Yesterday I wrote about the fact that until the other three major Central Banks blink, risk assets are going to be on offer.
Over the next three days I am going to examine each of these Central Banks one at a time.
Today I am going to start with the ECB. It is a great day to talk to about the Eurozone as this morning the much anticipated CPI figure was released. It was expected to come in at 0.8%, but once again the CPI fell more than forecast with a final reading of 0.7%.
EU CPI YoY Percentage Change</a> </div>
Over the past couple of years inflation has been steadily declining. This is not surprising as ever since the Eurozone crisis was quelled, the ECB has been aggressively shrinking the size of their balance sheet.
EU CPI (yellow line) vs ECB Total BS (white line)</a> </div>
It has also corresponded with morose private sector borrowing.
Although Mario Draghi was willing to expand the ECB’s balance sheet in the depths of the Eurozone sovereign debt crisis, ever since then, the ECB has proven quite reluctant to embark down the same path as Japan and the US with aggressive quantitative easing.
This reluctance is often blamed on the German’s hard money obsession. Too often the German excuse is used as a convenient scape goat. The truth of the matter is that the Germans are powerful, but if the Eurozone community was committed to quantitative easing, then the other countries could easily band together and overrule the Germans. The Europeans are not as enamoured with aggressive monetary expansion as many Wall Street strategists believe.
If the Europeans had their way then the Japanese and Americans would not be engaging in such aggressive quantitative easing. But they don’t have the luxury of telling these other world Central Bankers how to run their economies. The ECB must deal with the reality that their major trading partners are actively devaluing their currencies.
This tighter ECB as contrasted to the looser Fed and BoJ is causing the supply of Euros relative to US dollars and Yen to shrink. This is causing the Euro currency to rally. It is especially pronounced against the Yen.
EURJPY Rate</a> </div>
In essence by refusing to join the QE party, the European Union is importing the rest of the world’s deflation.
As this deflation engulfs their economy, the ECB’s concern is rightfully elevated. Recognizing that the status quo will result in an ever increasingly Euro and decreasing inflation, the ECB has attempted to jawbone the markets into submission. There is a constant stream of threats about the “too high” Euro and the “ready to be implemented” monetary easing programs. They have even threatened negative rates in an attempt to slow down the Euro rise and disinflation trend.
During the credit crisis, Draghi’s famous “whatever it takes” speech successfully stopped the contagion. Since then the ECB has mistakenly over emphasized the use of rhetoric. Draghi’s speech during the credit crisis was so effective because there was a collapse of market confidence. His steadfastness in the face of the crisis was the exact sort of leadership needed to calm markets. Unfortunately he now thinks he can simply “tell” markets where to go. His threats about the “too high” Euro are now actually costing him credibility. Threats without followup action are not enough to overcome the bigger picture supply and demand equation.
But the real question is how long will the ECB threaten with no follow up action?
I must confess that I fell for the “ECB is about to unleash the next major QE program” or the “negative rates will be instituted at the next meeting” trade a few too many times. Fool me once, shame on you. Fool me twice, shame on me. What about fool me three or four times? At this point, I am simply an idiot for continuing to believe that anything different will happen.
And it’s not just me that has lost faith with the ECB’s commitment to change. Have a look at today’s reaction to the CPI number. CPI came in below expectations and should increase the chance that the ECB follows through with some sort of monetary easing. This should cause the EUR to fall… Which it did… for about 10 minutes:
EUR intraday trading</a> </div></p>
The market no longer believes that anything short of an economic collapse is going to change the ECB’s stance.
Why is this? The great blog the Testosterone Pit had a terrific post explaining the behind the scenes jockeying at the ECB:
Consumers in the Eurozone, who in many places had to tighten their belts as wages and benefits were whittled down, have been spared the scourge of steep inflation. A real benefit, given their squeezed incomes. But central bankers, corporations, and politicians in France and other countries abhor this scenario, and they clamored for more inflation and for the devaluation of the euro, and they made deafening noises to push the ECB to start printing some serious money and douse the lands with QE.
With some effect: on April 3, ECB President Mario Draghi announced that the Governing Council had unanimously committed “to using also unconventional instruments within the mandate to cope with prolonged low inflation.” QE would start any minute. This led to more deafening noises about beating down the strong euro and stirring up inflation with a big bout of money printing and bond buying, to the point where the Wall Street Journal summarized it this way today:
The drumbeat for quantitative easing in the euro zone grows louder by the day – and it is the European Central Bank that is doing much of the banging. Barely a day passes without a speech by a member of the Governing Council discussing why, when and how the ECB might start to buy bonds.
This kind of jabbering about money-printing makes a lot of Germans very nervous.
So the leaders of the parties that make up Germany’s Grand Coalition – Chancellor Merkel’s CDU, its Bavarian sister party CSU, and the center-left SPD – met for a private two-day shindig at the majestic, mountain-top Steigenberger Grandhotel Petersberg and Federal Government Guest House, in Königswinter, near Bonn, to discuss various politically tricky topics from foreign policy to consumer protection in financial matters. The idea was to do it away from the media, out of the spotlight, to hash out some deals, perhaps. At any rate, one of the guest speakers was Draghi.
And while the meeting was private, a “euro-area official present at the meeting,” who didn’t want to be identified, told reporters, according to Bloomberg, that Draghi tried to assuage these skeptical Germans. He expected low inflation to continue, Draghi had told them, but he didn’t see any threat of deflation. The ECB would be ready to embark on QE if needed, Draghi said, but it wasn’t imminent and would be relatively unlikely for now.
This switcheroo fits well into central-bank forked-tongue politics and market-manipulation: pacifying strong-euro Germans out of one side of the mouth, and out of the other side, promising financial markets “whatever it takes.”
I think that the ECB has decided to tough it out. The Americans are winding down QE so hopefully that pressure will be declining in the coming months. The Europeans can’t do much about Japan since the Japanese commitment to aggressive monetary policy is now unrivalled. At the end of the day, the ECB is much more skeptical of the efficacy of QE over the long run anyway.
Therefore, although they are in the uncomfortable position of importing everyone’s deflation, the ECB is not really prepared to do anything about it. Yes, they complain about the rest of the world’s irresponsible monetary policy and they threaten to unleash their own monetary tsunami, but they are currently not prepared to do anything about it.
When I talk about the other three major Central Banks’ need to pick up the monetary expansion baton from the Fed, I am least hopeful about the ECB rising to the challenge. I am ready to change my opinion if they show me differently, but I expect that the Europeans are only beginning down a long road of under performing due to relatively tight monetary policy.
Jackasses come in all prices
By now everyone knows what a complete jackass LA Clipper Owner Donald Sterling is.
I try to make sure that I keep my posts market related as the last thing you need is another moron droning on about his political views. But bear with me for a second because I think Sterling’s fall from grace demonstrates an important point that should act as a warning to many young traders’ infatuation with CNBC investor “moguls.”
When I was growing up, my teenage growth spurt came late. Although my brother and Dad are both well over six feet, I was always shorter. Therefore when I was fifteen years old and was still waiting for puberty, I was really short. Seriously short. One of my old man’s friends asked how many phone books I sat on while was learning to drive. It was made all the worse by having a brother who was 3 years younger, but nevertheless taller. Anyways, I was feeling sorry for myself (which in itself is pretty funny now, but at the time it sure felt terrible). My father sat me down and explained that even though it seemed like my problem was terrible, everyone was feeling the same way. Everyone had their own problems that seemed overwhelming. Everyone was insecure about something and that mine was just going to be that I was short.
Well at the time I didn’t believe him, but later in life I came to same conclusion as Mark Twain:
“When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years.”
Throughout the years I have met some very wealthy people. I am always amazed at how much they are all like you and me. They have the same insecurities and worries that we all do.
As I get older, I find that I am more attracted to people that are comfortable in their own skin as opposed to their level of achieved success. Some of these people are at the pinnacle of their careers, while others are more regular and simply happy people.
The important thing that I have learned is that a person’s wealth has absolutely zero correlation of the type of person. And simply looking at the outside success of an individual is a terrible practice.
Two weeks ago the majority of people would have looked at Donald Sterling with a mixture of envy and awe. Here was this super rich NBA basketball owner with a young girlfriend. For many, he would have been an individual at the pinnacle of his life that had everything going for him.
But as my father told me so many years ago – everyone is feeling the same worries and insecurities – even NBA owners.
Look at how insecure Donald Sterling really is…
He was so insecure that he took out a full page ad to commemorate his gift to UCLA:
UCLA announced on Tuesday that it is returning an initial donation of $425,000 from Sterling and rejecting the remainder of a $3 million pledge the Clippers owner had made to help kidney research at the school’s division of nephrology. The announcement came hours after NBA commissioner Adam Silver announced that Sterling had been banned from the league for life after his racial remarks had been made public.
In a strange twist to UCLA’s rejection, the school said that a “thank you” ad in weekend editions of the Los Angeles Times (above) had been placed by Sterling, not UCLA.
The school also told the paper that the ad’s claims that a research lab would be named in Donald and Shelly Sterling’s honor were false and were never a condition of the original donation.
Here was a fellow that had been lucky enough to make a fortune for himself during his lifetime. He should be happy in the simple act of being able to give back. But instead he was so insecure he needed everyone to know.
Which brings me my favourite courtroom deposition that I have ever read:
All the money in the world does not help the fact that he was insecure about women “wanting him.” And it shows you how desperate he was. Let’s face it – he is an old guy whose only redeeming quality is that he is super rich. It is quite pathetic that even he tried to fool himself otherwise.
Back to the markets… Too often these “moguls” appear on CNBC and seem to have it all going on. Too often they are idolized by other traders. But often these individuals are no different than you and me. And in fact, some of the worst are those whose insecurities lead them to their very success.
There are some really decent “moguls” on CNBC, like David Einhorn or Stanley Druckenmiller, but often the ones that get the most attention are more like Sterling than most realize.