Thursday’s statement from the European Central Bank just blew my head off.
Read this: “The Governing Council plans to raise interest rates further to dampen demand and hedge against the risk of a persistent rise in inflation expectations.”
What is that? Board of directors” ? It looks like something out of “Star Wars”.
And then this:
“As the current drivers of inflation fade over time and the normalization of monetary policy trickles down to the economy and pricing, inflation will come down. Looking ahead, staff at the ECB has significantly revised its inflation projections upwards and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.”
I think these people have no idea what they are doing. This is Europe’s “Minsky Moment”. The combination of Russian President Vladimir Putin’s aggression and the recklessness of the ECB and its leader Christine Lagarde – and decades of bad decisions in Western Europe regarding power generation – has produced a very, very bad scenario.
But how is this possible? Where could this inflation come from? With a rate hike of three-quarters of a percentage point across the board, the “Governing Council” of the ECB shows how extraordinarily late it has been for the inflation party. The ECB has three main interest rates. According to the ECB website:
The deposit facility rate is one of three interest rates that the ECB sets every six weeks as part of its Monetary Policy. The rate defines the interest banks receive for depositing money with the central bank overnight. Since June 2014, this rate has been negative. There are two other key interest rates: the rate of our main refinancing operations (MRO) and the rate on the marginal lending facility. The MRO rate defines the cost at which banks can borrow from the central bank for a period of one week. If banks need money overnight, they can borrow from the marginal lending facility at a higher rate.
So here is. On Wednesday, there was still completely free money handed out by an extraordinarily powerful central bank. The world of novelist John Kennedy Toole is now upon us. We really live in a “confederacy of dunces”. The ECB has been handing out free money (with negative rates, it’s actually cheaper than free, although it’s a sieve, conceptually speaking) for over eight years, but now — now?! — they are surprised at inflation.
It’s really scary and it’s time to enter the evil empire of leveraged ETFs to try and profit from the European implosion. These are not titles that I usually buy for my clients. These are names that I usually throw in my Robinhood account for a few days. But now is the time to buy leveraged short-term European exchange-traded funds as protection, not just as speculative vehicles, and I’m shopping around for my clients today.
So, one of my favorite ETF sponsors, ProShares, offers the UltraShort FTSE Europe (EPV) ETF, a two-time leveraged short play against its underlying index, which is the FTSE Developed Europe All Index. Cap. The preparation for the Minsky moment in Europe has obviously been horrendous for the euro, as it has fallen 14% against the dollar since the start of the year. But I’m a stock jockey and I leave the macro trades to others.
The European economy is decimated. If your company produces houses, cars (I tracked the European auto sector for five years for DLJ and UBS) or any other tangible “stuff”, your margins are about to be underwater. On that note, this March wasn’t the best time to open a massive new factory in Germany, like Tesla (TSLA) did in Gruenheide, but Elon Musk is still marching to the beat of his own drummer.
It’s bad there. Buy EPV and protect yourself from the idiocy of European technocrats and earn a few dollars, doing it, Cheers!