The Continent's chief banker offers a quixotic solution to its debt problems. Can he really pull it off?
For the past month, and perhaps two, folks have been anticipating Federal Reserve Chairman Ben Bernanke's speech at Jackson Hole, Wyo. (which he delivered a week ago), the Sept. 6 meeting of the European Central Bank, the German Constitutional Court ruling on Sept. 12 -- the next big data point -- and then the meeting of the Federal Open Market Committee on Sept. 13.
My view has been that we would get money printing from the Fed and that ECB President Mario Draghi would morph into Bernanke and come up with his own easy-money policy (as I discussed last week).
Though it is not knowable when those outcomes will become clear to all, Bernanke's speech heavily telegraphed a third round of money printing (aka QE3). And, thanks to Thursday's ECB announcement, we know that Draghi is committed to unlimited bond purchases. Of course -- wink, wink -- he is claiming those purchases will be sterilized, but that is an impossibility.
The ECB appears to have created a path to implementing Fed-like easy-money policies. If it does, it's a huge game changer for Europe and the world.
A potentially important development took place last Monday when the U.K. paper The Telegraph ran a story by Ambrose Evans-Pritchard headlined "Germany backs Draghi bond plan against Bundesbank." Because I think it is so important, and because the article itself was so succinct, I am going to quote liberally from it.
The story begins:
Pan American Silver’s stock has fallen sharply as the potential negatives have been written into the price. But an informed look reveals the silver lining behind the clouds.
On Tuesday night, Pan American Silver (PAAS) reported earnings. It is a company I know rather well, and one in which I have a decent-sized position, which I added to this week. Thus, I thought I might take the opportunity during an otherwise extremely quiet and boring week on Wall Street to offer a closer look at a single company than I otherwise might.
First, let me be clear that I am biased. I know the people at Pan American quite well, and I am a big fan of theirs. I was a director of the company for almost 15 years, having stepped down from the board in December 2011.
In the past I have not been able to discuss the company in too much detail, for fear of crossing a line and running afoul of securities regulations (even though it is unlikely I would have done that). Now that I have been away from the board for eight months, I feel I am free to say whatever I want.
If you think you haven't been paying high enough prices, you're in luck. Some Federal Reserve officials agree with you.
Prominent articles in The Wall Street Journal and The New York Times on Tuesday discussed interviews given Monday by the head of the Federal Reserve Bank of Boston, Eric Rosengren, and they naturally goosed the market while also getting under my skin.
For one, the articles made it painfully obvious that Rosengren is a central planner at heart. If he had his way, he would unleash as much money as it took to force the economy to deliver the lower job and higher inflation rates he wants:
"You continue to do it (print money, monetize debt) until you have documented evidence that you are getting growth in income and the employment rate consistent with your economic goals . . . . For the first seven months we've been treading water. That's different from what we expected at the beginning of the year," Rosengren said.
After a yawner from the Fed, the markets needed real action from Mario Draghi, the head of the European Central Bank. But he still seems to think words are enough.
Heading into last week, there was obviously a lot of "headline risk," whereby the expected news can move the markets dramatically. Meetings of both the Federal Reserve's Open Market Committee and the European Central Bank were on the docket.
First up was the Fed, which met last Tuesday and Wednesday. The panel left interest rates untouched and said the Federal Reserve would "closely monitor data and will provide additional accommodation as needed." Stocks sold off initially on that "news," but in the end, it amounted to a fairly big yawn.
Wall Street looks to its tech hero to save the day. But with Apple's earnings miss, it is clearer than ever that only the Fed can give the market what it wants: More easy money.
The first two days of trading this week saw more chaos worldwide, as Asian markets were trashed on Monday and European markets punished Monday and Tuesday. The locus of the trouble was again Europe's debt markets; Italian and Spanish bonds were hammered, with yields for the former climbing to 6.3% and for the latter to 7.4%.
On Tuesday, the yield for Spain's two-year bond climbed past 5%. (Contrast that with the U.S. two-year, whose yield, at 22 basis points, is a mere rounding error.) Spain is in the process of coming completely unstuck, with its regional governments (entities similar to states in the U.S.) going bust, on top of the central government and central bank's problems.
Economic fundamentals continue to weaken, making the long side unattractive. Yet the prospect of more money printing makes the short side downright dangerous.
Market fundamentals were dealt another knock early this week by Monday's retail sales report, which was negative for the third month in row, both for total sales and sales excluding autos. According to the people at The Liscio Report, who do terrific work, streaks like this are rare.
Since the ex-auto series began in 1967, there have been only five instances of three-month streaks in both series. Four were in 2008; the most recent results mark the fifth. Liscio pointed out that three-month streaks in either series are also rare. Since 1947, there have been only 29 streaks of three months of negative retail sales (i.e., just 3.7% of the time). However, all but two of those have been during recessions, or within three months of one.
As economies worldwide weaken, the pressure is rising on the world's central bankers for dramatic action that will ultimately do more damage. When that happens, the gold rally is on.
World stock markets remained under pressure over the last week due to the ongoing dysfunction in Europe and -- not to be underestimated -- the fact that the world economy is slowing down dramatically (which should not come as a shock to anyone who reads this column).
I think at this point it is worth discussing the worldwide response by central banks to this macro-deterioration. As my longtime readers know, I have absolutely no respect for any of the idiots who run central banks. They are always wrong. Repeat: they are always wrong.
Do you believe in global waning?
For the last six to 12 months, they have all felt that their individual economies were stronger than they were. And no central bank has been more off the mark, or guilty of making more mistakes, than our own Federal Reserve.
It is so incompetent that, in addition to spawning two gargantuan financial bubbles and the ensuing consequent dislocations, it is not even capable of understanding that when you have the warmest weather in more than 100 years, it skews the seasonally adjusted data. Thus, they were all patting themselves on the back this winter while I and others were pointing out that seasonal data were drastically boosted by the weather.
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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