The Day The ECB Died: The SUM Report 12-20 | QPOL Issue #29
How the Fed broke the ECB once and for all.
Last week the Fed raised rates by 50 bips which finally forced the hand of the ECB. Powell called Lagarde’s bluff. How? She can’t both protect the euro AND credit spreads because it’s a game of confidence and manipulation of narrative. What do I mean by that? I’ll explain below, but the TL;DR is the ECB is bankrupt and anyone who thinks they’re more credible than the Fed is on the kind of drugs I wish I was on right now as I write this because goddamn my ADHD is killing me.
A Crash Course on Bonds and Credit Spreads
The chart below demonstrates the ECB admitting defeat the day Powell raised rates. So what? I’ll explain with a little crash course on bonds and credit spreads. Full disclosure, I’m not an expert in any of this. I’m just a loud-mouth on the internet who likes to ask hard questions and call bull shit when I see it. Onward…
What we’ve got here is a fall of the credit spread between US 10yr debt (treasuries) and German 10yr debt. So what does that mean?
If interest rates/yields on a 10yr goes down, that’s a good thing because that means bond prices go up. Meaning, the value of that debt is higher and that sovereign nation’s credibility is higher, especially if we’re talking a 10 year bond.
However, there’s a difference between the above explanation and a “spread” between two different nations’ sovereign debt.
Before this “collapse”, the chart is implying that those peaks meant the yield on US debt (again at the peak) was 1.966% higher/more of a risk than German bonds. The perceived market risk (lie) is that Germany is lower risk.
Implications
It’s importance to understand that this isn't a US vs Germany situation. The issue is that the perceived risk of Germany being lower than the US is a lie, and it’s what Lagarde uses to justify the Euro being a safe haven. Her announcement of the Transmission Protection Instrument (TPI) was merely means to buy herself time.
News flash. THE EURO IS NOT A SAFE HAVEN!
Why isn’t the Euro A Safe Haven? Again, because they’re bankrupt. If at anytime the PIGS (Portugal/ Italy / Greece / Spain) experience a sudden bond problem because they're just running more & more debt, Lagarde basically plays whack-a-mole every day. She’s constantly intervening to make sure anytime spreads blow out on Italy to German debt, the ECB finds a way to plug that hole through different methods or pools of capital in the market they control like selling Italian debt to bail out German debt and vice versa, or simply printing more money. It’s a Fugazi.
A European country defaulting would bring down the Euro. So Lagarde is basically fighting for the EU’s life, she chose to defend the Euro and NOT the credit spreads because SHE CAN’T DO BOTH! Regardless whether or not the euro is high doesn’t mean shit…
Understand, it’s easy for Lagarde to maintain the issue with Greece and Portugal because those are small countries with smaller economies. So it’s not hard to plug their financing holes. Spain and Italy on the other hand are a different story. They are expensive to service, so they're going to cause capitulation of the EU if they go bust.
And so as that spread collapsed upon Lagarde caving, that meant investors lost confidence in the ECB and bought US 10yrs instead. US debt is simply more trustworthy of an investment and the Fed’s tightening policies are proving to be more credible because the ECB/eurozone is bankrupt.
A Bigger Picture: Capital Flight
So what does all this really mean? As I hammered home in a recent issue of QPOL, A Crisis of Capital Flight: The SUM Report 12-11 | QPOL Issue #28, capital flight is everything in geopolitics. It means capital has been leaving Europe for US and Lagarde is trying to BS her way from letting that happen. Davos wants to have the EU default on its debt, but they want to do it on their watch, not the Fed’s. As much as Lagarde has tried to keep yields down in Europe, that dam finally has broken last week. Where do you suppose that money is gonna go now? The cleanest shirt in the dirty laundry. America.
Powell’s policy is working as the world continues to be drained of offshore dollars which get more expensive every time he raises rates. He’s destroying Davos’ ammo to defend its controlled demolition and it’s desire to bankrupt the Fed. The ECB is dead. The Fed fulfilled its job. Bye-bye offshore dollar market.The Fed is off the reservation and with its aggressive monetary policy it will embrace monetary sovereignty once and for all, euro-commie colonialist trash be damned.
~ Phil Gibson
The Day The ECB Died: The SUM Report 12-20 | QPOL Issue #29
Thank you for the explanation! Q: Is the means by which the spreads are managed basically buying or selling very large quantities of either of the bonds in the spread?