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5 Things To Ponder: The ABC's Of The ECB's QE

Tyler Durden's picture




 

Submitted by Lance Roberts of STA Wealth Management,

Well the day has finally arrived that after two years of promises, jawboning and hope - the European Central Bank finally announced they will take the plunge into the Quantitative Easing (QE) pool.

As I wrote yesterday:

"Today, the ECB announced that they will engage in a "QE" type program buying €60 Billion (Euros, not Dollars) a month of investment grade sovereign bonds.

 

While the markets may welcome another source of liquidity to replace the vacancy left by the Federal Reserve, the are several problems that the ECB will still have to hurdle. The first, and arguably the most important, was identified by Axel Merk in his recent newsletter:

 

"It should be clear, though, that the negative deposit rate at the ECB makes comparing today’s balance sheet to that of 2012 akin to comparing apples to oranges.

 

Let’s keep in mind that anyone selling bonds to the ECB must do something with the cash. QE programs in other countries allowed banks to earn some interest on their excess cash. At the ECB, sellers will have to pay the ECB to in order to hold excess cash. As a result, sellers will think twice before selling. Having said that, at the right price, there will be sellers. However, we are now moving from apples and oranges to bananas – pardon the pun: any amount of buying by the ECB will be more potent with negative interest rates on cash deposits at the ECB, casting serious doubts over whether it is appropriate to state that the 2012 size of the balance sheet is the appropriate size."

 

This is crucially important. With the ECB leaving interest rates unchanged, the negative interest rate carry makes this QE program much less attractive to sellers.

 

Secondly, given the fact that "QE" programs have failed to spark "inflation" anywhere else on the planet, the question really becomes "what is the point?" The deflationary pressures in Europe are Draghi's real concern, and since QE suppresses interest rates and inflation, the whole process seems to contradict the stated goals."

Whether or not the ECB's QE program has the desired effect or not will not be realized for a while. However, this week's reading list is a variety of opinions and initial takes on the "ABC's of the ECB's QE."


1) Finally The Details by Peter Boockvar via The Big Picture

"The ECB said the combined monthly purchases which includes ABS and covered bonds and now include sovereign and agency bonds will total 60b euros per month and will continue to do so “until we see sustained inflation improvement.” The ratio will be based on the capital key where about half is made up of Germany, France, Italy and Spain. The ECB will coordinate the purchases but will be implemented decentrally which means at the national level. European institution paper (such as EFSF paper will be subject to loss sharing but national central bank purchases of other sovereign debt will not be subject to loss sharing which appeases the Germans).

 

They also lowered the rate at which the TLTRO will be lent at to .05% from .15%.Bottom line, as I doubt even the ECB believes that this news will directly increase bank lending, it is likely all about further weakening the euro."

Read Also:  Investor Implications Of ECB QE by Axel Merk via Merk Investments

 

2) Draghi's Going To Have A Bad Day At The Office by Mark Gilbert via Bloomberg

"A better solution might have been to leave the program open-ended, with Draghi repeating his "whatever it takes" mantra. That would count as the kind of shock-and-awe that would win plaudits from the QE crowd. Talking Germany into an infinite commitment, however, was always going to be an impossible task.

 

Draghi still has to negotiate the tricky issue of buying government bonds at the negative yields currently prevailing across much of the euro zone. Paying for the privilege of storing money in, say, a three-year French bond effectively locks in a capital loss if you get back less than you paid. A lawyer could argue that that constitutes "monetary financing" of governments, which is forbidden by the monetary union treaty. Draghi has already seen off one legal challenge to his power to buy bonds; that fight may be rekindled in the near future."

Draghi-QE-BalanceSheet

 

3) Mario Draghi May Need A Bigger Boat by Jeff Cox via CNBC

"That's precisely why Thursday's announcement could just be the first leg of ECB QE, just as the Fed launched two of its own initiatives before finally settling, in the third round, on simply telling the market the asset purchases were "open-ended" and could continue indefinitely. (As it happened, the Fed ended QE3 in October.)

 

Citigroup economist Willem Buiter thus expects an opening salvo of 600 billion euros over two years, which likely won't sate the appetite of investors wanting a full frontal attack on deflation.

 

'We regard such a program as far from optimal: our preference would be for a bigger program, over a shorter period, with full mutualization of any losses agreed at the outset. But a limited program may well be needed to get wide support.'"

Read Also: ECB Move Lacks Shock And Awe by John Authers via Financial Times

 

4)  Stock Investors Should Leave For Europe by Michael Kahn via Barrons

"Thursday's plan by the European Central Bank (ECB) to start a new monthly bond buying program cheered investors as stocks around the globe rallied and the euro fell as expected.

 

The rising equities tide in Europe lifted U.S. stocks with it as key indexes in Europe and the U.S. were roughly 1.5% higher in recent trading. But the falling euro, and commensurate soaring U.S. dollar, will be a problem for American exporters. By extension that suggests large-capitalization stocks, which do a large percentage of their business overseas, are facing some troubles.

 

The attractiveness of U.S. stocks, which were by far the best place in the world to put money to work this decade, has waned, at least in the near term. One look at a chart of the Stoxx 50, which is a pan-European blue-chip index, drives that point home"

Euro-Stoxx-50

Read Also: Why Central Bankers Are Terrified Of Falling Prices by Shobhana Chandra via Bloomberg

 

5) Societe Generale Explains Why ECB's QE Will Fail by Societe Generale via ZeroHedge

Note: This article has a good summary of the entire program as announced. While I encourage you reading the entire piece from SocGen, here is the punchline:

"The potential amount of QE needed is €2-3 trillion! Hence for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-3tn, not a mere €1tn. Should the ECB target such an expansion of its balance sheet, it would have to ease some conditions on its bond purchases (liquidity rule, quality...) or contemplate other asset classes- equity stocks, Real Estate Investment Trust-(REIT), Exchange-traded fund (ETF)...- as the BoJ, previously.

 

So the onus will remain on delivery of better-designed fiscal policy and structural reform. But it is difficult to be hopeful on these fronts."

Read Also: ECB Takes Out The Bazooka by Matt O'Brien via Washington Post


"Not all information is beneficial." - Ben Bernanke

Have A Great Weekend

 

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Fri, 01/23/2015 - 17:46 | 5698117 Zirpedge
Zirpedge's picture

All that balance sheet (#2) shows is a return to a "unsustainable" ECB balance sheet not seen since 2012? The horror!

Fri, 01/23/2015 - 17:49 | 5698133 wendigo
wendigo's picture

World, hold together another six months. If you can't do that, at least give me three. I'll soon be as ready as possible, but not quite yet. 

Fri, 01/23/2015 - 17:52 | 5698142 Carpenter1
Carpenter1's picture

You need 6 months to go buy a gun, gold, and groceries?

Fri, 01/23/2015 - 18:10 | 5698193 wendigo
wendigo's picture

Got a year supply of food, 5 year supply of silver, and 10 year supply of ammo. Just like a little more time to move out to the farm and buy a few odds and ends. I guess I could do it in 1 month if I hurry. 

Fri, 01/23/2015 - 19:41 | 5698402 Greenskeeper_Carl
Greenskeeper_Carl's picture

Just curious, but how do you calculate a 5 year supply of silver? Genuinely serious question , not talking shit.

Fri, 01/23/2015 - 17:50 | 5698135 Carpenter1
Carpenter1's picture

QE has zero ability to stop deflation. It's a 100% criminal operation to steal from the public and enrich the .1%

Fri, 01/23/2015 - 18:38 | 5698261 disabledvet
disabledvet's picture

It's just counterfeiting dude.

 

In English law you would be executed for this...aye, twaas many years ago laddy.

Fri, 01/23/2015 - 17:50 | 5698140 Ribeye
Ribeye's picture

I thought about explaining to everyone I know how this was not a good thing, 

But, then I remembered that here in Ireland, it was fckn pointless, 

Only the reset will educate people, nothing else will work, 

"sigh"

Fri, 01/23/2015 - 17:56 | 5698159 Carpenter1
Carpenter1's picture

Wow, the Irish are sharp. Here in Canada, 99% of people still won't get it even after they've had every dime taken from them by their beloved socialist system.

I'm going to have to defend myself and my food stash from these zombies, but secretly, I won't mind taking them out one bit.

Fri, 01/23/2015 - 17:50 | 5698141 Skateboarder
Skateboarder's picture

Let's use some hip new words to make it sound like it's saving the world:

"Sustainable QE"
"Green QE"
"QEcycling"

Fri, 01/23/2015 - 17:56 | 5698161 gatorengineer
gatorengineer's picture

Its about a weaker Euro.... not deflation..... I also just connected the dots further in that Putin is getting paid I think in Euros for his gas......

The increase in the balance I believe increases the money supply about 5% so devaluation should at most be 5% so basically the Euro is 3 or so percent oversold.....

What happened to the greek elections?

Fri, 01/23/2015 - 18:14 | 5698194 falak pema
falak pema's picture

you guys better get over it : Draghi will now run the global monetary show until hell freezes over.

Europe is now the hen pen of fiat disseminaton and the US is at the receiving end; winning on the straights and scared shit less on the turns.

If Draghi blows it, its the end of the Squid's hold on Davos and fiat world.

What a butt bashing this is becoming on the top deck of the Titanic.

"All men to starboard ! Its the monster there on the right. Watch your step Captain Draghi we don't want to die 'cos of you."

The only known unknown is when will China join this CB fed currency war?

Fri, 01/23/2015 - 18:12 | 5698197 Romney Wordsworth
Romney Wordsworth's picture

 "Yea Lance"!

~Mata Hairi

Fri, 01/23/2015 - 18:11 | 5698202 monad
monad's picture

ABCs of Qriminal Entitlement: Empty your pockets. What was yours is mine.

Fri, 01/23/2015 - 18:28 | 5698245 unionbroker
unionbroker's picture

Central bank purchasing government debt is in reality cancelling goverment debt since there is never any reason to dispose of the debt since it cost nothing to purchase it other than thin air

Mon, 01/26/2015 - 10:05 | 5705776 gregga777
gregga777's picture

Ah, so very, very not so, Grasshopper. The loan to the organized criminal organization—oops, what was I thinking? The truth?—I mean Government becomes an asset to the central bank on the Asset side of the ledger book. Likewise, it's a liabilty on the Liability side of the ledger book. The central banks are as thinly capitalized as your average tentacle of the Global One Bank consortia, namely Goldman Sucks, JP Murder, Shi*** Bank, Hells Cargo, etc. They're leveraged at least in the 25:1 range and above.

Marked to market, all of the Fed's assets, a large proportion of which are not even worth their weight as toilet paper, would immediately wipe out the Fed's capital and its leverage would zoom below zero towards a very large negative ratio!

Transparency of central bank asset and liability books should be required by REAL laws and ENFORCED. The FED generally declines to open its books to Congress for regular review based on any standards. Otherwise, they are highly leveraged ticking time bombs with portfolios of dubious quality. Most would see their capital wiped out if their portfolios were marked to market.

Better yet, the late President Andrew Jackson had the best idea and followed through with his typical direct action. He abolished the United States central bank of his time. The years between 1836, when President Jackson shutdown Rothschild's central bank, until 1913 when it was illegally resurrected, were the most prosperous times in the history of the United States.

If only the United States Constitution had an Amendment requiring the separation of Education and the Federal Government, similar to the prohibition against a state religion. Then perhaps we would have an educated population who would understand that the United States Federal Reserve Bank and subordinate Federal Reserve member banks, are completely Unconstitutional and their circulating greenbacks are both Unconstitutional and illegal.

The ownership of the FRB and it's twelve district member banks is difficult to determine because it is not a public corporation and is not required to file the types of documents with the SEC as public corporations must. There are many conspiracy theories surrounding this ownership issue and I will not add more fuel to that fire.

The FRB refuses to respond to FOIA (Freedom Of Information Act) requests stating, "We are not a part of the Federal Government and therefore we are not subject to the laws that apply to the Executive, Legislative or Judicial branches of Government."

The dictatorial powers of the Chairman or Chairwoman of the Federal Reserve is in many ways much greater than that of the president.

"Let me issue and control a nation's money and I care not who makes the laws." Mayer Amschel Rothschild (1744-1812) founder of the house of Rothschild

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake up homeless on the continent their fathers conquered… The issuing power should be taken from the banks, and restored to the people, to whom it properly belongs. — Thomas Jefferson in the debate over 'The Recharter of the Bank Bill' (1809)

"I believe that banking institutions are more dangerous to our liberties than standing armies." Thomas Jefferson

…The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating. — Thomas Jefferson

Fri, 01/23/2015 - 20:39 | 5698574 Al Tinfoil
Al Tinfoil's picture

 QE by the ECB is the entirely logical, even inevitable, next step in the credit/debt road of false prosperity that is modern monetary and fiscal policy.


  The World's democracies went bankrupt in the 1970s. The later movement of manufacturing from developed to emerging countries exacerbated the problems.  Economic growth and prosperity have been maintained since the 1970s by ever-increasing national debts, ever-increasing central-bank credit infusions and increasing consumer credit to sustain consumption.  In the 1990s, every financial crisis Worldwide was met with huge injections of liquidity by the Federal Reserve under Greenspan et al.  Then the Wall Street operators persuaded the US government to repeal Glass-Steagall in 1999 and thus remove the limitations on stock market speculation with money belonging to bank customers and insurance company policy-holders which are guaranteed by the public treasury.  The stock markets went on a financialization and securitization  tear that melted down in 2008. In the USA, the Federal Reserve and US government "remedied" the situation with more massive injections of liquidity to re-inflate the banks and stock markets.  Worthless "assets" issued during the securitization boom were bought up with public funds and put into "troubled asset" pools.  Wall Street was saved, while public debt ballooned.  Ever since, Wall Street and the US government have been on QE life support.

 

  Europe's banks caught contagion in 2009-2010.


  When the financial ponzi melted down in the PIIGS in 2009-2010, the remedy used was the standard IMF script of buying up the sovereign bonds of the overstretched nations and the worthless  IOUs of their local banks that had spent and lent (respectively) so recklessly in a credit/consumption boom.  Until the IMF/ECB/EC troika bought these bonds and IOUs, they were held by German, French, and UK banks, which banks faced financial ruin if the PIIGS defaulted.  So the worthless sovereign bonds and IOUs were transferred to the troika, saving the German. French and UK banks, and austerity was imposed (per IMF rules) on the PIIGS to make money available for payments to the troika. But this  merely put off the problems to another day.


  That day has arrived.  It has become apparent that the 2009-2010 problems remain in the PIIGS.  Imposed austerity has left these economies in deep depression and unable to pay the troika.  Citizens are fed up with living in poverty and are seeking remedies in utopian leftist and rightist political lunacies, threatening to upset the unstable apple cart.  Most of the rest of the EU remains in recession, if not outright depression, with governments failing to rein in deficits and sovereign debts increasing to heights beyond any conceivable ability to pay off.  Consumption and manufacturing have stagnated.  Efforts at getting consumers to take on more debt have failed.


  So what is to be done?  Draghi thinks that the remedy is to double down on monetary injection. 

 

The first EU remedy (2009-2010) was to relieve private banks of worthless sovereign bonds and IOUs by transferring these to the troika.  The new QE remedy is to allow nations to issue more worthless or near-worthless sovereign bonds directly to the ECB or to the central banks of each such nation.  Essentially, this is an indirect way to enable each nation in the Euro zone to print Euros, which is not permitted in a direct way per the terms of the EU/Euro Treaties.  

 

Each nation in the Euro zone now has its own Euro printing press.  What could possibly be wrong with that?  Let the orchestra play on!

 

 

Sat, 01/24/2015 - 03:12 | 5699180 bid the soldier...
bid the soldiers shoot's picture

3 or 4 years ago I predicted "synchronized printing" by the central banks.  That they would all increase their monetary supplies simultaneously and proportionally.

Obviously I was wrong.  

QE is more like 'gang rape' than 'synchronized swimming'.  

That's where the biggest dick goes first and the lesser dicks follow in order. 

Fri, 01/23/2015 - 20:52 | 5698615 AgeOfJefferson
AgeOfJefferson's picture

I think this is a good thing, as all it will do is SPEED UP THE DEMISE OF THE EURO.

R.I.P.

Sat, 01/24/2015 - 13:16 | 5699747 Atomizer
Atomizer's picture

ABC’s = Always About Conning. [Taxpayer] The ones who subsidizes bad risk decisions made by a group of people not democratically elected under rule of law.

Mon, 01/26/2015 - 10:50 | 5706032 gregga777
gregga777's picture

Does anyone here have substantial money tied up in an IRA or 491k? The government very cleverly made these very attractive, tax-advantaged investment vehicles with your company often kicking in 50% or more of your 401k contribution.

Well, prepare to involuntarily help rescue Uncle Sugar after the 2nd Phase of the Global Financial Crisis ravages US government finances. Our very own 'Muslim Candidate', now 'Muslim President and Chief Mullah of the United States' pitched this as his MyIRA program during the 2014 State of the Union Address. He swore you won't lose a Penny invested in his MyIRA. And we all know that he has a sterling reputation…seriously, the Koran allows Muslims to lie to Infidels with impunity.

In February 2014 there were about $21 trillion held in IRA and 401k accounts. Per John Williams' ShadowStats.com, the end of fiscal year 2013 on September 30th, on a GAAP versus simple cash accounting basis, the total US Federal debt, deficits and unfunded obligations stood at $92.3 trillion.

And because the BLS has consistently understated inflation by 2% for a number of years they have chronically overstated US GDP. So US GDP is only around $10 trillion.

Therefore, our true Debt-to-GDP ratio stands above 9:1. That's impossible to payoff—even with ZIRP, it's why we've had ZIRP for six years running—because no politician has the cojones to tell the truth to the American public. A populace whom for the most part have been dumbed down by over 60 years of union-run and government controlled schools.

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