Financial Market Report for the week ending Friday August 7, 2012
1) … On Thursday, World Stocks, VT, and World Small Cap Stocks, VSS rose strongly, as European Financials, EUFN, Greece, GREK, Austria, EWO, Spain, EWP, Italy, EWI, Germany, EWG, Russia, RSX, Australia, EWA, Australia Small Caps, KROO, blasted higher, as Louis Armistead of the Telegraph reports Mario Draghi defies Germany with launch of ‘fully effective backstop’ for euro. Mario Draghi has defied German opposition and launched an “unlimited” bond buying programme by the European Central Bank (ECB) that he said would provide a “fully effective backstop” to the stricken eurozone economies.
China Minerals, CHIM, China Infrastructure, CHXX, rose strongly; US Infrastructure, PKB, rose to a new high on higher cement, TXI, CRH, CX, EXP, Appliances, WHR, Building Supply Stores, SHW, Building Materials, OC, USG, HW, and Home Furnishing Stores, LZB, FBHS, PIR, LL, and HD. Homebuilders, ITB, rose to a new high.
Banks, NBG, DB, SAN, LYG, BCS, RBS, CS, UBS, led World Banks, IXG, European Financials, EUFN, Investment Bankers, KCE, and Financials, XLF, higher.
Retail, XRT, Large Cap Dividend, DLN, Dividend Payers, DVY, Real Estate, IYR, Consumer Discretionary, IYC, rose to new highs; these together with carry trade nations of EGPT, ENZL, THD, EPOL, TUR, are the canaries in the stock market coal mine showing the future direction of the stock market. Risk assets were drawn up by Mario Draghi’s plan; but next week all are likely to trade lower as can be followed in this ongoing Yahoo Finance Chart.
Disney, DIS, CBS, NWSA, TWX took Dynamic Media, PBS, to a new high,
Monsanto, MON, PPG Industries, PPG, FMC Corp, FMC, Raytheon, RTN, General Electric, GE, 3M, MMM, led Large Cap Growth, JKE, to a new high.
Annaly Capital Management, NLY, and Starwood Property Trust, STWD, rose taking Mortgage REITS, REM, to a new high.
Ford, F, General Motors, GM, PACCAR, PCAR, led Automobiles, CARZ, higher.
Technical Software Manufacturers, MENT, CNQR, ANSS, CDNS, PMTC, led Small Cap Technology, PSCT, higher,
Small Tools, SNA, led Small Cap Industrials, PSCI, higher.
Small Cap Energy, PSCE, rose strongly.
Footwear producers, ICON, SHOO, DFS, and CROX, as well as Apparel Retailers, ANN, CMRG, BKE, CAT, JOSB, MW, RUE, SSI, TLYS, DSW, PLCE, ANF, JNY, PSUN, CBK, as well as Textile Manufacturers RL, and UA, and Home Furnishings such as FBHS, LZB, led Small Cap Discretionary, PSCD, to a new high. The ongoing Finance Chart of PSCD, PSCT, PSCI, PSCE, shows the dramatic rise of PSCD.
Synthetics, MTX, GGC, and Specialty Chemicals, KOP, NUE, WLK, SHLM, RPM, POL, ODC, KMG, WDFC, FUL, CYT, SXT,OMN, APEC, CHMT, KRA, OMG, CBT, and OLN, led Small Cap Basic Materials, PSCM, to a new high.
Budweiser, BUD, Direct TV, DTV, Comcast, CMCSA, Carnival Cruise Lines, CCL, led US Consumer Services, IYC, to a new high.
PowerShares Nasdaq, QQQ, rose to a new high; Nasdaq 100, QTEC, Semiconductors, XSD, Networking, IGN, Cloud Computing, SKYY, Steel, SLX, Copper Miners, COPX, Banking, KRE, rose strongly.
Dividend Payers, DVY, Small Cap Revenue, RWJ, Too Big To Fail Banks, RWW, Premium REITS, KBWY, US Preferred Shares, PFF, rose to a new high.
Drug Manufacturers PFE, LLY, NVO, took Pharmaceutical Manufacturers, IHE, higher.
Paper manufacturer International Paper, IP, and WY, NP, rose to new a new high; and Junior Gold Miners, GDXJ, Gold Miners, GDX, rose strongly.as Timber, CUT, Unleaded Gasoline, UGA, Gold, GLD, and Silver, SLV, traded higher, but commodities, DBC, traded unchanged.
Bonds, BND, traded lower.
Emerging Market Currencies, CEW, traded higher taking Turkey, TUR, Egypt, EGPT, Thailand, THD, New Zealand, ENZL, and South Africa, EZA, higher, the British Pound Sterling, FXB, the Canadian Dollar, FXC, the Australian Dollar, FXA, the Swiss Franc, FXF, the South Africa Rand, and the Euro, FXE, rose; while the Swedish Krona, FSX, the Yen, FXY, and the US Dollar, $USD, UUP, traded lower.
2) … On Friday, World Stocks, VT traded higher again on Mario Draghi’s announcement of his Outright Monetary Transactions Program, the program will be unlimited; buying will focus on bonds with one-to-three year maturity.
Euro Intelligence in their for fee newsletter relates Draghi’s Big Bazooka causes outrage in Germany
Pari passu will be guaranteed through legislation;
The ECB governing council will have full discretion to determine when conditions have been met;
The ECB will provide a transparent breakdown of its purchases;
Jens Weidmann votes No, and is quoted by the Bundesbank as condemning the decision as monetary financing of debt;
Die Welt has the headline: “Financial markets cheer the death of the Bundesbank”, as the reaction in Germany was one of outrage;
Holger Stelzner writes that the dividing line between fiscal and monetary policy has disappeared; he said the German constitutional court can still stop this;
Marc Beise says it is wrong for Draghi to risk everything to save the euro;
Nikolaus Blome says inflation will come with a delay.
Small Cap Growth Shares, RZG, rose to a new high. And Small Cap Value Shares, RZV, rose strongly as Automobile Dealerships KMX, SAH, ABG, CRMT, LAD, GPI, and PAG, rose to new highs. The Street reports US Auto Sales on Road to Next Subprime Bubble. Experian Automotive, a unit of Experian, the credit-rating firm, reported Tuesday that “loans in the nonprime, subprime and deep-subprime risk tiers accounted for more than one in four new-vehicle loans in [the second quarter] of 2012.” That was a 14% increase from the same period a year earlier, and it actually exceeded the rate in the second quarter of 2007, before the financial crisis made lenders tighten their standards. And Zero Hedge writes Subprime Auto Nation.
World Banks, IXG, rose strongly as China Financials, CHIX, led China Infrastructure, CHXX, China, YAO, Shanghai, CAF, Hong Kong, EWH, higher. South Korea banks, WF, KB, SHG, EWY, higher. India Earnings, EPI, led India Infrastructure, INXX, India Small Caps, SCIF, and India, INP, higher. Brazil Financials, BRAF, led Brazil, EWZ, EWZS, higher. Russia, Russia, RSX, ERUS, Poland, EPOl, Australia Small Caps, KROO, Sweden, EWD, rose strongly. National Bank of Greece, NBG, and Royal Bank of Scotland, RBS, led European Financials, EUFN, Italy, EWI, Spain, EWP, Austria, EWO, and Germany higher.
Regional Banks, KRE, rose to a new high; and The Too Big To Fail Banks, RWW, rose strongly as MS, JPM, GS, BAC, and C rose strongly, taking Financial, XLF, near its earlier high. Small Cap Revenue, RWJ, continued higher to match its previous high.
Copper Miners, COPX, Metal Manufacturing, XME, Steel, SLX, Small Cap Energy, PSCE, Energy, XLE, XOP, Energy Services, OIH, IEZ, Coal Miners, KOL, Gold Miners, GDX, GDXJ, Rare Earth Manufactures, REMX, and Uranium Miners, URA, moved higher.
Transports, IYT, and Industrial, IYJ, finished the week higher.
Copper, JJC, Timber, CUT, Unleaded Gas, UGA, Gold, GLD, and Silver, SLV, led Commodities, DBC, higher, while Natural Gas, UNG, traded lower.
Total Bonds, BND, traded higher but below their August 2012 high, while PICB, BKLN, EMB, JNK, BWX, MBB, rose to new highs this week, taking distressed securities, FAGIX, to a new high as seen in this combined Yahoo Finance chart. M2 (narrow) “money” supply jumped $26.3bn to a record $10.07 TN.
Emerging Market Currencies, CEW, jumped strongly; the Euro FXE, the Swedish Krona, FXS, the Swiss Franc, FXF, the Australian Dollar, FXA, the British Pound Sterling, FXB, the South African Rand, SZR, the Canadian Dollar, FXC, and the Japanese Yen, FXY, blasted higher, and the US Dollar, USD, UUP, fell strongly; major world currencies, DBV, rose, but closed below their early August 2012 high.
3) …Open Europe relates
Quartet of EU presidents working on plans for a new eurozone parliament. Citing EU diplomats, Handelsblatt reports that plans being developed by Council President Herman Van Rompuy, Commission President José Manuel Barroso, Eurogroup chief Jean-Claude Juncker, and ECB President Mario Draghi, would see the creation of a new ‘eurozone parliament’. The new parliament, in which both MEPs and national parliamentarians would sit, would have powers over eurozone members’ fiscal and economic policy. Other proposals include a stronger role for the European Commission to veto national spending plans. The far-reaching proposals would require changes to the EU Treaties. Handelsblatt
ECB to announce unlimited bond purchases but with emphasis on conditions. Bloomberg reported yesterday that the ECB will at today’s monthly meeting announce a new bond buying plan termed “monetary outright transactions”, which will involve potentially unlimited purchases of short term government debt (under three years). However, the purchases would be sterilised to offset any inflation fears and the ECB will not publicly announce a cap on the spread in borrowing costs between different eurozone members. Countries wishing to receive such assistance will also have to apply to the eurozone bailout funds and adhere to a strict reform programme. Bloomberg.
Reports suggested that Bundesbank President Jens Weidmann remained the only member of the ECB’s Governing Council to object to the proposed plan. The FT reports that Netherlands, Belgium, Luxembourg and Finland have insisted that a discussion of plans for a credible exit strategy from the bond buying be added to the agenda for today’s meeting. In a joint statement leading business groups from France, Germany, Italy and Spain issued a call for greater action from both governments and the ECB to safeguard the euro, although they added that the current pessimism was unjustified with structural reforms beginning to take effect. Carsten Schneider, budgetary spokesman for the SPD, accused German Chancellor Angela Merkel of forcing the ECB to break its mandate and take on a governing role due to her inability to make decisions, according to Handelsblatt. FT WSJ Bloomberg 2 Independent Irish independent Euractiv BBC: Hewitt Telegraph The Irish Times Corriere della Sera Sole 24 Ore Le Monde Le Monde2 Le Figaro Repubblica FT Times: Leader Times Guardian European Voice FT: Atkins FT: Barber FT: Davies Handelsblatt
Cheap ECB cash could prove to be the worst form of bailout. Writing on his Telegraph blog Open Europe’s Director Mats Persson warns against becoming reliant on ECB intervention to save the euro, arguing, “Once the ECB taps are opened, it’s incredibly hard to turn them off without causing huge market distortions and creating an even graver crisis than the one that the original intervention was meant to stave off. That is why the ECB is right to insist on countries committing to reforms, through an intergovernmental decision, before it bails them out. Perhaps that mix could work for struggling Eurozone countries. But there’s also a huge risk that Europe, in the long-term, will pay a very high price for what is only (at best) a short-term fix.” Telegraph: Persson.
4) … CNBC reports (Hat Tip to Gary of Between The Hedges)
Italy Has No Plans to Access ECB Bond-Buying Plan: Monti. Italian Prime Minister Mario Monti said he is not expecting Italy to access the European Central Bank’s new bond-buying program anytime soon in an exclusive interview with me for CNBC’s “Closing Bell.”
China’s Factories Run at Lowest Rate in 39 Months. Industrial output growth slowed to 8.9 percent year on year, the weakest since May 2009 and below market forecasts of a 9.1 percent rise, data from China’s National Bureau of Statistics (NBS) showed on Sunday. Fixed asset investment, which accounted for half of China’s net economic growth in the first-half of 2012, grew 20.2 percent between January and August compared to the year earlier period, a touch below expectations for a 20.4 percent expansion.
China August Imports Shrink 2.6%; Exports Grow. China’s imports fell by 2.6 percent on year in August, while exports grew by a less-than-expected 2.7 percent, the customs administration said on Monday. The country logged a trade surplus of $26.7 billion, topping forecast of $19.8 billion, from July’s $25.1 billion. China’s trade outlook for 2012 is worsening, darkened especially by growing problems in Europe, the Commerce Ministry said last month.
5) … Doug Noland writes Diverging Like It’s 1929.
With the financial world fixated on Draghi, Bernanke and endless QE, global markets now wildly diverge from economic fundamentals. Many are content to celebrate, holding firm to the view that financial conditions tend to lead economic activity. Markets discount the future, of course.
Importantly, traditional rules and analysis no longer apply. Monetary policy has been locked in super ultra-loose mode now entering an unprecedented fifth year. Here in the U.S., financial conditions can’t get meaningfully looser. The Federal Reserve has pushed corporate and household borrowing costs to record lows. Liquidity abundance will ensure near-record 2012 corporate debt issuance. “Loose money” has already had too long a period to impact decision making throughout the economy – with decidedly unimpressive results. Arguably, previous unfathomable monetary measures some time ago created dependencies and addictions that are increasingly difficult to satisfy.
Clearly, monetary policy is exerting a much greater impact on the financial markets than it is on real economic activity. In the U.S. and globally, market gains are in the double-digits, while economic growth is measured in dinky decimals. The vulnerability associated with elevated securities markets has tended to only compound the issue of systemic fragility, and policymakers have responded to heightened stress with only more extraordinary policy measures. Recent weeks have provided important confirmation of the Bubble Thesis.
Amazingly, in the face of exceptionally buoyant securities markets and an expanding economy, the Federal Reserve is apparently about to embark on yet another round of quantitative easing (“money printing”). Few expect this to have much impact on the real economy, but it is clearly having a major impact on already speculative financial markets.
I’ve always feared such a scenario: Severely maladjusted Bubble Economies responding poorly to aggressive monetary stimulus, spurring policymakers into only more aggressive stimulus measures. Meanwhile, financial fragility mounts, as Credit systems continue to rapidly expand non-productive debt. Securities markets become dangerously speculative and detached from underlying fundamentals.
Students of the late-1920s appreciate how late-cycle policy-induced market and economic distortions laid the groundwork for financial collapse and depression. Especially in 1928 and early-1929, highly speculative financial markets diverged from faltering global economic fundamentals. Our nation’s business came to be precariously dominated by “money changers,” financial leveraging and market speculation.
the speculator community was emboldened back in late-1998. Not surprisingly, loose monetary policy combined with a central bank market backstop had the greatest impact on the fledging Bubble at the time gathering momentum in technology stocks. The Nasdaq Composite then rose from about 1,000 in early-October 1998 to its historic March 2000 high of 4,816.
It’s certainly not uncommon for individual stocks – or markets – to enjoy their most spectacular gains right as they confront rising fundamental headwinds. Indeed, whether it was the Dow Jones Industrial Average in 1929 or technology stocks in late-99/early-2000, deteriorating fundamentals actually played an instrumental role in respective dramatic market rallies. In both case, bearish short positions had been initiated in expectation of profiting from the wide gulf between inflating stock prices and deflating fundamental backdrops. In both cases, short squeezes played a prevailing role in fueling “blow off” speculative rallies.
Actually, the most precarious backdrops unfold during a confluence of serious fundamental deterioration, perceived acute systemic fragilities, aggressive monetary policy easing and an already highly speculative market environment. This was the backdrop during 1929 and 1999, and I would argue it is consistent with the current environment. Excess liquidity and rampant speculation drove prices higher in ’29 and ’99, as the unwinding of short positions (and the attendant speculative targeting of short squeezes) created rocket fuel for a speculative melt-up. Over time, intense greed and fear and episodes of panic buying overwhelmed the marketplace. Would be sellers moved to the sidelines and markets dislocated (extraordinary demand and supply imbalances fostered dramatic spikes in market pricing and emotions). Market dislocations – and resulting price jumps – were only exacerbated when those watching prudently from the sidelines were forced to capitulate and jump aboard.
The technology Bubble was spectacular – but it was also more specific to an individual sector than it was systemic. Today’s Bubble is unique in the degree to which it encompasses global markets and economies. Systemic fragilities these days make 1999 appear inconsequential in comparison. The backdrop has more similarities to 1929 – and, not coincidently, policymakers are absolutely resolved to avoid a similar fate. Thus far, policy measures have notably succeeded in fostering over-liquefied and highly speculative markets on a manic course divergent from troubling underlying fundamentals.
The Draghi Plan was unveiled this week, and expectations have the Fed coming imminently with QE3. I don’t anticipate measures from the ECB or the Fed to have much effect on economic fundamentals. At the same time, Drs. Draghi and Bernanke already have had huge impacts on global risk markets. Their policies have dramatically skewed the markets in the direction of rewarding the “bulls” and severely punishing the “bears”. History will not be kind. Policies have, once again, incentivized speculation and emboldened speculators. Policymakers have further energized the expansive global “government finance” Bubble.
From my perspective, the key issue is not whether the ECB finally has a (Draghi) plan that will resolve Europe’s debt crisis – the coveted big bazooka. Monetary policy won’t solve Europe’s deep structural problems anymore than QE will resolve U.S. economic maladjustment and global imbalances. Indeed, there is little doubt that the Draghi and Bernanke Plans will only exacerbate global systemic fragilities.
6) … Bloomberg reports
Matthew Brockett and Jeff Black report Draghi Says Officials Agree on ECB Unlimited Bond-Buying. European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup. The program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt after the ECB held its benchmark rate at a record low of 0.75 percent. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.” “Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial-market circumstances and risks to financial stability exist — with strict and effective conditionality,” Draghi said. The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, he added.
Jeff Black and Jana Randow report Weidmann Says ECB Bond Plan ‘Tantamount’ to State Financing. Bundesbank President Jens Weidmann criticized the European Central Bank’s bond-buying plan, saying it is “tantamount to financing governments by printing banknotes.” “Monetary policy risks being subjugated to fiscal policy,” Weidmann said in a statement issued by the Frankfurt- based Bundesbank today. “The intervention purchases must not be permitted to jeopardize the capability of monetary policy to safeguard price stability in the euro area.” While Weidmann represents Germany, the euro area’s largest economy, he was the only objector on the ECB’s 23-member council, where each national central bank governor has one vote. The Bundesbank, which is required to carry out ECB policy decisions, didn’t say it would stand in the way of bond purchases. “If the adopted bond-purchasing program leads to member states postponing the necessary reforms, this will further undermine confidence in the political leaders’ crisis-resolution capability,” Weidmann said. “The announced interventions in the government bond market carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers,” Weidmann said. “Such risk-sharing, however, can be legitimately authorized solely by democratically elected parliaments and governments.”
Brian Parkin reports “European Central Bank President Mario Draghi’s plan to shore up the euro by buying bonds is a ‘black day’ for the currency ‘with no turning back, said Germany’s Bild newspaper, siding with the Bundesbank. The newspaper’s chief political columnist, Nikolaus Blome, said in an editorial that the blueprint outlined by Draghi yesterday undermines conditions tied to bailout programs. Draghi’s plan turns the currency’s rescue program ‘on its head’ by letting states like Spain dodge strict terms for gaining help. ‘No, Herr Draghi, you’re not returning the euro to health by doing this — you’re making it sick!,’ said Blome. The plan ‘is as ludicrously wrong as putting sugar cubes in the salt shaker,’ said Blome. An ARD television poll published today showed 13% of Germans support ECB bond buying. Germany’s Frankfurter Allgemeine Zeitung newspaper shares Bild’s observation, saying in an editorial today that implementing Draghi’s plan means ‘there will no longer be a separation between fiscal and monetary’ policy in the euro area. ‘First the no-bailout ban for states in the EU treaty was dropped and now the ban on the ECB financing states via monetary policy.’”
7) … Mike Mish Shedlock writes Japan’s revised GDP growth cut in half; current account surplus down 41% to $8 Billion; Mathematical impossibilities.
Revised estimates of Japan’s growth have been cut in half, from 1.4% to .7%. More importantly, Japan has a small but shrinking current account surplus (in spite of running a trade deficit for some time). Once the current account surplus vanishes, and I believe it will, Japan will become somewhat dependent on foreigners to handle its budget deficit. Good luck with that at 0% interest rates.
Case For Stimulus? I am amused by a Reuters report that says Japan Q2 GDP revised down, builds case for stimulus. In a sign of slackening foreign demand for Japanese goods caused by the euro zone debt crisis and China’s slowdown, the July current account surplus came 40.6 percent below year-ago levels, reflecting a drop in exports. However, due to a slower rise in imports, the fall in the surplus to 625.4 billion yen ($8 billion) was less pronounced than the forecast 56.8 percent drop to 455.0 billion. Should the economy require more fiscal stimulus, the policy response could be delayed as policy making has ground to a halt due to a stand-off between the ruling and opposition parties.
Mathematical Impossibilities. Notice the absurd reliance on stimulus, in spite of a shocking amount of debt, exceeding 200% of GDP. Moreover, the idea of fiscal stimulus is actually preposterous given the government wants to hike taxes to do something about the deficit and mammoth amount of debt. Japan wants to do two things at once and it is mathematically impossible. Tax hikes are certainly not going to stimulate a thing, and on August 10, Japan Parliament Passed Sales-Tax Increase doubling the nation’s sales tax by 2015 as a step toward fiscal reconstruction.
8) … The usually leftist Der Spiegel references other newspaper criticism of Draghi’s plan reporting ‘The ECB is doing governments’ dirty work.
The center-left Süddeutsche Zeitung writes, “Rescuing the euro at any price could be an economic disaster — that is the red line that must not be crossed. The other limit is the law: In a community based on law, the ends can never justify the means. A euro community that is based on constantly breaching treaties is built on a shaky foundation.”
“On Thursday, the ECB unfortunately crossed both red lines. It did so reluctantly and not irrevocably, and yet it did so with determination. The purchase of government bonds by the central bank means that the ECB will tolerate and even reward economic mismanagement. (…) The crisis countries are not out of the woods yet. And that means that if the ECB provides them with unlimited help, then it is financing unsound states. It can only do so by printing ever more money. Ultimately, there will be the threat of bubbles, crises and inflation. It will benefit speculators, and the vast majority of citizens will have to foot the bill.”
The center-right Frankfurter Allgemeine Zeitung writes, “Draghi has made it clear that, from now on, the ECB will only buy bonds when a crisis-hit country asks for help from the euro rescue fund or agrees to other conditions. But that promise isn’t new. The would-be saviors of the euro have been insisting on structural reforms for years. The recipients of aid make promises but often do not keep them. But what will the ECB do if, say, Italy does not carry out the labor market reforms it has promised? Is it going to start selling Italian bonds? It can’t if it takes its own argument seriously, that monetary policy in the euro zone no longer functions properly.”
“The central bank is getting tangled up in its own arguments because it has allowed itself to become the prisoner of politics. Since it is willing to make up for the failures of European politicians, it can not quit the bond-purchasing program.”
“The leaders of southern euro-zone countries should be happy: They can continue to borrow at low interest rates and do not need to worry about finding investors. But the northern leaders are satisfied, too, because they can hide behind the ECB and do not need to face uncomfortable questions in, say, the Bundestag (Germany’s parliament) about all the additional risks that Germany is taking on. In the euro zone, there is no longer a distinction between monetary and fiscal policy.”
The conservative Die Welt writes, “Every time the politicians shout ‘fire,’ the ECB puts it out. “With his reference to a possible breakup of the euro zone, Draghi tried to justify the fact that he is trampling all over the ECB’s statutes. In doing so, he is doing the dirty work for governments, who can slow down the pace of reforms a bit now that they are being protected by the central bank. At the same time, the ECB will get clogged up with government bonds from the crisis countries.”
“The dangers of this policy are enormous. At the moment, it’s not inflation that is the big problem. Rather, it is the redistribution of wealth from the north to the south in a completely non-transparent way and without political legitimacy. (The money is flowing) from the savers to those who benefit from this irresponsible monetary policy. This is undemocratic and antisocial.”
9) … Mike Mish Shedlock asks, Actual constitutional case against OMT and ESM; Why bond buying undermines democracy; Is Draghi above the law?
A post on the the Fibs and Waves blog by “Blankfeind” outlines the actual legal case against the OMT. I believe the case is rock solid. How the German constitutional court rules in two days is another matter.
Please consider The ECB Thumbs Its Nose At The Law. On September 6th, the ECB announced its Outright Monetary Transactions program, known as OMT. Justified as a means for the ECB to repair monetary policy transmission and to recreate the singleness of monetary policy for the euro area, the OMT offers an unlimited commitment by the ECB to purchase short-term (one to three year) sovereign debt in the secondary markets for sovereigns who agree to certain conditions.
The bond purchases themselves will not be conducted by the ECB, but rather by the national central banks in proportion to their capital key with the European Central Bank. Hence, should Spain eventually fall under the OMT program, it will be the German Bundesbank that will be responsible for purchasing the largest single share of Spanish bonds.
But, is OMT legal under the treaties that govern the ECB?
The letter of the law. Treaty on the Functioning of the European Union (TFEU) Article 123 (ex Article 101 TEC)
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
With the OMT program, the ECB has essentially said that any European Monetary Union sovereigns unable to obtain favorably priced credit from the market may apply to the ECB in order to obtain that credit in unlimited quantities, albeit via debt purchases in the secondary market.
This clearly means that the ECB will have established a credit facility in favor of the sovereign participating in the OMT program, and that is an explicit violation of the letter of the law.
Primary vs. secondary markets and intent of the Treaty. Former ECB president Jean-Claude Trichet (and one of the original architects of the treaties that created the eurozone), opened up this can of worms by allowing the ECB to buy bonds in the secondary market.
Since the ECB could act as the end party immediately buying bonds from the original buyer, there is in practice virtually no difference between buying bonds in the primary and secondary markets.
Here is the loophole Trichet exploited: Article 123 (ex Article 101 TEC) 1. … Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
Clearly, that could not possibly be what the treaty intended. When discussing the intent of the treaty, the ECB is already in violation. Now Draghi has gone a step further.
“Blankfeind” continues Germany demanded the inclusion of Articles 123 and 125 of the Treaty on the Functioning of the European Union with the clear intent of protecting itself and its citizens from responsibility for the fiscal failings of other member states. Hence, OMT violates the intent of the applicable laws.
Conclusion..The OMT program is in violation of both the letter and the intent of Article 21 of Statute of the European System of Central Banks and of the European Central Bank and of Article 123 of the Treaty on the Functioning of the European Union (TFEU). “Blankfeind” is certainly correct. And I point out the obvious creep in unconstitutional acts. Trichet capitalized on one misplaced word and debate over the intent of “directly” giving Draghi a bit of cover to even more blatantly break the law.
Why bond buying undermines democracy. In a direct criticism of “Draghi Almighty” Der Spiegel explains Why ECB Bond-Buying Plans Undermine Democracy. Anyone who breaks a law can hardly excuse his actions by claiming that he is acting within the scope of the law. In any case, it won’t help him much — unless his name is Mario Draghi and he is the president of the European Central Bank (ECB).
Draghi wants more, though; he wants to save the European common currency at all costs. The euro, he says, is “irreversible.”
So far, the ECB has already spent over €200 billion ($256 billion) buying sovereign bonds from crisis-stricken euro-zone countries. If the exception now becomes the rule, additional bonds worth hundreds of billions could quickly follow. German taxpayers are also ultimately liable for this amount — without the German parliament, the Bundestag, having a say.
This Wednesday, Germany’s Federal Constitutional Court is expected to decide whether the European Stability Mechanism (ESM), the permanent successor to the current rescue fund, is compatible with the German constitution. It is seen as likely that the judges will put a ceiling on Germany’s liability. But in view of the latest ECB decision, such limits are already useless before they have even been enacted. The ECB apparently stands above the Bundestag and above the Federal Constitutional Court.
Double game. And what is the German government doing? It’s playing a double game. It supports both the ECB president as well as his main critic, Weidmann. Merkel is secretly pleased with Draghi’s initiative because the chancellor would probably not be able to gain majority support in the Bundestag for additional euro rescue programs. That’s why she is among those saying that the ECB is acting within the scope of its mandate.
If she said anything else, she would have to take action. She could, for example, file a suit with the European Court of Justice in Luxembourg in a bid to have the ECB decision nullified. The Bundestag could also pass a resolution calling for such a lawsuit — and thus force Merkel to put her cards on the table.
But if there are no plaintiffs, no judges will intervene. In such a situation, Mario Draghi is the most powerful man in Europe, undeterred by courts or parliaments.
The euro may be irreversible, but apparently democracy is not. That is exceptionally harsh criticism of both the OMT and of chancellor Merkel from a magazine that is generally quite pro-euro.
Is Draghi above the law? The answer to that question is obvious. He thinks and acts like he is. This should not be surprising. It is one of the direct corollaries of the Fed Uncertainty Principle, which I wrote on April, 3, 2008, long before the Fed started its big power grab.
What I said about the Fed applies equally to the ECB and central bankers in general. Here are key excerpts.
Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.
Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
10) …Mario Draghi’s Outright Monetary Transactions Program represents a shift of governmental sovereignty from current sovereign states to a Eurozone Super State.
The weekly chart of Steepner ETF, STPP, is now rising from Elliott Wave 2 bottom into an Elliott Wave 3 Up, at a price of 35.26, reflecting that the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, has settling at its 50 day moving average of 0.592, as bond vigilantes now have control of the US Sovereign Debt Interest rates, causing Total Bonds, BND, and US Treasuries, ZROZ, EDV, TLT, Longer Duration US Corporate Bonds, BLV, and US Corporate Bonds, LQD, to trade lower from their early August 2012 high, on debt deflation, that is currency deflation, as the US Dollar, $USD, UUP, is trading lower.
The lower Dollar, has propelled other currencies, especially emerging market currencies, CEW, higher, inflating, World Stocks, VT, and Commodities, DBC, and is bringing about peak monetary expansion, that came with the introduction of the Milton Friedman, Free To Choose Floating Currency Regime. Soon inflationism will be history and deflationism will commence. Soon the world will reach an inflection point, and move from an age of prosperity and into an age of debt servitude; that is the world will shift from an age of choice to an age of diktat.
Angela Merkel, laid the groundwork for a One Euro Government, she was the precursor of one greater, that being Mario Draghi, who is pouring the foundation for a Eurozone Super State. These are God’s point people, that is ordained leaders in establishing the economy of God, Ephesians 1:10, for the fullness of times Mario Draghi’s announcement of the Outright Monetary Transactions Program is completing the fullness of the times of prosperity, which came through the debt trade and securitization of all kinds of financial instruments. And Mr Draghi’s Program is the introduction of the of the first edict of regionalism, which at its fulfillment will result in the charagma or mark Revelation 13:16; Revelation 14:9, 11; and Revelation 15:2, being introduced as a means to conduct any and all economic transactions, when the fiat wealth system totally fails.
Neoliberalism featured wildcat finance, a Doug Noland term, where bankers waived wans of dect creation. Neoauthoritarianism will feature wildcat governance, where regional leaders will yield clubs of debt servitude and austerity.
The economy of God, Ephesians 1:10, that is the administration plan of Jesus Christ, is bringing peak wealth, to the fullness of of a time when the US and the UK have ruled the world with iron hegemony. Now Christ is directing the ten toed kingdom of regional governance, where ten toes of iron diktat and clay democracy, will rule the world as foretold in King Nebuchadnezzar’s dream,and presented by the prophet Daniel, Daniel 2:30-33.
Through the first horseman of the Apocalypse, Revelation 6:1-2, Christ is passing the baton of sovereignty from sovereign nation states to the ECB. Monetary sovereignty of the European periphery countries has failed prompting the ECB Chairman to act. Mario Draghi’s program is one of diktat, which is establishing the ECB as sovereign monetary of a nascent One Euro Government.
A full fledged Eurozone political union and fiscal union will soon emerge out of Financial Armageddon, Revelation 3:3. The Beast System of Totalitarian Collectivism, will rise to replace crony capitalism and European socialism; it will grow to occupy in all of the world’s ten regions, and in all of mankind’s seven institutions.
Soon the curtains of European stage will open, and onto the stage will step Europe’s Sovereign, Revelation 13:5-10. This cunning and fierce individual, will be accompanied by the Seignior, or banking lord, Revelation 13:11-18. Together their word, will and way will replace all constitutional and treaty law. Sovereign Authority will no longer reside in sovereign nation states, but rather in the diktat of these two leaders.
Regionalization, coming from regional framework agreements, will replace crony capitalism, and socialism, as regional blocs form in all of the world’s ten regions, Revelation 13:1-4.
The dynamos of global growth, and corporate profit are winding down crony capitalism and European Socialism. And the dynamos of regional security stability, security and sustainability are winding up regionalism.
The fiat money system will soon be ending as the world major currencies, DBV, and emerging market currencies, CEW, will follow the US Dollar into the pit of financial abandon. In Europe, the diktat money system will be overseen by the Seignior, that is the monetary pope, who will accompany, the Sovereign, or king, as they rule in a type of revived roman empire.