From Grant Williams, author of Things That Make You Go Hmmm,
Ken Burns and Alfred Hitchcock are movie makers. 'The Ken Burns Effect' - panning and zooming to focus attention on a certain isolated piece of the full picture; and the 'Hitchcock Zoom' - a 'shocking' dramatic change in perspective; keep the viewer occupied and entertained by material that would otherwise look a little staid and to ensure that attention is paid to the precise piece of the picture that the director wishes to be the center of focus. As Grant Williams ruminates on the Draghi Scheme (The Dreme), the devices of Burns and Hitchcock came to mind as central bankers attempt to either unsettle the viewers or make them focus on a specific part of the whole, rather than the big picture.
For the last eighteen months, we, the viewers, have been manipulated by a seemingly never-ending procession of Eurocrats, bureaucrats, technocrats and who-said-thats to look at a very precise part of the economic picture rather than be allowed to step back and try to take in the wider situation.
Accordingly, we thought this week we would take a step back, ignore where the Ken Burns Effect of Draghi’s words were pointing our attention, turn a blind eye to the conflicting rhetoric emanating from the various actors in the Theater of the Absurd and concentrate on the big picture - to try and make sense of the broader reality in Greece, Spain, TARGET2, and The Dreme. It damned near gave us vertigo.
THE KEN BURNS EFFECT: The Dr'aghi Sch'eme
The use of the Ken Burns Effect this past week by Mario Draghi was worthy of an Academy Award nomination for cinematography.
With a carefully orchestrated leak (via his old pals at Goldman Sachs) of just about every detail of his upcoming plan, Draghi successfully managed to focus the attention of the markets on one specific piece of his cleverly-crafted scheme (hereinafter referred to as the ‘Dreme’. Hey, Willem, this is easy!). Granted, he had help in that the piece he wanted focus to be on was exactly the piece everybody had been waiting (and, frankly, hoping desperately) to hear.
One little word; unlimited.
By using the ‘u-word’, Draghi ensured that the minor details of his proposal to conduct unlimited sterilized buying of bonds were passed by as his camera panned smoothly across a bunch of confused faces to settle on the word ‘unlimited’. It was beautiful.
Incidentally, how many of you even spotted that I just used the words ‘unlimited’ and ‘sterilized’ in the same sentence? Thought so.
By focusing us all on what we wanted to hear, Draghi managed to generate an impressive bounce in markets on Thursday—after all, he just promised essentially unlimited intervention—, but outside of the warm, fuzzy comfort of unlimited bond buying—sterilized, of course—the questions remained.
Almost lost in the hoopla was the fact that the ECB has now lowered its collateral requirements to the point where they will loan cash against essentially any old junk that isn’t nailed down in a bank’s headquarters.
This last point—hardly covered by a press corps focussed on the u-word—is likely to end up being the single worst thing to happen to the citizens of Germany since the invention of the mullet. Watch this space.
THE HITCHCOCK ZOOM: The Dreme
It’s hard to explain how markets could have been caught off balance and dizzied by ‘The Dreme’— after all, what he said had appeared almost verbatim on every major newswire in the days immediately prior to Thursday’s press conference, but dizzied they were.
In the lead-up to the big event, the usual perspective changes were evident as a stream of headlines hit the tape that were guaranteed to generate just the right amount of angst:
- MERKEL TELLS LAWMAKERS SHE OPPOSES UNLIMITED ECB BOND PURCHASES
- MERKEL CAN ACCEPT TEMPORARY ECB BOND BUYING, BARTHLE SAYS
- MERKEL CAN ACCEPT ECB BOND BUYING OF SHORT MATURITIES: BARTHLE
- ECB’S DRAGHI DOESN’T HAVE ‘TOO MUCH’ SUPPORT FROM MERKEL, MERKEL BACKS WEIDMANN
- ECB CAN ONLY BUY BONDS ATTACHED TO CONDITIONALITY
The Germans are out... no, wait, they’re in but only temporarily... yes, they’re in but only if the purchases are at the short end... no, wait, Merkel’s backing Weidmann and he threatened to resign over this last week so that must mean the Germans are out... hold it...as long as there’s conditionality ‘The Dreme’ can go ahead unchallenged... Dizzy yet?
Then Thursday came and ‘The Dreme’ was laid out in all its glory. European banks soared (in some cases as much as 15%) as Super Mario promised to take all their risky bonds off their hands at a nice fat profit and stick them on the taxpayers of Northern Europe’s his own balance sheet. This generated perhaps the most dizzying of all the effects of ‘The Dreme’ which was to be seen in the short end of the Spanish and Italian sovereign bond curves which have now retreated from 6% and 5% respectively to sit comfortably below 3%.
Now, this is obviously good for Spain and Italy (particularly Italy whose primary surplus has meant that it’s biggest problem has just been gaining access to ‘cheap’ money—though in recent months the economic picture in the country has deteriorated dramatically), but, as is always the case in Europe, there is a certain amount of dizziness inherent in the situation.
Under the strict conditionality rules surrounding the OMT (Outright Market Transactions) announced by Draghi, anyone making use of the programme must request a formal bailout—and that means it’s Troika Time. Thus far, without buying a single bond under OMT, ‘The Dreme’ has had a strong effect on markets, but those markets are just front-running what they see as the inevitable bailout request from Spain. However, as long as Spain can fund itself at the short end at these levels, the pressure is off them to request a bailout at all which means their debt will inevitably be sold off.
And round and round it goes.
REALITY: The Dreme
Draghi has gone all-in in his efforts to save the Euro and, in doing so, he has set the stage for one last political battle which will be fought against an immediate backdrop of the German Constitutional Court ruling on the validity of the ESM and the Dutch elections (both taking place on Wednesday and both with the propensity to throw up a shock or two) as well as the Troika’s upcoming report on Greece.
Economic data right across Europe suggests a recession is imminent for most countries and that will undoubtedly roil the political status quo. Throw in the inevitable riots in Greece and Spain as tensions over increased austerity flare, the burgeoning North South divide and you have anything but a stable environment under which The Dreme can be implemented.
No sooner had Draghi’s checkbook been taken out, than the power players of Europe began chirping at one another (including the usual references to WWII):
(UK Daily Telegraph): Former Spanish premier Jose Maria Aznar said the EMU crisis had poisoned relations between North and South. “We have a situation where one country has become the hegemon, and that is Germany. This is the first time we have seen anything like this since the Second World War,” he said in Cernobbio.
The bitter clash was all too evident in press headlines on Friday. Germany’s Die Welt ran with “Markets Cheer Death of the Bundesbank”, playing on deep-seated German fears over the loss of monetary control.
Italy’s Il Giornale - owned by the family of expremier Silvio Berlusconi - splashed with “ECB slaps Bundesbank in the face”. Its lead story highlighted the risks for Italy if it accepts the Faustian Pact of an ECB bond rescue. “States have to renounce sovereignty and hand over the keys to the house to European bankers, who will obviously impose heavier sacrifices,” it said.
Draghi has temporarily released the pressure on Europe’s peripherals, but he has had to go beyond to the very edge of his mandate. What happens next is open to debate but the Eurocrats are bound to find a way to ensure we have no more than a few days of relative calm ahead of us.
The simple reality is this: The Eurozone is absolutely unworkable in its present form and, if those in charge of it don’t decide on their own that it needs to be reworked, then markets will make that decision for them. If and when they do, it will be anything but ‘manageable’.
Spain will need a bailout that will dwarf those given to Ireland and Greece, the Greeks will have to be cut loose and forced to return to the Drachma and governments will fall right across the continent before this is settled, bringing the kind of political instability and strength amongst extreme parties that hasn’t been seen since the dark days of the 1930s—a return to which the Eurozone was ironically designed to specifically prevent.
Full report below: