Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Thursday, 26 July 2012

Abandon All Money Ye Who Buy Here


The summer sun seems to have frazzled a few brains. That or the willing suspension of disbelief has reached an extreme. This is where “an undertaking of great advantage but nobody to know what it is parts the fools with their money.

Consider the “positive” news which is providing doses of hopium to a market craving for it.

  1. Draghi says “ready to do whatever it takes”: Really Mr. Draghi? You have suddenly decided to act. And what exactly are you going to do? Well, the details are pretty sparse but you have told us to believe. “Believe me, it will be enough”. Amazing. After 19 summits, 3 full-fledged national bailouts, a second failed Greek bailout, a Spanish banking system bailout followed by the prospect of a full-fledged national bailout, imminent Greek exit, record breaking yields and constant jawboning since 2010 from European officialdom that confidence will return, the problem is isolated, the firewall has been built, the bazooka has been shown, the funds are more than enough and bailouts are unnecessary, we are now to believe. Again.
The last arrow in your quiver is monetisation but that requires stepping around the Lisbon treaty and more importantly getting permission from the northern Europeans, notably Germany. The Germans already seething at Merkel’s surrender in June are in no mood to print. But maybe they’ve told you secretly that they’d like nothing better than some exquisitely printed banknotes.

Some smart analysts say that the real game changer is this statement: “To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate”. What are you going to do? Reactivate SMP, watch all private bondholders dump bonds into it and then watch domestics reload on secondary and primary and kick that sovereign-bank feedback loop into a higher gear as has been done before? The peripheral states are sure going to practice fiscal discipline when they know that anytime bond yields go up a bit, the good old ECB is there to take them down in the name of the “transmission mechanism”. It's like the good old days without the imposition of officious Bundesbank discipline. 

At the end the ECB holds all the credit risk and enables a backdoor fiscal transfer. Good plan. But do check with this guy called Weidmann first. Seems to be a troublesome representative of a minor shareholder.

  1. The eternal China stimulus which is going to rescue the entire world. There is a great story about this in today’s FT titled ‘Changsha unveils $130bn investment plan’. The city of 7m which is the capital of the Hunan province is going to spend 147% (not a typo) of its GDP as stimulus. The FT states in all seriousness (emphasis mine) “Essential numbers were missing from Changsha’s announcement, which made it hard to gauge its potential impact. For example, it did not say over what length of time the money would be spent, nor did it say how many of the projects were new. It was also unclear how the city would bankroll the spending, with the headline target equivalent to 147 per cent of Changsha’s gross domestic product last year. It is also more than one-fifth the size of the Rmb4tn stimulus that China launched in 2008, despite the fact that this earlier money was spent nationwide while Changsha is a single municipality. Mr Shen said that local governments often overstated their investment plans and that the final amount spent might only be a third of the initial target. Changsha said that it would invite “global financial institutions” to participate in the investment, alongside the government and local banks.
You can’t make this up.

  1. Fed is coming to the rescue with QE3. Yes, because just before the election with Republicans baying for Ben’s blood he is going to launch an all out attempt of pushing on a string which even some within the Fed believe carries significant risks. From the last FOMC meeting: “Some members noted the risk that continued purchases of longer-term Treasury securities could, at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy.”
The human brain is hardwired to be optimistic but surely all those thousands of years of evolution might have tempered the optimism. And if evolution didn't, the study of history should have. Everyone wants a happy ending and a tragic one is inconceivable. Just like the First World War could not have possibly happened between economically interdependent and civilised nations.

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