I know you probably get tired of me saying this but the Euro-zone is headed for a massive crisis. On Thursday, June 9th, the ECB came out with its policy statement, less than one week before the next FOMC meeting statement (June 14th).
It was a doozy. Christine Lagarde attempted early on to project that soothing calm central bankers are supposed to exude even when everything is collapsing around them.
But, truly this was Lagarde’s ‘Baghdad Bob’ moment. She stood up there and read the ECB’s policy statement off the teleprompter like she had something caught in her throat, likely the remnants of what is left of her conscience, because even she couldn’t swallow the bullshit she was slinging.
We have inflation under control. We will still grow in 2022 (BWAHAHAHA!) and growth will accelerate in 2023 and 2024. These people haven’t gotten one quarterly forecast right in … forever, and yet they project this idea that they have any clue what GDP growth will be in 2024?
But, as Zerohedge pointed out, Lagarde then reversed herself during the press conference, trying to resurrect the ghost of Mario Draghi, saying that she stands ready to do ‘whatever it takes’ to stabilize the situation.
She notes there are existing instruments with the reinvestment capacity under the PEPP.
“And if it is necessary, as we have amply demonstrated in the past, we will deploy either existing or new instruments that will be made available.”
Lagarde states that “within our mandate we are committed to preventing fragmentation risks within the euro area.”
So some kind of asset purchase scheme for peripherals? The vagueness is intentional as it appears Lagarde is trying to pull off a Draghi ‘Whatever it takes’ moment while keeping her foot on the hawkish pedal.
If the ECB says to markets: “we will defend Italy’s spread,” markets will for sure test that statement. So – in effect – what the ECB did today is to raise the odds of markets trying to force its hand.All this is avoidable. Don’t hike. The Euro zone is going into recession…
The end result was obvious to anyone with ears to hear, we are reluctantly following the Fed’s lead in ending QE hoping that someone will still think that Italian BTP’s trading at 65 bps above US Treasuries of the same maturity is a ‘good deal,’ and invest in a country that now carries increasing redenomination risk.
If it wasn’t so over-the-top moronic, it would be funny. Now with the horrific US CPI print red-pilling a whole lot of investors that the Fed has the green light to be even more hawkish, the mad scramble is on to figure out where to park that money that’s been frozen by the clown show that is US domestic politics.
The Fed’s in control here, but not in the way a lot of people think. The next level of insight that should begin to take hold, especially if the next CPI print is equally awful, will be what I’ve been saying for a year now….
The Fed isn’t raising rates to combat inflation. The Fed is raising rates to break the ECB and Davos.
Spread Eagled ECB
Two months ago Italian debt, thanks to Lagarde’s lying and everyone’s front-running her trades, was trading at a premium to US debt. Um, Chrissy, you’re going to need to see that spread vs. US debt be more like 650 bps (6.5%) rather than 65, if you want to attract even the average NFT investor at this point.
The bond markets are all now moving away from the monetary experiments Lagarde inherited from Mario Draghi and she has neither the experience nor the gravitas to carry this charade off any longer.
The big takeaway, and the reason why the euro had a mild bout of myocarditis Thursday Morning before collapsing on its way to the bathroom, is because Lagarde is open to creating a new, improved, QQEternity, alphabet soup program in the future if this ending QE ‘experiment’ doesn’t work.
With the Fed now secure in its role as European liquidation agent, there’s nothing Lagarde can do other than follow the yellow brick road make the best of a terrible situation getting worse by the day.
That said, I have to ask the serious question, are they really worried about Italy at this point? It’s not like the folks at Davos Central didn’t manipulate the Italian political scene to achieve exactly this state of affairs. So, I honestly don’t think they care at all about Italy.
In fact, I’d argue that they would rather have Mario Draghi ride Italy into the ground and turn the country into a smoking ruin in the hopes of saving the northern European currency bloc.
The whole point of putting Draghi in charge was to liquidate Italy. Italy’s financial implosion would be just the cause celibre Davos has been trying to create to consolidate power within the ECB by taking complete control over its banking system when all the banks collapse.
Think back to the Banco Popular implosion where it was forcibly liquidated by Draghi when he was ECB president and sold to Santander for $1. The power that Draghi exhibited there was astounding. And it was a warning shot to investors that no one’s money is safe from the commissars at the ECB.
While Draghi kept things together through strong-arming and, at the time, a sympathetic FOMC with Janet Yellen at the helm, the precedent was set then that the ECB has power over its member banks that the Fed doesn’t have. Today, looking at the situation, I’d say this is a very good thing.
You’re going to see a lot of this going forward in Europe and too many commentators are not prepared for the idea that this is all deliberate.
It’s not the plan they wanted, which was for this collapse of the Euro-zone to occur on their timetable not the markets, but it’s still the plan. They hoped they’d have a compliant Fed putting the New York banks on notice that they have no friends left.
Davos may be improvising here, because the Fed is clearly working them over the coals as Eurodollar markets dry up, but they are still trying to make the best of a bad situation.
And that’s why Lagarde was trying to soften the market up by saying, “We have everything under control and still have tools.” It’s all you ever hear from these central bankers, when, in reality, they have zero real clue anymore than we do.
If the European banking system collapses in the way I am forecasting this is what will destroy the Eurodollar markets, as those banks which previously levered up their dollar balances will have zero ability to do so after they are absorbed by the ECB.
Once this potential outcome is truly digested by the markets, and I think Friday’s complete shitshow was the beginning of that realization, then that’s when we are going to see rapid shifts in bond spreads, O/N money market rates and blow-outs in things like 1 month and 3 month USD LIBOR.
Speaking of that, the SOFR/1month LIBOR spread blew out to 44 bps on Wednesday. After the ECB’s performance and the worse than expected US CPI print (8.6% vs. 8.3% expected), I’m having a hard time believing we won’t see a wider spread than the 53 bps we saw the day of the last FOMC meeting by Wednesday’s next FOMC meeting.
The Political Fallout
What is most important here is that the ECB being exposed as having no ‘there there’ undermines the political positions of nearly every major politician across the euro-zone. It’s not like a banking crisis is going to make Olaf Scholz’ coalition in Germany stronger or Draghi’s caretaker government in Italy.
These guys will finally begin to feel real political anger for change as inflation eats away the middle class, high energy prices gut corporate profits and there is no end to the regulatory tyranny coming from Brussels, hell bent on forcing an anti-hydrocarbon agenda down everyone’s throat.
That said, you know Davos will try to keep a tight lid on the EU’s core, because it carries the most political power. What they won’t be able to control, once this begins to unravel, is what the so-called periphery does.
Bulgaria’s Davos-backed government lost a key partner this morning. Boris Johnson is toast in the UK as the Night of the Tories Long Knives has come and gone. No one knows how to turn on their leadership like the Tories — Thatcher, May, now Johnson.
Turkey has all but declared war on Greece over Erdogan’s creative interpretation Greece’s sovereignty, accusing it of militarizing islands in the Aegean. Estonia lost its majority last week over inflation not caused by Russia, but by their own rabid Russophobia.
The economic realities of what Lagarde et.al. have set in motion but can’t control will be the collapse of nearly every major government in Europe over the next year or two while incentivizing countries like Hungary to declare independence from Brussels.
This is why Lagarde was so keen to remind us that she is aware of ‘fragmentation risks’ and that she’s on top of it. Too bad this is more bucking bronco than bucolic burro. I’ve got the under on whether she lasts the 8 seconds or not.
The key is Russia continuing to grind out victories in Eastern Ukraine while using the time to reinforce its positions in the south and expose the utter bankruptcy of the West. I told you that this was a race to someone’s Great Reset, not necessarily Davos’ when the war broke out.
Putin is upping the operational tempo on the neolibs of The Davos Crowd in Europe and the White House and their neocon useful idiots in the US/UK foreign policy circles, Congress and intelligence services to create the ultimate geopolitical Russian cauldron for their avarice.
Ukraine represents everyone’s existential threat.
If the neocons lose, they are done as an influence within foreign policy circles in the West forever because they will have failed to penetrate Fortress Russia.
If Davos loses, their grand plans for global domination become diminished to, at best, the European Union and some parts of the Commonwealth.
If Russia loses, the entire Global South, fails to escape the fiat, debt-based slavery of the Western central banking cartel, because they will control the flow of Russian natural resources in such a way that they will not be stopped. More on this later.
After Bojo the Bozo in the UK the big question is who’s next?
There’s a lot of speculation that the German government will fall, but I’ve seen this story play out in Italy before. The coalition could fail and the President Frank-Walter Steinmeyer, a Davos man through and through, will refuse to sanction new elections and should force the parties to cobble together a new technocratic government that will be indistinguishable in policy from the existing one.
Since the Greens are embedded in nearly every state delegations to the German Bundesrat (upper house) there will be no real policy change since they control what legislation actually gets passed.
This is why Scholz is so weak.
Since each state in the Bundesrat votes as a bloc, the Greens control 41 of the 69 votes there, giving them effective control over policy. This was Merkel’s greatest achievement while Chancellor while also bamboozling Putin in to thinking the Minsk agreements were something other than a time-waster while NATO built and trained the Ukrainian army his men are now pummeling into dust.
This is what she set up with each of the state governments, by refusing any AFD coalitions to form in any state, she ensured that no matter what happened, there would be no challenge to the Greens revolution of Germany’s legislative agenda.
Davos is setting up the failure of the German government to hand it to Brussels. So, if the German government fails and Steinmeyer refuses to go for new elections, then the resultant caretaker government will be even weaker than Scholz’ government and ensure the complete betrayal of the German people to the EU.
And the worst part will be that they will still feel like they have control over what happens to them next because the German people are still told they control EU policy at the top.
When in reality all that will happen is the EU will fracture along capital efficiency lines and the euro will drive it into bankruptcy, forcing real political fracturing. Eastern Europe will break off the moment the EU tries to enforce the energy embargo on Russia, especially if Russia gains Odessa and access to the Danube river system. Watch Bulgaria carefully as the next Soros-backed junta to fall completely to the economic reality of a dying EU.
Good job, Chrissie, you’ve achieved the exact opposite of what you intended, which is a unitarian banking and political system. Because, as always, people respond to incentives. In the US, we said no to Climate Change, CBDC’s and gun control. In Russia, they said no to debt and Nazis. And in China, they simply said no to oligarchs who weren’t Chinese.
Pretty easy to tear up the EUSSR under this scenario. Pretty easy to see what happens next.