Justice Litle, Editorial Director, Taipan Publishing Group
Monday, 14 February 2011
Three men resigned last week — two from their current posts, and one pre-emptively (more or less) from a job he was expected to take.
All three moves will have an impact on financial markets. So let’s take a look…
Resigner No. 1: Hosni Mubarak
There was a moment of drama on Thursday as Hosni Mubarak, Egypt’s embattled dictator — sorry, Joe Biden — refused to announce he was stepping down as the world anticipated.
After a rambling speech by Mubarak on Thursday night, in which the words “I quit” or “I hereby resign” were not spoken, there were fears of new chaos and protester outrage. The CIA (Central Intelligence Agency) looked openly perplexed and the WSJ spoke of how the situation was “slipping out of control.”
But then Hosni had a change of heart. Either that, or someone twisted his arm damn hard (probably the latter), because on Friday it was, indeed, confirmed that Egypt’s 30-year ruler would step aside.
As Egyptians rejoiced in Tahrir Square, the price of oil dropped like a stone. The threat of new buildup in the geopolitical “fear premium” — a heavy weight to take into the coming days and weeks — had suddenly been lifted.
In the short run at least, Mubarak’s exit has given room for markets to embrace a new “risk on” bid as the threat of Middle East turmoil fades.
This does not tell us how things will play out in the medium to longer term, and it certainly does not rule out new complications. But Mr. Market is more likely than before to breathe an extended sigh of relief — and continue in his U.S. recovery-oriented ways.
Resigner No. 2: Kevin Warsh
The second man to resign, Kevin Warsh, was considered one of the last remaining “hawks” on Federal Reserve Board of Governors.
Mr. Warsh, who will step down at the end of March, was previously an aide to President Bush and an M&A specialist on Wall Street — and, more importantly, one of the few dissenting voices on “QE2″ (quantitative easing). As The New York Times observes,
[Warsh] was the only governor with close ties to Republicans in Congress and to conservative organizations, like the Hoover Institution.
With his departure, the Fed board loses that link to conservatives at a time when conservative economists and some Republicans on Capitol Hill are sharply critical of the Fed chairman, Ben S. Bernanke, and his policies.
The central bank looks to be increasingly dominated by so-called doves, who emphasize policies intended to create jobs and economic growth equally with fighting inflation, rather than those known as hawks, for whom stable prices and low inflation are paramount.
With Warsh on his way out, we can expect further domination of the doves, as the president’s replacement will certainly be dovish also. This increases the odds of prolonged low interest rates, a continued relaxed stance in the face of stealth inflation pressures, and a greater likelihood of “QE3″ if it comes to that.
Given that Wall Street is to stimulus as Rush Limbaugh is to OxyContin, the news of Mr. Warsh’s departure will only be celebrated by the bulls. It is another case of “eat, drink and be merry,” for tomorrow is too far away to worry about when paper profits can be accumulated here and now riding the wave of cheap and easy money provided by a blind and morally compromised Fed.
(This isn’t the first time I’ve spoken about the Federal Reserve. Sign up for Taipan Daily to receive all of my investment commentary.)
Resigner No. 3: Axel Weber
The third man on our list is a bit of an odd duck: Axel Weber, president of the Bundesbank (Germany’s Central Bank).
Mr. Weber had long been considered next in line for the job of heading up the ECB (European Central Bank) when the current president, Jean-Claude Trichet, steps down.
Angela Merkel, Germany’s Chancellor, had also put great hope in Mr. Weber as a source of political stability. We’re nervous Germans to see a fellow inflation hawk and sound money advocate running the ECB, Merkel’s people reasoned, they would then feel better about the fortunes of the euro.
But now Mr. Weber has taken himself out of the running for the ECB job, much to Chancellor Merkel’s annoyance and dismay. She is likely to boot Mr. Weber out of his Bundesbank job in payback.
So why the shift? Because Weber is hard and rough where an ECB man need be soft and smooth. As Bloomberg reports:
Where Trichet is smooth, Weber’s public objections to buying bonds and cutting interest rates suggested he placed the primacy of his own views on beating inflation and maintaining central bank independence above the need to appease politicians or strike a consensus with colleagues.
“It’s like he’s wanting to prove he’s not the right person,” said Christoph Kind, head of asset allocation at Frankfurt Trust…
“Not the right person” indeed. Given his stance as a hard-nosed inflation fighter in keeping with Bundesbank tradition, Mr. Weber may have realized the ECB job would require him to flush his principles and ideals down the toilet.
The man to next head the European Central Bank will be in charge of a can-kicking dog-and-pony show, and will quite possibly need the glib demeanor of a used car salesman, in attempting to convince the world the euro is not being trashed and debased, even as further back-door bailouts accomplish exactly that.
As we have written in the past in these pages, Europe has no clear exit from its ongoing sovereign debt crisis other than an ugly program of monetization and devaluation. The credibility of the ECB, and the soundness of the euro itself, will have to be sacrificed for the sake of saving the peripheral economies.
The only alternative, when it comes down to it, is for the debt-burdened collapse of one periphery country (Portugal? Spain? Italy? Ireland?) to create a domino chain of collapses and/or defaults, in which the whole project goes belly up anyway.
Mr. Weber, being nobody’s fool, may see the writing on the wall — in which case it would count as good Teutonic sense to say he’ll have no part of that, thanks very much.
And so we have a hat trick of bullish implications for the near term, but at least two of these shifts boding ill for the longer term… and possibly all three, given we don’t know what Egypt’s next regime will be. (Democratic Islamic Republic anyone?)