A Whiff of Panic

Ahead of Thursday’s ECB meeting, there was a widespread consensus that Europe’s chief printing press supervisor would make up for the alleged “mistake” of under-delivering on monetary lunacy last time around. Therefore, a sizable dose of fresh absurdities had to be expected, with only small disagreements on the details. It is fair to say the man didn’t disappoint.

 

Draghobert the TerribleDraghobert the Terrible, trying to assault the euro again

Photo credit: Michael Probst / AP Photo

 

There was an even greater consensus that the punters populating the casino were eagerly awaiting such news, and that they stood ready to deploy wagon-loads of money (mostly other people’s) in the direction wished for by the central planning puppeteers. This particular detail didn’t quite work out as expected, at least not at first. For instance, after an initial swoon, the ECB’s very own confetti became more rather than less expensive.

 

1-Euro June futures, 20 minJune euro futures, 20 minute candles. At first, the euro did what it was “supposed” to do – and then it went “yen” on the Dragon and his minions – click to enlarge.

 

Similar scenes played out elsewhere. Here is for instance a 20 minute chart of the  June Bund futures contract, which was subject to a similar sudden change in market opinion:

 

2-german bund, june future,20 minInstant hangover in Bund futures  – click to enlarge.

 

Other playthings were similarly impacted, from the DAX to gold. All the stuff that used to habitually react in a certain manner to more ECB largesse essentially did the opposite of what it was “supposed” to do.

Readers may recall the last time when a similar thing happened. That was on occasion of Kamikaze Kuroda’s attempt to smite putative yen bulls by cutting the BoJ’s deposit rate into negative territory.

 

3-June yen futureThat didn’t quite work out as planned either… – click to enlarge.

 

Kuroda “only” decided to emulate the fashionable new European central planner absurdity of imposing negative interest rates, which means that according to the Keynesian rule-book, he “didn’t do enough”. However, it was a surprise move, as he seemingly had publicly ruled out negative rates only one week earlier.

As we have previously remarked, this adverse (from the perspective of the planners) market reaction had to be taken as yet another sign that the irrational faith of market participants in central bankers is beginning to crumble.

Evidently Draghobert concluded from this that he had to throw the whole kitchen sink and then some at the markets, so as to dispel the misguided notion that he was “running out of ammunition” (this idea is indeed misguided – there is no limit to the madness central bankers can inflict). This is what came over the wires ahead of his press conference:

 

“At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

(1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.

(2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.

(3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.

(4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

(5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.

(6) A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.”

 

When we became aware of this extensive list of fresh depredations, our first thought was “these guys are in total panic”. Even if one erroneously believes – as the members of the ECB council evidently do –  that prosperity can somehow be conjured into being by increasing the money supply and suppressing interest rates to absurd levels, it is a mystery why they would believe that even more of the same is needed right now:

 

4-euro area M1-TMSThere is panic on the Titanic – but why? Money supply growth in the euro area has accelerated to nearly 14% year-on-year, a level only briefly surpassed at the height of the two previous major credit booms. And we know how those ended, don’t we? – click to enlarge.

 

Market Reaction and Economic Impact – Where to From Here?

Assorted sell-side analysts have retrospectively tried to explain their failure to foresee the “negative” market reaction (contrary to them, we think it is definitely not negative for inhabitants of the euro area when the purchasing power of their currency increases and market interest rates move up instead of moving down to even more bizarre levels).

 

MarketSignalUnexpected market signals…

 

Specifically, they were referring to something Draghobert said in his press conference about not wanting to push negative rates on the deposit facility even further into negative territory from their current level of minus 40 basis points. He probably did this because Europe’s commercial bankers must by now have inquired whether ECB council members have lost their mind.

 

5-European bank stocksEuro Stoxx bank index, daily – click to enlarge.

 

To be fair, negative rates on the deposit facility were hardly the only, and possibly not even the main reason for bank stocks to come under pressure. However,  there has been quite a relief rally in bank stocks today, adding to the gains of the recent bounce from severely oversold levels. We think this has indeed something to do with the perception that the penalty rates imposed on bank deposits with the central bank won’t be increased further.

Moreover, let us not forget that there is now a new form of TLTRO which allows commercial banks to borrow from the ECB at negative rates. In other words, euro area banks have just been granted a huge subsidy presumably designed to offset the impact of negative rates on the deposit facility.

The idea is of course to incentivize banks to increase their lending – they now have the possibility to stoke credit demand by offering loans at extremely low interest rates, while still able to achieve a fairly decent interest margin. Whether this ploy succeeds remains to be seen, but surely some borrowers can be enticed by even lower borrowing costs.

Let us assume that this scheme does have the intended effect. What would this mean? Given the ECB’s paltry 1% reserve requirement, banks can theoretically extend credit from thin air at a rate of 100 euros for every euro they have on deposit. In other words, they can in theory expand credit by amounts that would positively dwarf their reserves on deposit with the central bank.

It is highly unlikely that the banks will get “fully loaned up” in terms of the reserve requirement, not least because new capital requirements represent a significant obstacle to such a huge expansion of credit. Assuming though that credit expansion does get a shot in the arm, what would it achieve?

For one thing, one would have to expect aggregate economic data to improve, as they always do on such occasions. After all, “economic activity” is bound to increase when credit expands. This is essentially all aggregate economic data are measuring -namely, “activity”. They are not telling us anything about the quality of said activity.

 

6-euro-area-composite-pmi@2xEuro area composite PMI – weakening in spite of EUR 60 billion in QE per month over the past year. Indicators like this one may well revive, but what will it really mean? – click to enlarge.

 

The problem is of course that a large chunk of the economic activity that takes place during boom periods is simply capital consumption masquerading as “growth”. So if the ECB’s latest ploy “succeeds”, it will only invite even more capital misallocation. This will feel good for a while, but it is apodictically certain that it will lead to even greater woes down the road – if it succeeds that is.

There is still another possibility, based on an idea we have mentioned on previous occasions: it is quite possible that the European  – and indeed the global – pool of real savings is by now exhausted to the point at which no amount of monetary pumping will suffice to revive economic activity. We cannot measure the state of the pool of real funding, but we can infer quite a bit from observing what happens  in the wake of additional monetary easing measures.

Should that be the case, we would expect the ECB’s recent actions to have surprisingly little effect on the real economy. In that case we should see faith in central bankers to continue to falter quite rapidly.

 

Conclusion

It remains to be seen how the latest interventions by the ECB will affect markets and the economy in the near to medium term – the initial reaction seemed negative, but one day later it has become more “mixed”, as risk assets have swiftly recovered. Even that is not telling us much yet, but it may be a first sign that renewed bubble activities will be set into motion.

 

Draghi_cartoon_03.31.2015_largeContemporary super heroes

 

However this turns out, there remains the important point that the market economy is continually prevented from adjusting to reality by the incessant interference of central planning agencies. The longer this continues, the more profound the eventual catastrophe will be.

There once was a time when economists would have been in an uproar upon witnessing the shenanigans of today’s central bankers. Nowadays they are not only acquiescing to them, they are actively demanding more and more intervention. Instead of being the voice of reason warning of the dangers such policies harbor, they have become cheerleaders for them. It is only a very small consolation that they will eventually be discredited. The cost will be extremely high.

As Ludwig von Mises noted, economists were once expected to strenuously object to the policies espoused by monetary cranks:

 

“There are men who are commonly stigmatized as monetary cranks. The monetary crank suggests a method for making everybody prosperous by monetary measures. His plans are illusory. However, they are the consistent application of a monetary ideology entirely approved by contemporary public opinion and espoused by the policies of almost all governments.

The objections raised against these ideological errors by the economists are not taken into account by the governments, political parties, and the press.

It is generally believed by those unfamiliar with economic theory that credit expansion and an increase in the quantity of money in circulation are efficacious means for lowering the rate of interest permanently below the height it would attain on a non-manipulated capital and loan market. This theory is utterly illusory. But it guides the monetary and credit policy of almost every contemporary government.”

 

Our assessment remains that the lunatics have taken over the asylum.

 

Charts by barchart.com, ECB, bigcharts, tradingeconomics

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

3 Responses to “Draghobert the Terrible Strikes Again”

  • No6:

    Jim Rickards, April 2014:

    “

I think Mario Draghi actually knows what he is doing. 

He has the right mindset”.

    Mmmmm

  • Kreditanstalt:

    The meaning of money: I think Stockman hit the nail on the head when he advocated saving in cans of baked beans – “anything Bernanke can’t destroy”…

  • Kreditanstalt:

    “There is still another possibility, based on an idea we have mentioned on previous occasions: it is quite possible that the European – and indeed the global – pool of real savings is by now exhausted to the point at which no amount of monetary pumping will suffice to revive economic activity.”

    This is pretty obvious, as “wealth” is now largely equated with “credit”. Otherwise called “peak credit”, or “pushing on a string”.

    The value of money been destroyed; moreover, the equation of “money” with “wealth” has been greatly muddied and, indeed, the very meaning of “money” has been placed in doubt.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com