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5 Things To Ponder: The Central Bank Edition

Tyler Durden's picture




 

Submitted by Lance Roberts of STA Wealth Management,

This past week has been all about "anticipation."  The markets made little headway during the first half of the week as traders waited in an almost breathless anticipation of the announcement from the European Central Bank.  When the news was finally received, investors were initially disappointed but David Tepper stepped into the fray with his ever bullish optimism.  CNBC's Kate Kelly stated:

"I just spoke briefly to David Tepper this morning who said his view has changed somewhat since last month when he spoke at a conference and said, famously, it is nervous time in the markets for a number of global macro reasons dealing with Central Banks. Now that the ECB has made this somewhat historic decision today he indicates to me that he is feeling a little bit better."

And with that simple line, the markets soared to historic highs as a massive "short squeeze" boosted stocks higher.

ECB-Announcement-060614

Zero-hedge-060614

It is the ECB's "historic" decision that we will ponder this weekend.  I have selected five different pieces of analysis with opposing views of the ECB's actions and what the potential implications may be. The ECB has clearly entered into uncharted territory on a massive scale with all other Central Banks now watching for clues to success or failure to dictate their own monetary policies going forward.

1) The ECB Goes Negative - What Does It Mean? By Cullen Roche via Pragmatic Capitalist

  • This has been done before
  • Negative rate should cause a further reach for yield
  • Could induce some lending as banks loosen standards to offset lost interest income
  • Could increase borrowing costs as banks pass own increased costs
  • Could feed into FX markets

"I don’t think this is a huge deal.  In fact, it’s probably more experimental than anything else.  The meager size of the rate cut tells me they’re toying with the policy and seeing what the near-term impact will be.   The more important policy change is probably the longer term refinancing operation and the ECB’s commitment to continue providing liquidity."

2) Draghi Unveils Historic Measures Against Deflation Threat by Jeff Black & Stefan Riecher via Bloomberg

"Draghi’s announcement is the most dramatic since he announced his plan to 'do whatever it takes' to save the euro in the summer of 2012. While that succeeded in keeping the bloc together, the ECB is still trying to fix its battered economy as banks in southern Europe unwind bad loans and shy away from fresh lending to businesses that could spur growth.

 

'Has Draghi served us a similar treat today? Not quite,' said Holger Schmieding, chief economist at Berenberg Bank in London. 'But he delivered more than the ECB had suggested before. Taken together, the innovative and comprehensive bundle of measures will support the economic recovery over time, and it certainly will not do any damage.'"

3) Rate Cuts Prompted Fury In Germanyby Ambrose Evans-Pritchard via The Telegraph

"The rate cuts prompted fury in Germany, where the head of the German Association of Savings Banks, Georg Fahrenschon, accused the ECB of expropriating savers. 'We are tearing a hole in the pensions of savers. Over time these low rates will destroy the value of assets,' he said.

 

Der Spiegel deemed it was the 'end of capitalism', while Die Welt described Mr. Draghi as Europe’s Bismarck, a near autocrat beyond control. It is a foretaste of what may happen if the ECB does graduate to QE later this year, once the machinery is ready.

 

It is an immature market in Europe, with just €700bn of assets to buy, and it is unclear whether purchases of asset-backed securities can direct much lending to small businesses, where it is most needed. It is costly to put together packages of sellable loans for family firms. “Their importance to politicians far outstrips their attractiveness to creditors,” said Matt King, from Citigroup.

 

In the end, the ECB may have to bite the bullet and resort to full-blown purchases of sovereign debt, just like the central banks of the US, Britain and Japan. That thorny issue has been put off for a few more months while the ECB prays for a miracle."

4) NIRP: Eurozone Officially Enters "Monetary Twilight Zone"by Tyler Durden via ZeroHedge

“'If the ECB cut the deposit rate, it would take an important profit opportunity away from banks,' said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London. By doing so, the ECB would also be 'encouraging banks to lend to the real economy' even though 'there’s hardly any demand for credit,' he said. Blattner predicts the ECB will cut its benchmark and leave the deposit rate at 0.25 percent.

 

ECB Executive Board member Benoit Coeure said on Feb. 19 that market interest rates of zero or lower 'can result in a credit contraction.'

 

That’s because banks, trying to preserve their deposit bases by paying customers a reasonable interest rate, may reduce lending to companies and households because the return is too low and invest in higher-yielding assets instead."

Bringing It Home....

5) Fed's Kocherlakota Urges 5 More Years Of Low Interest Rates via Reuters

"Kocherlakota acknowledged that keeping rates low for so long can lead to conditions that signal financial instability, including high asset prices, volatile returns on assets, and frantic levels of merger activity as businesses and individuals strive to take advantage of low interest rates.

But that is a risk, he suggested, the Fed should be willing to take."

Also Read:

Fed's Williams Says Central Banks Need To Realize Investor's Aren't Rationalvia The Wall Street Journal

“In a world of rational expectations, asset prices adjust and that’s it, but if one allows for limited information, the resulting bull market may cause investors to get ‘carried away’ over time and confuse what is a one-time, perhaps transitory, shift in fundamentals for a new paradigm of rising asset prices.”


The more I read, the clearer it becomes that the world's Central Banks have become caught in a "liquidity trap" which is entirely based on circular logic.  Central banks must create asset bubbles in the hopes of stimulating economic activity.  When the bubble eventually pops the economic activity evaporates which requires the creation of another asset bubble. 

It reminds me of Jack Black in "Envy" where he promotes his new product "Va-poo-rize." While you may appear to get rid of the "poo" for now, the question remains "where does it go?"

 

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Fri, 06/06/2014 - 16:52 | 4831263 max2205
max2205's picture

Got it.....but sick of reading about it everyday for 7 fucking years.

How are the Cubs doing?

Fri, 06/06/2014 - 16:56 | 4831274 Seasmoke
Seasmoke's picture

Looks like, The Cubs will win the World Series before this ponzi system collapses. 

Fri, 06/06/2014 - 17:04 | 4831296 TeamDepends
TeamDepends's picture

Fear not, fellow travelers!  For the ponzi collapseth before our very eyes.  Er, scratch that, run for the hills!!!!

Fri, 06/06/2014 - 16:53 | 4831265 Badabing
Badabing's picture

Ponder this CBs suck

Fri, 06/06/2014 - 16:57 | 4831281 debtor of last ...
debtor of last resort's picture

Free morfine always feels good.

Fri, 06/06/2014 - 18:08 | 4831420 NoDebt
NoDebt's picture

You may wish to lay off the free morphine for a while.

Fri, 06/06/2014 - 17:00 | 4831286 kchrisc
kchrisc's picture

It is a "theft trap" that the banksters have got their balls in, not a "liquidity trap."

They need to not only continue to cover up their past theft, but steal even more to keep the whole ponzi going.

 

"HELP WANTED: Guillotine operator and maintenance positions available. Must live near pols, crats and banksters. You'll know when and where to apply when the time comes."

Fri, 06/06/2014 - 17:01 | 4831289 NOTaREALmerican
NOTaREALmerican's picture

WHAT?  Investors aren't rational "actors"?   All information isn't known?   Didn't this guy pass Econ 101?

NO Nobel Prize for YOU!

Fri, 06/06/2014 - 17:06 | 4831305 besnook
besnook's picture

it would have been a lot easier and more effective(if reviving the economy is the goal) to just mail a "supplemental income" check to everyone every month until the recession ends, good only if they spend all the money in the month they receive it. in a situation as deflationary as this one inflation is a super hero.....for the banks.

Fri, 06/06/2014 - 17:24 | 4831339 NOTaREALmerican
NOTaREALmerican's picture

Yeah,  but goal is always:

 

1) To enrich the smart-n-savvy
2) Revive the economy
3) Not to confuse the dumbasses about how important the smart-n-savvy people are.

If you gave the loot directly to the dumbasses, the smart-n-savvy wouldn't get first shot at the loot and the dumbasses might suspect that money does grow on trees.  

Fri, 06/06/2014 - 17:19 | 4831333 hugovanderbubble
hugovanderbubble's picture

TULIPMANIA 2.0

Fri, 06/06/2014 - 17:26 | 4831352 Umh
Umh's picture

The lipstick line on the RPM gauge really doesn't mean a thing.

Fri, 06/06/2014 - 17:51 | 4831393 assistedliving
assistedliving's picture

feverish?  fallacious?  phallic?  CB's havnt a f#@king clue

desperate, despotic and the devil will take the hindmost

GO RANGERS! is about all a man can say...sad, very sad

 

 

Fri, 06/06/2014 - 18:03 | 4831411 alfbell
alfbell's picture

 

 

Basically, they are all trying to inflate away or "finesse" away the deflationary wave that hit us in 2007. They'll never be able to do it due to the massive amount of debt that has been created. It all has to be paid off or defaulted upon. And, we all know that paying it off is impossible (would need a major growth trend to be able to do that).

I'm with Harry Dent. He understands how key demographics is (you can't fault him for his time projections, as no one has a crystal ball, but he's been spot on about what will eventually come). Once the governments' and central banks' attempts to fight deflation with inflation are finally overwhelmed (and the public lose complete faith in them) it will be game over and time for a reset.

I'm also with Martin Armstrong. The USA isn't a revolutionary government that defaulted on its currency and that doesn't have a bond market and has no one willing to lend to them (Weimar, Zimbabwe). The USA has the deepest markets (specifically the bond market) and is the reserve currency (for awhile longer) and has a big military. There will NOT be hyper-inflation. Periods of high inflation, but never hyper-inflation because that means the end of government.

As all of this needless and ineffective debt that our leaders have brought upon us through stimulus, bailouts, etc.—is added on top of all the previously existing debt and problems that they were trying to "solve"— and growth and demographics take their toll, it will be a series of major collapses. DEFLATION. Just like in 2007-2009 but on a much grander scale. Everything went down then (stocks, bonds, commodities, real estate, etc. except the USD went up about 25%). It's DEFLATION. And I'm acting and preparing accordingly for it.

 

 

Fri, 06/06/2014 - 18:52 | 4831482 huggy_in_london
huggy_in_london's picture

And you forgot to mention the deflationary effects of the information revolution!

Sat, 06/07/2014 - 00:13 | 4831965 luna_man
luna_man's picture

 

 

It's the anticipation of the demise I wake for

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