The actions of the Swiss Central Bank in removing its costly Euro peg has shocked markets, who seem to assume that the purpose of a such institutions is to serve the interests of speculators, masquerading as investors, apparently unaware of the irony embedded in their calls to “buy the market” because of central bank actions, rather than something arcane like VALUE!
Well good for the Swiss, although as another element of the Corrosive Equilibrium dissolves away it becomes only a matter of time now until a real shake out develops and the catalyst for that event may be just around the corner. Indeed we may be at one of those moments where we look forward a couple of weeks and wonder will we be living in a changed world, or will we be wondering what all the fuss was about?
The consensus view is that in the face of imminent Eurozone QE the Swiss have decided that holding their peg to the Euro (designed to prevent their currency over-valuing against an already over-valued euro) is just too expensive and they cannot keep printing the Franc to hold things steady when the Euro printing begins.
Well that may be right but let’s briefly consider a few facts before we look at the alternative, which is that they are worried about a disorderly rout of the Euro, but not because anyone is printing money…anything but.
The Mainstream Narrative
The market consensus is that QE to the amount of €500 will be announced on Thursday 22nd January, necessary, we are told, to help the Eurozone grow out of it’s current malaise. Obviously this is notwithstanding the fact that QE doesn’t promote growth, that EZ bond yields are already on the floor (so buying them can’t help lower yields anyway), and that structurally the EZ is broken, are facts the banks don’t worry about.
Massive trading opportunities? Well that’s another thing. Now I don’t want to sound cynical, and I’m not, realistic is the word, but the banks don’t giving a flying you know what about Europe, real growth, real jobs, real people…..No, it’s only bonuses they care about and they are having a tough (relatively) time…..No seriously have you seen the 2014 Q4 bank results being reported on Wall Street recently? No?
Like most people you probably have real things to worry about. So, in synopsis, they have been pants; what with commodities suddenly responding to real supply and demand pressures, US QE ending and the S&P not just going up, and, Good Lord, what will the Swiss decision have done to them in Q1 2013??
So in short they’re VERY KEEN on QE and the opportunity to buy lots of assets which will go up….indeed RBS are saying buy just about everything, the money printers are here…..Errr…..Didn’t they say that last month? Yes they did. Indeed this narrative has been going on for months now, to the point where if they could place hysterical parenthesis in their analysis they probably would, unintentionally.
The point is QE as it has been practiced so far will have precisely bu&&er all impact on the Eurozne, except perhaps in preventing a sell off of bonds, if their low yields reflect speculative excess rather than deflation fears (which, unfortunately, I think they do), however if this is the case then frankly the faster this nonsense is over with the better.
More to the point with the Greek elections ahead if QE goes ahead and they buy Greek bonds just before they are repudiated by a new Greek government this will be impossible politically. If they buy bonds but not Greek ones they will be forcing the hand of the Greeks and guaranteeing a new extreme government who will be VERY cross, which again is impossible politically.
Oh and remember the Germans, the biggest boys in the room? Well they don’t believe in printing money and, more to the point, they (correctly) don’t believe in its efficacy and without their consent it’s hard to see it happening. But it may and if it is €500bn I would expect relative calm, with little market upside, as this is probably priced in. $1tn?…well that would make things rally, but that seems vanishingly unlikely.
The most likely outcome? Another disappointing (for the speculators anyway) discussion on various plans and proposals, perhaps hinting at more policies to come as and when appropriate, which of course everyone at the unified ECB will agree upon. This should spark a big sell off but as this is the last speculative game in town, the narratives last stand, we would probably just see a lot of huffing until the nonsense starts all over again in February…..but what if?
Hmmmm…..What if?…..
Back in August we pointed out that at Jackson Hole Mario Draghi made it clear there were limits to the impact the ECB could have in helping the Eurozone recover. He made it clear that fiscal policy had to change to allow economies to adapt and reform, a radical stance, that seems to have been progressively crushed out of him since then.
However we postulated at the time he may well have been staking his position that the ECB alone could not change things and there were much larger isseus at stake other than monetary policy, where he has limited freedom anyway. Thus if the politicians and bureaucrats of the EU didn’t bend he could walk away head held high to help Italy restore itself.
Then a couple of months later Ambrose Evans Pritchard (who is VERY well informed and right about many things..although not that QE works, clearly) speculated he may leave the ECB and return to help Italy as their President, despite there being several years left in the incumbent Giorgio Napolitano’s term, an idea that was also recently aired by the rather splendid John Mauldin. Such a detailed prediction seems even more speculative than ours being so specific.
And then on Wednesday, already forgotten about after Thursday’s shenanigans, Signor Napolitano resigned, leaving the post of Italian President open.
But this could never happen, a Central Bank would never stick its finger up to the market and break the code that they are there only to service Wall Street, the City and the Super Rich. Good Lord, a Central Banker deciding to do the morally right thing for the people he serves….never…never I tell ye….OH! Switzerland you say…Oh Dear! Another narrative bites the dust.
To be honest the biggest problem I have with the “Draghi resign’s to take up the Italian presidency narrative” is that it feels too contrived, just too specific…If it’s a real possibility people should be VERY, VERY SPOOKED because the consequence would be a loss of confidence that the ECB will ever right the ship and the Euro was on course for the rocks. This would probably collapse the currency faster than anything, and you really wouldn’t want to have too much exposure at all would yo……OH…
OH DEAR….If I’d heard through my Italian connections that Draghi was going to resign then I really wouldn’t want a Euro peg at all. And I might be happy to spook the market by getting out of it, even if it was all of an instant, as the alternative could be chaos…the Corrosive Equilibrium would be over…….which one day it will be. So why not Thursday?
Will be thinking on this next week.