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“Most attempts to find out what nations really are have suffered from an intrinsic defect: they have been attempts to define the general concept of nationality. People have said that the nation is this or that, apparently believing that all that mattered was to find the right definition; once found, this would be applicable to all nations equally. They have adduced language or territory, written literature, history, form of government or so-called national feeling; and in every case the exceptions have been more important than the rule. It is been like clutching at some adventitious garment, in the belief that the living creature within could be thus grasped.”

                                    Elias Canetti, Crowds and Power

Commentary & Analysis

A self-feeding loop of confusion…

I think by most conventional measures, used by most professional investors, European Central Bank Chief Mario Draghi has been a success. He has bolstered the returns for equity funds considerably since his decision to utilize a three-year term, instead of one year, in the ECB recent liquidity injection to European banks.

The fact is I missed the trees for the forest on this, and it has hurt. Failing to understand this lending–which reduced stigma associated with 1-year terms and better matched the funding needs of banks, led to more participation than expected. This in turn created a classic self-reinforcing positive feedback loop for asset prices:

  1. Increased demand for ECB funds stemmed liquidity risk
  2. Reduction of liquidity risk reduced bond risk premiums
  3. Liquidity helped banks buy local sovereign debt
  4. Demand for debt by banks was followed by funds
  5. This demand for European paper increased demand for euros (pushing up its value)
  6. Increased prices (lower interest rates) on sovereign debt increased the value of existing bank collateral
  7. Rising European banking stock prices reduce their cost of capital
  8. Rising European financial stocks begets more money flow from funds
  9. Bolstered European bank collateral reduces the need to de-lever from Eastern & Central Europe and Asian trade finance (which Europe banking represents and inordinately large impact).

Extending the loop to positive impact on global risk assets, as the core of systemic risk concern was laser-like focus on Eurozone bank liquidity problems, US stocks started rocketing on the ECB three-year term announcement back in mid-December. And yes, our friend Ben played a strong supporting role with his announcement US short rates likely remain in the cellar through 2014 if he is still the boss.

Mea culpa squared!!!

Of course the multi-billion dollar questions:

  • Is this a new paradigm?
  • Is the Eurozone crisis behind us for a while now?
  • Should we care at all about Greece?
  • Does leverage on central bank balance sheets matter (ECB is lowering collateral standards yet again by passing the decision on what is adequate collateral to individual country central banks; not perfect to say the least but expedient)?
  • Is the nasty fall in German exports reported today something to worry about, or is it rearview mirror stuff?

I guess the yes or no question to summarize all above is: Is this positive feedback loop we’ve witnessed since mid-December already imbedded in price?


  1. The ECB plans to offer another round of three-year funding at month end and expects the participation to be larger than last time. Shouldn’t that be bullish given the impact just reviewed?
  2. The Fed seems quite happy supplying more cash to the market and seems to be committed to doing just that on any signs of weakness. Shouldn’t that be bullish?
  3. China is being pushed by the IMF and some policy makers inside the country to initiate another big blast of stimulus (flame thrower switched on, in other words). Shouldn’t that be bullish?
  4. And Clint Eastwood tells us its only half-time in America. Shouldn’t that be bullish?

I guess the yes or no question to summarize all four considerations above is: If I can spout those four seemingly bullish items, is it already imbedded in the price?

Sorry, this Currency Currents issues seems to have turned out to be nothing more than a self-feeding loop of questions and confusion. But then again, is this game anything more than that?

The trend is your friend until it’s not. Something we can count on indeed.