Home > Uncategorized > 2011/11/04: Quick Post: Draghi Not Soggy. But Does G20 End Up Just a Cannes-Game?

2011/11/04: Quick Post: Draghi Not Soggy. But Does G20 End Up Just a Cannes-Game?

There was quite a bit of concern about whether Signore Draghi taking the reins at the European Central Bank (ECB) would lead to a much looser regime that would ignore inflation. In the first instance he is an Italian central banker, who historically have been known to have no qualms about allowing significant amounts of inflation. While he has been personally committed to far more fiscal rectitude than any of his Italian predecessors, that still left a question in the air.

Especially so at a time when Italy is going to need seemingly massive help with its sovereign debt problem. There was some passing concern (nothing really too serious) that he might be overly accommodative in supporting the Italian government bond market through ECB purchases. And all of that was seemingly compounded by the first interest rate decision under his regime yesterday, as the ECB put through a surprise 25 basis point rate cut to 1.25%.

Horror of horrors? Well, not really. Along with the rest of the world, European inflation does remain very high at present. As such, an easing ECB seemed to be joining Fed Liquidity Lubrication Club. However, in the context of the recalcitrant rate rises into an obviously weakening European economy by hawkish predecessor Jean-Claude Trichet, the reversal of one of those hikes hardly makes Signore Draghi an inflation Dove.

In fact, the economic data all seems to have vindicated his decision to make a bold move at his first interest-rate meeting as ECB President. As events have evolved today at the G20 meeting in Cannes, he has also rejected the idea that the ECB should continue purchasing the sovereign bonds of Europe’s weakest fiscal sisters. In that regard his indication that the Euro-zone needs to get its European Financial Stability Facility (EFSF) act together (funding, mandate, leveraging mechanism) is wholly consistent with that of his predecessor. On the whole, a very solid showing.

However, whether the ECB has turned just a bit more dovish is the least of the equity market’s concerns. The now bizarre machinations in Greece, and more importantly the continued lack of agreement on the critical funding and operational aspects for EFSF are plaguing the markets today. The biggest problem seems to be recurring failure of lofty pronouncements followed by no credible details on all of these various rescue at fiscal reform plans. And once again at the G20 in France, it is all starting to feel like not much more than a Cannes-game!!

Here’s the dilemma: not only Europe but the US as well has been taking a go-slow approach to their respective sovereign debt bailouts and fiscal reform efforts. As we have noted many times previous, in Europe this is classical dirigisme (fancy for ‘rigid statist views or control’) that means people should trust state, and be certain that if they have promised to take care of something it will come out just fine. On this side of the pond that feels like the degree to which Europe’s entire representative government structure only evolved out of being ceded rights by the King and his princes.

Of course, the US is no better insofar as it’s more populist democracy system is degenerating into the sort of mob rule (even if highly defined) that plagued the mother of all democracies… ironically, Greece. Serial generations of ‘pop’ politics instead of meaningful political discourse in the US has degenerated into a significantly strident, partisan vox populi.

Not much secret why the ‘Occupy Wall Street’ movement has attracted disaffected adherents. It is glaringly apparent that the Radical Liberal Left wing of the Democratic Party and the extreme Laissez-Faire Right wing of the Republican Party are the tails wagging each dog. And, of course, nothing is getting done in the middle. Many are suffering from the cyclical whipsaws of Left and Right US government political control fostering a lack of constructive cooperation. So what can we expect except the anarchists we thought had fallen by the wayside at the end of the 1970s are back in style? As we noted last week, the Greek Communists who abandoned the idea of violent revolution and decided to join the system long ago are looking like pretty reasonable folks.

So what happens from here? In the first instance, we stick with our previous observation that the G20 meeting is little more than a Cannes-game. If Chancellor Merkel wants to point out that something in the air prior to the G20 meeting is a ‘dream’ (as she aptly characterized an earlier deadline), she and French President Sarkozy should look in the mirror on any consideration China is ready to put more money into EFSF bonds. They are getting absolutely hammered on the ones they bought earlier this year. Even with any advantages China might realize from a more accommodative trading regime (or other concessions), they are certainly clever enough to make sure the financial side of the trade works as well (typically very well.)

As far as the International Monetary Fund (IMF) putting through a massive further round of support for Europe, this is way beyond a simple ‘dream’. It’s time to put down the opium pipe folks. There is of course an ongoing plea to help Europe so it does not fall into the sort of disarray that would affect the rest of the world. Much as in the previous major financial crisis, there is indeed some risk that disarray at major European banks might affect the global financial system through the intertwined trades with non-European financial firms.

That said, what in the world makes anybody think that Barack Obama can possibly sell the idea of more major US funding (as it’s the most significant contributor) for the IMF? The man is having no luck whatsoever putting through a modest stimulus package in his own country. And also relating back to the previous financial crisis bailout, Americans still have huge residual animosity toward the idea that a major portion of the previous bailout that went to the most distressed American banks was used to fulfill their obligations on swap contracts, and  rescue European banks.

One of our favorite comedians is John Pinette. [Check him out on YouTube; he’s really a stitch.] Part of some of his routines include references to the movie Free Willy. For the uninitiated, this is the story of a young boy who manages to free a killer whale from captivity. The specific context and punch lines are less important than the question he asks a bit further along, “What’s with Free Willy-II?” Paraphrased observation: Hey Pal, if you’re killer whale and I managed to set you loose the first time, if you get caught again, you’re on your own.” I get the sense that is the basic American perspective on handing Europe any more money while we are in such a weak economic phase and dire fiscal situation of our own.

Of course the failure at G20 is not a huge surprise. Each fresh European attempt to “declare victory and go home” has ended in lofty pronouncements that in no way reflected the critical details being worked out. In fact, the entire process since the problems first became critical in May of last year is a poster child for the old axiom, “The Devil is in the details.” And what are we left with now after all these world leaders went to France without any foundation for a credible agreement already in place?

Classical bureaucratic double-talk on all of the fine efforts belied by the fact that there really is no definitive agreement to do much of anything; or even necessarily a Greek government that is worth negotiating with on that particular subset of the broader problem. And so the meeting this week, and for that matter the entire French presidency of the G20, ends up being nothing more than a giant Cannes-game.

General Market Observations and EXTENDED TREND IMPLICATIONS

These remain exactly the same as the observations and projections in yesterday’s Candy Coated Equities Spooked by Halloween Goblins… As Expected. Now What? post, along with our discussion of the other key issue of why the gutting of the Euro-sovereign CDS (credit default swaps) market is likely to come back to haunt the European powers-that-be.

Thanks for your interest.

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  1. TIP
    November 6, 2011 at 11:31 AM

    Great post.

    I agree. Draghi hardly the same as Helicopter Ben. If he wanted to print he’d have lowered by 50bps at least. Which “he” could not have done as all ECB decisions are made by committee anyway.

    I was commenting on the disinflationary data coming out right before the move… did you see German and Spanish employment figures? The trend is not good. The rate cut was almost mechanical – ECB still sticking rigidly to it’s sole mandate of price stability.

    • November 6, 2011 at 1:38 PM

      Good further perspective on all that, and German and Spanish Employment only accentuate many other key indications; like all the PMI’s and implosion of German Factory Orders…

      …and did anyone catch the Canadian Employment figures debacle on Friday? Kind of a sad joke that US muddling along is the bright spot! But don’t worry… that’ll all end when the Super Committee flop brings the next US debt rating downgrade. I’ll have more to say on that this week.

      In the meantime, you’re perspective on the more aggressive cuts the ECB can not make fast enough is well taken. In this Weekend’s FT Long View James Mackintosh quips ECB/Draghi (paraphrased) “…needs to cut TO 0.25% not BY 0.25%.” Wow, ECB behind the easing curve… what a shock!

      Thanks for the comment.

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