JP Morgan On JC Trichet's Third Attempt At Pulling Off Paulson's Bazooka: Advance Thoughts On More ECB Bond Purchases

Tyler Durden's picture

Today the market surged after it was announced that JC Trichet has finally thrown in the towel and will launch some version of "buy the everything" program made so popular by his bald transatlantic late-afternoon genocide buddy over the last two years. Subsequently the market surged more on a rumor that America would send a mega dose of viagra to make Trichet's "bazooka" even bigger by boosting America's, er, IMF contributions to what will soon be a multi-trillion bail out. Lastly the market surged some more when that last rumor was proven to be false. Which is why tomorrow at 7:45 am Eastern (with conference to follow 45 minutes later) the hapless Pinata formerly known as Jean-Claude Trichet, whose every action is now predicated by the markets, better have something good to announce or else the market will go up so more... just as it will if there is no news. So for all those who wish to know why buying stocks is a guaranteed way to make money now that nothing at all matters, here are JP Morgan's advance thoughts previewing the ECB action, as well as Greg Fuzesi's observations on additional bond purchases.

The ECB had hoped that external liquidity support for Ireland would reassure and calm financial markets. This has not happened and that creates a lot of uncertainty ahead of tomorrow's policy meeting. The situation remains very difficult. Nevertheless, we only expect the ECB to announce a delay to its exit strategy, rather than any dramatic U-turns or policy actions. The main policy interest rates will also be left unchanged.

On the nonstandard liquidity measures, it is very clear that the ECB would like to proceed with a gradual exit. It does not want banks to rely too much on its cheap and generous funding, and thereby delay necessary balance sheet adjustments. But, this exit strategy was always conditional on  interbank markets normalising further; only then can the ECB scale back its intermediation and lender of last resort function. A short delay to the exit  has now become likely. We therefore expect the ECB to announce that unlimited liquidity provision will continue at maturities up to three months  during the first quarter of next year.

There is little reason for the ECB to worry about distortions from this delayed exit, given that intense market pressure is providing enough (and possibly too much) of an incentive for governments and banks to act. Of course, reverting back to competitive bidding at the ECB's three month refinancing tenders would not be a huge change, especially if the amounts offered were very generous at first and as the ECB would still be offering unlimited liquidity to all banks at maturities of oneweek and one-month. But, it would be very hard to communicate this to nervous financial markets. Therefore, why rush the exit and take the risk?

In fact, calls have become louder on the ECB to not only delay its exit but to expand its support. Some commentators are arguing that the ECB should  step up its sovereign bond purchases into the trillions of euros. We would stress that such an action is not equivalent to the QE undertaken in the US and UK. QE in the US and UK is essentially about how to continue to add monetary stimulus when the overnight interest rate hits the zero bound. The growth and inflation outlook is not pushing the ECB in this direction. And if the ECB were to step up bond purchases in the current environment, it would be monetizing the debt of sovereigns who cannot access capital markets due to concerns about solvency. While the ECB would characterize this as a temporary [HAHAHA] liquidity measure - to enhance the transmission of monetary policy through dysfunctional markets - the risk is that the central bank is making itself subservient to the fiscal authorities. The amount of debt that would be monetized would then be determined by the extent of the fiscal consolidations that sovereigns were prepared to engage in.

Trichet's comment yesterday that markets are underestimating policymakers' resolve was interpreted by some as hinting in the direction of additional asset purchases. Of course, the government bond purchase programme remains active. But, we doubt whether the ECB sees large-scale government bond purchases as appropriate. And even more generous liquidity provision by the ECB to banks is not really the solution to the underlying problem. If the central bank feels that markets are to some extent overreacting, as Trichet suggested yesterday, it will try to act as "anchor of stability" rather than adopt policies that it cannot easily get out of. The ECB wants governments to do more.

Finally, new growth and inflation forecasts, including for 2012, will also be presented. On growth, the ECB will continue to forecast a gradual recovery with growth averaging around 1.5% annualised, although it could note some near-term upside risk due to the upbeat business and sentiment surveys. On inflation, the latest ECB forecast in September showed core inflation rising from around 1% oya this year to 1.7%oya by late 2011, despite the still low level of GDP. This "normalisation" of inflation is remarkable and will likely get extended into 2012, with both headline and core inflation only slightly below target. This forecast would have a hawkish feel to it, even though the ECB will probably still describe it as suggesting contained and moderate inflation pressures over the medium-term and even though the policy interest rate will remain very firmly on hold for now.


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trav7777's picture

they got no choice

MarketTruth's picture

Yes... it is akin to the Ben Shalom Bukkake 'put'.

TheGreatPonzi's picture

Many European bears were waiting for a deflation.

Can't happen, won't happen, as the slightest point of percentage of deflation leads to bond impairments, and thus burns the entire ponzi down in less time you needed to read this comment.

Hyperinflation takes far longer to come, and there is a 0.001% chance it will save the world economy, so politicians will chose this way.

erik's picture

I see the press conference listed at 8:30AM EST.  Where did 7:15AM EST come from?

Barry McBear's picture

What happens at 7:15 AM eastern?  I think the press conference will be at it's usual time of 8:30 AM eastern which is when any announcement will be made.  Please correct me if I'm wrong so I can change my alarm clock.

gwar5's picture

Jean Claude Trichet is the most likely person to jump from the Eiffel Tower the day the EU dies.   

SilverIsKing's picture

Anyone mention this yet (from Harvey Organ's Blog):

"Monday night saw 5,428 longs deposit 100% of monies owing as they signalled to the comex that they were standing for the silver metal.

Early this morning I was really shocked to see only 34 notices sent down for delivery.  This never ever happens this early in the delivery process.

I then waited patiently for the open interest to be revealed for the second day and it was a reading of 1945.  With only 34 notices sent down, one can only conclude that 15 million oz of silver were bought off with cash and a huge premium.  These guys then entered the market and bought which will explain why the total open interest remained relatively the same as the day before.

The payment of dollars for a silver or gold contract is totally forbidden by comex rules.  However the USA do not pay attention to rules and they do whatever they like."

"Even Adrian Douglas , smelled a rat tonight:

The Open Interest in DEC silver was 5,428 which means that those were fully paid for contracts standing for delivery. Today the OI is reported as 1,945 contracts! What happened to the balance? Were the holders offered premiums to sell them? Something smells."







Double down's picture

Don't worry.  They will go long again.  There is blood in that stone

Double down's picture

It is getting interesting...

DavidRicardo's picture

I said it before this happened, but I'm happy to say it again:


there will be $70 trillion in bailouts.


Why?  Because BLS unemployment for BA + is 4.7%.


Before you contradict me, tell me the month and year that figure will hit 20%.

taraxias's picture

April 29, 2013 and yes, I pulled that right out of my arse just like you did with the $70 trillion number.

What the fuck is Mellonesque liquidation anyways?

steveo's picture

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Threeggg's picture

Just picked this up

China Blames Its Stock Market Plunge On An Unnamed International Bank

Wonder Who ?
Miles Kendig's picture

As pedophilia becomes the rule rather than the exception among market participants and their funders... No wonder the EU operates outta Belgium.  JCT & his associates musta got tired of stair climbing in Frankfurt while Christine of Berlin fame turns 50.  Bankers don't want to look to her example since they've all gone Chairman Mao looking for the little ones to get off on

Sick fucks are going Chinese communist on us all.  (No wonder Bill Gross, Mr 90 seconds hizzelf, likes the potential there) As Chinese communists willingly suck on the current edition of western opium so they can continue the hunt for ever younger participants.  DOGS ALL

T Rex's picture

Buy the everything.


Enuf said.

Rich V's picture

"On the nonstandard liquidity measures...."


Is that like calling a bank robbery a "nonstandard account withdrawal"?

Miles Kendig's picture

Given the flow of funds I suspect that traditional withdrawals constitute bank robbery in the minds of officials.  A fine sign of the times

Jean Valjean's picture

Anything, ANYTHING, to prevent you from taking delivery of something REAL.