Paulson Tours ECB and Bundesbank Before Eurozone Rate Meeting

Monday, June 30, 2008

Will US Treasury secretary Hank Paulson beg for a delay in the inevitable series of rate hikes the Euro will see in the next two years?
Paulson has started out on a trip to Frankfurt in order to have a cup of tea with ECB president Jean-Claude Trichet and declared ueberhawk German Bundesbank president Axel Weber. He will see them at separate meetings before the ECB will decide on a possible rate hike in its governing council on Thursday.
Trichet has no other option than to hike rates if he wants the commitment to the ECB's mandate of fighting inflation still to be taken for serious.
Eurozone inflation shot to a record 4% in June, after 3,7% in May, Eurostat reported in a flash estimate on Monday. This figure has never been varying more than 0.1 percentage points. Theses are official figures although.
My lying wallet tells me otherwise as European gas prices shoot from one record to the next on an almost daily basis. Given my limited grocery experience I nevertheless see especially milk products taking the sky for a limit. Inflation now hides in shrinking packages sizes, I notice.
European bonds declined on Monday, signalling the market expects a hike form the ECB.
From Bloomberg:
European government bonds fell, sending the German two-year note to its biggest drop in three weeks, after inflation accelerated more than forecast in June, bolstering the case for policy makers to raise interest rates.
The decline pushed the yield on the two-year note up by the most since June 5, with the price poised for its biggest quarterly slide in at least 17 years. A government report showed the inflation rate in the 15-nation euro region rose to 4 percent from 3.7 percent in May. Economists had forecast a 3.9 percent rate, according to the median of 38 estimates in a Bloomberg survey.

This comes at a a time when the strain on Europe's economies and its inflation ridden consumers cannot be hidden anymore. A real estate bubble is threatening to bring down several of the Eurozone members where millions are stuck with property they did not have the money for in the first place.
Add into the picture that European banks are stuck with once AAA rated US property debt papers that are hidden in off-balance subsidiaries. Probably all dirty tricks are used to keep the illusion of a mark-to-model pricing scheme that keeps the real disaster among Eurozone banks hidden from shareholders.
If the concept of the Euro shall be held up Trichet has to announce both a rate step to 4.25% in its target leading interest rate policy and threaten more of the same medicine, regardless of economic developments that I would categorize as drastically slowing, thanks to a super strong Euro in comparison with Federal Reserve Notes (FRN's) that are poised to experience more devaluation day by day. A look at the USD index chart tells me a next drop to €1,70 could be imminent.
The image of a rich Europe cannot even be attached to the former Wirtschaftswunder, Germany anymore. A report in the German Weekly die Zeit from last week shows that 18.6% of Germans live under the poverty line, somewhere around €780 per month.
Looking (and blogging) since more than four years at the paper debt bubble I conclude that we indeed could see a dramatic global meltdown of banks. The mountain of more than $700 TRILLION derivatives can only be settled in a dramatic way. The past 4 years have given more than enough signals.

Austrian Central Bank Elects New Governor

Friday, June 27, 2008

The Oesterreichische Nationalbank (OeNB) has elected a new interimistic governor who will participate in the meetings of the European Central Bank (ECB) from September 1. The 64 years old Professor Ewald Nowotny will follow the present governor Klaus Liebscher - one of the hawks in the ECB's governing council - who is going to retire by August 31.
Nowotny, a declared social democrat, can look back on a long academic and banking career that began in 1971 at the Austrian Postal Savings Bank (Oesterreichische Postsparkasse). From 1999 to 2003 he served as vice president of the European Investment Bank. From 2006 to 2007 he cleaned up the mess at Austrian Bawag bank where his predecessors had gambled away some €1.73 million in deals with the son of former Bawag CEO Walter Floettl, Wolfgang, who is remarried to a niece of former president Eisenhower.
Walter Floettl will be aquitted - or prosecuted - in the coming days for his casino-like gambling with Yen carry trades that brought down Bawag which was aquired by US hedge fund Cerberus last year.
Cerberus official plan is to IPO the bank as soon as possible. In the current banking climate it is likely that Cerberus will have to keep Bawag as a long term investment.
Like Fed chairman Ben Bernanke Nowotny has a long academic career with stops at Harvard and the Technion university in Haifa, Israel.
Nowotny has so far not commented on the monetary policy of the ECB. The interimistic governor will take part in the council meeting on September 4 for the first time.
Due to the mess in Austrian politics the length of his term will highly depend on the result of the next Austrian parliamentary elections which may take place this year already because of unsolvable problems in the ruling coalition of conservatives and social democrats.

A Bad Omen for the Euro? ECB Delays Construction of its New Headquarters

Wednesday, June 25, 2008

Is this a bad omen for the future of the Eurozone's artificial currency? According to a report of the Austrian TV station ORF the European Central Bank has delayed the construction of its planned 185 metres high twin leaning towers. ORF said that the ECB surprised with an announcement that said the central bank was not able to find a construction company that could build the towers with a budget of €500 million.
It seems the ECB may become its own victim of the accelerating inflation in Europe. Eurozone consumer prices rose to a record annual rate of 3.7% in May from 3.3% a month earlier. Producer prices are rising much faster. In April producer prices raced along at an annual rate of 6.1% in the Eurozone.
According to the Austrian architect company Coop Himmelblau all bids had been substantially higher than the budget. The city of Frankfurt/Main had permitted the new buildings only last May. According to the original schedule the building should have been finished in 2011. The ECB said it will rethink the bidding process.

PHOTO: A model of the leaning towers that should become the new headquarters of the ECB in Frankfurt/Main. Planning is on hold now. Photo: ECB
This surprising development can be seen as more evidence that prices are rising much faster than official figures show. Looking at my expenses I would put Eurozone inflation at roughly double the official rate of 3.7%. The Euro celebrates its 10th anniversary this year. 

Next FOMC Statement Could Sound Like This

Tuesday, June 24, 2008

Don't get too excited about the next statement of the Federal Open Market Committee (FOMC) that will rattle markets a short while after publication before the investment community will remember that any improvement in the real economy has not been in the cards since the April statement. Fed chairman Ben Bernanke and his fellows of the FOMC may have new - mostly worse - data points worth an extensive discussion.
But $139 crude oil and the housing/consumer credit/bank/ employment mess created by too much easy credit will not vanish by more helicopter drops that end up at banks who shore up their balance sheets while the rest of the economy is effectively shut out from the easy money game. A game that led the Fed to hold more than $400 billion in junk, pretending that these securities are worth as much as all the freshly digitized Federal Reserve Notes (FRN) banks were getting in exchange. Even the official consumer and producer price figures show that Bernanke and his fellows are way behind the curve as short maturity rates now pay negative interest.
How insane (or desperate?) are money managers to keep a game alive where it is clear that inflation is out of control and cannot be tamed by another 25 basis points change in Fed funds, regardless of the direction of such a move which appears to be very unlikely IMHO.
Check yourself at the Fed's website in the left menu bar the submenu "Policy Tools" where you will find six "tools" to direct the economy along the Fed's policy guidelines. These six terms basically all mean the same: More fiat money to help the finannce sector to keep their heads above the waterline. Hundreds of billions of new FRN's every month and the crisis only gets worse because you can't douse a fire with petrol.
Bernanke and his fellow decision makers actually have only one choice that may not work either: pray for a miracle that extinguishes markets in flames without drowning everybody at the same time. I doubt this will work.
It is clear that consumers cannot take a rate hike that would raise their mortgage payments. But it is also clear that another rate cut would send FRN's into an immediate tailspin. The only positive aspect would be a steepening of the yield curve, a situation loved by the banks who can borrow cheap on the short end while long-term lending and pocketing the rate differential.
This leads me to the conclusion that the Fed can only stay put in order to shield gyrating markets from high volatilities.

A Possible Version of the FOMC Statement
The FOMC statement, scheduled for release on Wednesday at 2 PM, could therefore sound like this:
The Federal Open Market Committee decided today to leave its federal funds rate unchanged at 2 percent.
Recent information indicates that economic activity may remain weak until later this year. Household and business spending has been subdued and labor markets have softened further. Financial markets are expected to remain under exceptionable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Readings on inflation have been deteriorating further and high energy prices as well as other indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Investmentwise I hold on to my projection that growing inflation fears will lend even more support to gold and last Monday's whacking of gold may have been a good entry point. Either my wallet is lying or inflation is raging. I suspect the latter is the case.

Wikinvest Wire