to save. Fear that they will try creates more panic in the market for those government bonds, the viability of the euro is perceived by the markets to be threatened and so all eyes switch to Germany and France to provide further bail-outs.

But then everyone realizes that France and Germany's own banks are being dragged down. And, in France and Germany at least these banks would take priority over those of other countries. So the trillion-euro bank balance sheets of many of the eurozone's financial institutions seem too big for even the core governments to save. Runs develop in the core government bond markets too as investors take fright that they might try. Meanwhile, the continued absence of any coherent pan-European political leadership ensures any opportunities to get ahead of the panic are missed, and so one/some European banks fail.

Thus the entire financial system fails. The 1931 Credit Anstalt crisis is rerun and the depression that follows is too much for austerity fatigued peripheral eurozone members, whose electorates succumb to the siren call of  anti-euro populists promising deliverance from the economic misery imposed by Berlin. The euro ends not with a whimper, but a bang ....

Now, personally, I don't think this will happen. I think the ECB will get the printing presses rolling before we get to the stage where markets seriously panic over the solvency of the eurozone's core, or of its banks. And when I say I expect the ECB to get the printing presses rolling, I mean QE of the unbridled unsterilizable sort, and of which The Ben Bernak is so fond.

This action won't be taken lightly. In fact, I doubt it will be taken at all until the market puts a gun firmly to the ECB's head and forces it to choose between its two great loves: the euro or its Germanic belief in hard money. "You can't have both" the market will say, as it cocks its gun and slowly squeezes the trigger. And my guess is that the ECB will let its principles go and sell the strategy to Germans as a hard-money sabbatical. After all, if the hard-money Swiss National Bank can commit to unlimited money printing, so too can the ECB.

I also suspect such an action would be the final kick of the can. Money printing buys time and nothing else. But I think it could buy the eurozone quite a lot of time, certainly enough to be open-minded towards owning the cheap assets the episode might throw up. Let's face it, equities would likely become very cheap in the sort of panic that would force the ideologically Germanic ECB to print with the abandon of a Ben Bernanke.

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carbonmutant's picture

"Agree to be removed early so Draghi can announce “his” first interest rate cut?"

Rude Choice...

max2205's picture

Printing there isn't the same as Ben printing here. You know that

Transitory Disinflation's picture

All this can kicking.... surely the contents of said can must be starting to make the shoes dirty.  Go long shoes.

SDRII's picture

Charts of china trade balance?

MsCreant's picture

They will print and hold each other's marked to myth crap as collateral. The US, with TARP, AIG, all those events, were a rehearsal for the global shit show. I believe in conspiracy in so far as I think these folks talk very blunt behind closed doors and watch what happens when each of them run little experiments. We did ours in 2008, we are running lean and ready to go.

We have another huge wave of kick the can coming. Until there are widespread shortages of something(s), they will keep this absurd story line going. No one cares about integrity or honesty. Make folks believe so they don't freak out. Let them know it is crooked, but just keep it going. 

Conspiracy theories thrive because they give us the illusion someone is in control. I don't think they are. I think they are crisis responders and not planners or proactive.

I think there are interests who plan. They may get their way here and there. But mother earth and what she shares has the final say.


Who would even take this job?

carbonmutant's picture

"Conspiracy theories thrive because they give us the illusion someone is in control."


StychoKiller's picture

Even the "X-Files" made some sort of sense, I'm completely lost in all the plot-turns in the X-Economy™!

GeneMarchbanks's picture

'From SocGen:'

One bankrupt institution accusing another... tiss tiss tiss. You bitches at SockGen should be be concerned with Moody's dropping your sorry asses down a couple notches and not the ECB freakshow.

I'll bet a Ag Eagle ECB outlives SockGen, anyone?

spiral_eyes's picture

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

— Romano Prodi, EU Commission President, December 2001 

Smiddywesson's picture

After all, if the hard-money Swiss National Bank can commit to unlimited money printing, so too can the ECB.

Yes, after three or four years of zaniness, the muck finally settles out and we can see with clarity.

The SNB finally got it, this isn't about fixing anything or shoring up a currency.  It is about running up a huge bar bill while buying up all the cheap gold out there, and then performing a chew and screw.  The Swiss joined the party, the Germans won't be far behind.

GeneMarchbanks's picture


Their logic is flawless: if we all print money together, then we'll still have collective Priiize Stabeeeleeeteee. Trichet you magnificent bastard! Nobel! Nobel!

Caviar Emptor's picture

They'll repet every mistake from 08-10. And the dire situation will get worse as biflation takes another vicious twist of the rack 

caerus's picture

they should get jean claude van damme

caerus's picture

bloodsport bitchez

MsCreant's picture

Fightclub bitchez. Makes as much sense as politicians getting botox, makeup, and hair dye to get elected. At least with bloodsport ECB planning the stongest something would win, not the fakest. 

There is No Spoon's picture

In fact, I doubt it will be taken at all until the market puts a gun firmly to the ECB's head and forces it to choose between its two great loves: the euro or its Germanic belief in hard money.

The gun is to the ECB's head now. The next meeting is 9/21 coinciding with the FOMC meeting - coordinated action is likely. Trichet will do a rate cut as cutting rates generally precede outright money printing.

prophet's picture

3A - Become unavailable.