Blain’s Morning Porridge – June 5 2020: The ECB’s Einstein Moment

Blain’s Morning Porridge – June 5 2020: The ECB’s Einstein Moment

“Finland, Finland, Finland, it’s a great place to be…”

The Finns are revolting.  They are good Europeans, but the Frugal Four just became Five.  Their parliament has apparently rejected the EU’s 750 bln Coronavirus Next Generation Recovery Fund proposals – in its current form.  The Finns say they are willing to talk, but want something that is largely loans, much shorter in duration, and much much smaller.

The Finns are unique among the Axis powers from the last European Unpleasantness – they paid their debts after finding themselves on the losing side, and their economy wasn’t rebuilt and bailed out through the Marshall plan.  They aren’t convinced they should be paying for the woes of Southern Europe.  One comment this morning summed up a growing Eurosceptic thread: “We don’t have the Mafia, we pay our debts, and our bridges don’t fall down.”

As the song about Finland says; “You’re so sadly neglected, and often ignored. A poor second to Belgium when going abroad.” Finland is certainly not foremost in the minds of the Brussels Eurocratocracy.

But unhappy Finns (you will know because they will be smiling – Finns are generally happy when they have something to be unhappy about), are just one problem for the EU this morning. ECB President Christine Lagarde is juggling a lot of balls in the air after Europe’s Central Bank announced yet another few hundred billion of QE Infinity to stem the crisis, juice inflation and pull Europe together.

Yet, the ECB is doing essentially what its been doing ever since Mario Draghi set “whatever It takes” as the EU’s one and only guiding principal about a million years ago (July 26 2012). Whatever it takes – yep, that’ll sort it every time..

Except doing whatever it takes hasn’t solved much…

Lagarde would do well to recall the Einstein principle: “The definition of insanity is doing the same things over and over again, but expecting different results.” 

The brutal reality is while Draghi might have been right – his words saved the Euro, no one is actually willing to ask what that “Whatever” is. What is the whatever that Europe has to do to sort itself?

It’s not neccessarily more and more QE Infinity and Negative Interest Rate Policies (NIRP). To be blunt, these two monetary confabulations have achieved the square root of f*** all for European growth and recovery over the past 8 years. While ECB policies haven’t been impressive or effective – their tenacity has been!

It’s not the ECB’s fault. The truth that no one dares speak across Europe is that the ECB is great idea, but fatally flawed unless monetary union is matched by fiscal and political union (the two have to go together), which is only possible if Europe is truly united. Which it isn’t and isn’t likely to be with this generation. (I have high hopes for the future tho.. which I will touch on below.)

In the absence of political union, all the ECB has done is treat Europe’s gaping monetary wounds with sticky plasters. QE saved Europe from bleeding out over the Sovereign debt crisis of 2012 – but it hasn’t addressed the symptoms underlying that sovereign crisis – it has no mandate to do so, except urging austerity as defined by Euro rules about GDP debt ratios.

When the media report the market’s joy at Italian bond yields tightening after Lagarde through another pile of money at the problem – they weren’t cheering because Italy’s dismal economic underperformance is cured.. Nope the market was cheering because all that free money is going into their pockets.

And dare I suggest it, but I suspect Christine Lagarde tells Porky Pies. (Non English Readers – a porky pie is a mistruth, a lie.) The ECB is telling us this plan is going to work – European growth will be right back on post-virus track by 2022. Well of course Largarde lies.. she was a French politician for years! (Which might be why she got the ECB gig – last thing Macron wants is a better pie baker in Paris than himself…)

There is nothing “awe-inspiring” about the numbers the ECB is banding about anymore. They are just numbers. Their comments about inflation are meaningless and imaginary. They aren’t achieving very much except creating rising doubt as problems pile up under the carpets they’ve been swept under.

Across Europe nationalists are asking difficult questions. In the face of the European dream, they remain very much a minority – but an important one. The reason the Frugal Five are unwilling to sign blank queues to bail out the South is not because they are bad Europeans… it’s because they are good Europeans and know it has to change. They know if Europe can’t move the Union narrative forward, then eventually the monetary façade of the Euro is going to crack.

Everyone wants European Unity, but who wants to pay for it? Everyone agrees Europe needs rules, but not these rules.

And if Finland is a problem, then Germany is the planet sized asteroid heading for Brussels. What about the Germans? The German constitutional court is still waiting for a justification of QE policies. They’ve made clear they consider the actions of the ECB to be “potentially” ultra vires. Yesterdays chuck another “few hundred billion” into the QE Infinity Pot isn’t likely to have impressed them…

As Marcus Ashworth of BBerg pointed out y’day Lagarde only expects European inflation to hit 1.3% in 2022 – she was saying the increase in QE Infinity Bond Buying is directly linked to her inflation forecasts, a bland attempt to satisfy the Germans and their inflation fears. Politics, politics.

After explaining above why Europe is such an awful mess, what is the right market strategy?

Cleary it’s to embrace this latest “Whatever it Takes” moment and buy more Italian bonds!  Keep buying them as long as the euphoria lasts, and then sell them. Wait for them to widen as doubts emerge, wait for Lagarde to say something positive (some iteration of “Do Whatever it Takes”) and buy them again. Repeat.

At some point….

At some point Europe is going to have an enormous mess to clean up.. but not tomorrow….

Back on Planet Earth. 

I’ve held off from saying much about the riots in the US. They’ve been shocking – but there has been an incredible amount of media hype around the violence, and a spectacular amount of fake news about legions of Ultra-Right Survivalists pretending to be Antifa Anarchists, while the Antifa are dressing as Red-necks. If it wasn’t so serious it would be funny. Its distracting from the real issue – which is justice. If we want efficient markets, then social justice and equality in all things is a critical component. Adam Smith said it in the Theory of Moral Sentiments.

What’s interesting is how the anger has quickly spread around the globe – embraced by young people of every hue and race. Black Lives Matter demonstrations are taking place everywhere. My kids – in their 20s – feel very strongly about this – Jenny was making placards last night to demonstrate tomorrow. I’m rather pleased about that.  How strongly Jack and Jenny feel about racism, equality and that Black Lives Matter gives me hope that racism will be cured.

40 years ago I was carrying a “Maggie Maggie Maggie! Out Out Out!” banner as we marched down Princess Street in Edinburgh complaining about Education Cuts, the treatment of miners or whatever. Social justice was important, but racism wasn’t something on the Scottish agenda back then. When I moved to London and stumbled into the City… I evolved into a “Things Can Only Get Better” Champagne Socialist in 1997, before losing my faith last year because of Corbyn. Yet the beliefs I held in my 20s remain an essential part of me today.

Racism won’t be cured overnight. For instance, it’s taken 50 years for Homophobia to become utterly repellent. Racism has been around for millennia, but perhaps in 40 years time, the emphasis young people are now putting on it, equality and social justice will see Racism finally eradicated.

And I’m also encouraged to see that young people across Europe tend to count themselves European first… perhaps a truly united Europe is idea that’s time will yet come!

Finally.. Thanks for all the messages of support in my war with GoDaddy. I hit them with it. They say they will reopen the account, but won’t let me send email shots from it – which is why the porridge format has changed. Just press on the link to take you the articles.

Five Things to Read This Morning

Bberg – Dealmaker’s $2 Billion Claim Returns Focus to Barclays Bailout

BBerg – German Economy is Past the Worst, Will Still Shrink 7% This Year

FT – Inside the US Protests: Pictures of a Nation in Turmoil

Torygraph – Bald men at higher risk of severe Covid, research finds

WSJ – Why Mr. Market Ignores a World in Turmoil 

Out of time and have a great weekend..

Bill Blain

Shard Capital