Draghi Out Of Ammo And Under Attack

In classic fashion, equity markets gave up all of their gains since mid-July on a panic selloff this Friday as key US equity indexes ended the day down around – 2.5%, the first drop greater than 1% in 2 ½ months. This occurred on the aftermath of the ECB president Draghi leaving rates unchanged even as the Eurozone struggles with low to no growth, deflation, and the upshot of the 2008 financial crises.

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Draghi said there are limits to monetary policy and countries will have to rely on fiscal stimulus. Essentially the ECB is overwhelmed, out of monetary ammo and passing the buck to governments. For either group, it’s a daunting task to fight the list of headwinds which added to the already mentioned includes a new possible Grexit, the actual Brexit and an ongoing refugee situation. There are more headwinds brewing but that’s what bubbles up to my cortex immediately.

If the sentiment is similar from other central bankers throughout the world, then this could be a critical inflection point for markets worldwide. The admission of the limitations to the power of central banks by bankers themselves could be a lead indicator and change to the world order.

The plunge protection teams this Friday were either overwhelmed, took the day off or are still lurking at lower levels. One thing for sure, the supernatural forces that seem to levitate markets whenever there has been red were nowhere present Friday.

With the exception of regional banks and Gold which were down only about. - 5%, the sell off left most asset classes deeply in the red. The wipe out of gains that took 8 weeks to accumulate got a helping hand after comments on Thursday by bond guru Jeffery Grundlach who suggested that rates have bottomed. He then promptly left the interview and headed to the nearest fallout shelter.

One might think he was nervous about North Korea’s new and improved nuclear capabilities but that was not the case and he just sees the huge bond bubble popping with both equity and fixed income prices dropping together with no place to hide.That insight was dead on as US long bonds offered no safety on Friday and were down to -1.6%.

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Gary Anderson 4 years ago Contributor's comment

Draghi knows that there is a shortage of bonds for collateral. That is partly why he doesn't do anything. He wants fiscal deficit spending in order to create more bonds.

Also, by not doing anything, Germany has a big financial surplus, as investors pay Germany to invest in its bonds. Draghi is clever, very clever.

Keith Schneider 4 years ago Author's comment

good insight... in Japan the central bank own almost 40 % of their Stock etf' s

Gary Anderson 4 years ago Contributor's comment

I did not know that, Keith. That is quite disturbing, since Japan views helicopter money as being dirty and has only asset purchasing QE as an option to fend off deflation. Yes, that is quite disturbing. Perhaps you could go into more detail in any future article about Japan.

Keith Schneider 4 years ago Author's comment

I just checked and that number is up to 60% for their domestic etf...

Kevin Richards 4 years ago Member's comment

Thanks for fact checking that.