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Mr T: "Uncredible" Sleepiness

|Includes: SPY, iShares 20+ Year Treasury Bond ETF (TLT)
Credibility represents one of central banks' most crucial assets with respect to the success of monetary policy and its consequences on the major aggregates.
This matter has been thoroughly studied during the "Great Disinflation" period (1982-2007), as can be seen in the links below, for the more curious minds among us.
 
Central Bank Behavior and Credibility, The Federal Reserve Bank of St Louis
Central Bank Credibility, The Federal Reserve Bank of Cleveland
 
 
The ECB's situation in this respect is one of the most striking, since it is the newest of the major central banks, given its creation in 1998 by the Treaty of Amsterdam while the Fed was born in 1913 (The Founding of the Fed), the Bank of Japan in 1882 and the Bank of England in 1694!
 
The least we can say is that the credibility of central banks in general and of the ECB in particular has suffered greatly in the past five years.
 
Since its historic error of July 2008 when it hiked key interest rates at the worst possible moment, it always appears to be behind the curve, as it remains trapped in now discredited economic theory, which explains our term for them, the Austrian ostriches.
 
We hate to fire on the ambulance, but let's not forget the central bank's many reversals of position in recent months, including on collateral assets and the importance granted (or not) to credit ratings, exit plans announced and then abandoned or the interventions on secondary markets in which the ECB announced "sterilisation" measures are a source of amusement to all those who understand the functioning of a fiat currencies and banking reserves system.
 
As if that were not enough, we have just been treated to a new jewel by Mr Trichet in an interview with the Financial Times.
I had to give my page a double-take as I read his response to the FT journalist about the severity of the eurozone crisis in May:
 
FT: How close did the euro area come to disaster in May?
JCT: No, I don’t think that the euro area was close to disaster at all – seen from inside.
 
Who does he think he is fooling?
I wonder, just "what" he was inside at the time to make such a statement. Out of courtesy and good taste, I will limit my comments to just a few ideas!
 
On the eve of the establishment of the various bailout programmes on the eurozone, I wrote the short and desperate headline for the Thaler's Corner of 7 may, Merkel-Sarkozy must impose their decisions or its all over!, given my view of the urgency of convincing the Austrian ostrich to finally pull its head out of the sand.
 
 
Unfortunately the consequence of a statement as incongruous as that pronounced by Mr T should be obvious: We would be better of shorting the euro against the yen (still our target at 100), the dollar and almost all the other currencies in the world.
 
Above all, for those who bet on the civilisation aspect of European integration and acquire Greek debt, at the irresistible yield of 12% on 10-year and 11% on 2-year bonds, we had better keep our safety belt buckled.
 
The ECB will continue to increase the colossal amounts of liquidity to eurozone banks, including to the most reckless ones in the boom years, but don't count on it to provide direct help to countries in difficulty.
 
Although Greece may have cooked its books and behaved irresponsibly as the German ant built up its competitiveness, a big part of the financing difficulties of this country today stem from the downgrade of its credit rating, which has resulted in the exclusion of its debt from most bond portfolios. 
 
As such, instead of qualifying its approach, as it does, credible alertness, I think a more apt term would be "Uncredible" sleepiness.
 
We do not even need to consider the tensions on peripheral nation debt to gauge today's thoughtlessness of monetary authorities, as you can see for yourself in the graph, below.
Bear in mind that the ECB's official target for M3 growth is +4.5% per annum: we are currently at 0% since the beginning of the year.
As for loans to households and non-financial businesses, the graph speaks for itself.
 
 
M3 and credit in Europe
Incredible!
 
 
 
 
 
 
Have a good weekend.
 
 
 
Asset allocation biases and advised option strategies 
 
 
·        Our Bund target remains around 2.40-50% for the 10-year GGR, i.e. 130 on December Bund and 2800-2900 on the Eurostoxx 50. 
With the market's nearly three-point decline, we are not really very far, and advised last Friday to strongly reduce all the downward bets.
The 
Bund call and put ratios set up are working correctly (a bit less on the puts for the time being, given velocity), between the decline in volatility and the Bund's down leg.
 
·        And 2800/2900 on the Eurostoxx 50.
The Eurostoxx call ladders are working perfectly, given the hike in the spot price and the passage of time.
We have even suggested and set up for certain clients 
outright call purchases on the Eurostoxx on September and October, hoping for a little velocity and benefiting from affordable implied volatility.
 
Feel free to contact me for details on strikes and maturities.
 


Disclosure: Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds, Long Eurostoxx50 ETF