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Saturday, July 28, 2012

Draghi – We Will Continue to Fight Until Everyone is Dead

A week ago I cut a EURUSD short position that was well into the money. (Link)I was concerned that “something” might happen that could make a mess. I listed a number of concerns that might have caused a flip-flop, but Mario Draghi talking, was not on my list. Of course, that is precisely what happened.

I’ve read what Mario said a number of times, I think there is no substance to his words.

“The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”

I’m reminded of an article I wrote more than two years ago titled, Sarkozy Will Get “Stuffed” (link). The occasion was a stupid remark made by then French President Nicholas Sarkozy regarding some new measures that would, once and for all, end the run on the bond markets of Europe:

“We will confront speculators mercilessly. They will know once and for all what lies in store for them.”

This didn’t work out so well for poor old Sarko. The speculators ended up crushing him, and he lost his job. Draghi will suffer the same result. Mario must be saying to himself,

 
“If only I can just get the Spanish Ten-year back to 6%, all will be well again”

.

I think he’s nuts. Spain’s problem is its competitiveness. The domestic economy will never recover without a currency devaluation (and debt restructuring). If Mario has his way, Spain will suffer from a decade of recessions with unemployment over 20%. How could he possibly call that outcome a success? On Friday we got some clarification of what exactly Draghi has up his sleeve when he promised, “It will be enough”. From Bloomberg:

DRAGHI’S PROPOSAL SAID TO INCLUDE BOND BUYS, RATE CUT, NEW LTRO

Bond buys? Rate cuts? New LTRO? That’s Draghi’s bazooka? These things have been tried in the past and have failed. These steps might buy the EU a few weeks (or hours?) of market relief, but they have no chance of turning the EU around.

There is still a market-based system that exists in the world of central bank manipulation. In the end, market forces always prevail. The outcome for the Euro will be no different. Draghi thinks he has the power to thwart the markets. He does not have that power. Draghi is either bluffing or lying, that or he is a blind as a bat.

.

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FX Note:

An interesting outcome of the Draghi comments is that the Euro ended the week north of 1.2300 (up 1.5%). Whatever chance the EU may have, it is dependent on a weaker Euro exchange rate. In my book, Mario’s words have set the EU back, not forward. A week ago I swore (Link)I would be out of FX until we got into late August. The silliness of the last few trading days changed my mind. I bet all of my recent FX gains on a short EURUSD option strategy. I missed a big blip that got the Euro above 1.2400, and ended up with a fill a bit over 1.2300.

 

My thinking is that someone in Germany is going to say:

 
“Sorry Mario, you can’t have our cake and eat it too.”

.

As if on cue, this article appeared in Germany’s Handelsblatt today:

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Comments

  1. Thanks so much for keeping us up to date and real about Europe.

  2. “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”

    Preserving the euro may prove to be a pyrrhic victory

  3. Hello readers, old and new.
    I have moved from Blogspot to my own URL. I’m now a dot com.
    All of my 880 articles are here someplace. And every one of your comments have been saved and brought over.

    Welcome!
    Bruce Krasting

  4. Jim,MtnView,Ca,USA says:

    Who keeps falling for these “pronouncements” which mean nothing?
    I guess, though, that they make money if they can get the market to spike for a few days.

  5. It’s all about central planning and the power it brings to those central planners. Nothing more, nothing less.

  6. Bruce,
    Thank you very much for generously sharing your insights on financial events.
    Much Gratitude,
    Lil

  7. Bruce, I am very encouraged by what you have written. I am heavily shorted and deeply in the red. I really hope next week the euro would resume tanking. Thanks for your great article. Keep them coming.

  8. The key word is “preserve”. That could mean preserve the union, and may speak nothing to the value of the Euro relative to gold. One way to do that is print away the debt, while devaluing the Euro relative to Germany and gold. The way to do that, is Germany exits and then the printing starts. That is what I think will happen. They will preserve the union and Germany will be firewalled as the print starts. They don’t have all the concessions on fiscal union yet, so this isn’t going to happen yet. Spain and Italy will implode further first.

    • “Preserve the union” could mean many things and what that union is may not include some countries. As you suggest, he said nothing, absent of the bond buying part.

      I exited a Euro short position right before this happened and then reupped at the peak on Friday as well. Every time the eurusd comes close to $1.20 and the spanish 10 year bonds sustain above 7% something is coming.

  9. I was long last week, seeing how downtrend stalled on 4h. And I made my pips. Good luck everyone on shorting or trading based on fundamentals, you are betting against central banks. You may or may not win. But if you think you are only against ECB or “europe” ya all got it wrong, you are also betting against FED, BOJ, BOE, SNB and big hedge funds. Yields are already in the haven and yet euro still even dare to appreciate, go figure! They can blow you in either direction easily couple of hundred pips leaving you stunned, scratching your heads “whasup?!”, only to present you some BS “news” like this one later – that we heard countless of times already.

    So my advice is: listen to your charts, dont even look at news! Just trade what you see not what you think should be! Either direction, no bias!

  10. German bonds are already diverging:

    http://i.imm.io/yqti.png

  11. Ralph, I am the one who commented about the possible meaning of “preserve”.

    The central banks actually have their hands tied because there are certain things that the powers that be want to happen:

    1. Fiscal integration of Europe and forcing the PIIGS to their knees until the relinquish sovereignty.

    2. Blame the collapse of the USA on Europe and China and Iran.

    3. Not print before the election so to avoid armed unrest or political chaos against the Fed. I don’t know if you saw that Ron Paul was winning state conventions where the party officials walked out in protest and then created two sets of delegates, etc.

    4. Germany lost its stable rating last week from Moody’s. Its AAA rating is threatened. Finland did not because it has been demanding collateral. Germany has gone as far as it could politically. Germany is stalling to gain fiscal integration, and then Germany will exit. As Bruce documented in past, the DM bonds are already being created.

    There is a bigger plan at work here. It is all about reaching one world government.

  12. Oh and one more:

    5. Blame the coming inflation on Iran. So Fed must wait until after the Iran false flag that starts the war. Bruce has documented the escalation of aircraft carriers in the area. We see today that Syria is nearing overthrow chaos, then next will be Saudi Arabia. The plan of course is to shut down the supply of oil to break the economic back of the gun owners in the USA (the last hurdle blocking the world government).

    • I am perfectly aware of your points and they are valid, but there is a trillions worth overleveraged market that is shorting euro in any ways possible and u bet they will do everything in their power to NOT to pay winners. U too must admit, for all whats happening today euro is extremely resilient, this is not normal, not natural and by all means not free market, its pure manipulation. With such huge balance sheets and liquidity. I guess its not a problem anymore.

      Also, I read last time Greece may get its debt written off as much as 30% and it would get its debt/GDP to about 100% from 160%. How do you think markets will react, when they can spike up several hundred pips on BS talks only? It wouldnt solve structural problems, but it would send a *huge* signal out.

      Lastly, say its true about grand plan and world government theory. World power will need a single world currency and euro is a testbed. So even for those, survival and confidence in single currency is extremely important. Not to break it just to be able to put blame on eu.

      My thoughts are that if euro break, it will happen when nobody expect it, like everything else in history. It could even gain some confidence and create new highs before that happen, just to screw and confuse all bears. But those are just my thoughts.

      • The Euro trade has been crowded since Q3 2011, and it has been correct trade since then with Euro falling from 145 to 120:

        http://soberlook.com/2012/07/bets-against-euro-still-popular-trade.html

        Volatility can be used to relieve many of their capital in that trade. So it doesn’t mean the trade has to change secular direction in order for the majority to lose. Also, many lose because they get out of the trade too late, when the secular direction finally changes.

        The ECB either prints in August, or the Euro is going to make one more big move down slicing through the 120 level.

        The short-term volatility is that most think ECB is going to print. I think there is no way Germany is going to allow more printing. Instead Germany wants for these PIIGS to have a worse crisis, so they will concede their sovereignty. Then once the PIIGS capitulate, then Germany will firewall themselves with the DM and allow the printing to begin (so as to revalue their gold up and set up their dominance of a new Europe).

        This recent Draghi bazooka was a way to accomplish the above goals. Also Germany does not want to make it too obvious, they want to periodically appear that they are working towards negotiation. For example in that recent ESM agreement, where everyone claimed that Merkel lost. NO! She won!. She didn’t give any timing for the ESM to take effect, yet she got many concessions on sovereignty.

        The powers that be (the bankers who run the world), have a very clear strategy. It is so obvious to me. I don’t know why most other people can’t see it.

      • The bond vigilantes don’t believe the BS talk, so jawboning is losing its staying power. ECB either prints or not in August, and that will determine the direction. They may try to craft some BS proposals to keep the markets in limbo through the vacations in the first 2 weeks of August, also no bonds for sale during that lull.

        • Reiterate that there is no time for them to stall the Europe deflation, because they need it to occur before the USA enters a fast decline (approaching), and before the oil is shut off from the Middle east. Because they want to blame the collapse of USA on the lack of central govt in Europe, and then blame the massive inflation coming from printing on oil crisis in Middle East.

          This is why they have been toppling the governments in the Middle East (Hillary is funding the muslim brotherhood):

          Tunsia
          Egypt
          Libya
          Yemen

          Next:

          Syria (almost now)
          Saudi Arabi (the last straw that breaks the camel’s back!)

      • Check my logic. If Greece actually defaults (30% of debt), this will cause negative derivative ripple effects. If Greece debt is forgiven (30% of debt) without allowing CDS to trigger, then also causes negative ripple effects.

        Again I reiterate that Europe is in a massive deflationary move and no tricks can stop it.

        The only thing that can change the deflation is the ECB prints and gold is revalued up. This will cause inflation in fiat and deflation relative to gold. There is no way to escape the deflation relative gold. The only choice is whether to transmit the deflation in gold, to inflation in fiat or not. The choice is the ECB prints or not. Eventually the ECB will print, because it is the only way to politically retire the debt. But not until after the bankers get their centralized government for Europe. Draghi put the cart before the horse. But he knows what is really going on. He hinted at it, if you read carefully. He said they will perserve the Euro (they will! but deflated relative to gold), and he said they made much progress on centralization of governance (loss of nation-state sovereignty).

      • http://finance.yahoo.com/news/euro-zone-crisis-heads-september-103328306.html

        [QUOTE]Another source said Draghi was not flagging an imminent move, and any action would likely come only in September or October, in conjunction with euro zone governments, and with a request from Spain for a bailout program, which Madrid was still trying to avoid.[/QUOTE]

        • http://finance.yahoo.com/news/insight-ecb-thinks-unthinkable-action-142923840.html

          [QUOTE]Bold action is probably at least five weeks away, insiders say, though some more clues may come when the ECB reveals its latest interest rate decision on Thursday.
          Several other pieces have to fall into place before the ECB will act decisively, insiders say. These include a request for assistance from Spain, which Madrid is still resisting, a decision by euro zone leaders to let their bailout fund buy bonds at auction, and a German court ruling on the legality of the euro zone’s permanent rescue fund, due on September 12.[/QUOTE]

  13. Btw Bruce, I would really really appreciate if u put some research and thoughts on Sweden and eur/sek. Sek is appreciating like crazy as if it dont depend on europe anymore much, they even say so. But I would like your fundamental research on it, pls if u can find some time to do it, analysis, forecasts etc.., u know the drill.

  14. therooster of Christ says:

    The Euro and the dollar will survive because their ultimate value is not necessarily in acting as a currency but as real-time measures in support of real-time bullion-as-money. There you have it and you can reverse engineer real-time digital weighted gold and you will see the FED’s footprints every step of the way. The process has been all about moving full circle from gold-as-money with fixed value to gold-as-money with real-time value. The process must be completed by way of market introduction, now, bottom-up. A top-down process cannot be taken for fear the dollar (still a currency) would crash far too quickly. The elite are now relegated to the narrow role of “carrying the stick”. The market must now respond. I guess some evils were made to be necessary in “the script”.

    • They will survive but deflated in value relative to gold. The fiats will all be devalued relative to gold. Only a rising value of gold can retire the debt.

      There will be a fiscal budget and banking union gained by the statists in Europe as a result of this crisis. Probably other “gains” on centralized statism in North America and Asia as well. Statists never waste a good crisis opportunity to expand their power.

  15. No Deflation, except in Europe

    http://www.caseyresearch.com/cdd/deflation-dont-count-it

    [QUOTE]Here are the actual numbers: between the summer of 1920 and 1921, nominal GDP fell by 23.9%; wholesale prices as measured by the PPI dropped by 40.8%; and the CPI fell by 8.3%. It lasted for roughly two years.

    I have yet to see anything like this in Japan. I have yet to see anything like this in the United States[/QUOTE]

    Yet we do see it now in Iceland, Greece, and now Spain, which are experiencing these massive GDP contractions.

    IMO, this is because Europe does not have a central bank tied to a central budgetary process. TPTB are using this an example to the world, that the world must accept centralized budgeting.

    So don’t expect the European deflation to end any time soon.

    And the European deflation will be blamed for when the USA and Japan finally reach rising interest rates and deflation.

    This is a grand political donkey show, to get the statists to support one world governance.

  16. Here comes the big disappointment…

    http://www.bloomberg.com/news/2012-07-29/deflation-dismissed-by-bond-measure-as-qe3-anticipation-abounds.html

    [QUOTE][B]Deflation Dismissed By Bond Measure Amid QE3 Anticipation[/B]

    The Fed’s favored bond-market gauge of inflation expectations ended last week at 2.39 percent, above the 2 percent levels in 2008 and 2010 that led the central bank to inject $2.3 trillion into the economy by purchasing Treasuries and mortgage-related bonds, the policy known as quantitative easing. The five-year, five-year measure shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017.[/QUOTE]

  17. …continued from prior comment…

    http://www.bloomberg.com/news/2012-07-31/fed-seen-forgoing-next-round-of-asset-purchases-until-september.html

    [QUOTE][B]Fed Seen Forgoing Next Round Of Asset Purchases Until September[/B]

    Federal Reserve Chairman Ben S. Bernanke will probably forgo announcing a third round of large- scale asset purchases this week, and is more likely to wait until September to unveil plans to buy $600 billion in housing and government debt, according to median estimates of economists in a Bloomberg News survey.

    Eighty-eight percent of economists say the Federal Open Market Committee will refrain from starting new purchases at a two-day meeting beginning today in Washington. Forty-eight percent say the FOMC will announce the buying at its Sept. 12-13 meeting, according to the July 25-27 survey of 58 economists.

    The FOMC may take further action should the job market not make “sustained progress” in bringing down an unemployment rate stuck above 8 percent for 41 consecutive months, Bernanke said this month in congressional testimony. The FOMC wants to see more jobs data before beginning asset purchases aimed at holding down borrowing costs, spurring growth and reducing unemployment, said Michael Gapen, senior U.S. economist for Barclays Plc in New York.

    Policy makers “don’t need to do something immediately because the economy is basically treading water,” with a second quarter growth rate of 1.5 percent, Gapen said. “What gives the Fed the ability to sit tight for now is financial market conditions haven’t weakened that much.”

    Rather than increase asset purchases this week, the Fed is more likely to extend its pledge to hold its main interest rate near zero beyond its current horizon of late 2014.

    “There’s nothing that really suggests the Fed has an itchy trigger finger or that they’re champing at the bit to ease policy again,” said Paul Edelstein, director of financial economics for IHS Global Insight in Lexington, Massachusetts.[/QUOTE]

  18. ECB can’t print soon enough, no matter what
    =================================

    I just realized that the proposal can’t start until after the ESM is approved in Germany on Sept 12, no matter what. The proposed use of the ESFS in the meantime won’t work, because the ESFS lost its AAA rating in January.

    Draghi’s proposal requires the rescue funds on the primary market as the buyers, and thus requires waiting for the ESM (Gemany is still in
    control!):

    bloomberg . com/news/2012-08-01/draghi-risks-market-wrath-as-pressure-for-ecb-intervention-grows.html

    [QUOTE]Draghi proposes that Europe’s rescue fund buy government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its interest rates, the officials said on condition of anonymity.[/QUOTE]

    ===================
    Summers finally writes something new (that wasn’t in his last private newsletter)

    http://gainspainscapital.com/?p=2073

    He is making a similar point (as I did in a prior post in this thread on Wednesday) that any ECB sovereign bond buying is not going to help the Spanish banks which need an imminent $300 billion bailout, and if the ECB also directly bails out those banks, then Germany will walk (or create a lot of threats) which will cause fear of the program be limited or of EU disintegration when Germany exits the EU.

    Remember the proposal Draghi is floating, depends on German bonds being available for convertibility. Germany’s Brunkesbank will have to offer monetary support to offset the pressure to increase (arbitrage) its bond yields.

    PIIGS don’t fly.

    =========================
    Speculation on politics behind the scenes in the ECB

    The common logic of all of these is that although Draghi may be have enough “yes” votes within the ECB to start some bond buying, he will not get an unlimited program, and thus the bond vigillantes are likely to continue to attack (maybe after some lull). The market might be immediately disappointed, or maybe after a while.

    washingtonpost . com/blogs/ezra-klein/wp/2012/07/30/was-mario-draghis-promise-to-save-the-euro-unrealistic/

    ftalphaville . ft . com/blog/2012/07/27/1099471/winning-over-buba/

    nakedcapitalism . com/2012/07/more-on-draghis-the-ecb-is-all-in-bluff.html

    larouchepac . com/node/23525

    macrobusiness . com.au/2012/08/draghi-is-set-to-disappoint/

    minyanville . com/business-news/editors-pick/articles/AAPL-LOW-DB-FB-GOOG-Apple/7/31/2012/id/42853

    ===========================
    Who cares about the “periphery”

    When you hear the German ministers speak, they says “who cares about a few basis points for the periphery”.

    German unemployment rate is only 6.6%. A weaker Euro helps their manufacturing, and Germany is mostly an exporter.

    I realized something. The core countries have low sovereign rates:

    USA
    Germany
    Switzerland
    Denmark
    Japan

    They can let the “periphery” (PIIGS + BRICs) collapse until it dominos into the core countries.

    They can let this be an example to “periphery”, that they too must become part of the core, by fiscal unification and joining the world govt system.

    This is just more of the “the dollar is our currency, and your problem” as Treasury officials said to other countries in the past.

    Everything seems to fit, except for the part about Draghi risking his reputation. Yet remember he is retiring after this year. And remember he didn’t say the solution would be imminent. He could layout a medium-term plan on Thursday and frame it in a way that he was not breaking a promise.

    =============================
    More details from Geithner:

    finance . yahoo . com/news/u-raises-pressure-euro-zone-074448918.html

    [QUOTE]Geithner said Schaeuble and Draghi had walked him through plans they were putting in place to try to solve the crisis, but he cautioned against expecting immediate action.

    “What you know, from what Europe has said, that they are committed to doing what’s necessary to hold the Europe Union together,” said Geithner. “I absolutely believe they have the means to do it.”

    Geithner said past financial crisis showed that the longer it took to address the issues, the more they cost.

    “I believe they understand that. That’s why they’ve signaled they are prepared to move further. Now again, this is going to take time,” he added.[/QUOTE]

    ================================
    PhD explains why Europe’s implosion can’t be stopped

    financialsense . com/contributors/john-hussman/no-such-thing-as-risk

  19. Fight between Draghi & Germany may escalate in public in a few hours
    =============================================

    http://www.zerohedge.com/news/hyper-mario-and-germany-verge-all-out-warfare

    http://www.businessinsider.com/a-showdown-is-imminent-between-the-germans-and-draghi-2012-7

    Again I don’t think Draghi has the firepower to make it work. The ESM is not ready to do, and ECB is not going to do unlimited buying on the secondary market before it is, and Germany is going to go into all out war of words if they do. Any of these scenarios means investors are not going to gain confidence and implosion will continue.

    Perhaps instead Draghi will try to reach compromise with the Germans, and offer to not begin the SMP again until the ESM is ready, and/or to limit the program. But that won’t assure investors sooner or enough either.

    And Draghi has to be careful, some leaders in Germany’s coalition have threaten to sue for an injunction against the ECB. Although they may not get it, it will throw investors into uncertainty.

    I see some incredible volatility ahead starting in a few hours. August/September is likely to be a tempest.

  20. Fight between Draghi & Germany may escalate in public in a few hours
    =============================================

    http://www.zerohedge.com/news/hyper-mario-and-germany-verge-all-out-warfare

    businessinsider . com/a-showdown-is-imminent-between-the-germans-and-draghi-2012-7

    Again I don’t think Draghi has the firepower to make it work. The ESM is not ready to do, and ECB is not going to do unlimited buying on the secondary market before it is, and Germany is going to go into all out war of words if they do. Any of these scenarios means investors are not going to gain confidence and implosion will continue.

    Perhaps instead Draghi will try to reach compromise with the Germans, and offer to not begin the SMP again until the ESM is ready, and/or to limit the program. But that won’t assure investors sooner or enough either.

    And Draghi has to be careful, some leaders in Germany’s coalition have threaten to sue for an injunction against the ECB. Although they may not get it, it will throw investors into uncertainty.

    I see some incredible volatility ahead starting in a few hours. August/September is likely to be a tempest.

    • Ah, Draghi doesn’t have the mandate to cap spreads
      ======================================

      It is very likely the SMP offered in a few hours, will not be unlimited and thus disappoint the market. Go back and read carefully what Draghi said. He will not overstep his legal mandate.

      http://www.zerohedge.com/news/reality-rest-draghis-believe-me-speech

      [QUOTE]More broadly, it seems evident that the ECB does not have a mandate to create the informal fiscal transfer union that a cap on peripheral yields would ultimately imply. The fiscal authorities could provide that mandate. However, from our layman’s perch they seem relatively unconcerned with recent market developments. Furthermore, Article 123 of the EU Treaty, which prohibits monetising debt, has its origins in German economic thinking on the hyperinflation of the early 1920s. Therefore, it is very unlikely to be compromised easily.

      We expect Mr. Draghi to clarify his comments in the coming days. That might mean waiting until the August 2 press conference. Regardless, if our interpretation is correct, then the rally in peripheral bonds should unwind quickly. The size of the move probably has knocked many shorts out of the market.[/QUOTE]

Trackbacks

  1. […] Draghi – We Will Continue to Fight Until Everyone is Dead […]

  2. […] Acu Tetigisti Posted on July 29, 2012 8:09 am by Bill Quick Draghi – We Will Continue to Fight Until Everyone is Dead – Bruce Krasting My thinking is that someone in Germany is going to say: “Sorry Mario, you can’t have […]

  3. […] talk didn’t convince former FX trader Bruce Krasting. He wrote in response, “On Friday we got some clarification of what exactly Draghi has up his […]

  4. […] I would not be long the Euro for a bit, just in case. And yes, I’m talking my book. From a week ago (Link): […]

  5. […] not be long the Euro for a bit, just in case. And yes, I’m talking my book. From a week ago (Link): I bet all of my recent FX gains on a short EURUSD option strategy. I missed a big blip that got […]