Suddenly what was discounted as a potential “isolated event” has come full circle to show just how contagious it may very well be. e.g., Greece.
Over the last few months the financial media has not only turned deaf ears to the drama, (out of boredom) they have also blindly discounted any contagion effects as “isolated” at best – relative periphery contagion at worst. In other words: Any and all problems can be contained, mitigated, or solved by none other than your friendly neighborhood Central Bank. After all, if you listen to the so-called “smart crowd” these bankers have powers even Zeus would envy.
So why worry about a little turmoil at the foot of Olympus? After all, the gods haven’t been seen nor heard from in millennia. Central Bankers give press conferences live and in person. Thunder vs a press conference? No contest in today’s role for proving omnipotence. All one needs to remember for proof is Mario Draghi’s now famous chortle of “having a bazooka and willing to use it.”
However, just as in any hero-worship endeavor one thing must remain constant or it all falls apart. Those that worship can never witness any event regardless of how minor: that the gods are not all that they portend to be. In other words: Allow just one moment of truth to be witnessed showing frailty instead of omnipotence – and the whole ruse falls regardless of the size and strength of the monuments and temples built to honor. For they will be abandoned. Sometimes slowly. At others: all at once. It doesn’t take much.
A great analogy to express this was portrayed in the movie sequel Iron Man 2 (2010 Paramount Pictures) when the characters played by Mickey Rourke, and Robert Downey Jr. are conversing in a cell about the who, what, and why of Rourke’s rampage at the speedway. Everyone in the room seems content with the idea or fact they contained or stopped Rourke’s character Ivan Vanko in his tracks. Yet, as Rourke explains to a mystified Tony Stark played by Downey. He had already won and it was Stark who didn’t understand as he explains: [laughs] “If you could make God bleed, people would cease to believe in Him. There will be blood in the water, the sharks will come. All I have to do is sit back and watch as the world consumes you.”
This onerous theme as well as implications just might be playing out in Greece. Only this time, it’s not in a fable, or on the big screen. Rather – it’s in real-time with real consequences for the financial markets as a whole.
In my opinion the utter faith in Central Banks has never been more enshrined within not only Wall Street, but the world as a whole by media, politicians, business leaders and in some ways the general public at large. For it’s no longer seen as “what a politician will do to enhance the business environment” rather it’s what the Central Banks are doing. Central Banks have morphed into exactly what they were supposed to be the antithesis of: The political.
Central Bankers can disavow till their blue in the face that they don’t engage in politics. However, it is not lost on anyone that a president or other political leader can discuss all they want about their nation and their economy. Yet, for all intents and purposes – its moot. Today, it’s the Central Bankers that move markets, garner headlines, as well as carry a bestowed political relevance with their proclamations. Not the other way around.
One doesn’t need any more proof of just how high of a pedestal Central Banks have been put on than the meme that is now recited in style and reverence resembling a chant or incantation when any potential market hiccup occurs: “The Fed’s got your back.” Now that meme as I inclined before has shifted from the financial markets – to the political.
I use as example the following headline from Bloomberg™ this past week: “ECB Has Your Back If Greece Breakdown Tips Markets Into Turmoil.” Or said differently: The fate of nations will rest upon the shoulders of the Central Banks.
Whether one agrees or disagrees with Greece’s financial predicament within the Euro Zone (EZ) one thing is clear above all else. It is not the political will and discourse that will decide whether or not the European Union will hold together. It will be whether or not the ECB can save the political from itself. i.e., Ring fence any potential contagion effects to the periphery.
This was once the place of the politicians. Not any more. That is now subjugated to the monetary policy arm. And it’s a dangerous switch in my opinion for this reason: Banks or bankers omnipotence (or faith there of) rise and fall on one thing – and one thing only: their ability to respond and project control of the money. But (and it’s a very big but) money is only one part of the political arsenal. Important of course. But again, it’s only a part. On its own it can cause more problems than it can solve.
Politicians (as a general rule) control so much more that can be used to bluster or fortify a meme or intent. i.e., the people, the laws, the nation as a whole, the taxes, it’s war machine, etc., etc. It’s not a distinction without a difference. An example can be: You can have all the money you need to buy off an adversary – but without an army willing to protect you, they might come back and take what you have left. Or worse, convince your army to join them and split the bounty.
Pure monetary warfare or monetary political maneuvering is more susceptible to unforeseen consequences that can backfire more than almost any other. Remember my example earlier from the movie: All one needs to do is show “they can bleed” and everything changes. And I do mean everything!
Whether or not Greece defaults or exits the Euro Zone is an unknown as I write this. However, no matter what one thinks about whether or not it is right or wrong is inconsequential. The real underlying issue that has other nations within the EZ itself watching is whether or not Greece inflicts a wound to the Central Banks for all to see. Because Greece, for all the hardships it may entail will still be a nation one way or another. Possibly with new alliances (e.g., Russia) in which bankers miscalculated the political ramification focusing only on the monetary as if it were the only issue to be considered. Greece may in fact make alliances that benefit it far greater. It’s an unknown. However, it will be watched very carefully by others.
Italy, Portugal, Spain, and who knows who else will be looking and watching carefully for the slightest showing of injury that may rock the Central Bankers (particularly the ECB) back onto their haunches. And if that were to happen the shift in intellectual thinking (i.e., political gamesmanship) as well as monetary positioning will ripple through the financial markets in ways none of us may be able to comprehend at this time. Especially the bankers themselves.
Add to this the perfect storm that may be brewing elsewhere in places like the once “savior of the world economy” China. Where it too may need to put its own central bank through the test of omnipotence with a potential stock market meltdown of near biblical proportions now brewing. Where a decline of 50% would be seen as a godsend rather than what might be building. Not to say anything about the impending implications of a raising of rates in the U.S.
So much for the meme Wall Street mavens have recited ad nauseam “China will lead us out of the economic malaise.” Sure they will. How’s that been working out? Banks in China today are scrambling trying to quell jitters reverberating within both the markets of Asia as well as the political. And now there’s potential on top of this for an EU break – as well as contagion fears? No problem if you’ve been listening to the financial mavens: “Just be diversified.” Yeah, sure.
Already this weekend only hours in FX brokerages have already began issuing “close only” mandates to account holders in preparation of a final EU determination on Greece this weekend. A lot of good “diversification” is if you can’t put on the trade to begin with because out of the blue brokers in the most liquid, and vast market place begin gating their doors. But the pontificates via the next in rotation fund manager on (take your pick of networks) never eludes to such a possibility.
And speaking of gating, don’t forget that little line along with its new regulation you now see on every “money market” statement where you have “money” or “cash” allocated. The market that basically controls and is intertwined within all the markets globally. Probably the most important single market to structure stability as a whole. e.g, The Money Market.
And to what line(s) am I referring to you ask? Well for those that don’t remember (or don’t bother to open their statements) let me highlight it here. To wit:
“Money Market funds are not insured or guaranteed by FDIC or any other government agency and although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose by investing in the fund.” Ah, yes, as important as that line might be, the more important yet overlooked is the new regulations that allows those funds to “gate” your ability to access. Gate as in – No… you can’t get at it.
If the markets for whatever the reason do suddenly show signs of contagion fears (or actual contagion) and things once again startle even the most prevalent Central Bank devotee. Don’t be surprised if people begin eschewing the knocking of their heels three times repeating “I believe, I believe, I believe.” And instead take steps to not only walk, but run to that dispenser of truth not found in any confessional booth. i.e., ATM machines everywhere.
For the true test of Central Bank omnipotence may be upon us. All once again, a test that’s held at the foot of Olympus. What irony.
© 2015 Mark St.Cyr