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The Whaley Report: Captain Prediction

There is nothing more useless than making bold predictions without any data or reasonable logic to back them up. You know who I’m talking about: the guys who are constantly making big predictions, hoping one will turn out to be right so that they can circle back and say “I told you so.”

Within hours of the European Central Bank’s monetary policy meeting last week, I saw one such prognosticator doing his best Babe Ruth impersonation, calling the bottom in the euro and saying, “The Euro will be going to 120 [i.e.$1.20 USD] if not higher.”

I don’t usually find it necessary to comment on such ludicrous stances, but something about this guy’s self-proclaimed “insight” hit me sideways.

Each week, I give a well thought-out case for a given market perspective and I always back that perspective with data. It drives me nuts when I see market-related articles with as much value as the nutrition in a Twinkie. You eat enough Twinkies, you lose a toe to diabetes. Likewise, following the investment advice of “prediction” commentaries could cause your portfolio to lose a whole damn leg.

So, to Graham Summers, a.k.a. Captain Prediction, I’d like to thank you for providing my readers with a learning opportunity. I promise to be as gentle as I can, but it’s woodshed time.

Action Speaks Louder

Captain Prediction starts by writing, “The European Central Bank (ECB) just announced it would be tapering QE.” Erroneous Captain, erroneous on all counts. C’mon Captain, you’ve got to read past the headline if you want to play this game at a high level.

Look, I don’t know where this cat went to school, because he’s not willing to share his bio, but the ECB’s stance last Thursday was anything but tapering.

Graham—and others who interpreted the ECB’s action as a taper—focused on the fact that rather than maintaining its asset purchase rate at €80 billion a month, the ECB is dropping it to €60 billion, starting in April.

However, certain “experts” missed a major point: most investors were expecting the ECB to extend its asset purchases for six months, but instead it is extending them for nine months. Now, I know math is hard for some folks, but the last time I checked, nine times 60 billion was more than six times 80 billion.

So the ECB is going to buy €60B more assets than investors were anticipating. Not only that, but it expanded the range of maturities it can buy. This is critical because it makes expanding the size or duration of these asset purchases in the future much, much easier.

Lastly, the ECB removed the minimum yield requirement, so now it can buy bonds with any yield it wants, including bonds yielding less than the ECB’s deposit rate of −0.40%.

You don’t take these actions unless you are fully prepared to deploy more capital and know that you may need the extra inventory to purchase.

And if that isn’t enough non-taper reality for you, Draghi ferociously defended the fact that tapering wasn’t even discussed. “… a sustained presence is… the message of today’s decision… that’s why tapering was not discussed.” When he was asked if the ECB would taper if economic and inflation data turned favorable, he responded, “We haven’t discussed that at all today. We seem to be fairly far away from any such high-class problem.”

I’m not sure how anyone can misconstrue the ECB’s actions. The euro clearly got the message, declining more last Thursday than the day after the U.K. voted to leave the eurozone.

Landon Whaley

Landon Whaley is the Founder and CEO of Whaley Capital Group. Mr. Whaley launched Whaley Capital Group in the aftermath of the 2008 Financial Crisis because he wanted to provide real value and a unique client experience in an otherwise highly commoditized industry. Whaley Capital Group delivers on this mission by following a rigorous investment strategy that is committed to a global macro-style of investing, while simultaneously providing a world-class, boutique-style client experience. You can contact Landon at: landon@whaleycapitalgroup.com