ECB stands for Extra Cash Baby

Central banks will do what they believe they have to do, which includes lying to markets.

As the title of the blog references, the ECB is expected on Thursday to finally enact its version of QE.

It’s expected that it will be different from the US and Japanese versions in that the EU constitution forbids the central bank from directly purchasing sovereign nation debt, and Germany has requested additional safeguards to prevent what they have made clear they will not participate in, which is joint and several collective underwriting of liabilities (they ain’t being a guarantor in essence).

The likely mechanism will therefore be the ECB pumping funds into individual central banks which then use it to repurchase their own sovereign debt.

Whether the differences in the EU implementation has any effect on how well the programme works is unknown, but it’s pretty clear something has to be done, and if this is the best they can do then whatever it is, it’s better than nothing.

Oil

The price of oil continues to fall and markets continue to fret.

The big question is why? Is it falling demand which indicates failing global growth, is it over supply because of fracking or is it speculators selling the commodity short?

The truth, frustratingly, is that nobody knows but historically big spikes up or down in oil have been accompanied by expert predictions of a magnified continuation of the moves which have not in reality occurred.

The Goldman Sachs energy forecast several years ago was that $200 a barrel was coming, now the same guy is saying, it’s going down below $30. (I would like this job, it’s hugely well paid and plainly credibility isn’t required to keep it.)

Wages

As we wrote last year the growing asset and wage inequality between the rich and middle class is becoming a central theme for politicians in the UK and US, both of which are gearing up for national elections. David Cameron spoke of the need for a middle class pay rise on a Sunday TV appearance and slightly more impressively President Obama focused on the need to redistribute wealth in the State of the Union address last night.

The wealthiest 1% own well over 90% of the world’s assets today, it’s projected this will increase but the question is what can actually be done about it?

In theory, democratic elections should automatically self-regulate asset redistribution as the 99% can elect governments committed to greater social equality, but it doesn’t seem to work that way in practice.

Nobody likes to pay more tax and with free markets and capital those that have the most will simply leave if they are targeted.

Add in the power that wealth and resultant influence brings and you have a distorted equilibrium.

As an aside I watched the joint press conference with Obama and Cameron last week and was amused by the interaction between the two.

Prime Minister Cameron spoke first referring to President Obama who responded by several times thanking David (I was waiting for junior!) for his support. David replied that Barack was very welcome.

Big boys with big toys but still the playground rules.

Its silly time boys

The Greeks go to the polls at the end of the week to vote for a new government and the indication is that they will elect the Syriza Party who have pledged to renegotiate (read renege on) the country’s debt agreements with the EU.

A likely outcome apparently is that ultimately the debt will remain but will be restructured over 100 years at a zero rate of interest (that’s nil, zip, nada, sweet FA folks).

Now this is important because there is then NO DEFAULT, seriously, this avoids an official default.

Well played Zorba!

Swiss Tony

No foreign exchange company or bank is happy with the Swiss National Bank, very very unhappy is closer to the mark.

The back story to last week’s massacre of traders and hedge funds starts in the financial crisis when the Euro was imperilled and investors were searching for safe havens to park their cash.

The currencies deemed safe during this period were the US dollar, pound, Yen and Swiss Franc.

The Swiss National bank did not want a strongly rising currency because it’s terrible for both their main industries, tourism and exported goods. They said to markets, “we are going to peg the currency to the Euro, don’t test us as we have huge foreign reserves and we will win.”

Interestingly because the Swiss have a reputation for seriousness of purpose, the markets backed off and the Swiss Franc stopped rising.

Over the last two years the central bank has kept affirming the peg as an absolute strategy.

Even early last week it said, it’s absolutely central to our plans and then just two days later it abandoned it.

Why?

Several reasons but probably the combination of having accumulated Euros to about 90% of GDP and then knowing Euro QE was coming which would devalue the Euro further; this was an untenable position.

Who got hurt

All the traders and hedge funds that borrowed in Swiss Francs to buy other assets, who were shorting it (of whom there were a lot) and any foreigners invested in Swiss stocks.

To give an idea of the magnitude of the event the Swiss Franc rose initially over 30% against the Euro in about an hour.

So to go skiing in Switzerland from Germany got 30% more expensive and a Swiss watch to buy in Paris the same.

What did we learn?

Central banks will do what they believe they have to do, which includes lying to markets.

NOTE: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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