It is my thesis the next financial crisis will stem from our losing faith in government institutions. Watching the Democrats and the media self-immolate over Donald Trump’s Presidential victory has only confirmed this belief.
Every day Congress fritters its time away playing hyper-partisan political games positioning for the 2018 mid-term elections. Meanwhile, the people become more disheartened that anything will ever change.
The hard Left has coalesced around infantile opposition in the vain hope Congress will impeach the President for the crime of being Donald Trump. The neoconservative Right is working overtime throwing up barriers to reform while provoking Russia into an open hot war.
And everyday, we inch closer to a critical mass of people saying, “Screw it and screw them.”
In the political arena, this loss of faith is obvious. In financial markets, however, it isn’t.
In successive weeks, the two most important central bankers in the world got called by the market. Janet Yellen’s Humphrey-Hawkins testimony was meant to jawbone the dollar up and U.S. Treasury bond prices down (yield up). It didn’t happen.
In fact, since her testimony before Congress, markets are more convinced of a recession in the U.S. than before she spoke.
Then last week, ECB President Mario Draghi’s monthly policy statement made it clear he would be dovish in perpetuity. The euro briefly fell versus the dollar, as was Draghi’s wish, but then it rose.
The euro found itself at the mercy of U.S. political instability brought on by Special Investigator Robert Mueller announcing a wider investigation into Trump’s business dealings.
This is a clear example of markets being bigger than the people who think they control them.
Both central bankers were powerless to stop currency movements against their wishes.
I wouldn’t be saying this if the moves weren’t significant technically. As a financial and technical analyst, the moves in both the euro and the dollar markets were significant. And they haven’t reversed.
I wasn’t the only one who noticed. From Zerohedge on Friday:
Summarizing the market reaction, Yann Quelenn, a market strategist at Swissquote Bank said,“Draghi tried to talk the Euro down, even going so far as to suggest that ECB’s quantitative easing could be increased and prolonged. But the currency markets were not buying Draghi’s line, and neither are we. Available bonds are too scarce, and turn to a taper is too clear to disguise.”
The Fed got called in a similar manner in 2013 when they too ran out of bonds to monetize and had to end its QE program. But, the difference then was that Ben Bernanke never tried to deceive the market about it. He simply announced that he would begin tapering QE and the markets lost their minds.
But, they did so in the right direction. The dollar strengthened, foreign currencies weakened, yields rose for a time and everything, while extreme, made sense and fit Bernanke’s expectations.
What happened last week was nothing of the sort.
The key to the historic level of complacency in the capital markets comes down to faith in Mario Draghi. This is truer than of Yellen. Not because Draghi is more powerful, but because the EU’s financial and political situation are more tenuous.
And hence, a loss of confidence by the market in Draghi’s ability to navigate the brewing chaos will be more devastating than if Yellen loses the market’s confidence.
Why? Because there is no safety net for the ECB. It doesn’t issue the dominant trade currency in the world with the deepest debt markets like the Fed does. Once Draghi is exposed as having no solution to Europe’s financial problems (He doesn’t) the euro will drop quick and the situation goes from zero to sixty in a New York minute.
Yellen, on the other hand, gains from a loss of confidence in Draghi. Because so much of the world’s debt needs to be repaid in dollars. And that makes the dollar more resilient in times of stress.
Europe has to fail before the U.S. does. Structurally, the euro-zone is less stable both politically and financially than the U.S. Even if Trump gets impeached we’ll still be in better shape than the EU.
The last crisis, in 2008, was the last one that the central banks could contain. It bankrupted the commercial banks and made them into zombies. The next one will bankrupt the central banks. The people are turning to gold and cryptocurrencies like Bitcoin to protect themselves. They are beginning to see what I’m seeing.
Who bails out the Bail bondsmen?