Home > Uncategorized > 2012/06/07: Central Bank-a-thon winds down, and so do risk assets

2012/06/07: Central Bank-a-thon winds down, and so do risk assets

© 2012 ROHR International, Inc. All International rights reserved.

It’s over. Central bank-a-thon’s three day run has ended. Good riddance. Amidst all of the other intense influences, this week’s scheduled central bank meetings and other activities were not necessarily helpful. Even the extended boost from Mr. Bernanke’s testimony and the somewhat unexpected People’s Bank of China rate cut was fading a bit by Thursday’s US Close.

Tuesday’s downbeat perspective from the Reserve Bank of Australia and Bank of Canada turned out to be the confirmation of the negative sentiment rather than the driver for further economic and equities weakness. That much was apparent from the resilience of the June S&P 500 future that held somewhat above the higher of its 1,260 and 1,245 supports. In fact, even in overnight electronic trading the worst it traded was 1,262.50.

And then on Wednesday it’s weak Euro-zone economic data all around into the ECB meeting and press conference. But do the equities break and bonds rally? Nope. And the Spanish minister saying that without assistance Spain was effectively shut out of the bond markets? No problem. Equities higher, euro higher, economic bellwether Australian dollar up as well. What in the world was happening?



There’s comes that point we have alluded to once again lately when a sharp move in the markets puts the burden of proof on those who have been successful on the recent swing. This was the case on the initial S&P 500 debacle into the 1,300 area three weeks ago. Inability to keep the swing below the key 1,297 level fomented an upside reaction. And that was also consistent with the old Woody Allen quip about being grateful this week about just being miserable; last week things were horrible. It is also the case that sometimes markets sense the ultimate horrible influences were already priced in.

Data and Dialogue

And there it was, right on time on Thursday: better-than-expected economic data on everything from Australian Employment through the UK Services PMI right into the ECB meeting. Like the markets knew it was coming when the US equities extended their rally late Wednesday in spite of what sounded like ECB parsimony (more on that below.) So it was with the Spanish bank recapitalization conversation as well. It went from entrenched opposing positions to a constructive dialogue in a hurry. Nothing like a mini-market crash to focus the minds of the powers-that-be.

Which would be comical if it were not so critical. And such a predictable recurring cycle. Last week the Spanish sounded like the Mexican banditos from the movie Treasure of Sierra Madre telling the rest of Europe “We don’t need no stinkin’ support.” And there were the Germans saying, “That’s OK. We aren’t interested in handing you any euros anyway.”  All good. Until the Spanish are indeed at risk of not be able to access the bond markets. Then everyone is suddenly speaking about a hybrid plan for Spain that will not involve the typical (i.e. Irish and Greek) loans to the government that blows up their Debt-to-GDP Ratio.

Now we’ll see what happens in this next “Jerry Maguire (‘show me the money’) Moment” for the Germans and their northern European cohorts. What will it take for them to actually approve funding that does not leave a sovereign on the hook for the debt? That’s going to be one interesting selling job for the already significantly distressed Chancellor Merkel.


And you have to admire European Central Bank President Draghi for another phase of Euro-zone ‘kicking the can’. Except instead of pointing it down the road, he aimed it squarely at the European politicians. Kudos on that. And this was not a sudden shift in the ECB position. It has been his clever ploy to get around the parsimony of his predecessor by handing out a massive amount of liquidity in the form of loans against collateral of sometimes specious quality in the LTRO (Long Term Refinancing Operation.)

And having done that, he is tossing the ball back to all the politicians who are ‘concerned’ the ECB might violate its EU Treaty guidelines by handing out money to finance government operations (the taboo “monetary financing”.) While lauding the benefits of the euro project and making clear that this is not 2008 all over again, he makes plain that he can do no more to counter the stresses in the Euro-zone financial system under his current mandate. He smiles and tells the financial press assembled for Wednesday’s press conference that he will do whatever the political class desires, but it needs to decide what sort of Euro-zone they want…

…and pass the appropriate legislation and ratify the treaty amendments to implement the program. Needless to say, what passed for a definitive program that was going to succeed has been shown to be an overly optimistic muddle… classical triumph of hope over reason. So his tactic is brilliant insofar as he has provided a massive amount of money, which has still been shown to be inadequate.

And in that regard, he and Chairman Bernanke have become kindred spirits.


Everyone knows that the transparency Mr. Bernanke was so enamored of when first assuming the Chairmanship of the Fed has yielded to extensive candor on just what the Fed is not capable of accomplishing. And for all some would like the Fed Chairman to always be more accommodative, he has been very demure of late. It seems he has realized the limitations of the Fed’s power to conjure up economic strength out of sheer liquidity. And that is where he is becoming more Draghiesque (and yes, that a real colloquial term; we know, because we just coined it!!)

His semi-annual testimony was a masterful navigation of the extremely polarized American political landscape. The Liberals want him to stop speaking about it and just start printing again. Without being partisan about it, the Conservatives want something that seems a bit more practical… for Mr. Bernanke to allow that the Fed has done all it can do through monetary policy and the stubborn weakness of the economy is the political class’s problem! Which is something we suggested on the eve of the 2010 US midterm election.

And what is the point of more Fed Quantitative Easing? Buy more Treasury and US government agency paper to… keep rates low??! In the current environment that would be delusory at best and delusional at worst. It is glaringly obvious the problem is not a lack of liquidity; it is the lack of confidence in the classical ‘transmission mechanism’ to turn all that liquidity into fuel for reliable and significant economic growth. It is clear nothing has happened since Jack Bouroudjian and I coined the term ‘Taxulationism’ almost two years ago to describe what ails the American economy. It still rules.  

And as we think the Chairman only crazy in the sense of being like a fox, he proved that in his answers to all sorts of loaded and rhetorical questions from the Joint Economic Committee. He repeatedly turned them back by demurring from specific endorsements of plans, and suggesting the consequences of the various paths Congress might take… only encouraging them to do something constructively bipartisan sooner than not.

And in that regard he was remarkably like the more direct Signore Draghi, who agreed to do whatever the political class in Europe mandated. He consistently just asks them to decide what sort European Monetary Union they want, pass the legislation and fund the mechanisms. Hmmm. Sounds an awful lot like what the US needs in an already nominally unified system.

Too bad about those radically polarized visions of the sort of America we want.

General Market Observations

This all remains much the same as previously noted in yesterday’s TrendView Brief Update. So rather than provide any extensive technical trend perspective in the EXTENDED TREND IMPLICATIONS as well, we refer you back to that analysis.

All we can say is that the typical cycle is already seeping into the market mentality: quite a bit of hopeful anticipation into the ECB meeting and Mr. Bernanke’s testimony was already losing its influence by late Thursday. And the upbeat Euro-zone sentiment on the ‘conceptual’ discussion of a Spanish cure is yet to see the ‘practical’ program that might sustain that better sentiment and global economic prospects. Otherwise the improved sentiment typically has a 72 hour lifespan before negativity sets in once again. In this case that might be extended into the middle of next week in deference to the critical Greek elections a week from Monday.

Thanks for your interest.

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