Coordinated Central Bank Policies? Gartman Weighs In
Dennis Gartman is editor and publisher of The Gartman Letter, and a strategic partner with the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN) who lends his institutional insight to educate advisors and investors about trading gold in different currency terms.
Euro weakness is not at all uncommon these days and of course everyone everywhere knows that the ECB meets this week and everyone everywhere believes that the Bank shall have to put forth some sort of QE. It cannot do otherwise. The SNB’s action last Thursday was an anticipatory move by that central bank ahead of the ECB and we have to believe that the monetary authorities at both banks “winked and nodded” to one another, with the ECB signaling to the SNB that QE was coming. Yesterday, the Central Bank of Denmark moved to lower interest rates there, also in anticipation of some sort of aggressive action by the ECB. Perhaps the SNB’s decision was made without tacit approval or acquiescence by the ECB, but we have to believe that the SNF and the Danish Central Bank both would not have acted of their own volition; certainly they had to act because the Germans had signaled that it would be wise to do so.
The question then from our perspective is not whether the ECB shall move, but by how much and how materially it will move? The ECB’s problems as we have discussed here often is that it hasn’t a pan-European debt security upon which it can lean to effect monetary policy unlike the Fed, or the Bank of Japan, or the Bank of England, or the Bank of Canada, or the Reserve Banks of Australia and New Zealand or the Central Bank of Russia or the People’s Bank of China. These other banks have securities they can buy and/or sell, allowing the central banks in question to ramp up or diminish the sums of money in circulation at a moment’s notice. The ECB has to choose from a supply of national debt issues, all of which have different ratings, ranging from near junk to the highest possible quality.
So therein is Mr. Draghi’s problem. He would indeed like to unleash the hounds of monetary policy, but he’s no real hounds to unleash. Instead, he has a pile of small cats and little puppies, with one or two larger dogs from amongst which to choose. As we have said many, many times before and as we are saying here again this morning, we do not covet Mr. Draghi’s job, nor should anyone else. He has promised to do “Whatever is necessary” to keep the EUR intact and to bring monetary policy to heel, but the harsh fact of the matter is that the monetary and political unions were done badly from the outset and he and Europe are suffering now as a result. So, shall he ease monetary policy at this Thursday’s meeting? Of course he shall. He has no choice, but he hasn’t the weaponry at hand to do what must be done to bring deflation to a halt and the sad fact is that he and his associates shall disappoint the markets when all is said and done Thursday.