The Draghi Tango

European stock markets staged a sudden rebound and rallied on Thursday, driven by banks and food stocks, after European Central Bank President Mario Draghi pledged to do whatever was needed to save the euro. We have seen this before: Not a word on EU debt management, growth, or rearrangement of the EMU's non-functional political arrangements. Global governments are blowing smoke, I am defensive and PM are up to prove that nothing is changed. The presses are running. Best, Islander

Can we all now just stop "worrying about Europe"? Or.... How many times can they chew the same cabbage??

Can we all now just stop "worrying about Europe"?

Or.... How many times can they chew the same cabbage??

Unfortunately this garbage is what moves this market on daily basis. Who said what, and will there be a QE3, or a Bailout or not.

And officials have figured it out too, and just keep using words to move the market from both sides of the ocean.

It will all last while words are working. But without real actions words are just words, so economy is unlikely to recover from "words" .

And real actions will not be taken until they figure out that words no longer work, and market will be forcing them to act.

My guess is.. sell the words, wait for actions.

Can we all now just stop "worrying about Europe"?

Or.... How many times can they chew the same cabbage??

Unfortunately this garbage is what moves this market on daily basis. Who said what, and will there be a QE3, or a Bailout or not.

And officials have figured it out too, and just keep using words to move the market from both sides of the ocean.

It will all last while words are working. But without real actions words are just words, so economy is unlikely to recover from "words" .

And real actions will not be taken until they figure out that words no longer work, and market will be forcing them to act.

My guess is.. sell the words, wait for actions.

I'm curious what kind of "action" do you anticipate? What are the options? thanks

Edited by uburack, 26 July 2012 - 08:37 AM.

it is ST covering by the institutionals imo. Words are just an excuse for short covering. It won' t last anyway. I think they are doing day-trading actually. On the other hand they don' t give money to anyone who asks for it, so that their traditional business is actually over and they must invent something to stay alive. I' m talking about the big failed banks of europe. They are failed and they need state money which doesn' t arrive because many states in europe are under a mountain of debts of their own.

Edited by andr99, 26 July 2012 - 08:43 AM.

Can we all now just stop "worrying about Europe"?

Or.... How many times can they chew the same cabbage??

Unfortunately this garbage is what moves this market on daily basis. Who said what, and will there be a QE3, or a Bailout or not.

And officials have figured it out too, and just keep using words to move the market from both sides of the ocean.

It will all last while words are working. But without real actions words are just words, so economy is unlikely to recover from "words" .

And real actions will not be taken until they figure out that words no longer work, and market will be forcing them to act.

My guess is.. sell the words, wait for actions.

I'm curious what kind of "action" do you anticipate? What are the options? thanks

From ECB:
Half {bleeeep} action :gradual buying of Spain/Italy bonds on the market to keep rates a bit lower ... in the long run it will fail.
Bold action : Write down Spain and Italy debt to manageable levels, and recapitalize banks that will be taking giant losses at the same time.

From Fed:
Half {bleeeep} action : Small QE to keep the markets happy. Will probably keep em happy for a few days.
Bold action ... Massive QE, buy mortgage bonds. ... Will probably be a helluva rally, but effect on economy in the long run uncertain.

Can we all now just stop "worrying about Europe"?

Or.... How many times can they chew the same cabbage??

Unfortunately this garbage is what moves this market on daily basis. Who said what, and will there be a QE3, or a Bailout or not.

And officials have figured it out too, and just keep using words to move the market from both sides of the ocean.

It will all last while words are working. But without real actions words are just words, so economy is unlikely to recover from "words" .

And real actions will not be taken until they figure out that words no longer work, and market will be forcing them to act.

My guess is.. sell the words, wait for actions.

I'm curious what kind of "action" do you anticipate? What are the options? thanks

From ECB:
Half {bleeeep} action :gradual buying of Spain/Italy bonds on the market to keep rates a bit lower ... in the long run it will fail.
Bold action : Write down Spain and Italy debt to manageable levels, and recapitalize banks that will be taking giant losses at the same time.

From Fed:
Half {bleeeep} action : Small QE to keep the markets happy. Will probably keep em happy for a few days.
Bold action ... Massive QE, buy mortgage bonds. ... Will probably be a helluva rally, but effect on economy in the long run uncertain.

First, one needs to understand the difference between an economic contraction and a soverign debt crisis. The first is like only being able to take the spouse and kids on a near-home car camping trip for summer vacation, the latter is like having to rent out your spouse to put food on the table for the kids. The US economy/markets will feel an EU economic contraction but it will not be earth shattering and other factors will add or subtract significantly from any impact. A sovereign debt crisis on the other hand, well, just the mere thought of it, mouth by the wrong person, can send the markets tumbling a few hundred points.

Second, one needs to understand the difference between a monetary sovereign entity (e.g., US, Japan, China, AND the ECB) and non-monetary sovereign entities (i.e., all households, businesses, local/state govts AND all Euro-dependent central govts from Greece to Germany). A monetary sovereign owes its debt in the currency it issues; as such, it can never default on its debt (unless it has a Congress filled with stupid people who vote not to pay the debt). A non-monetary sovereign owes its debt in a foreign currency; as such, there is always the potential for default (also, all historic cases of hyperinflation occurred with non-monetary sovereign entities). Essentially, all the Euro-dependent nations owe their debt in a foreign currency, the Euro, because they do not control its issuance, the ECB does.

Third, and this requires more words than this forum could stand , there are no bond vigilantes operating against the will of a monetary sovereign (well, there's always dumb people in every endeavor but they get killed off pretty fast). In such an environment, bond dealers are in, at best, a symbiosis relationship with the most humongous whale imaginable - the good traders get very good at reading early whale signals and not waiting for that mother-of-all-whales to turn and crush them like a barnacle. Note - the whale knows this and may mess with the barnacles' heads, well, for whatever reason (including, on occasion, stupidity) a humongous whale might have – you can sit around and try to question the whale’s motive but that likely means you’re not moving and you’re gonna get crushed.

There are, however, plenty of vigilantes ready to pounce and bleed dry a non-monetary sovereign if given half a chance. The question for these bleeders is if and when a big frickin whale is going to come in and change the entire situation. Do they want to be the last barnacle to move by waiting for "bold action" when it is always the case that that last barnacles get crushed?

The big whale in this case is the ECB. Anyone who waits for them to take "bold action" is going to get crushed. What you need to know is the ECB on a path to get to bold action. Even if Mario wants to take bold action, he does not have the same freedom as say whale Bernanke. Who holds Mario's strings? How strong are they; can Mario break free? Does Mario even want to break free?

These things are pretty much unknowable to most people, and as far as precise timing, completely unknowable even to the actual players until the last possible moment. There are things that might force the hands of some of the actual players, but those are even more complex. The “play” however might show up “early” in some good TA.

Or one can watch for this –



Any guess as to who that is?

Salsabob, I understand this. Bold action from ECB, I mean bold action from Europe. ECB definitely can't do it. The problem is that Sovereign debt crisis is linked to the economic crisis in many ways, the way I see it. Governments are responsible for good chunks of economic activity ( as a small example governments in Europe have been subsidising Solar industry ) Can Spain do it now ? I doubt it. Raging crisis undermines economic confidence elsewhere Consumer spending ability is also undermined by lower salaries, fear for their pensions, and banks unwilling and in many cases unable to lend. I can go on and on with the list. Basically the sovereign debt crisis undermines spending power and confidence all over the world. Maybe to a lesser extent in US then Europe, but still it effects the companies willing to spend and hire. Even if a whale/ECB comes in to buy Spanish bonds, and manages to lower the Spanish rates by 1% ... it doesn't solve the problem. Spain will still be insolvent and economic confidence and spending power aren't going to come back. Buying spanish bonds isn't a solution. Wiping spanish debt is. It needs to be brought down to manageable levels. But ECB can't do it, and the rest of them aren't willing. Particularly Germany, whose banks are leveraged on that garbage. As for Traders reading whale signals... the Spanish 10 year are yielding 6.95% after Draghi's comments. Down a little from historic yields 2 days ago but still just as good as 7%. Does it imply that Draghi is about to solve everything ? Or that Draghi is bluffing ?

Edited by ogm, 26 July 2012 - 10:57 AM.

Salsabob,

I understand this. Bold action from ECB, I mean bold action from Europe. ECB definitely can't do it.

The problem is that Sovereign debt crisis is linked to the economic crisis in many ways, the way I see it.

Governments are responsible for good chunks of economic activity ( as a small example governments in Europe have been subsidising Solar industry ) Can Spain do it now ? I doubt it.
Raging crisis undermines economic confidence elsewhere
Consumer spending ability is also undermined by lower salaries, fear for their pensions, and banks unwilling and in many cases unable to lend.
I can go on and on with the list.

Basically the sovereign debt crisis undermines spending power and confidence all over the world. Maybe to a lesser extent in US then Europe, but still it effects the companies willing to spend and hire.

Even if a whale/ECB comes in to buy Spanish bonds, and manages to lower the Spanish rates by 1% ... it doesn't solve the problem. Spain will still be insolvent and economic confidence and spending power aren't going to come back.
Buying spanish bonds isn't a solution. Wiping spanish debt is. It needs to be brought down to manageable levels.

But ECB can't do it, and the rest of them aren't willing. Particularly Germany, whose banks are leveraged on that garbage.

As for Traders reading whale signals... the Spanish 10 year are yielding 6.95% after Draghi's comments. Down a little from historic yields 2 days ago but still just as good as 7%. Does it imply that Draghi is about to solve everything ? Or that Draghi is bluffing ?

Mechanically, ECB can do it; but politically/legally? Well, that's the real question isn't it.

Let's get specific: what makes a sovereign debt crisis a crisis? That's the risk of default. And yes, sovereign default will have untold horrendous impacts on its economy/markets. But, the other way around, does a bad economy lead to sovereign default? Like I said, not possible for a monetarily sovereign entity, like the ECB, that pays its debts in the currency it issues (now inflation/devaluation is possible). But yea, as we've obviously seen with the PIGS, it can put one on the road to default if one is non-monetarily sovereign.

If ECB takes over Spain's debt (explicitly or implicitly), then there is no longer any threat of that debt being defaulted on. Spain could still be an economic basket case (and by the way, in many ways, Spain was a very healthy economy even compared to Germany before the hot-money driven financial sector bubble collapsed); however, one might consider a situation where Spain and global investors are no longer worrying about sovereign debt defaulting (dare we say boom?).

Spain's economy is bigger than Florida's but smaller than California's and they all suffered about the same housing/financial bubble popping. Does CA's or FL's situation threaten sovereign default? Maybe CA, likely not FL and certainly no possibility of a US default. And if CA did default, if the feds allowed it to default (very unlikely), sure it would have some hefty impacts on some markets (i.e., muni's but unlikely equities); but, nowhere near that being suggested even for tiny, tiny Greece (GDP now about the size of the state of Maryland).

Why do you think that is?

It's because with one, there's no doubt that its big whale is watching ready to crush any barnacles (including the relatively thin and tiny gold market that any of the top 5 or 8 whales could crush in minutes if it becomes a nuisance). But with the other, who knows? And that's the problem….

...or is it a trading opportunity? I get those two things mixed up.

Edited by salsabob, 26 July 2012 - 02:12 PM.