Teutons shiver as ECB lets lose a liquidity tsunami
Throughout this year, the verdict on the Eurozone cardhouse will remain in the balance. If the European Central Bank’s copycat experiment work, desperate unemployed Europeans will only see a real relief late in the year or possibly only early in 2016. If their financial engineering flops, Weimar here we come.
Like everybody else, I was caught completely off guard by the ECB president, Senor Draghi when he announced on Wednesday his institution’s plans to initiate an aggressive bond buying programme of some Euro50 billion per month, continuing for at least a year. Market reaction was immediate and within one hour after the announcement the yields on 10 year Bunds and on Japan bonds went up by 16.8% and 12.6% respectively indicating that investors were fleeing major capital markets and that these bonds became considerably cheaper.
However, only a day later on Thursday, the German capital market reversed course with the yields decreasing again by 16.67%, but only in the German market. In Japan, the shortselling continued and the yield on the Japan 10 year bond grew another 13.2%. So much for confidence in Abenomics.
After hearing such a dramatic announcement one must expect it to reverberate through the markets very rapidly. By Thursday, European equity markets started responding in an aggressive way, – the FTSE 100 climbing more than 6%, and all the other major markets following more or less in the wake. Of course, these oscillations proved fascinating to me, dealing with statistics of markets of which we can hardly perceive their size, and their depth. But these reactions were to be expected.
When I inspected the currency, equity and capital movements more closely, only then did I start to see the pattern, and could I draw some conclusions. Perhaps the scariest of these is that collusion in European financial markets is rife, and that it holds the potential to lead us again to a global catastrophe, only this time even the Great Depression of the 1930’s will look like child’s play.
There is zero empirical evidence that I can offer to prove that the chairman of the Swiss Nationalbank had a discussion with the president of the European Central Bank during the past two weeks. But seeing the Euro’s implosion on Thursday, losing more than 11% of its value in a single day, leads me to no other conclusion. The Swiss must have been forewarned. There is no other rational explanation for their irrational announcement a week ago to smash the peg that ties the Swiss Frank to the Euro. Less than a month before, Swiss Nationalbank officials vehemently defended this peg, saying that it is a key link in Swiss monetary policy, which, as we all know, is negative.
I suppose when the financially austere Swiss were told the Eurozone is engaging in the industry of manufacturing liquidity, they also put two and two together, worked out what it will do to the Euro and decided the madmen who dwell on the flatlands are no longer good bedfellows.
In a nutshell, the European Central Bank has finally arrived at the “Whatever it Takes” moment and some players opted not to go along. Short-term interest rates are already at or near zero, while long-term interest rates have receded gradually over the course of a year. In practice, that means there is absolutely no room for either the European Central Bank, or any other central bank in Europe, to raise, even incrementally, short-term rates. Returns in Europe’s capital markets will tend to become negligible, and I suspect the intention is to force money into equities to create the charade of prosperity.
This strategy is seemingly working so well in the United States so why not play copycat and do exactly the same thing in Europe.
But there are many highly regarded analysts who do not swallow this bubble of bs. Many argue convincingly that we are entering a phase of extreme volatility, and that this week’s developments in Europe may just swing the volatile pendulum one oscillation too high.
We in emerging markets must expect this extreme volatility to continue and must come to terms with the fact that it will still play havoc with our currencies, none that I know off that is sufficiently strong to withstand this type of tampering.
I expect 2015 to be basically unpredictable. Whatever we forecast now may well be obsolete a week from now. I believe it will still present many ramifications later this year, especially for foreign debt denominated in dollars or euros. And I am now absolutely convinced of collusion between the world’s big central banks.