Playing with fire: Not so Super Mario disappoints investor’s by failing to deliver new bailout measures

ECB President Mario Draghi, aka Super Mario, disappointed investors yesterday when he failed to deliver any new bailout measures. As a result of the central banks lack of action markets across Europe and Asia tumbled, and Spanish and Italian bond yields shot back up to dangerous levels.

President of the European Central Bank (ECB), Mario Draghi, who has previously been dubbed “Super Mario” for his decisive action on the Eurozone debt crisis, disappointed investors yesterday by failing to deliver any new bailout measures. Speaking at a news conference in Frankfurt, Mr Draghi said that the Governing Council “may undertake outright open market operations of a size adequate to reach its objective.”

He went on to say, “Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.”

The vague nature of Mr Draghi’s language angered invertors who had hoped that he would deliver on last weeks promise to do “whatever it takes” to save the euro.

As Bloomberg reports, “a bargain is beginning to emerge between Europe’s politicians and central bankers over how to calm bond markets and end the debt tumult that threatens the euro’s survival.

The European Central Bank sketched out its side of the deal yesterday, offering to buy Italy’s and Spain’s bonds on the market as long as the euro governments’ bailout fund makes purchases directly from the two countries’ treasuries and ties them to tough conditions.

ECB President Mario Draghi offered only a glimpse of the new strategy, with the actual interventions weeks or months away and a host of obstacles standing in the way before Europe can claim to be on a path out of the crisis.”

Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London, said, “All of the announcements, if transferred into actual activity, would be close to the big bazooka approach that the markets are looking for… Market disappointment is hardly surprising in this context but we may well find this lays the groundwork for the grand plan in coming weeks.”

William Hoffman, a private investor and macroeconomic strategist from London, told 247Bull that, “Draghi is playing with fire… the ECB is the only institution capable of putting a lid on Italian and Spanish debt yields and it’s within its mandate to maintain price stability, which in this context means preventing deflation, since a breakup of the eurozone would trigger a major banking crisis which would be highly deflationary. The longer he leaves it [money printing] the more dangerous that threat becomes.”

In any event the ECBs decision to leave interest rates unchanged at 0.75%, and to delay major intervention sent markets into a tailspin.

After the press conference European markets fell sharply, with Spain’s IBEX falling 5.16%, Italy’s MIB falling 4.64%, the CAC dropping 2.68%, the DAX declining 2.2% and the FTSE 100 ending the day down 0.88%.

Spanish 10-year bond yields also shot up, rising back above the 7% danger level.

The bottom line

Politicians take the path of least resistance and so do asset prices.

With that in mind, and since inflation is significantly more palatable that deflation, we are confident that global central banks are about to embark on a period of unprecedented money printing.

Their actions will turn a sovereign debt crisis into a currency crisis which will send the nominal value of all assets higher. The real winners however, will be hard assets, in particular precious metals such as gold and silver, whose values are likely to increase several fold as investors clamour to reach the safety they provide.

For more information, see The 247Bull investment strategy.

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