While Sandy is causing problems in the US, Europe has its own little Sandy. Rajoy and Monti are meeting in Madrid today. This could prove interesting , as these gentlemen are not the best of friends. From Bloomberg.
While both have jointly argued against extra budget austerity as the price for help from theEuropean Central Bank, their interests diverge when it comes to whether they should ask for assistance together. A go-it-alone strategy by Spain would probably cut Italy’s borrowing costs while leaving Rajoy to weather the political flak of seeking emergency funds.
“Rajoy was probably pressed by Monti in August to accept a pre-emptive” bailout, said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “It would have made things so much smoother in Europe and for Italy as well. Rajoy is very much following his own route now.”
European officials are waiting for Spain to trigger a bailout plan unveiled by ECB PresidentMario Draghi last month and designed to draw a line under the region’s debt crisis. While Draghi’s plan to buy potentially unlimited quantities of government debt has soothed markets for now, a botched Spanish rescue could still trigger further turmoil.
Even A Risk on/Risk Off World Isn’t This Simple, Or Is it?
This is the S&P 500 since July. We’ve had earnings, elections, open ended QE, attacks on embassies, doubts about the viability of social media as a business, weak economic data out of China, bouts of strength with U.S. economic data, budgets, and stress tests, yet I would argue that the ECB has had the single biggest influence on the market.
While it is impossible to tell what drove the overall trend, let alone any given day, there is a strong case to be made that the ECB has played the biggest role in the “risk on” trade, and for that matter, even the recent “risk-off” trade. The moment Draghi said he was prepared to do “whatever it takes” the market rallied. The ECB press conference immediately after was a bit of a disappointment, but reading between the lines, and the odd use of “transmission” by two ECB members was a good sign that something was in the works.
OMT was announced, and while not the full and easy QE we get out of the U.S. Fed, it was fairly impressive. My initial reaction was to give it an A for Effort but C for Execution. It was the first clear sign that the ECB was looking to take new actions and was working hard to address market concerns. It would rely on the ESM to play a role and was a little short on details, but seemed good.
Both Draghi and Bernanke are committed to buying his market higher, whatever it takes. Investors are all long the QE go long trade, and are all waiting for equity prices to spike further. What if this doesn’t happen, and the ECB is actually in panic, and actually doing the wrong thing? From The Telegraph.
The break came in 2010. Until then everything went well,” Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview.
“Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure … pressure from outside Europe.”
Mr Stark said the ECB’s new plan to buy up unlimited amounts of eurozone states’ bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided.
“Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally,” Mr Stark said.
“It can’t be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously.” (Full article here).
Spain is on fire. Unemployment is still exploding, especially among youths. We have now reached a stage where protests are part of every day life. People are simply pissed off, especially as Mr Rajoy hasn’t accomplished much since he took over after Zapatero. The blame game is starting. Expect more protests from Spain, and a wind of nationalism. This certainly won’t help the economy. Draghi, what’s next, as the “we buy everything” simply won’t work? With investors all positioned for a QE rally, things could get interesting if Ben’s bazooka backfires.
A few market comments by Peter Tchir.
The Fed Wants to Know What You Buy for a Country that has Everything?
We need an increase in real final demand. That is what will turn our economy around. Unfortunately, real final demand generation isn’t one of the tools in the Fed’s workbox. Asset buying is. That is all they really have left, next to just giving everyone $1 million.
But QE is not a good tool for increasing final demand. Sometime it can help, but with the current situation, I don’t think it will do anything, at least not for domestic final demand.
But how do you get people to buy more when so many already have so much?
We have a record number of people receiving food stamps. That is sad and awful, but QE3 isn’t going to spur final demand from this group. No amount of mortgage bond buying is going to get a penny directly into the pockets that need it most. We need to create jobs, but jobs come from final demand and this large group will not increase that just because the Fed is buying mortgages.
Then there is the rich. The group that owns most of the stocks but is already doing well and already spends a lot of money. This group is the most likely to directly benefit from QE, at least in the short term. Certainly their stock portfolios jumped in value. Anyone who hasn’t re-financed now can, but seriously, how many people is that? The Fed purchases will keep a group of professionals in banking and the legal side busy, but now we are talking about a relatively small group of people. The problem here is that this group has been spending at a relatively “normal” pace. Is their spending really going to increase? A $3,000 purchase of jewelry versus a $2,500 one otherwise? Does that do much? When QE1 was enacted, this group was on its heels. It was nervous. It wasn’t spending. It was freaking out how suddenly it was impossible to get a jumbo mortgage. But by and large, that is a distant memory.
A few ealry market thoughts by Marc Chandler of Marc to market.
Williams joining Mauldin could be a great product. Meanwhile, here is the last “old school” pdf by Grant Williams.
QE3 IS coming folks. Maybe not quite yet, but soon and when it does, it will be a coordinated blitz between the Fed, the eCb, the boe and the pbOC with the boJ tagging along because… well, why not? Not only will it be coordinated, but it will be gigan- tic. It’s really all they have left now. The fear of falling that surrounds deflation has paralyzed the world for the last four years and drastic measures have been taken to stave off that which central planners fear the most.
Lately, the big problem the world has faced has been Europe’s unwillingness to get its head out of its a** come to a collective decision about how to tackle the suffocating debt, but in recent weeks Mario Draghi has seemingly lost patience with political leaders and has begun to force the issue.
Coincidentally, this week, as he opted not to attend Jackson Hole, in an op-ed published, im- portantly, in Germany’s Die Zeit, Draghi signaled just how Europe was going to finally turn on the printing presses:
Guest post by Peter Tchir.
Is it a New EU?
Of the major players coming into June 2011, almost none are left. Attrition and elections have taken care of most of the major players. In fact, you could make a case that Merkel is really the only major player still in the same position.
I think this is important particularly for the ECB. Draghi has now had time to establish himself in his role, and get comfortable with the people at the ECB, the various central banks, and the politicians. He entered the role with a bang – a rate cut, more symbolic than anything, at this first meeting and then began the LTRO’s.
Since then, his efforts to get Spanish and Italian bond yields down have been thwarted by the markets and a deteriorating economic situation. He wants yields low and looks like he is prepared to stretch his powers to fulfill the mandate of “transmission of economic policies”.
How far is he willing to stretch? How much can he do based on that “transmission” mandate? That is the question and we need to get answers, but more and more, it looks like he is prepared to be aggressive. It may not be a completely new EU, but it has changed a lot in a year, and the ECB does look to be a new ECB.
Guest post by Peter Tchir of TF Market Advisors.
Herding Cats and Obstinate Politicians
The mental image is so clear. Draghi, Hollande, and Obama, wiping the sweat from their brows with dust covered hands, having successfully corralled the Merkel. She’s still feisty and not happy about being in the pen, but they have managed it for now. Job well done, time for a well deserved refreshment after a long day.
It’s only then that they realize the Rajoy isn’t in the pen. They can’t believe their eyes. There is that damn Rajoy sitting on the other side of the river licking his paws preening himself. They cannot believe. They are stunned, flabbergasted, and about to go ballistic.
Seriously, after all the effort to cobble together something that they managed to convince the markets would turn into action is being derailed by the person who is most to benefit?
It is absolutely ridiculous, but it’s not as though they will just give up. They will corral Mr. Rajoy. It is inevitable and the real risk is whether Merkel is able to escape while their attention is focused on Rajoy.
So while it is concerning that Spain is not playing along, I think the pressure brought to bear will be great and Spain will accept something to keep the EU, ECB, and Obama happy.
Legend tells of one such lunch at which Heming- way was present along with several writers of the day during which a discussion on the skill of concise story-writing evolved to the point that a wager was made. Hemingway bet $10 of his own against each $10 stake of his companions that he could write a six-word-long short story. six words that would contain a beginning, a middle and an end. the wager was duly accepted by all and one of the more junior members dispatched to fetch drinks for the bon vivants gathered at the Round table. Hemingway took a napkin and scribbled six words upon it which he then presented to the group. It read simply:
“For sale: Baby shoes. Never worn.”
Wager won. Brilliantly.
I was reminded of this tale a few days ago as I listened to the words of Mario Draghi and the immense amount of speculation surrounding his incendiary words last week at a nondescript event in London. Draghi was making unpre- pared remarks—which is always dangerous in a position such as his—and yet markets, bereft of optimism, ripped the words from his lips and clutched them feverishly to their collective bo- som in the hope that this, finally, was the water- shed Europe had been waiting for.