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Bill Blain: "Let's Pretend"

Submitted by Bill Blain of Mint Partners

Blain's Morning Porridge - Fed Acts, ECB Smoking - but what?

The Fed acts. Normalisation. Hints of a rate rise in December, confirmation of further “data-dependent” hikes to come next year, and ending the reinvestment of QE income. Exactly as expected – although some say three hikes in 2018 is a bit hostage to the global economy. The effect: Dollar up. Bonds down. Record Stocks. Yellen threw the bond market a crumb when she reminded us low inflation will require a “response.”

Relax. US markets will sweat, but not break. Dollar ascendant.. Yen collapses.. What about Yoorp?

Not quite as simples in Europe.

I’m indebted to my colleague Kevin Humphreys on BGC’s Money Market desk for pointing out yet another Northern European central banker with a smug self-satisfied smile on his face this morning.
Klass Knot (Holland) has been telling us the European reflationary environment is improving to the extent where the tail risk of a deflationary spiral is no longer imminent. He said “robust” economic developments have improved confidence inflation will rise in line with the ECB’s mandated aims. He added the appreciation of the Euro reflects an improving assessment of the EU’s economic success. And, he concludes the ECB should focus on the more important structural and institutional issues facing Europe, rather than the short-term stabilisation and crisis management – WHICH ARE NO LONGER REQUIRED.

Christ on a bicycle.

Can I have please a couple of ounces of whatever he has been smoking. I reckon that ranks alongside Gordon Brown telling us the boom/bust cycle was over… Sadly it pretty much sums up how Central Bankers want to string the story these days…

Let’s pretend.

Let’s pretend there is not a storm of contradictory bluster and threats facing Europe – which central bankers should ignore at their peril.

Let us pretend this is a robust economic recovery, even though in reality it’s a bit sub-optimal and pretty vulnerable to global direction.

Let’s pretend the Euro is strong because markets have suddenly woken up to the hidden strength of the European Economic Miracle while ignoring the likelihood the Euro is up as a reflection of dollar weakness and expectations of the end of the Euro ZIRP phase.

Let’s pretend the world loves European stock markets (ignoring the ingrained red-tape, labour hassles, and incestuous markets, etc) and ignore the probable reality European stocks were briefly in vogue only because we were too tired and empty of ideas to justify further gains in US markets.. stocks always need the next new thing.. I know, let’s go gorge on EM stocks instead!

And, let’s completely ignore the fact that ending stabilisation and crisis management – ie ending QE – will simply trigger the next crisis. Which is probably to highlight Italy’s debt unstainability!

As I say.. can I please have a couple of ounces of whatever happy herbs they are using in Yoorp please..

Oh, hang on, here they are.. the ECB will continue to pump massive amounts of liquidity into the European banking system, the banks will be able to more than make up the limited effect of the ECB withdrawing its liquidity. Not a bad thought – the ECB continues to distort markets by proxy… Nothing to worry about then…

Argg! Pass me another Camberwell Carrot.. 

I do hope Draghi says something about “ongoing vigilance” when he speaks, and tells us “these are not the droids you are looking for” as he Jedi mind-wipes the disbelievers among us..

Meanwhile, I read Greece is considering a bond exchange of small illiquid bonds into a smaller number of more liquid benchmarks. It will build up their reserves ahead of the bailout exit next year, and sends signals to the markets about a continuing ability to raise debt to service its debt. Really? Think I need to check out which bonds they are considering getting rid of. Some Greek bonds remain more equal than others.

The Greek issue remains one of the gap between what domestic politicians, the ECB and the IMF are saying about Greek debt sustainability – and the brutal reality (which markets are well aware of) re the chances of Greece exiting the bailout smoothly next year. What a wonderful signal of pan-European success if a country they’ve brought to its knees in order to rebuild its economy can stand on its own two feet again…

Somewhere in Brussels it will be recorded in the financial histories of the Euro: “In order to save their country, we had to destroy it..” Somewhere in Greece will be a plinth: “Go tell Brussels, passerby, that here obedient to their laws we lie..” 

Back to the day job..