Mario Draghi at the April 4 ECB press conference



Link to ForexLive
Posted: 12 Apr 2013 11:21 PM PDT
The image of one of the "Masters of the Universe", the former boss of Goldman Sachs, Hank Paulson, getting down on one knee to beg Democrat Nancy Pelosi, to approve TARP, is one of the most memorable of this crisis. And yet it was not photographed, even if it was widely reported by a highly entertained press (particularly the fact he was in a $3500 suit). That was some four and a half years ago in September 2008.
The $700 billion Troubled Asset Relief Program enabled the US Treasury to inject capital into the financial system. The aim was to stabilise the financial sector and avoid a highly damaging credit crunch. At the time, it was widely criticised by the American public and caused rage in the media. "Main Street Bailing out Wall Street".
Tarp protest
And yet it has done exactly what is supposed to do. The American economy is growing, the financial industry is healthy and the property market rebounding. The giant bailout package was created to avoid a repeat of the great 1930's depression and it did.
Compare that to Europe where the banking industry is still in a tragic mess. Europe needs to follow the example of the USA and create a TARP. But for TARP it needs a Hank – someone to make it happen. And I can't see anyone willing to take on that role.
The problem is that there is political abhorrence of using taxpayer's money to bail out what many view as irresponsible, greedy and sometimes corrupt, bankers. And yet the American experience shows it is the right thing to do. TARP has been hugely beneficial for the US economy as it has enabled its financial system to recover and lend again.
And it has been a good investment for taxpayers too. At the latest Treasury Report to Congress in March, "taxpayers have recovered $393 billion – or 94 percent – of the $419 billion in TARP funds disbursed to date". So almost all the money has been paid back already. The US government has got all of its $269bn back from programmes specifically for banks plus a $24bn profit! No Surprise then that the Treasury states "By any objective standards, the Troubled Asset Relief Program has worked: it helped stop widespread financial panic, it helped prevent what could have been a devastating collapse of our financial system, and it did so at a cost that is far less than what most people expected at the time the law was passed".
But there is absolutely no political desire in Europe to replicate TARP. Politicians do not want to risk the public's animosity and therefore their chances of re-election by using taxpayer's cash to help the banking industry that is blamed for so much of this crisis. And yet, such bold and brave action is desperately needed.
At the press conference on April 4, ECB President Mario Draghi frequently mentioned the weak European banking industry and the negative impact on GDP.
Mario Draghi April 4 press conference
Mario Draghi at the April 4 ECB press conference
In particular Draghi noted that European banks had withdrawn credit from mid-2011 (at the height of EZ concerns) which he believed had been a significant contributor to the subsequent slump in economic output. He talks about the "tight credit conditions (which) will continue to weigh on economic activity" and "particularly for small and medium sized enterprises in several euro area countries".
Draghi understands that the European banking industry needs to be strengthened.
"It is very urgent that we have a European framework for the resolution, recapitalisation and restructuring of the banking industry,” Draghi said.
He adds "it is essential…. The resilience of banks (is) strengthened where needed" and of the importance of "proceed(ing) with financial sector restructuring". But the problem is although the ECB has propped up Europe's banks temporarily thanks to the LTRO and more obliquely, the OMT, the ECB "cannot replace the lack of capital in the banking industry." This is a job for the political class who know voters hate bankers. Witness the new highly popular EU banker's bonus cap.
To be fair, the EU is slowly creating structures to help its troubled banks – the European Stability Mechanism and the promised Banking Union. However neither is close to the power and impact of TARP.
Firstly, the ESM comes with strings attached. For a government to seek cash for its banking industry through the ESM, it has to agree to budgetary oversight from Brussels. Few politicians are willing to do this and prefer to pretend that the banking system is not quite as bad as it truly is. Spanish banks finally took around €40 billion at the end of last year but this was much delayed.
The aim of a banking union is that when a banking industry is failing, it should not drag an entire country down with it, as occurred in Ireland. However there is still a very long way to go politically in creating it. And Cyprus showed us quite how far – no single regulator, no agreed approach to wind the failed banks down, no common deposit insurance and no mutualisation of the losses. And this is the main political problem – the sharing of bank losses across Europe. This is still a highly contentious subject. Draghi restated his position against mutualising bank debt last week, although without it, I cannot see how the link between banks and sovereigns gets broken.
The ESM and the Banking Union do offer hope for the future. But in the meantime, a credit and confidence crunch is seriously damaging Europe's economy. And it is a feedback loop: worse GDP, banks take losses and so don't lend, which leads to a credit crunch and back to worse GDP etc.
The eurozone needs a Hank, who was willing to be hated by almost all, to save his country.  It needs someone to plead with politicians that taxpayer's money must be injected into the financial system to help the wider economy (and therefore all those taxpayers).
Paulson on one knee begging Pelosi
A reenactment of Paulson begging Pelosi from Too Big to Fail
The next question is, who could be Eurozone Hank?
And this is the problem. We have no one with the authority or desire to stand up and demand that eurozone's banks need more capital and help with their bad loans. Draghi tries to send the message out but is reluctant to go further given the separation of central banks and government.
TARP was signed into in October 2008 – a swift and bold response to the crisis from Washington. And yet in Europe, years have gone by as the slow political process to create the "institutions" required, plays catch-up. Now this may be democratically ideal and the Merkel solution, but time is damaging. Zombie banks continue to live the life of the undead and throttle Europe's economic output. Weaker GDP increases government debt – another feedback loop as the state's banks tend to own the debt of their sovereign.
Bold action is required. The Eurozone needs a TARP (and a Hank) and its Stress Tests? Just remember Laiki Bank and the Bank of Cyprus passed those less than a year ago.
When I first proposed this column to Adam, he quipped that "with 17 countries in the euro, the EZ's Paulson will have to get on his knees a lot of times" which is – both witty and succinctly summaries the problem.
And just to remind you of Just to remind you of Ms Pelosi's great retort to Hank on his knees? "I didn't know you were a Catholic". Brilliant!
Posted: 12 Apr 2013 11:00 PM PDT
Good article from Reuters, well worth a weekend read: Insight: When options trading ahead of deals raises eyebrows
A study for Reuters by options research firm Schaeffer’s Investment Research of 181 such announcements in the 14 months to the end of February shows … 41 examples of companies, or 23 percent of the sample, where the volume of new call options positions (rose) by at least 50 percent in the five days before the news when compared with the average of the previous six months. For 33 of these companies, the volume more than doubled.
Option activity ahead of a big announcement isn’t always trading on inside information, there are other explanations, but the numbers do raise eyebrows, at the very least.
This sort of thing would never happen in the FX markets (where’s that rolly-eye, sardonic emoticon?)
Posted: 12 Apr 2013 10:58 PM PDT
There’s probably been enough said about Bitcoins over the past 2 weeks, but I’ll add a little to the noise.
Was Bitcoin in a bubble? I’ve heard a bubble is defined as a trading instrument that’s rising rapidly that I’m not long of :-) .
Bitcoin trading is, as far as my investigations show, a long-only proposition; I can’t see its possible to short it. When it is then Bitcoin will be something else to trade. Until then, if you want to trade it, treat it a speculative mining stock (a speculative mining stock is a hole in the ground with a liar standing at the top).
Interesting article in the Financial Times (gated) – touches on the impact the Bitcoin volatility is having on real0world merchants who accept it as payment (those interviewed weren’t fussed by the volatility as the volume of trade in Bitcoin is miniscule). Bitcoin fans put brave face on price fall
Posted: 12 Apr 2013 10:55 PM PDT
Adam posted this on Wednesday: Tough month for organized crime
I jumped on the bandwagon: BoA analyst: Kill the 500 euro note to boost the economy
Now the Financial Times (gated, but the two above links aren’t!) is getting in on it: Bin €500 notes to spread debt burden
The argument is that the €500 note is mainly used by criminals. The short story is Boa/ML analyst Athanasios Vamvakidis reckons the ECB should call in the notes, asking for proof they were legitimately earned (no details presented on how to do this):
If, say, one-third of the notes are not presented in time, the ECB's liability would be cut by a very handy €100bn.
Posted: 12 Apr 2013 07:49 PM PDT
A bit more weekend wow – an enormous landslide in the world’s largest man-made excavation has shut down a Utah copper mine. The photos are incredible. No-one was hurt.
Article
Source: Australian
Source: Australian
Posted: 12 Apr 2013 07:48 PM PDT
And for a bit of weekend wow … a US Navy video of a drone being shot down with a ship-mounted laser weapon.
Shots are said to cost around $1 each … cheaper than Starbucks.
Posted: 12 Apr 2013 07:47 PM PDT
A retail survey shows that that consumer plan to save more but if I know one thing about Americans, it’s that they will spend every last penny.
Listen to this shill trying to earn his paycheck:
The National Retail Federation, recently released a survey saying most people are saving and not spending. The trade group’s president, Matthew Shay, sees that as regrettable because consumers should be “investing their hard-earned money”–on shopping trips that spur overall economic growth.
Posted: 12 Apr 2013 07:47 PM PDT
A Russian drive-in cinema is hiring people to dress up as blood-soaked maniacs from horror movies who will look in patrons' car windows  at scary points in horror films.
The job just isn't for anyone, though:
Other job responsibilities include the provision of first aid to hapless moviegoers who faint, and to film their victims' reactions.
Boogeyman wanted: Russian cinema to hire 'monster' to scare audience
Posted: 12 Apr 2013 07:45 PM PDT
A bit of fun from the Friday 'Market Beat' page of the Wall Street Journal, saying the currency market has got itself into a frenzy about USD/JPY trading at 100:
Overhyped? Almost certainly. Baseless? Definitely not.
The article goes on to briefly discuss people's irrational fixation with round numbers, but also notes:
rounditis isn't going to be cured any time soon so we might just have to learn to live with it.
At least we can put 100 on the back burner for a while after Friday's sell-off.
Posted: 12 Apr 2013 07:44 PM PDT
Some analysts are thinking countries like South Korea, Indonesia, Malaysia,  amongst others, may put capital controls in place to regulate cross-border flows of money.
BBC video of a Westpac currency analyst discussing the prospect.
Posted: 12 Apr 2013 07:43 PM PDT
The article is from a couple of days ago but for those who may have missed it there's a clear discussion of the distortions on Chinese trade data of speculative capital inflow disguised as trade transactions:
Companies that cannot legally move money into the country for the purpose of currency speculation often try to circumvent China’s capital controls by overstating trade invoices, thereby disguising investment funds as payments for goods and services sold overseas,
Also, more here:
China Customs Official Apologizes for Incorrect Data
Posted: 12 Apr 2013 07:41 PM PDT
Yesterday we noted Bloomberg had obtained a draft of the IMF's World Economic Outlook in which US GDP growth was revised down to a 1.7% expansion from earlier forecasts of 2%. More on this here if anyone is interested:
IMF Trims U.S. Growth Outlook in Draft Report Citing Fiscal Cuts
Posted: 12 Apr 2013 07:40 PM PDT
I first noted this on Tuesday, the potential inclusion of New Zealand in the Citigroup's benchmark World Government Bond Index, and how this should be NZD supportive. Available details to refer traders too were sparse indeed, though.
This from Friday:
New Zealand Debt Management Office last week priced a NZ$2bn (US$1.7bn) bond … The deal also takes the country's total debt outstanding above the threshold for inclusion in the WGBI index. As part of that benchmark, the country's securities are expected to enjoy higher prices and greater liquidity.
Another factor supporting NZD.
Posted: 12 Apr 2013 04:45 PM PDT
Friday’s column from Ambrose Evans-Pritchard:
As predicted by so many, the attempt to drive down wages in modern democracy is not only brutal but often impossible. What you gain from wage compression you lose from lagging productivity as investment collapses.
Posted: 12 Apr 2013 02:00 PM PDT

Forex trading headlines for April 12, 2013:

The yen stole the headlines all week and it made a grand finale. Later jitters about the Treasury currency report and a smallish earthquake added to pre-weekend position squaring and sent USD/JPY as low as 98.09 in the final hour of trading.
EUR/USD fell to 1.3040 in Europe but recovered in US trading. Early moves were choppy with 1.3040 briefly breaking but it was skyward from there and the pair closed slightly above 1.3100.
The gold chart was like a series of 5 waterfalls as it dropped an consolidated several times. The big news is that it closed below the triple-bottom at $1522 and entered a technical bear market.
Posted: 12 Apr 2013 01:25 PM PDT
USD/JPY will end the week close to its lows. Some of the late pressure may have come from the Treasury report on currencies because it includes a portion on Japan, noting that the US is ‘monitoring closely’.
USDJPY hourly chart april 12, 2013
USDJPY hourly chart
Firstly, there is no way the Treasury will ever name Japan a currency manipulator.
Secondly, that’s the biggest late-Friday move I’ve seen in a long time. Reeks of amateur hour but it will make for an interesting open on Monday.
Posted: 12 Apr 2013 01:15 PM PDT
As long as US companies make fortunes from cheap Chinese labor, they never will.
It would have been interesting to see if Mitt Romney would have kept his promise to label them a manipulator on Day 1. I somehow doubt it.
The rest of the headlines:
  • US notes yuan has appreciated 10% against the dollar since June 2010
  • Treasury says yuan remains ‘significantly undervalued’
  • Will closely monitor Japan’s policies to the extent they support growth of domestic demand
  • Will push for concrete adherence to recent G7 and G20 commitments
  • The full text of the report (PDF)
Here is the pertinent part on Japan:
In Japan, economic performance and continuing deflation were key issues in last year's election, and the Abe Administration came to office committed to reinvigorating growth and escaping deflation. Early statements by Japanese officials suggested that policies would, in part, be directed towards “correcting” yen strength, and there were proposals by some outside of government to ease monetary policy by purchasing foreign bonds. However, Japanese officials subsequently disavowed these statements. The Japanese government joined the G-7 statement of February 2013, affirming that their policies would be based on domestic objectives using domestic instruments, and would not target exchange rates. Since then, Japanese officials clearly ruled out purchases of foreign assets and have refrained from public comment on the desired level of the exchange rate. On April 4, the Bank of Japan announced a new monetary policy framework, which includes accelerated purchases of domestic assets to achieve a domestic inflation target of 2 percent. We will closely monitor Japan’s policies and the extent to which they support the growth of domestic demand.
Posted: 12 Apr 2013 12:47 PM PDT
Looks like both will finish near the lows of the day. With gold the thinking might be that Asia sees the large drop and bails at Monday’s open.
No scheduled weekend news jumps out as a big risk but there are some notable speeches on the calendar.
weekend calendar
All times are New York
Posted: 12 Apr 2013 12:37 PM PDT

Futures market speculative positioning data from the CFTC as of the close on Tuesday:

  • EUR net short 51K vs short 66K prior
  • JPY net short 78K vs short 78K prior
  • GBP net short 70K vs short 65K prior
  • AUD net long 78K vs long 84K prior
  • CAD net short 65K vs short 63K prior
  • NZD net long 25K vs long 18K prior
  • CHF net short 10K vs short 12K prior
  • US Dollar Index longs at 50K vs 54K prior
A few things jump on in this report but mainly it’s that positioning hasn’t changed at all since the BOJ decision. Yen positioning is still heavily short but you would think a 700 pip move would attract some fresh interest.
The lack of fresh AUD longs is also a bit of a surprise to me, given the continued rise in the Australian dollar. It shows the market is somewhat cautious.
Finally, the NZD longs jumped as the pair approaches a record high. Feels like the market might be getting too tilted in one direction.
Posted: 12 Apr 2013 12:01 PM PDT
Just when you think Congress can’t sink any lower, they do something like this.
Today, without debate in either chamber, lawmakers repealed part of a law that was passed last year with great fanfare that would have required financial disclosures to prevent insider trading. The disclosures were due to begin on Monday.
There are more details of the reasoning for the move here.
at

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