You're now on the archive server. Commenting has been disabled.
A Comparison Of Liquidity Expansion Efforts In The Eurozone And The US - Implications For The Euro-Dollar Trade
With the vast majority of analysts focusing on American monetary expansion, few if any seem to be looking at what the monetary situation is in the Eurozone. Alternatively, looking at relative strength of the dollar vs the euro, one may suggest that aggressive monetary expansion is the only factor that needs to be addressed. Some highlights of European monetary aggregates confirms just that (especially when juxtaposed with American counterparts), and present several questions: i) when will Europe catch up with the US in expanding various monetary bases, and ii) what will happen to the EUR once the ECB realizes that it needs to recreate the Bernanke Moral Hazard Doctrine and start expanding monetary circulation to the same extent as the Federal Reserve already has?
M2 and M3 are the broadest monetary aggregates tracked by central banks. While the US no longer tracks M3, the Eurozone has been kind enough to continue supplying this information. As a reminder, the ECB M3 comprises of the following: Currency in circulation, Overnight deposits, Deposits with an agreed maturity up to 2 years, Deposits redeemable at a period of notice up to 3 months, Repurchase agreements, Money market fund (MMF) shares/units, and Debt securities up to 2 years. The last three are components only of M3, not of M2, and comparably so in the US. As we have presented previously, both repo markets and money markets are among the most critical marginal components of monetary aggregates: due to the rapid fluctuation in these datasets, especially in the post-Bear Stearns period, keeping a perspective of how they are intertwined with other monetary proxies is more critical now than ever.
Below is a chart demonstrating the plunge in the ECB's M3: the year over year collapse in this most comprehensive aggregate has been unprecedented, with just a 1.7% increase over the prior year period. This is the lowest M3 expansion in the last three decades! It appears Europe's efforts to add incremental liquidity are failing completely, or have yet to be implemented. Is it thus any wonder why the dollar-euro relationship is so skewed? The message at all those G20 meetings seems to have been that only Bernanke is allowed to inflate assets, with the dollar being the sacrificial lamb, while no other central banks are allowed (or expected) to do a comparable balance sheet expansion.
This begs the question: does Europe anticipate not having budget deficits of the same magnitude as America, and if the answer is that it does, then does Brussels expect to simply raise taxation massively to compensate for budgetary drop off? As this is political suicide, it is likely only a matter of time before the ECB is forced in the same bad as the Fed, and starts monetizing like a Ben Bernanke on crystal meth. Furthermore, with certain European banks still having leverage and capitalization ratios that are soundly greater than their respective GDP's, the thesis that monetization is merely a matter of time is reinforced further, as debt inflation will have to occur elsewhere as well. Thus the only open question is: why is the ECB delaying so much? And the answer is that everyone seems to be avoiding a race to the bottom at the same time, and instead a concerted attempt is made to have sequential currency devaluation. The ECB presumably expects that fringe economies will continue to be bailed out by the IMF with fallout being mostly contained to the core of the ECB before it also is forced to put the Heidelberger druckmaschinen on turbo overdrive.
This conclusion is justified by an apples to apples comparison of European to US M2 comparison: the broadest moentary aggregate made available by the Fed. First we present a relative comparison of the European M3-M2 delta.
What is notable here is that the M3 exclusive components in the ECB seem to be taking precedence, which is expected - repos and money markets are contracting rapidly for a variety of reasons, comparable to what we have discussed as the parallel dynamic in the US. However, the overall broad pattern in movement between M2 and M3 is consistent, and is indicative of a major collapse in monetary aggregation, and an inability to flood the markets with excess liquidity.
How does ECB M2 and US M2 compare:
It is evident that after a period of time in the mid 2000s when the Eurozone was playing catch up with the US by pumping massive amounts of liquidity in a cheap funding environment, characterized by dollar-denominated asset purchases, the last year has been a dramatic reversal. While the delta has not hit the all time wide, set in 2001, the most recent reading indicates that M2 growth in the Eurozone has been virtually throttled. An observations again from the early 2000's indicates that this seems to be the ECB's MO: initial relative reduction in monetary expansion (relative to the US) and when all signs turn green, followed up with a massive liquidity expansion.
The take home message here is whether the ECB will be correct in its assumption that the current episode is comparable to the one experienced in the beginning of the decade. In other words, with monetary expansion cut off at least temporarily, will the ECB have enough time to turn on the printing presses sufficiently far down the line before the debt overhang problem in Europe becomes as staggering as the comparable one in the US. Yet with Europe not faced with a CRE cataclysm of the same magnitude as the US, it would appear Trichet has the benefit of at least some additional time. And that is the current bet driving the high euro, low dollar trade. In the meantime, if an unexpected "domino effect" event occurs in Europe, and the ECB is forced to urgently take monetary matters into its own hands by rapidly expanding the M2, look for the euro to tumble, and do so with a speed unmatched before, compliments of the dollar being the current carry funding trade, with trillions of shorts needing to be unwound on very, very short notice.
»
- 5173 reads
- Printer-friendly version
- Send to friend
Similar Articles You Might Enjoy:
- Surging Libor-OIS And Cross Currency Basis Swaps Indicate Europe's Response Is Too Little Too Late
- Roubini Blasts "The Barbarous Relic," Recommends Spam Over Gold
- The Latest Move in Bullion: Something's Gotta Give
- Today's Economic Data Docket - Initial Claims, ECB Keeps Rates Unchanged
- An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility
yes it looks like deflation.
so what, i don't understand the logic of your argument ?!
Ah shit. Looks like I'll have to put my "Dow 10,000" t-shirt back in the closet.
I am thinking you can wear it on Friday 10/30/2009.
We've reached a tipping point where neither consumer nor government has real capacity to take on new debt. Even though the government is still trying the decline in consumer demand and ability to support debt is the stronger force. What does this mean? It means that Ben's policies don't work. When interest rates are lowered to zero the goal is to spur lending and consumption, that isn't happening. When that happens what you get is bubbles everywhere. The money has to go where it gets the best risk/reward return. That is not the consumer. All Ben can do now is to chase money out of the dollar and into foreign currency, foreign bonds, foreign markets, domestic bonds and domestic markets. This chasing yield if funnier money than the paper Ben creates hence bubbles bubbles everywhere.
Ben thinks he is avoiding the Great Depression but he is really ensuring it. A better policy would be explicit public announced buying of SPY. Let people buy and sell stocks using the profits to pay their mortgage. This would funnel money to the consumer who is willing to spend it not just move it around chasing yield.
But what do I know. I don't have a PHD in economics nor a nobel prize. Just a lowly degree in reality.
This all goes back to Bubble-Nanks not fully understanding the scope of this recession/depression. I believe his response to date, which was based on his study of the Great Depression, would have been successful in stemming the tide if the downturn had been consistent with his initial assessment. However, given what the world economy is faced with, and the response to date (i.e., pissing away billions by the day), i agree another Great Depression is assured.
Excellent post.
The "sequence mentality" is based on China importing materials from developing Asia, China making consumer goods for sale in America, and the EU providing capital goods to China.
Policymakers are caught with their pants down, because American consumers are done. It's over. But G7/10/20 lacks the vision and character to reconfigure. So the world will buy US treasuries, forcing yields down, giving the US more room for action.
Europe (and GE) is faced with an emerging market cataclysm which leaves them a CRE-style implosion with even less ability to exercise collateral.
+1
Germany and Austria in particular have huge exposure to Eastern Europe. Could get real ugly, real quick....
so what? Germany has East Germany for long time. Do you want them to drop it as well? There are more issues at play than simple profit driven anglo-saxon capitalism
I think he means further east; Latvia, Lithuania, Estonia, as well as the Scandinavians who invested heavily in them.
Looks like global deflation continues. Just give it a few more weeks for the bubbles to pop.
Three words: Fed. Swap Lines
Carry on..
MS
It appears that some of the big boys may be betting on all of those short dollar bets needing to be unwound rather quickly, as I just saw at http://www.goldalert.com/gold_price_blog.php/ that 10,000 Dec $23 calls were bought in the UUP. Bearish sentiment on the dollar is stronger now than in July 08 when the dollar index was lower, which to me is a bullish sign given that the dollar index may have bottomed last week in the 75 area.
Check out the March 24's: 137,856 contracts bought today.
Hope you are right. Unwound the short dollar / long gold / long AUD Monday, shorted SPX Tuesday. Still looks good but Wednesday's victory dance might be premature...
Anyone trade futures or options on 9mm ammo?
Euro Hit .76 Retrace
from www.crudewire.com
The Euro topped out July08 at 1.6038 and moved down in 5 waves to 1.2329 last October . That .3709 long term move down , call it A, was retraced exactly .76 at the high of 1.5062 last Thursday one year later . Additionally the "c" up from 1.2457 has a very complete look to it's count at the high. That is likely the termination of B .
The completed B implies a high risk of Euro weakness to under 1.2329 with C=A targeting 1.1353. Of course the 4th of lesser degree ( on the REALLY long term chart) may also offer support around 1.16 but these are still huge moves having presumably a huge negative impact on USD commodities.
Confirmation probably would take an overlap of 1.40, a little closer, the .618 retrace of that move up from 1.40 hits about 1.441. All a long way off.
Euro Hit .76 Retrace
from www.crudewire.com
The Euro topped out July08 at 1.6038 and moved down in 5 waves to 1.2329 last October . That .3709 long term move down , call it A, was retraced exactly .76 at the high of 1.5062 last Thursday one year later . Additionally the "c" up from 1.2457 has a very complete look to it's count at the high. That is likely the termination of B .
The completed B implies a high risk of Euro weakness to under 1.2329 with C=A targeting 1.1353. Of course the 4th of lesser degree ( on the REALLY long term chart) may also offer support around 1.16 but these are still huge moves having presumably a huge negative impact on USD commodities.
Confirmation probably would take an overlap of 1.40, a little closer, the .618 retrace of that move up from 1.40 hits about 1.441. All a long way off.
What would be the first signs of ECB liquidity pumping - i.e. not wanting to wait for the official stats nor the EUR implosion? Is there any way to see it beginning?
Damm. I should have thought of the Dec $23. I only bought the March $24 as they seemed to be better priced with the time delay. Oh well. Game on.
might be a good time to inject the fofoa blogspot into the equation re the ECB, gold and freegold. This am "Dai, head of China's National Social Security Fund (NSSF) and a former Chinese central bank governor, also said that the global currency system dominated by the dollar would gradually shift to one comprising of the dollar, euro and Asian currencies such as the yuan CNY=CFXS in the aftermath of the financial crisis" Does this not imply a revaluation of 'things" based on some new benchmark. Perhaps the flaw in the analysis is that it presumes the the monetary game is destined for a linear outcome. Such a revalaution based on some new benchmark could go a ways toward offseting those cross border liabilities (debt) much talked about in europe banks - with the leverage ratios not necessarily a good comp to the US based on IASB presentation. A systemic rest alone would solve the cross border albatross. Japan and germany issuing debt in dollars says something - hopefully it is more informed than the Landesbanks buying toxic ABS. perhaps the tell will be when the US decides to start issuing in ?
Links
http://www.aleablog.com/fluctuation-in-haircuts-fluctuations-in-balance-sheet-quantities/
http://www.aleablog.com/ifrs-vs-us-gaap-european-banks-leverage-overstated-picture/
Thank you for a very interesting and insightful article. Nothing moves in a straight line, and this provides some understanding of where the next major reverse arc of the pendulum may come from.
In a prior comment under the discussion http://www.zerohedge.com/article/manhattan-project-did-bernanke-use-monetary-nuclear-option, Fish Gone Bad provided the following chart of US based M3, in response to a my comment re the possibility that the Fed dropped M3 to hide equity market intervension - http://www.nowandfutures.com/images/m3b_with_taf_etc.png.
The US M3 chart didn't make the argument look particularly compelling. However, in light of the EU M3, which has plunged, the relatively flat estimated US M3 may be more of a tell than it looks upon initial blush.
However, I cannot speak to the accuracy, one way or the other, of the US M3 data in the link. It could look quite different depending on time frame chosen and scaling. But it does make me wonder.
Looking at M3 in isolation tells you little.
Europe has just endured a monetary shock, through the collapse of widely held financial assets denominated in dollars.
Liquidity shifts from asset to asset, not always encompassed even in M3.
A little understanding can be a misleading thing. But a nice try.
If there are any implications for the eurodollar trade, they will not be drawn from this analysis.
Care to share any analysis that you feel implications could be drawn from? Or why you feel the post is inaccurate? I'm not a forex expert, as are many others, so I would be interested in counter-arguments/opposing views as well.
Adding substance to your comment might be illuminating for the rest of us.
I agree with your comments Tyler...it was clear that at the meetings in Rome they decided to sequentially debase currencies in order to balance inflation and bond sales in the different regions.
Technicals say we may be in for one last rally...if we don't cross the rubicon of S&P 1030 decisively.
Dodgerino.
You have to read M3 inclusive of the USD swaps for the capital exporting core no?
Just the 30's when no one would borrow and no one would lend. Eventually the banks just gave the money back.
When no one has the balls to to buy anew car then you know Main street is out. That leaves corporations and Goldman Sachs as the only money makers in the world today.
You can only buy so many porsches so that means even these folks are telling their bankers to put it in T-bills.
Basically, we are slowly, so very slowly, sinking into nothingness.,,,,,,
Anyway, how about those GDP number! You afraid yet? You should be, the big red botton just got pushed.