What did Mr. Draghi say?

It never ceases to amaze me how the media (specifically CNBC) seems to consistently get it wrong. And, yesterday it seemed to be almost intentional. Wednesday, March 9, all were eagerly awaiting Thursday morning’s European Central Bank (ECB) policy pronouncement. When it arrived via ECB Chair Mario Draghi, the markets in Europe and the US stood and saluted. They cheered with many terming it a “Bazooka”, strong medicine for what ails Europe. Of course, that was before the market turned lower around 10 AM (EST). At the high yesterday, the Dow Jones Industrial Average was up 116 points. By 2 PM it had swung 295 points lower, down 179 points on the day. What happened? The talking heads and pundits began to parse Mr. Draghi’s policy statement.

Why? It’s what Mr. Draghi said!

“We don’t anticipate it will be necessary to reduce rates any further.” — (Mario Draghi)

This is part of what he said and it is what the media glommed onto to make the leap from what seemed to be a pretty bullish policy statement to a mind-numbing move to the dark side, triggering big moves down in Europe and US stocks. The snap conclusion was that the ECB would do NO more to stimulate (or, some said could do no more to stimulate) … game, set, match … La Fin. Here is another clip from Fast Money contributor, trader, Tim Seymour, taken at midday to reflect this sentiment.

I know that there will be those who read this who will react in the following manner: ‘Told you so’ or ‘just blowing up a huge bubble’ or ‘the world economy is toast’. To all I say, “you may be right.” My bet is that this ends with significantly higher inflation. The only question is ‘When?’ not ‘If’? And, if I am correct, the key to protecting yourself in an inflationary environment is owning assets. Stocks are assets that benefit from inflation. However, I’m agnostic. If not stocks, you need to own some type of assets. Be not a lender! Again, I cannot time inflation rearing its ugly head, but the money printing that is currently under way is a good precursor.

But, what did Mr. Draghi say in addition to the above quote?

“We don’t anticipate it will be necessary to reduce rates any further. Of course, new facts can change the outlook.” — (Mario Draghi)

This sounds very much like Fed-speak, ‘data dependent’. The latter part of this quote was conveniently omitted from the rest of the commentary yesterday. In fact, CNBC reporter, Bob Pisani, did a recap of the day’s trading, citing the first half of the quote as the prime reason. He even played a clip of Draghi’s complete quote, with him referring to the bit about ‘new facts’ changing ‘the outlook’. It seemed pretty clear to me that the ECB could do more if necessary. But Pisani refused to frame it that way.

They failed to mention, potentially the most bullish element new program.

BANKS GET PAID TO LEND!

Here, according to the New York Times, is the program (E.C.B. Takes Bold Steps to Stimulate Eurozone Economy):

• The new approach, being paid to lend, will apply to a special program that allows banks to borrow money for four years, provided they lend the money on to consumers and businesses.
• Initially banks will pay zero percent interest, the new main benchmark rate. But if the commercial banks meet certain criteria, they will get a bonus of 0.4 percent annually on the value of the loan after two years, applied retroactively.
• Theoretically, banks would be able to refinance up to 30 percent of their loan book under this new arrangement.

If there is continuing severe pressure on European banks due to credit issues, the 30% refinance provision should provide some relief. The pay-to-lend provisions should provide strong incentive to make new loans at attractive rates.

Obviously, the message to some will be, ‘Europe is worse off than we thought’. I don’t buy this. It is Europe finally taking measures it should have taken more aggressively after the 2008 financial crisis … making up for lost time (stagnation). Having said all this, I have to give credit where credit is due. CNBC morning anchor, Brit, Simon Hobbs, seems to have really gotten it right! Watch this clip, it is very much worth your time. BTW, Hobbs made this comment early in the trading day. The rest of the organization chose to ignore his point of view. Is it because it didn’t bleed? It did not accentuate the negative?

What do you Think?

P.S. The market seemed to get this later in the day with both the Dow and S&P 500 closing virtually unchanged.

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