Thursday, August 30, 2012

The "wealthy white people" come through

I have no idea what Ben Bernanke will say at Jackson Hole, but I would be shocked if he announced QE3 this year. Nevertheless, I would expect that central bank action will act to send global equity prices on a tear some time in September because of the actions of the ECB, not the Fed.

Watch Mario, not Ben
In the last few days, it seems that Mario Draghi's European Central Bank has embarked on a concerted effort to sell the idea of bond buying to the European Community and the German public in particular. The latest effort was a piece in the German weekly Die Ziet (via Business Insider, emphasis added):
Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.
The ECB seems to be repeating the mantra "staying within our mandate". In addition to the ECB's mandate of price stability, i.e. fighting inflation, Draghi emphasized the point that "it is committed to its responsibilities as an institution of the European Union" and the existential imperative to support the euro.

Earlier this week, Executive Board member Joerg Asmussen pretty much said the same thing in a Frankfurter Rundschau interview: [emphasis added]:

We act within our mandate, which is primarily geared toward guaranteeing price stability over the medium term in the euro area as a whole. Only a currency whose continued existence is not in doubt can be stable. That’s what we in the ECB are working for.
In the same interview Asmussen outlined the details of the bond buying program that the ECB is preparing as a way of elaborating on Draghi's comment "whatever it takes" [emphasis added]: 
 ...the ECB has announced the beginning of August, a new bond purchase program, which will ensure better transmission. Compared to the old bond purchase program SMP will include the following improvements:
  • The ECB will only act in parallel with the EFSF and the ESM later. For this purpose, a State must submit an alternative claim and extensive economic support fulfillment. In my opinion, the EFSF and the ESM at the request of the country concerned to intervene in the primary market before the ECB intervenes. Such a request is only the necessary condition for action by the ECB. The Governing Council will continue shall act independently of whether, when and how the ECB's bond purchases on the secondary market. With this method, to ensure that the affected country also implements all necessary and agreed reform measures. The error with Italy in the summer of last year, as the ECB has bought Italian government bonds and the time was unfortunately not used for necessary adaptation measures may not be repeated.
  • In addition, the new program will be set up so that the problem of the perception of a preferred creditor status of the ECB will be addressed. Because this perception complicates the countries concerned to return to the capital market, because their status as private investors feel insecure and turn away from the country concerned.
  • Finally, the ECB will buy under the new program, only bonds with short maturities. The control of short-term Geldmärkt is the classic job of monetary policy. In addition, the distortions in the short end of the yield curve in times of crisis are particularly strong.
The technical and operational details of the program are currently being developed. The Governing Council will deal extensively with all these aspects of the program at its meeting in a few days. The whole discussion is led by the proviso that any concerns of a non-conforming state funding withdrawn. We will act only within our mandate.
In other words, the Establishment has gotten together and brushed aside the objections of the Bundesbank and will implement a bond buying program for peripheral countries, but under certain conditions: in parallel with EFSF and ESM and only if the member state asks; subordinate its "preferred creditor status" and only in the short maturities.

When I use the term "Establishment", I include German Chancellor Angela Merkel. She appears to have lined up with Mario Draghi as she declined to side with Bundesbank President Jens Weidmann this week, according to this Bloomberg report [emphasis added]:
Asked about comments by a party leader calling for Greece to leave the 17-nation currency, Merkel told ARD television that such comments were damaging as crisis fighting reaches a “decisive phase.” Alexander Dobrindt, general secretary of the governing Bavarian Christian Social Union, told Bild newspaper that Greece wouldn’t be part of the euro in 2013.

Everybody should weigh their words very carefully,” Merkel told ARD yesterday in Berlin. The Greek government under Prime Minister Antonis Samaras is undertaking “serious efforts” to reduce its debt, she said, and reiterated Germany’s desire to stand by the country where the crisis originated.

Euro leaders are preparing for a critical month in the three-year-old crisis that will involve the formulation of a European Central Bank bond-buying plan, a progress report by Greece’s international creditors and a looming German court decision on bailout funding on Sept. 12. Bundesbank President Jens Weidmann opened a new line of attack over the ECB’s plans, warning in Der Spiegel that monetary financing of budgets can “become addictive like a drug.”

Merkel told ARD she welcomes input from Weidmann, lauding him for continuing “to make demands on policy makers.”

Wait for September 12
After reading the above analysis, you may be tempted to conclude that the ECB will formally announce the details of its bond buying program at its meeting on September 6. Investors betting on that outcome will likely be disappointed.

Don't forget that the ECB is a bureaucracy. Bureaucracies do everything in careful steps. Recall that Asmussen said that the program will be undertaken in conjunction with EFSF and ESM, but the German Constitutional Court ruling on ESM won't come down until September 12, six days after the September 6 ECB meeting.

Don't expect a formal announcement from the ECB on September 6. We need all the pieces to fall into place after the German Constitutional Court ruling, which most analysts expect to be favorable.

Wealth white people compromise in the end
Regular readers know that I am of the view that the eurozone is unlikely to fall apart because of the deep political commitment that the elites have to a European Union, despite the alarmist headlines that surface on occasion. Josh Brown put it much better than I can when he wrote [emphasis added]:
But here's the part where I help you. Because while I have no special expertise or experience in forecasting the vicissitudes of core European diplomacy and socioeconomic policy, I do know white people. And I know wealthy white people, in particular. And wealthy white people, American or otherwise, can always be counted on to compromise at the last moment so as to preserve the status quo. And that compromise will typically involve whichever option is the least painful, even if it means that more work must be done in the future (the proverbial can-kick). And we know that euro printing, even if it means a bit of inflation for the German middle class to wrassle with, is probably worth it if the task is preserving the hegemony of the creditors, rentiers, landed gentry and aristocracy.

And so eventually, no matter how scary the headlines become or how volatile markets become in the short-term, you can expect a compromise that the wealthy and powerful elites (read: the markets) can live with. You can set your Swiss watch by it. Keep this in the back of your mind when the bullshit artists come on TV or puke their newsletters into your inbox. They are very intellectually intelligent, but they are also misanthropic social outcasts who do not and have not ever understood the way people work.
When it comes to the crunch, the wealth white people have indeed come through and they are kicking the can down the road yet once again.  

Also don't forget the Fed, even though Bernanke may not announce QE3 at Jackson Hole, he has made it clear that he stands ready to act should the economy weaken. The Bernanke Put still lives.

Risk on!

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.  

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


Anonymous said...

At what point do the consequences (and there are many) of these irresponsible can-kicking and money printing policies materialize? QE-to-infinity with no consequences? Wars have been fought because of the social consequences of marginalizing the citizenry for the benefit for the elite.

Cam Hui, CFA said...

A strategy of kicking the can down the road can be effective as long as the road is long enough.

That's the real question: How long is the road?

Anonymous said...

Good question. I guess this is what the elite and the political class are looking to find out. Eventually we will re-visit another crash.

To follow the herd or not - tough call.

I value your blog as you always have some interesting insights. I like the way you play the markets!