‘No One Tell The Germans’ – ECB Power Play Is For All The Marbles

Authored by Bill Blain via MorningPorridge.com,

“The enemy is anybody who’s going to get you killed, not matter which side he is on…”

Global Stock markets seem to be living the dream, but under the surface there are serious concerns. In Yoorp the ECB makes its power play this week to confirm its place within the political trinity of States, EU and ECB by effectively handing itself control of the fiscal and industrial policy levers that could power up Europe. No one tell the Germans…

Fascinating numbers coming out the USA about the $28 bln of new money that pumped up the stock market in June – read all about it in the WSJ: “Retail Investors Power the Trading Wave with Record Cash Inflows”.

10 million new brokerage accounts and over 70% of US retail investors are convinced the market rally has further to go, the Fed will stand stead-fast behind the market – keeping the money spigot open, and meme stocks and cryptos are cheap. They are buying – buying dips in the really classy financial assets they know and love.. like Gamestop and Buttcon. When a stock tumbles like that, it must be because the market has got it wrong surely… it’s what Wall Street calls a buy the dip opportunity, a window to make lots of money.

If you think so…

Only 44% of professional fund managers share the retail bullish view. They are far more concerned about the way in which certain tech stock movements look very 2000 dot.com crash familiar. They are concerned about IPOs, SPACs and valuations. They are concerned about rates, central banks and recovery.

Meanwhile things are getting interesting in Europe.

The ECB’s governing council will sit down in Finanzplatz Frankenfurt later this week to discuss and approve President Christine Lagarde’s grande plan – an all-encompassing strategic policy rejig of its remit – the first review in nearly 20 years! It’s the usual European thing – an opportunity for the 25 voting and vetoing members to trade naked and not-so-naked domestic self-interest and political advancement, versus the objectives of the Eurocracy in Brussels.

It’s a fascinating thing the ECB.

Christine Lagarde has proved herself an effective leader of financial institutions – but she is not a classical central banker. She is very much part of the French political master class, which is why she was parachuted in over the heads of many well qualified bankers. Her role within the ECB was always to build political unity and steer it in the correct direction. Which direction? France’s or the Brussels Eurocracy?

Which ever suits. France is unfazed by monetary debate. The number of angels holding €500 notes on a pinhead required to spike inflation bothers them not. How much debt-addled Southern Nations are borrowing under the ECB’s skirts – is not an issue. France has been bust many times, and is still France. And, if the ECB leads ends up leading European climate change policy, that’s just another thing you can’t blame the Elysée Palace for. Lagarde will make a great President of the Republic when she retires…

It’s a very un-Germanic approach. The Germans, as we all know, fear nothing but tremble at inflation above 2%. Curiously they still sincerely believe that German workers should not be paying the inflated pensions of Club Med workers. They have even broken ranks with the rest of Europe by showing remorse about Brexit, and heaven forbid, letting the perfidious English beat them at Football.

Bundesbank chief Jens Weidmann is earnestly dull and boring, warning about inflation and bond buying dangers, while the new crop of German politicians are all trying to attach themselves to demands Europe reverts back to strong enforcement of debt/GDP rules. The rest of Europe is resolutely looking the other direction. Everyone promises to consider German fears and then does the opposite…. Because they know the Germans will complain, but will never act for fear of discovering how unpopular they remain in Yoorp for the crime of bring wealthy and successful.

Lagarde’s plan is to boost the ECB’s political relevance by effectively placing it at the centre of European Climate Change policy. She will direct ECB bond purchases to qualifying assets, ie Green bonds that suit her environmental objectives. Corporate Bond QE has proved a very effective central banking control tool – limiting access to capital and funding for perceived bad actors.

The ECB’s powers to direct fiscal aid via the EU’s de-facto mutualised European €800 bln bond recovery programme, and to set industrial policy via its climate change mandate will give it unprecedented power.

Which is .. dangerous. The idea an essentially bureaucratic, unelected – but subject to domestic political patronage, independent (well, notionally) financial body should be setting European climate change policy will concern many Northern nations who may conclude Southern Europe’s willingness to pay climate-change costs and externalities will prove as unenthusiastic as their efforts to rein back spending.

Let’s see what emerges…

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