You know why Mario Draghi was such a competent central banker? Because he understood that the biggest part of the job was the showbiz. When he was the head of the European Central Bank, his most famous speech ever – the “whatever it takes” one, back during the eurozone crisis – was basically done off the cuff.
But it worked. And at pretty much every meeting after that, Draghi dared the markets to underestimate him. He did that by expertly managing expectations, and then confounding them almost every time.
I’m not a fan of central bankers in general (I think the moral hazard they’ve engendered in markets over the past three decades or more is a major reason why we are where we are right now). But whatever your view of the role, Draghi was good at it.
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The danger we’re learning today is that it appears that his successor, Christine Lagarde, doesn’t fully grasp the showbiz side.
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The ECB announced its particular bailout package today. Clever people who I pay attention to on Twitter actually thought the package was pretty good. The ECB didn’t cut interest rates, but rates are already negative. So arguably that wouldn’t have helped.
And when it comes to the banks, in effect banks were given a massive buffer to protect themselves against losses, and in turn, those banks are expected to prop up their customers with it. This is basically the same message that the Bank of England gave banks in the UK.
So, long story short, the ECB is saying: we’re fully behind the banking system, and we expect the banking system to be fully behind companies.
Thing is, Lagarde then rather fluffed the press conference. None of this was particularly clear and she also delivered a clumsy response to a question about the exploding gap between the yields on Italian government bonds and those on German ones. In effect, she said that’s not the ECB’s job, when in fact it very very much is the ECB’s job. She did backpedal on that later but the damage was done.
This of course, came on top of Donald Trump’s confusing and garbled travel ban message early in the morning.
What was the upshot? Markets still don’t feel that policymakers are ahead of this and they had a major, major panic today. The S&P 500 crashed at the start of the session and was closed for 15 minutes once again. The FTSE 100 closed more than 10% lower. All of the eurozone markets fell by even more.
What should you do about it?
Well, don’t panic. I refer you back to what I wrote this morning. The advice hasn’t changed.
The FTSE 100 is sitting well into bear market territory now. I’m not saying for a minute that it can’t fall further, but equally I fully believe that there are opportunities in there right now that in a couple of year’s time you’ll probably be happy you took.
We’ll be delving into those in coming issues of MoneyWeek magazine (and we even highlight some in tomorrow’s issue. Chances are they’re a good bit cheaper than when we wrote up the story – so subscribe here if you don’t already).
