Empty words from top European banker

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.

By Bill_Fleckenstein Aug 3, 2012 2:04PM

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.


The focus on the Fed will now turn to September's meeting, and you can be sure economic data points along the way (like Friday's nonfarm payroll report) will be scrutinized especially closely.


Thursday's market action was a tale of before and after Mario Draghi, the man who chairs the ECB.


Sometimes talk is expensive

After the ECB met and announced it wouldn't do anything new, Draghi in a news conference uttered a lot of brave words, not the least of which was "It is pointless to bet against the euro." Besides that, and hints at potential future action to come, he didn't back up the previous week's bravado with anything concrete.         


(For those who missed it, in a speech in London on July 26, Draghi said: "To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate.  . . . Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. . . . Believe me, it will be enough.")


The real question is whether he was silly enough to just pop off and think he was going to be able to jawbone markets to where he wanted them or whether he is now just buying time. Because doing the sorts of things required that will allow the ECB to mimic the Federal Reserve is going to take a while.


Of course, we don't yet know the answer to that question. One would think that a person in his position would know that more empty words will lead only to a disaster in the short run. He and the ECB don't have the luxury of the Fed, which has only to hint at taking action to move markets. The Fed doesn't have to do much, since it has shown its willingness in the past to print money with reckless abandon.


The market's response to Thursday's disappointment was swift and brutal. European debt markets, which had been rallying before the ECB announcement, were slammed, with Italy and Spain declining roughly 40 basis points. (Italy's bond yields rose to well north of 6% again, and Spain's topped 7%.) Equity markets in Europe were similarly smacked after being higher to the tune of 1% to 2%. Meanwhile, post-Draghi, Italy and Spain lost 5% or so.


The road to inflation

My suspicion in all of this is as it has been: In the end, the ECB will become Europe's Fed, after a fashion, mimicking the U.S. bank's easy-money ways. But it is going to take more market pressure and fear, if not panic, to create that. Part of the reason is that the ECB can't act quickly, and part of it is that its Powers That Be don't really want that outcome. They prefer to keep the pressure on European governments to solve their own debt woes. Thus the financial psychodrama that is Europe continues unabated.


As the various scenarios surrounding the U.S. and European central banks play out, we might be approaching a critical shift in the psychological thought process away from deflation and toward inflation. That will be aided and abetted by higher food costs, and maybe, for once, instead of ignoring them, folks will realize it is not just the price of food that has been going steadily higher but the price of many things, excluding homes.


If we finally get to the inflection point where the focus of fear turns from deflation to inflation, the investment world will be turned upside down. That is not today's business, of course, but it will be, perhaps sooner rather than later.


It was a dark and stormy Knight

I would now like to turn briefly to an important side note in the Wall Street sideshow. For all of us who hate algorithmic trading and the lunacy it has engendered in this anchorless, fiat currency, centrally planned world that we live in, another visible blow to the "financial system as we know it" was delivered Thursday.


Knight Capital Group (KCG) was crushed for a 50% loss when it announced a $440 million trading loss caused when it sold the stocks it had erroneously bought Wednesday morning because of what the company's CEO referred to as "a large bug" in its trading software. (Read the news here.)


One can only hope that the pendulum has swung about as far as it can in that direction and that some sort of sanity will be brought forth so that we don't have to wait to for the computers to lose all of their money before they stop making it even more difficult for the rest of us to make ours.


At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.

Aug 4, 2012 7:42PM
Draghi is almost as bad as Obama- all talk no action. With him in charge (take your pick of either) the toilet is about to flush. Shame either one of the turds isn't in it.
Aug 4, 2012 2:19PM
Aug 3, 2012 8:40PM

With today's (with significant short covering) 200+ DJIA rally (from an obviously very oversold condition) came a drop in the VIX below 16 which means complacency is BACK amongst USA stock market investors.  The VIX trading below 16 has been a very reliable indicator to signal caution ahead; a big drop in stock prices likely looms in the next 90 days or so, my guess. Possibly after a run-up to new all time highs in the DJIA prior to the presidential election. After that, if not sooner, watch out below! 

Aug 4, 2012 5:58PM
yes why is gas 4 dollars a gallon , gee wheez  monday gas was 3.47 a gallon now 4 bucks what happend  to jump 50 cents  they changed it  twice a day , well there goes the recovery  depression time  again , the heck with stocks  its people that makes the ecomomy go round , to the stock market players  yes i said players they are not brokers  your ears are going to pop soon  as the market drops so fast an hit rock bottom , if we have so many experts in the world  all the people that went to college why in the heck the world is in the shape its in , so i as well put my two cents worth in too  or with inflation is 1.00 worth lol  have fun comming up with more lies to cover your a$$ this week eourpe bankers what next earth quake in the bath tub  or your wife needs new ear rings WHAT NEXT HUH ,  
Aug 3, 2012 9:52PM
The VIX has nothing to do with anything.  You can come with any number of indicees one way or another.  The "markerts" amd the "marketeers" are a sham and a scam.  They do a job as part and nothing more.  They know no more about this than a common layman would with any sense. It is entirely "controlled' and there is no regulation.  They..."pundits" are given direction..and that is obvious unless you are braindead.  Inflation is here and it will not get better.  Again, technology is not only killing the markets it is making them.  You mark it....this is going to get much worse and see no way it will be stopped until it stops itself.  Then, game over.
Aug 3, 2012 6:22PM
At the end of your column, it would be nice to have your views on what to do with the information every week.  Sometimes I just scratch my head and say [WHAT].  How about a little heads up on what do do.  Just saying, because without anymore information your column doesn't mean squat.  I don't like to hope, I would like to know. 
Aug 6, 2012 11:56AM
Everyone here misses the real reason. It is not the stock market. Inflation is a hidden tax. This is caused when the Fed and central banks manipulate the currency and interest rates by printing and injecting so called 'stimulus' money.  It devalues the dollar. This is one of the problems using Keynesian economics and a fiat currency. Booms & Busts. It is a historic trend, look it up. This is why Europe and the U.S. have mega deficit contagions. Instead of adopting 'sound money' , Austrian economics and allowing the free market to set interest rates, central banks intervene by price fixing and diluting money supplies for their profits and advantage, not yours. Thus inflation, depressions & recessions. The 'House always wins', remember that!
Aug 6, 2012 10:03AM

Europeans are great for empty words, sort of like most of OUR politicians.


Romney's the perfect person to run for President after GW Bush and Obama.


GWB and Obama took the US on a joy ride and wrecked it. Now Romney can follow through by doing what he does best, and drive the wreck to a chop shop and sell off the pieces, perhaps to China.

Aug 6, 2012 10:19AM
Stimulus is dead - It will only increases inflation reducing the buying power of the consumer and increases unemployment. We are not going to get out of our economic problems until we dramatically rethink Americas economic policies. Actually America is going through bankruptcy right how. We have had a major devaluation of our assets. The november elections may get rid of a congress with failed ideology.
Aug 4, 2012 9:56AM
"He's been wrong about inflation for four years now. . .but ya never know."

Agreed... you and I don't know. Could be that people like Bill suggested fleeing to gold long ago and a HUGE number of people jumped on that wagon as well as Shorting. In a nutshell, the volume of anti-growth hedges exceeds the volume of Kool Aid addicts investing other people's money in folly. So... we printed trillions of dollars that left our shores and settled in with foreign whores who aren't going to give it back. That scenario affords a control over inflation by suppressing and stagnating our nation. Figure it out... who lost their jobs first? Mainly family men who were breadwinners with skill sets that didn't take crap from button pressing paper pushing college alumni. You don't see any Job recovery because it automatically throws control back into the hands of the people. Every Nouveau Elitist would get her asss kicked out of the corporation and be forced into hocking her shoe collection to cover her outrageous credit debt. She? Yep. It isn't hard to surmise that guys are senior administrating the stagnation and girls are working sheep stalling the Chaos that shouldn't be tolerating all this suppression, control and manipulation. A 70% divorce rate validates this. So where does it leave us? Big business has been filtering supply overages through a variety of outlets. Really good stuff is not all that available any longer. We will be forced to endure the massive mountain of inferior goods and at nosebleed prices to recoup the cost of warehousing it for more than a decade. By now, I should have pissed off women enough to ask an obvious question... do you REALLY need that store bought coffee and flavored oatmeal? Do you REALLY need 3,000 pairs of foreign-made shoes? Do you REALLY have enough fundamental supplies and stores to protect YOUR family from a slow, stop or hyper-price hike in retail? YOU ladies... are leading us off the cliff.
you say every thing is circling down the drain??? couldn't last forever!!!
Aug 6, 2012 7:29AM
Bloggers are correct. Fleckenstein is the first guy to us what's wrong but never solutions or advice. Our economy will never get better as long as the current POTUS is in office. In his entire he never ran as much as a lemonade stand. With all his shortcomings Romney knows to run a business and create wealth.
Aug 6, 2012 10:31PM

Time for the printing presses in global markets to go faster.......Yikes!!!!!



I agree.  We should be bringing back all the floor traders to slow down the market trading.  An enormous amount of money can be lost in an instant due to a malfunction that can and will still occur in the future.  


At least with floor trading, a mistake has time to be identified and corrected before the bottom drops off.    Have you heard of anyone having a "rash raise".   Neither have I.  We only get "flash crashes".

Aug 3, 2012 8:11PM
He's been wrong about inflation for four years now. . .but ya never know.
Aug 4, 2012 8:38AM
Well it seems that ole Oil Giant has regained new life after being slained for a while. How in hell do you justify a $4.00 increase in the price of oil commodities except pure lies and BS speculation? The news of some dam surprise drop in oil supplies, like the ones who keep data on the levels all went to the cymans with Mitt over the weekend and came back and noticed reduced levels and caught up with the supply and demand calculations. So F ing stupid they must think we all are. Can't  wait till November when the revolution starts. OBAMA 2012
Aug 6, 2012 3:14AM

ha, you conservatives rip on Obama but never back it up with any facts.

And yes, I would have liked to see more change since he's been in office too.

To bad the party of NO has blocked everything from Obamney Care to jailing the banker crooks who da..mn near brought our economy down. Crony Capitalism at it's finest.


Oh yea, we ever going to see Mitt's tax returns?

Obama 2012!  

Aug 3, 2012 10:13PM
Mr Doom and Gloom only shows up on down days to tell us what we already know never has any info on what to do . Wonder how he has any clients
Aug 4, 2012 12:18AM
You can count on Fleckenstein to write the most extrenely cynical articles found on money.msn.  The only "lunacy" he refers to above is in the highly opinionated content of his articles --- which more closlely resemble personal rants against the "system". 
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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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