Insiders say the European Central Bank (“ECB”) is about to break the No. 1 rule in portfolio management.
Ironically, the rule is… don’t break the rules.
Regular Chaikin PowerFeed readers know that a disciplined approach is critical to investing success. Creating rules – and sticking to them – keeps us from wrecking our wealth.
Rules exist to help us create a repeatable process. That way, we can replicate the things that work – and avoid those that don’t. Good investors know not to break the rules.
And yet, the ECB is about to break the biggest rule of all.
More specifically, its transgression involves Germany’s financial-stability rules…
You see, one of the most important rules for government financial institutions is, “Don’t risk the integrity of the financial markets.”
Put simply, that means countries should make sure money always flows safely and easily through their economies. That basic structure keeps business operating as usual.
But the ECB could soon tamper with that foundation. And while the outcome might take time… it could potentially ravage the German economy – and the rest of Europe, too.
It all comes down to so-called “reserve amounts.” That’s how much of your moneya bank actually keeps on hand. And this is where financial-stability rules come in…
These rules are in place to protect your money. The government tells banks they need to always keep a specific amount of money in reserves. The banks can’t lend out that money.
The government decides how much money banks need in reserves every day. And when countries head toward uncertain times, the rule is that banks should start increasing their reserves.
That’s in case more people need to dip into their savings to make ends meet.
Given the energy crisis in Europe, several countries are facing tough times. And in Germany, some banks are already building up reserves.
Despite that, central-banking insiders believe the ECB is about to tell German banks that they don’t need to increase their reserves.
Messing with banks’ capital buffers could have long-lasting consequences. In the short term, it allows the banks to lend more easily. But a cold winter – literally and metaphorically – could present a serious challenge for the banks…
After all, a lot of Germans might need to quickly access their money as energy costs surge.
It also signals a shift to desperation…
As an investor, you don’t consider breaking your rules until you’re at a point of desperation. And if the ECB is willing to risk destabilizing its financial system for a short-term bump in economic activity, it must be very desperate.
It makes me wonder what other basic financial-integrity rules the ECB is willing to break.
And just like you wouldn’t pick a portfolio manager who breaks his own investment rules, you don’t want to invest in a region that breaks its own financial rules.
The ECB is bending the rules for Germany. That’s a worrying sign for the German economy and its stock market.