All Heck Breaks Loose after Draghi Fails to Outdo his Own Hype

Something big is broken.

Hedge funds – already beaten up by lousy returns or massive losses this year and struggling with redemptions as frustrated investors are bailing out – are now watching their European bets get demolished by an evil surprise: Draghi failed to outdo his own hype.

German investors are largely conservative. They like to put their money in brick and mortar to own something real and profit slowly. People with smaller ambitions squirrel their money away at the bank to collect a tiny amount of interest, back when there still was interest. Many invest in life insurance products for retirement cash flows. But they aren’t big stock-market jockeys.

So when the German DAX today plunged 4.5% within a couple of hours, from 11,315 just before Draghi’s fateful announcement to 10,789 at the close, it wasn’t frustrated Germans dumping their darlings.

The French are even less into stocks than the Germans. They don’t trust them. They like their government-sponsored savings accounts. They like brick-and-mortar investments. They like all kinds of insurance products. So when the French CAC 40 plunged 3.6% even as Draghi was speaking, it wasn’t the French he’d disappointed.

It was his former colleagues and rivals at Goldman Sachs and other banks and hedge funds, and they were dumping European equities.

And neither the French nor the Germans suddenly went out of their way to load up on the euro, though it jumped 4% within hours, a breath-taking move for a major currency, from a seven-month low of $1.055 just before the meeting to $1.098 as I’m writing this.

The euro had dropped 5% from the beginning of October until just before the ECB announcement. Shorting the euro had become the standard bet for hedge funds, based on all the hype the ECB had emitted about how it might ramp up, extend, fortify, and add to its monetary policy instruments, which would in theory whack the euro as part of the ECB’s relentless currency war. It was a crowded trade. Now they got caught in an epic short squeeze.

And European government bonds sold off across the board and yields skyrocketed – “skyrocketed” in today’s zero or negative-yield environment. For example, the German 10-year yield spiked 20 basis points from 0.47% to 0.67% – a 42% move!

The ECB has a special relationship with hedge funds and banks that includes closed-door meetings where it hands them privileged information, allowing them to trade in advance of ECB moves. When this popped on the front pages, Draghi, rather than pretending to be shocked and appalled, defended the practice: “Direct exchanges with … specialised audiences form an essential part of the ECB’s communication policy,” he wrote. They were “integral to its transparency policy.”

The ECB has enriched hedge funds and banks every way it could over the years since the euro debt crisis and bailouts. So what had Draghi done today to cause such uproar among his buddies?

Stocks and bonds started selling off even before Draghi spoke at the press conference, as hedge funds were reacting to the ECB’s statement. It promised a lot of goods for them, for a long time:

  • Cutting the deposit rate to -0.3%, thus socking it to savers even more; but it left interest rates on the main refinancing operations at 0.05% and on the marginal lending facility at 0.3%.
  • Extending QE to at least March 2017, but leaving the monthly asset purchases at €60 billion.
  • Buying more assets with the proceeds from maturing securities “for as long as necessary” to somehow contribute to “favorable liquidity conditions.”
  • Buying bonds issued “by regional and local governments” in the Eurozone to monetize even the deficits of cities.
  • Continuing its refinancing operations “for as long as necessary….”

In short, it enhances one of the greatest wealth transfer schemes of all times. But it wasn’t enough.

Hedge funds had expected a larger cut in interest rates, with the deposit rate getting pushed deeper into the negative, an acceleration of QE from €60 billion a month to something much higher, and perhaps some new goodies.

In the past, the ECB would relentlessly hype future measures, such as QE, and whip markets into frenzy over them, then on the day of the announcement, it would outdo its own hype and offer even more than had been imagined. Stocks and bonds would soar all along throughout the hype period, get a big boost following the actual announcement, and then soar further until QE would kick off a couple of months later.

He was a master at this dark art. From October 15, 2014, when the QE hype began, to April 10, 2015, shortly after the larger-than-hyped QE became reality, the DAX had soared 45% and euro government bonds had reached stunning valuations, with a large portion sporting negative yields. But after the ECB began buying assets, rather than just talking about it, hedge funds got out. By the end of September, the DAX had plunged 24%.

Draghi’s buddies must have been complaining bitterly about this during the closed-door meetings. That’s when a new round of QE hype started. German stocks began to soar again, and by November 30, they’d jumped 20%. But this time, hedge funds didn’t wait until the new measures actually kicked in before they started dumping. Many of them hadn’t dumped quickly enough last time and got caught in the bear market. They learned their lesson: dump on announcement day!

And this, after seven years of muscular central-bank market interventions and manipulations around the globe, is what “investing” has come down to: betting on the words of a few god-like central bankers, running in a solid herd behind central-bank hype, using privileged information to front-run central-bank announcements, selling assets at a profit to central banks under the QE programs, and profiting from the run-up of even the crappiest stocks and bonds to ludicrous heights.

But it’s not working anymore. Something broke. Instead of making a roaring bull move, markets in Europe dove, and US stocks and bonds got hammered too. And that, if you’re betting on central banks, should put you in a pensive mood.

Investors are already getting bloodied as the Great Credit Bubble in the US implodes at the bottom. Read…  “Distress” in US Corporate Debt Spikes to 2009 Level

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  24 comments for “All Heck Breaks Loose after Draghi Fails to Outdo his Own Hype

  1. Spencer says:

    Against the CB’s. A bottle of good French table wine with my dinner, and five gold Maple Leafs, thank you.


      • Dan Romig says:

        Wolf, your third to last paragraph sums things up so accurately! ” … betting on the words of a few god-like central bankers, …” This is, but should not be what investing has come down to.

        Thank you, and keep up the battle to tell the truth.

  2. chris Hauser says:

    he seems like a smart guy, but i was underwhelmed. and he’s been wrong. not as idiotic as trichet, though.

    would you want draghi and yellen to manage the front and back of your restaurant?

    i thought so.

    • I don’t agree. Rickards points out that Draghi realizes money printing leads nowhere, which is why he’s done far more talking than doing when it comes to expanding the currency supply. He’s determined to strengthen the euro, not necessarily ‘save’ the European economy.

      • Bob Miller says:

        Short, Sweet and right to the point, Mr. Holmgren. At least while they’re bashing Draghi, they’re letting Yellen and the others alone for a few minutes. You just got to love the Pica hudsonia Anthem, “Everyone’s To Blame But Me.”

      • CHRIS HAUSER says:

        i agree with your thought. but half measures lead to half accomplishments.

        what am i saying? it’s all symbolic anyway.

  3. CrazyCooter says:

    If Japan has done this for literally decades, it is impossible to know when the road will finally run out. But, when it does, CONFIDENCE will be the key factor that will finally start the fire that burns the house down … and that element is present in what we are seeing in Europe right now.

    And we got the Fed meeting coming up as well.

    Let’s see if this gets legs.



  4. Vespa P200E says:

    Uh oh – Kuroda at BoJ’s QE to oblivion gave up the ghost and now Super Mario in ECB is losing its clout? BoC is saddled with mother of all stimulus’ bad debt (and counting). Seems like every round of QE is losing oomph? Sure Janet lost face in Oct and forced to tell the market who the queen is by nudging the rate only to come to rescue the plunging market and strong USD by ushering in another QE in early 2016 but will this play out in yet another financial engineering experiment?

    Do I sense that all is not well in global CB cabal and shoes are about to drop globally? Guess it’s time for competitive devaluations and ushering of money printing by giving away money in hopes of reversing deflation and unwittingly bring about inflation monster resulting in CBs panic rate increases?

    We indeed live in interesting times to say the least…

  5. VegasBob says:

    The problem is that there is no instance in recorded human history where rampant money-printing and interest rate suppression have led to long-term prosperity. Not one.

    That means that unless this time is different, and it IS NOT DIFFERENT, all of the central bank actions of the past 7 years have basically been some variant of fraud.

    Unfortunately, one of the unpleasant side effects of monetary fraud is that it takes successively bigger and bigger doses of fraud to obtain results as good as the initial result.

    While Bernanke’s first iteration of money-printing in 2009 may have been necessary to prevent a system meltdown, that should have been the end of the money-printing. In others words, the first round of money printing should have been the last. It should have been labeled as “one and done.”

    Unfortunately, people never learn to stop bad behaviors that seemingly feel good. So they keep repeating undesirable behaviors until disaster occurs.

    My sense is that Wall Street’s addiction to fraudulent money creation and fraudulent interest rates is too great to relieve through normalization of monetary policy.

    Since the only tool available to central bankers is some form of fraud, the Hobson’s choice for the central bankers now is to destroy the economy to save Wall Street (keep the fraud going) or to destroy Wall Street and try to save the economy (end the fraud).

    • ucde says:

      Money printing aka deficit spending is how the U.S. entered the modern era. There would be no new deal and no WWII without deficit spending; there would be no 1950s GI bill and no DARPA/gov-funded research (computers, integrated circuits, fiberoptics, computer networks, lasers). And government-issued money is not “debt”, that’s a misnomer reflecting an underlying misunderstanding. We created our modern prosperity by deliberately issuing money to serve public purpose throughout the 30s, 40s, 50s and 60s. Bonds are a farce, except for countries that have to borrow dollars, which is not the case for the US.

      Governments are NOT like households, their inflows and outflows do not have to balance, because they are the sole issuer of the currency. Its a tricky paradigm to get one’s head around, but it explains why, for example, economic belt-tightening aka austerity in Europe has been an unmitigated disaster. See , and for why Governments are not like households, see .

      What is referred to as “Sound Finance” — e.g. publicly balanced budgets, has historically always led to recessions and depressions. See this talk by Steve Keen:

      It sounds counterintuitive, right? That’s why the opposite belief (“If we just balance our budgets, our economy will be OK”) carries so much weight. Because that IS how economics works… when you’re not a State!! And none of us have experience being States or Banks, so we think our own budgetary ideas scale up to good macroeconomic ideas, when history shows the opposite is true.

      This is the thing thats hardest for us to accept: the sole currency issuer (the Government), in order for its populace to experience improving economic conditions, actually has to *issue currency*. It has to issue currency to serve public purpose. There are two sides to it: creating the currency, and distributing it. We have allowed private banks to multiply the money supply by an order of magnitude over the last decade. But none of it has really been distributed. As a result, it was used to fuel speculation and create asset bubbles in housing, cars, real estate, fine art, and stocks. It basically fueled a bidding war in the playlands of the rich and well-to-do.

      Much of our malaise arises from this fact: as Steve Keen demonstrates, a decrease in public spending must necessarily result in a rise in private debt, for people’s overall wealth to remain equal. And private debt is the big monster of modern times, as Richard Vague, Michael Hudson and Steve Keen keep pointing out. Public debt and private debt are completely different in terms of their downstream impact.

      Long story short, give everyone a basic income, and let the systemic change ripple through the system: labor will be empowered to self-define its own version of productive work. There is no need to pretend that units of account are scarce, or that their value hinges on everyone in a country being poor. Its literally the other way around. See

  6. whoz says:

    I’d like to see Nintendo come out with a “Super Mario – Central Bankers” video game. They could use a modified Mario figure but with Mario Draghi’s image. The goal would be to navigate Super Mario across hurdles in order to flip the switch on the printing presses and then gather up the newly printed bills in a bag like Santa Claus. He has to carry the newly printed money back across the hurdles to actually score points. The amount of newly printed money carried out is equal to your score for the game.

  7. Julian the Apostate says:

    Still in wait and see mode. I wouldn’t have expected it to last long. Perhaps all the CBs will have to get hit simultaneously, rather than these what appear to be diversionary tactics. So far the magician’s trick of keeping the eye off the ball is working. How much longer? Here there be dragons.

    • CrazyCooter says:

      Actually, they all play ball together – to the extent their domestic political motivations don’t deeply divide them. Consider in the ForEx market, all currency pairs are FIAT currency pairs or baskets. If two countries devalue by the same, their ForEx rates will remain essentially unchanged – yet their was an expansion of the money supply. Isn’t that a currency peg – just like dancing where one leads and another follows?

      What I think we are going to see going forward is either (1) a divergence so devaluations actually get “competitive” or (2) the political pressures become great enough to push them apart at the expense of the (diminishing) benefits of coordination. For the former, think about the major reval of the Swiss Franc and for the latter look to the AAIB.

      Coordination is breaking down – but it is impossible to know how this comes apart.



      • chris Hauser says:

        agreed. when political needs widely diverge, stuff happens, and then it compounds.

        i got a general bad feeling, everything is getting harder, but, the sun will come up tomorrow.

        • Bud Wood says:

          You assume is that the earth will continue rotating. Good assumption, based upon past occurrences. However, that is still an assumption.

  8. walter map says:

    There are limits to how much the financial economy can parasitize the real economy without degrading it, and the financial economy exceeded those limits years ago.

    The financial economy may be able to maintain its illusions with new and improved smoke and mirrors and QE and ZIRP, but it cannot escape the essential reality that it is damaging the real economy on which it ultimately depends. Killing the host obviously isn’t a long-term solution, but it works just fine in the meantime.

    The financial economy is truly one heckuva shiny fraud, but it is still, after all, a fraud:

    For the world’s more full of weeping than you can understand.

  9. prepalaw says:

    Wolf is correct: when a major currency moves 4% in value in less than 24 hours, that shows that something unseen is badly out of whack.

    I just took a look at the 15 year chart for the Euro/US Dollar:

    After gaining solid footing, the Euro moved from US$1.00 in 2000 to US$1.60 in mid 2008. What a hell of a good investment for US$-based people – you make more than 50% capital appreciation in 8 years + interest.

    From that point in time until today, it has been all down hill: The Euro zigzagged heavily from 2009 until January 2014, starting that year tad shy of US$1.40. However, the price movement during those 5 years looks orderly, with rises and falls and backfills.

    Beginning in January 2014, and in space of 14 months, the Euro was crushed and placed in a free-fall mode. The Euro stabilized around US$1.08 in February 2015, achieving a “loss” in US$ purchasing power of more than 30%. There is nothing orderly about this decline. The price was continuously suppressed with no backfills, etc. Leaving fingerprints of price manipulation.

    From February 2015, the Euro has been range-bound between US$1.05 and US$1.15, with little hope to be gained from chart that the Euro will regain its former territory of US$1.40 and beyond. In fact, those with short memories should look at the value of the Euro before 2000 when it was less that US$1.00.

    I do not know what is in store for the future. But I do know that nothing publicly-trade is a safe place to put your money.

  10. ERG says:

    I have seen our future, and it is Japan.

  11. Nick Kelly says:

    Comments invited on below:

    One operating principle of humans is their ability to adapt. We live in insane times- but I’m starting to think inside the asylum.

    First crazy idea: since the EU has all this money to throw at Greece, how about this. A bona fide tourist going for a Greek holiday presents his euros at customs, and hands them over. He is then presented with say, 1.5 times as many euros. The serial numbers help slow down fraud, by proving an exchange took place.
    The point is to inject money directly into the tourist sector, and transfer wealth from Germany, Britain etc. to Greece, but not to the Greek government.
    Everyone seems to lament that Greece can’t devalue and provide cheap holidays. This exchange at the border does that for tourists. The Greek euro, for them, is devalued.

    Second crazy idea :

    Since we know that helicopters dropping money isn’t a physically practical method of instantly providing liquidity- how could it be done?
    It would have to be electronic, obviously, which at the same time removes the necessity of printing, and of delivery. (The requirement for 100 bills at one stage outstripped US gov print capacity and some was farmed out to the Swiss)
    So by a process of elimination, I think you arrive at something like this: all personal bank accounts (one per person) with less than 10, 000 in them, receive an injection of say, 1,000 dollars.
    No one could say only banksters are getting this jam- it would flow directly to Main Street.
    It would also be progressive, in the sense that the flush accounts don’t get it- nor do business accounts.
    There is a slight problem of optics- it would smell of desperation. So what could the bonus be called?
    Peace dividend?

  12. ManAboutDallas says:

    How long will it take for the rest of you to see what’s happening here ? The Euro is being quietly transformed into The New Deutschemark. This has been Germany’s plan all along, right from the very beginnings of the Euro’s life. They’ve always wanted economic control of Europe; the tried a couple of times in the 20th Century, and that didn’t work out so well for them, did it ? No, so now in the 21st Century they found some of the patience they needed, and NOW.. voila! … they’re going to get what they’ve always wanted and this time, without firing a shot! As they say in the Guinness commercials….. “BRILLIANT!”

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