Watch European Central Bank for Opportunities to Make Money on Policy Moves
NEW YORK (TheStreet) -- Mario Draghi, President of the European Central Bank, has just announced new moves by the ECB to combat the possibility that the eurozone will fall into a deflationary cycle.
He has lowered the interest rate the bank charges for refinancings from 0.25% to 0.15% and has pushed its deposit rate from zero to a negative 0.10%.
These moves were expected by the financial markets and so there should not be too much market fuss over the actions.
But, this does not mean that investors have already taken positions to take advantage of the ECB policy changes.Some people have already acted in anticipation of this news: see "Hedge Funds Anticipate Euros Will Fall" for an example. This is what can happen when central bankers and policymakers "have" to act to "save the system." Tim Geithner, former U.S. Secretary of the Treasury, speaks to this in his new book Stress Test. Geithner discusses actions that were taken in 2008 to create a "put" to protect large commercial banks from failing; for more, see pages 311 to 314. But here is the gist. Geithner writes, "The hedge fund manager David Tepper later told the press that in February 2009.... his Appaloosa Management fund began buying bank stocks, because he read our public statements and thought our strategy sounded sensible." The result: Tepper, according to Geithner, made "billions of dollars" -- not millions or thousands! "Of course, our goal wasn't to help Tepper make billions of dollars for himself and his investors. Our goal was to get the economy growing again and that required stabilizing the banks so they could start lending again." George Soros could likely tell a similar tale about his adventures with the British pound in the 1990s. The story currently taking place concerns the perceived need of the ECB to take action to keep the eurozone from falling into a deflationary cycle, while at the same time the Federal Reserve System in the U.S. is going though the process of "tapering" its purchases of securities. That is, the ECB is seen as loosening up on monetary policy, whereas the Federal Reserve System is restraining monetary policy from being as loose as it had been.
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