22nd December 2011: Is Draghi a Dove or a Hawk?

Quote of the Day:

… we’ve certainly seen a big contrast between him and Trichet…

Danny Blanchflower (ex-BoE Committee Member) on ECB President, Mario Draghi

Macro Overview

Jury Is Still Out On Draghi

• Well? Is Draghi a Hawk or a Dove? We were led to believe he was of the same mold as Trichet – stringently hawkish and as stoic as a Bundesbanker. But we’ve been getting mixed signals. Announcements sound a little dovish but confrontations with the press sound hawkish. So how should we judge the new ECB: by its official announcements or by its verbal jousting with the press?
• Perhaps the answer is: neither of the above. Ex UK BoE Committee Member Danny Blanchflower thinks (on Bloomberg TV) Draghi has turned on the hawkish precedent of the ECB. Make no mistake, the LTRO and rate cuts is a distinct culture shift from the ECB. They are pre-empting potential deflationary hazards with money-printing – this is QE European style.
• There are some interesting questions though, for all the talk of German fears of inflation, where is the backlash? Has the German taxpayer been genuinely hoodwinked into paying for peripheral debt, not via direct tax contributions to the EFSF, but in the guise of indirect taxation from an inflationary creep on their cost of living? Hey, perhaps the timing was impeccable, perhaps Super Mario and Merkel knew all the inflation hawks would be distracted at the butchers, spitting feathers at the cost of their Christmas Turkey?
• Or did Merkel cunningly overplay the inflation hand so she could secure the negotiation over a Germanic political structure (aka treaty change)? This is what I wrote at the beginning of the month…

• Consider this: could Angela Merkel and her CDU Party be playing their EU hand beautifully? Many theoreticians and economists make the mistake of looking at the EU through a “lens of logic”. This could not be further from the reality. In a political shake-up as violent as this, self-interests, horse-trading and power-plays dominate and economic logic takes a back seat. Like shifty characters at a high-stakes poker table, EU leaders size each other up as they pore over the political hands they’ve been dealt … and some are playing their hand with much adeptness.
• Consider this: Germans have always been paranoid about inflation. But are they really as paranoid today as they are making out? Is the average German truly petrified of inflation in the midst of a (deflationary) global slump, (deflationary) debt crisis and lurching violently into a (deflationary) pan-European recession? It would be awfully clever of Merkel’s CDU to suggest that they indeed are still vehement inflation hawks (and indeed some are). But, by publicly over-blowing this risk, Merkel’s CDU have irrefutable leverage over other states (like France and the Southern Europeans) to acquire what it has truly wanted since the dawn of the European experiment.
• Consider this: Germany has has never taken its eyes off the prize. A Germanic Central Bank was a significant milestone for Germany in the context of the Euro, but, in this final chess game, Germany recognizes it as merely a sacrificial pawn. Merkel, the longest serving leader of a G8 country, is no mug – indeed Sarkozy is a political lap-dog by comparison. She may be happy to throw her lap-dog a political bone and trade a Germanic Central Bank for the ultimate prize: a Germanic European Constitution. A supra-national political body which, incidentally, would command a strategic force (economically, geographically, militarily, politically) more powerful than anything we’ve ever seen.

• Sigh… politics…

Market Overview

Traders… Saddle Up For Inflationary Trades Again

• Yep, the ECB is the new cowboy in town. Draghi’s regulators have their had on the printing lever and one swift wrist action from Super Mario would re-invigorate some of the old relationships we’d gotten used to a couple of years ago… Gold up, commodities up, equities up, dollar down etc. Ah… all the old trends that we know and love.

Warning: Potential Buying Opportunity For Equities and Commodities Ahead!

• Of course, history never repeats itself, but it often rhymes. We have to balance this new global fiat inflation paradigm with an ensuing Eurozone recession (no matter what solution they come up with) and a distinctly more challenging economic crux for Asia (lower growth with persistent inflation). One thing I’m actually quite excited about, I think the coming economic hardship will present some great buying opportunities for risk assets like selected equities and commodities.
• But my Chart of the Day is a sanguine, cheerfully Christmas chart. The VIX (normally a measure of uncertainty and risk aversion) has plummeted to new lows. Too early to call an end to economic hardship (we can start by keeping an eye on ISM numbers out in early Jan) but there is light at the end of the tunnel, things are indeed looking up in The West – yes, that’s right… I did actually say that!

Don’t Drink Too Much This Christmas! 

• Finally, I think we have to end with a message of caution for all you Christmas party-ers – by all means have a drink… but don’t drink as much as this British woman!

Chart of the Day

VIX (Source: Bloomberg)

Events

Macro Events:

Update:

• US GDP revised down (worse than expected)
• UK GDP revised up (better than expected)

Alerts:

• France GDP
• Singapore CPI
• Taiwan Industrial Production

 

Corporate Events:

Results:

• Nothing Significant

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant