So where does this leave us? Well, it’s highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB’s promise of “unlimited” bond purchases based on certain “conditions” being met (an empty promise if ever there was one).
In closing, the new ECB program will ultimately prove to be Mario Draghi’s big bluff. By presenting an old, failed program as something “new” and “unlimited” in scope, the ECB has actually shown that it’s essentially out of firepower.
Oh, and France just nationalized its second largest mortgage lender. But don’t worry, the EU Crisis is definitely contained and Draghi and others have got everything under control. After all, when the US nationalized Fannie Mae and Freddie Mac in 2008 the financial crisis came to a screeching halt… didn’t it?
This was the obvious conclusion anyone who actually bothered doing research would come to. Bernanke stated as far back as May 2011 that the consequences of QE outweighed the benefits. He also stated a month ago that for the Fed to buy too many Treasuries or Agencies would “hurt” the financial system.
The biggest even this week is Ben Bernanke’s Jackson Hole Speech which will take place on Friday August 31. It was at Jackson Hole in 2010 that Bernanke hinted at QE 2. With that in mind, many investors believe that the Fed is about to unveil or at least hint at a similar large-scale monetary program this Friday. We, at Phoenix Capital Research, disagree for three reasons. Number one, stocks are at or near four-year highs. With stocks at these levels, there is little reason for the Fed to use up any of its remaining ammunition.
For several months now, I’ve been stating that the world’s central banks are in a bind. That bind is that their monetary policies are becoming less and less effective at placating the markets while the consequences of said policies (higher costs of living, the targeting of troubled banks in the credit market, etc.) are increasing.
Bernanke has all but admitted this recently, saying "I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies… If the Fed owned too much TSYs and Agencies it would hurt the market."
The US is experiencing its worst drought since 1956. Altogether 63% of the lower US 48 states are experiencing a drought. As a result of this, the USDA has said that 50% of the US’s corn crop will be in poor to very poor condition.
My point with all of this, is that we’ve just witnessed Mario Draghi’s “bazooka” moment. Remember back in 2008, when Hank Paulson claimed that it he made a big enough monetary intervention threat that the markets would somehow correct themselves? Well, we know how that turned out (the markets called his bluff and the Crash happened).
The US is clearly heading into another recession in the context of a larger depression. And it’s doing this while in the worst economic shape in its post-WWII history. We’ve never once entered a recession when the average duration of unemployment is at an all time high, industrial production has failed to break above its previous peak, and food stamp usage is at a record high. We’ve never done this.
As far as I can see the ECB has one of two “Bail Mary” options. They are: 1) Massive money printing and buying of sovereign debt, 2) The issuance of Euro-bonds along with across the board banking backstops.
As for backstopping EU deposits... no entity on earth has the capital to do this. Total Eurozone deposits stand at €15 trillion. Even deposits at the current EU “problem” countries (Spain, Italy, Portugal and Ireland) are €5.5 trillion. That’s nearly TWO TIMES the size of the ECB’s balance sheet and over FOUR TIMES the size of the various EU bailout funds (the EFSF and ESM, the former of which only has €65 billion in capital left by the way).
Will Germany leave the Euro? I believe so. The country is already bordering on insolvency due to nearly €1 trillion in backdoor EU bailouts (pushing Germany’s Debt to GDP to 90%). Over 69% of Germans are worried about inflation. Angela Merkel is up for re-election next year (and has gained political points anytime she played hardball with Europe) and Germany has implemented steps to place a firewall around its financial system and passed legislation allowing it to leave the Euro if need be.
