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A Complete Preview Of Q€ — And Why It Will Fail
To be sure, we’ve written quite a bit lately about the ECB’s upcoming plunge into the world of 13-figure debt monetization (or as we call it, Draghi’s Waterloo), and while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.
Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed. On the latter point, even though negative deposit rates and miniscule yields limit banks’ options for what they can do with the proceeds from any EGBs they’re willing to sell to the ECB, they could of course choose to do the unthinkable and actually make loans. ECB chief economist Peter Praet is pretty confident banks will be forced to do just that if they want to maintain margins (which have ironically been crushed by the same type of policies that the ECB is set to roll out):
“...as expected returns on securities will be compressed, maintaining net interest income will require banks to shift their portfolios away from securities and towards loans to firms and households.”
However, this simply isn’t going to happen for the same reason other attempts to pump money into the system haven’t filtered down to Main Street: banks are too scared to lend and a tougher regulatory regime is reinforcing their reluctance. Here’s Bloomberg:
The incentive to lend created by lower returns on securities runs into the Basel III regulatory framework. The new rules, which aim to make banks resilient to shocks, mean banks must set-aside more capital for loans. The cocktail of Basel III and QE therefore poses a dilemma for banks: either continue to hold cash and sovereign bonds, both are liquid assets and have a zero percent risk-weighting, or lend to the real economy in return for higher interest payments but lower liquidity and capital ratios.
To the extent that banks will make a profit when they sell their sovereign bond holdings, there may be a bit of extra capital floating about to make new loans. However, given the regulatory context, the chances of a big boost to lending are slim.
This dynamic is exacerbated when you consider the dramatic increase in NPLs that has occurred across the currency bloc over the course of the protracted crisis.
We’re not finished yet. Consider also this knock-on effect of the supply/demand imbalance: if sellers suspect prices will go higher because they believe the ECB will be desperate to meet its €60 billion euro/month target, they’ll likely hold out, especially if some market participants get nervous about the availability of certain issues for short covering.
From FT:
When the Bank of England and US Federal Reserve launched QE, their governments were still running massive fiscal deficits. With eurozone governments retrenching fiscally, purchases under the ECB’s QE programme will comfortably exceed net debt issuance — especially in Germany.
So to meet its target, the ECB will have to squeeze others out of government bond markets. That will be hard if bond holders are reluctant to sell, either because there is nowhere else to put their money, or they expect prices to rise further, which may then become the case.
It is [also] unclear on what terms the ECB will lend the bonds it acquires back to the market so that traders can cover sales of paper, known as “short” positions. If dealers worry they will not be able to replace bonds they offer, they may hold back from selling — or demand a higher price from the ECB.
All of this is compounded by the fact that no one really knows how the hell this is actually going to work (logistically we mean). The mechanics simply have not been spelled out and while Hank Paulson will probably tell you that the whole reason you wield a bazooka is so you don’t have to explain the details, the market is starting to get nervous. For as Bloomberg explains, there are many unanswered questions, including “how much the Frankfurt-based central bank will spend on each class targeted, as its monthly budget will include existing programs to buy covered bonds and asset-backed securities, as well as government and agency bonds [and] will these be conducted via reverse auctions, like the Federal Reserve did, or on the secondary market, as ECB has done previously?”
Thankfully, Morgan Stanley is here to help shed some light on the subject, although in the end, we can’t say we’re any more convinced that, to use Citi strategist Matt King’s words, another trillion can possibly make any difference when it comes to stimulating inflation (and ultimately demand), when 5 trillion has failed to do the trick thus far.
The good news is, issuance is off to a good start.
From MS:
So far, euro area sovereigns have issued a total of €192bn of paper in January and February i.e. 24% of estimated 2015 target of €814bn. This is higher than the past five years’ average issuance of 20.5% as of end-February. Gross and net issuance for February stands at €86bn and €46bn, compared to the average (2010-14) of €83bn and €64bn, respectively.
Comparing the funding progress on a country basis: Running ahead of schedule: With Ireland’s second syndication and Portugal’s 5y tap in February, they have already completed 62% and 52%, respectively, of funding target and are running significantly ahead of schedule (Exhibit S1). Keeping on track: Belgium and Italy have completed ~27% of issuance, slightly higher than average. The Netherlands is running slow but is likely to catch up post the 10y DDA in March. Laggards: Austria (ZH: There’s probably a Heta joke here somewhere, but we don’t want to get sidetracked) and Finland are still lagging behind while Germany, France and Spain are in line with average.
...and now for the scary numbers (i.e. the part where we again delve into just how ridiculous this monetary policy adventure truly is in the context of things like gross issuance and, even better, GDP):
Looking to March, the ECB bond purchase programme will have the largest impact on supply/demand dynamics. To place the scale of the programme in context, the ECB’s €1,140 billion purchasing programme equates to 12% of euro area GDP and 14% of the domestic bond market. Although this compares relatively favourably with the US and Japan in terms of the percentage of the bond market, it is somewhat short in comparison to GDP. Given that the purchases will take place over two years, the percentage of gross annual issuance (54%) is similar to other schemes, but the ECB purchases are the highest in terms of net issuance.
So the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.
From Citi:
Additional stimulus will probably be needed; expect policy to remain accommodative for long time, most likely beyond Sept. 2016
ECB would probably be ready to loosen in near term if growth prospects don’t improve, most likely via deposit-rate cut (ZH: so even further into NIRP)
From Credit Agricole:
Don’t expect ECB to taper bond purchases any time soon
From UBS:
Should 2017 inflation forecasts show inflation still isn’t back to target, this could be interpreted as indication that ECB is positioning itself toward extending QE beyond Sept. 2016
Likelihood of QE being extended beyond Sept. 2016 “is not small”
Here’s what purchases under the program look like on a country-by-country basis.
...and here’s a more complete breakdown from Deutsche:
As for the distribution of the monthly €60 billion, here’s MS’ projected breakdown:
So there you have it, a roadmap of just how and where the ECB will spend more than €1 trillion. If history is any guide however, all of this will ultimately be for nought at least as it concerns boosting inflation and demand, for as Citi has shown, if anything, QE isn’t doing much for inflation expectations (and may actually be producing deflation):
Reinforcing this point, here’s a look at the market’s pricing of inflation versus MS economists’ projections:
Enough said.
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Supply and demand bitchez... We already have too much cheap paper, there is no more demand.
dumbasses. You want to print more? Show us the collateral motherfuckers.
If I was a bank and the ECB bought my bonds, I would buy Gold with the proceeds.
Assuming there is enough physical gold available to buy.
Nice to see them using Ukranian flag colors on the charts [rolls eyes]
Exactly, especially when it comes to the history of "price fixing". If you ever want to complete crush your official market activity, start price fixing.
There is always enough physical gold to buy.
I might even part with some of mine.
offers?
Is this really so much as "banks not lending," or the fact that there's no credit-worthy borrowers left, and there's no sustainable demand that can provide entrepreneurs with suitable ROI?
This is Mises a million times over, capital destruction via over production of capital goods brought on by the temporary increase in consumer good demand.
Yes, although I will simply add that with 7+ billion and growing, all competing for a better standard of living, there is still plenty of demand for the resources and goods that make that possible.
"Well, then keep rewriting the contract until they ARE credit-worthy goddammit!", "They'll take on more debt if we have to shove it down their fucking throats!". - huge bonus banker
"Is this really so much as "banks not lending," or the fact that there's no credit-worthy borrowers left..."
Part of it, no question. Bankers as rule may not be the brightest bulbs in the string, but neither are they abjectly stupid (at least, not all the time). Why would anyone lend for an extended period (meaning > 2yrs) in today's ultra-low interest rate environment?
Eventually, rates MUST rise. When (not if) they do, loans locked in to today's low rates will lose value at the same time bankers see their cost of funds rise. IOW, bankers face massive interest rate risk; so why loan/lock in now?
Once the Politicians figure out they can sell bonds and have a buyer for everything....watch them go berserk...they will go into debt more and more..it buys votes...and keeps them in power....whats a trillion or two between friends...
why not to cut tax rates to 0 and just print out the eqivalent? why not really try to pump money this way into the system? why do we need banks as an intermediary?
Let 'er rip, dumb fucking bansksters !
The sooner this shit castle implodes, the better.
IT WILL NOT FAIL - IT WILL BE HUGE A SUCCESS DUMBASS!
Oh sure, Main Street is going to get an ass pounding...but for those who EUQE are intended to truly help, it will mean 100's of billions in profits.
"It's the banks dumbfuck!". EUQE is all about the banks...100's of billions in bad paper...can't collect...no bigger fool to sell it to..in walks EUQE and a buyer of any/everything (at a premium price) enters the room...problem solved...banks "recapitalized"....Capitalists "Recapitalized"...Salaries, Bonuses and "Exit Packages" get paid...HUGE FUCKEN SUCCESS for the those is was designed to help!
Again, that ain't you and I...
How can this not be ultra bullish for Gold and Silver ???
Gold and Silver are suppressed on a mind boggling scale. If you wish to fight CB's, do so.
Because the price of gold/silver = desire AND ability to pay!
The world is broke...$1200 for a little lump of metal? How many people in this world have $1200 bucks to spare?
Of those that do, given the choice of an iphone6 AND the latest Xbox OR a lump of metal, how many will choose the metal?
Also, if you think gold/silver will protect you from "evil government"...you need a history lesson...your gold will be worthless should the shit really hit the fan...even worse, you'll be branded a criminal just for owning it...and if the shit hitting the fan is elephant sized, you may be shot for owning it...also, how are you going to spend it when a couple hundred million have NONE and you have a suitcase full? The sheeple will flood your bunker, drag out your dead body and run off with your gold...
Russian Nostalgia .... people who are really missing .... the good old days .... of Stalin ?
Prior to ~1968, the price of gold WAS SET BY THE GOVERNMENT....AT LESS THAN $50!....HOW FUCKEN STUPID ARE YOU GOING TO LOOK WITH AN AVERAGE PRICE OF 1000's WHEN THEY RESET THE PRICE BACK TO $50?
"Alexander Hamilton, first U.S. Secretary of Treasury under President George Washington, priced the American dollar at 24 ¾ grains of gold (not quite 1/20 of an ounce, making its price $19.39.) This set the “gold standard.” The price of gold remained approximately $20 per ounce until February 1934, a period of 142 years."
LOL...fools.
http://www.tchistory.org/TCHISTORY/Gold_Timeline.htm
More History Morons!>...Learn it now before you painfully repeat it...
1933:
"During the Great Depression, President Franklin D. Roosevelt was elected and moved quickly to end the outflow of gold from banks. With a proclamation, he closed all banks in the U.S. for a three day moratorium. This stopped citizens from removing and hording gold. He then required all citizens holding gold return it to the banks under threat of imprisonment and a fine of $10,000. This stimulated the domestic economy by encouraging people to spend their money instead of holding it in gold bars. In addition, only those U.S. citizens who dealt with gold for “customary industrial, professional, or artistic” use could own refined gold by obtaining a special license."
Speaking of history. "Laws" that cannot be enforced have never been very effective.
What gold and silver? Moreover, there is quite a history with respect to "price fixing" as well, so good luck with that...
Get long black markets and sharecropping, beat the rush.
"What gold and silver?"
Exactly, you don't have any, can't spend what you "don't have" can you...can't sell it either...so what's it's value?
Well seems like we have lots of wealthy people around who could sell land or companies or assets... or use money stored off shore or in other currencies.
True if all currencies crash, then the Wealthy will only be able to raise inflated dollars or deflated dollars.
I still don't get Deflation very well. But I could see the USA have its dollars Inflate except ... well if you exchange with other currencies if won't help if both currencies are inflated. If they stay at a near parity to each other we won't really be able to tell much difference... much like today.
Good Points to consider. But they have to put "Free Trade" and China back in the Box to make that work. Is the USA going to become Isolationist and Protectionist? Maybe of us have been considering this would be a good idea, maybe a Libertarian Idea as well.
Really you have to put all the BRIICS back in a box and take international markets and limit US Citizens from accessing them to purchase gold, silver or whatever.
oh my goodness, it looks like the eurozone will disappoint Dr. Krugman...again
Bazookas locked and loaded, plenty of ammo... and no targets?
It reminds me the scrawlings on the walls: "What if it's WAR... and nobody shows up?"
So you are saying that the ECB isn't printing?
are you saying it IS? This "fabled" QE is supposed to start in 12 days, and bring back the balance sheet levels the EuroSystem...HAD...in 2012
did the ECB...unprint, in the last two years? upppsss! Sorry, Dr. Krugman! Soooo sorry!
You were the one who said they haven't and won't, not me. Bullshit, they all are. When does any productive business/person get access to hundred of billions for zero interest?
I guess we will see shortly won't we you statist fuck. Krugman, like yourself, is just another useful idiot.
Laws, do you read the articles? Fact is that the ECB was at higher levels of "printing". Here the link to the source
in June 2012, 3'112 billion. In February 2015... 2'181. Counting all EuroSystem CBs. Again, how do you call that? de-printing?
The whole stated purpose for this exercises is to go back to the 3.1 trillion levels. The unstated purposes... have a lot to do with NCBs
take your "statist" and shove it where the sun does not shine, or send me an invitation to your state-free territory, so that I can join you
So you admit exactly what I was saying, basically that CBs around the fucking world are printing/directly monetizing.
Thanks.
eh? how can you call it printing what the ECB did from June 2012 to February 2015? you really have a need to believe that thing about "all the CBs around the fucking world" (... doing what the FED is doing), don't you? A need to fervently believe that "All fiat goes to zero..." which is correct, eventually, followed by "... at the same time", which never happened, yet
further, read the damn article: Tyler is postulating that there is nothing to monetize available, or at least not enough for that trillion. net debt issuance is half that sum
I happen to agree. Again, you want to issue more currency, show me the fucking collateral.
There isn't enough real collateral for that trillion, let alone all the other paper claims on real goods and services being held by the top 0.1% of the planet.
Exactly.
Interesting Question is what is the USA worth or the EU Worth.
I found some data on Wikipedia.
USA Financial Worth " domestic financial assets totaled $131 trillion and domestic financial liabilities $106 trillion.[6]"
So depending on the year of the data, 2010, our total worth was something like $131 Trillion.
But we had $1.7 Quadrillion in Derivatives issues up to 2013 by DTCC if I remember the decimal figure correctly.
By law EU is much tighter with issuing debt as we know, but their economy is comparable to the USA I believe. If the USA has a total debt of like $58 Trillion as per FRED Data and Federal debt issues of $18 Trillion... I'm not sure why EU is looking like they only have like a Trillion in Debt and it must be much higher than that.
I guess I have to research this some time.
Looks like EU Government Debt = € 11.386 Trillion
CIA World Factbook: EU, Debt - external:
$15.95 trillion (31 December 2012 est.)
country comparison to the world: 1
$14.78 trillion (31 December 2011)
Nope.
Defaults did that.
These are the pitfalls of fractional reserve banks.
I wish it was defaults. But in reality, the magic of the boomerang, i.e. return of the LTROs and TLTROs is the real culprit
Loans not performing .... then just give the money away .... a fat COLA .... for Senior Social Suck .... trickle up Keynesian stimulus ?
Optimist.
"Doing the same thing again & again and expecting a different result... yada yada"
Oh wait! Perhaps it's time to consider that the true intention has something to do with achieving the SAME RESULT... [in which case, the VERY FEW get richer & you become more of a slave]...
Isn't that right CH1? Yeah "Fuck DHS" right? Tell everyone here how pissed off you are about this!
A-Fucken-Right-On Thirst...QE works everywhere it is implemented...anyone that thinks it's a failure, doesn't understand what it was intended to do...the dumb fucks actually believe it's intention is what salesmen (bankers, politicians, executives) say it is...LOL...Stupid shits...probably believe in Heaven and Hell too...perfect muppets.
SUMMARY:
QE PAYS FULL PRICE FOR BAD PAPER...MAKING THE SELLER WHOLE...AND THE BUYER POORER...YOU ARE THE BUYER, THE BANKERS ARE THE SELLERS...UNDERSTAND?
This is called the Maharajah Fallacy.
Oh, you're right about the buyer becoming poorer, and the seller becoming richer -but only in relative terms, not in absolute terms.
The Maharajah Fallacy, is what we call it when a powerful person or organization seizes all of the wealth of society, as did the Maharajah's of India.
They become fabulously wealthy as compared to their citizens, but in so doing they retard commerce to the lowest denominator of the Dark Ages.
Hence, in real material terms they are measurably less wealthy than industrialists in vibrant economies.
The Maharajah decides, as Milton put it, "It is better to rule in hell than to serve in heaven."
Precisely. Want to kill all official market activity? Start price fixing and destroy all price discovery.
Interesting allegory but British seem to have had their own version through Lords, Manors, and Kingships. The European Peonage. Just like the Hacienda System.
And actually I think the Anglo-American System rules today and draws examples from history like yours and includes tools from Kings, Roman-Empire, and China.
All economic stimulus theory .... can be reduced .... to two opposing concepts .... Trickle Down .... or .... Bubble Up !
So?
What?
You're saying that Bankers cannot achieve painless restructuring in the general economy, such that the causes of the recession will be addressed?
This is news?
Hey bankers!
You can't get there from here! Some oxen are unproductive and must be gored!
No! You cannot choose which ones, for if you choose any other than the RIGHT oxen, the recession will continue.
What we're seeing is the broad-scale, clear-as-day, non-threoretical refutation of the theory of aggregate demand.
I'm inclined to think you are correct although you speak in flowery language and are metaphorically vague.
Eventually, countries like Italy, Spain, and France will take the bull by the horns and start ignoring completely the deficit targets. Germany will be dared to do something about it. I think Draghi is trying to get the governments of the EU to start running much larger deficits. QE is the carrot and the club.
Well if Investment is low, Money Velocity is Low, Labor Supply is High, Wages & Compensation are Flat or Low, ... actions that would lead to investment in Capital facilities or Capital Equipment... Protection of Local manufacturing... Less purchase of goods from outside the community ...might help.
animal spirits are resting
so it appears, EUR zone corporations will be borrowing via bank loans to repurchase shares. let the announcements begin! 'its a good deal for shareholders b/c stocks are at such low valuations"
Why can't Ukraine just print bank notes as Krugman advises and get wealthy that way? Sheesh dumb feckin' Utes ....
Tell them Fatboy Krugman sent you....you fat, useless, immoral, short fingered, fuckin' piece of shit.
R U Sure you are not Navajo??
"dumb feckin' Utes."
Draghi's QE is a desperate attempt to save the Euro.
IMHO, Tyler is over-analyzing Draghi's QE, trying to make it fit into banking mechanics, while overlooking the ECB-to-national government and Central Bank links.
Draghi's QE allows Euro nations, banks, and corporations to trade bonds to the ECB for cash. This gives each of them a Euro printing press for as much as the ECB will buy of their bonds.
Draghi's QE is not about stimulating consumer demand and economic activity - it is about saving the Euro from collapse as it becomes ever more clear that the "bailouts" of the PIIGS have not cured the Euro debt problems or their failing economies, but made them worse, and financial collapses arise - as with the Austrian Hypo bank.
The Euro system is facing a cascade of voter revolts and defaults among the PIIGS, which will require all Euro nations to ante up more funds to cover more and more bad debts. The Euro Fiscal Stability Treaty requires that all Euro zone nations guarantee the debts of all others - a pact tying a noose around every neck.
Draghi's QE can provide funds at ever-lower interest rates and with longer due dates to: (1) allow current debts to be rolled over with no difficulty;
(2) provide emergency funding for governments that have guarantee obligations relating to banks and corporations, such as Austria is now facing;
(3) meet capital demands under the Fiscal Stability Treaty as more and more bailouts are required as the Euro zone nations circle the drain.
Market mechanics be damned. Draghi's strategy is to save the Euro from collapse with a desperate Hail Mary pass. The Hindenburg has sprung a huge leak, and massive amounts of gas must be released into the leaking gas-bag to keep it from crashing.
Anybody ever wonder about the economic miracle of Post WW II Europe.
Anybody ever consider that the Marshall Plan or some secret plan may have included secret USA Printing of Dollars to pay off European debts over say 30 years, thus stimulating the economy, making whole those who knew how to invest, and providing funds for the building of streets, ports, and cities.
It is commonly known that US Dollars overseas are not seen as Inflationary, and are not really included in calculating the Money supply.