Is Mario Draghi About To Go Full-Kuroda? RBS Says ECB Could Buy Stocks

Tyler Durden's picture

At Thursday’s presser, Mario Draghi telegraphed more easing from the ECB come December. 

This wasn’t exactly a surprise. In fact, some observers had expected Draghi to expand PSPP at the September meeting and although the market was disappointed in that regard, the ECB did raise the issue limit from 25% to 33% effectively giving themselves more dry powder. 

The question now, is what exactly the ECB will announce. That is, will Draghi cut the depo rate further into negative territory thus setting off a chain reaction for the Riksbank and the SNB and thus raising the spectre of NIRP for retail depositors? 

How long into 2017 will PSPP be extended? 

Given the scarcity of purchasable paper, will the ECB expand the universe of eligible assets and if so, will Draghi go full-Kuroda knowing full well that you never, ever go full-Kuroda? 

All good questions, and ones we suspect many a sellside strategist will attempt to answer in the weeks ahead. For his part, RBS’ Alberto Gallo is out with a rundown of the ECB’s options and not only are non-financial corporate bonds on the list (something we predicted months ago), but so are (gasp) stocks, suggesting that the ECB may soon embark on a Japan-style effort to corner the equity market along with the government bond market. 

First, Gallo notes the ECB’s mention of the SNB (another central bank which, like Japan, is sitting on a hundred billion dollar equity book): 

Yesterday the ECB prepared the ground for more easing in December, as we expected. What was surprising was the post-meeting Q&A, which went into more detail on the possibilities for easing, and even made a direct comparison with the Swiss National Bank – currently the central bank with the largest balance sheet as % of GDP (90%) in developed markets.


Next, RBS suggests that we should take the ECB quite literally when they say that they are “open to a whole menu of monetary policy instruments”:

All options considered means non-financial credit, wholesale loans, subsovereigns, and even equities. We have already outlined that expanding purchases to other types of credit could theoretically double the pool of the ECB’s purchasable bonds, to almost €19tn. 


Adding more utilities or state-backed corporates is a logical step, but it is not going to give the ECB much further room. The ECB could decide to go further into the pool of € non-financial corporate bonds (€893bn) rated BBB and above, including € bonds from non-Eurozone issuers (€687bn excluding non-Eurozone issuers). 



Adding equities would be particularly aggressive, offering a further €7tn of purchasable assets.

Then there’s the possibility of buying muni bonds:

Sub-sovereign bonds are another option, adding €336bn of local government bonds to the pool of assets. Sub-sovereign bonds account for around 3% of Eurozone GDP (this is small compared with the US, where municipal bonds are 21% of GDP).

And finally, in what might be looked upon as an even more outlandish move than buying equities, the ECB could simply buy individual personal loans from banks because apparently, doing so indirectly via ABS purchases hasn’t worked:

One incentive for the ECB to launch the ABS purchase programme last year was likely to encourage securitisation, helping banks to deconsolidate their balance sheets and unlock new lending. But securitisation issuance hasn’t picked up (see SIFMA data). This is partly due to the lack of harmonisation of national-level rules, the harsh capital treatment even for simple securitisations and the lack of government support (no guarantees to mezzanine tranches, even though the ECB can now buy guaranteed mezzanine tranches through ABSPP). Given the stagnant developments in the securitisation market, the ECB could instead start to buy loans directly to better target easing at the real economy. There are practical hurdles to loan purchases – illiquidity, lack of transparency, long settlement periods. 

Yes, “practical hurdles” like “illiquidity, lack of transparency, long settlement periods” ... and let’s not forget “the public perception that the Gods must be crazy”, which is precisely what people would think once they learned that a developed market central bank had begun buying individual borrowers’ car loans from banks.

Just how large could this program ultimately get, you ask? Well, you're in the pee wee league if you're a central bank and your balance sheet doesn't sum to a respectable percentage of GDP and on that measure, the ECB has a long way to go:

The SNB has a balance sheet equivalent to 90% of GDP, the highest amongst major developed economies (see chart above). Taken that as a theoretical ceiling, the ECB could further expand its balance sheet by another 70% of GDP, i.e. over three times what they have done so far.

Of course none of this is going to work. As we've seen in Japan, you can monetize assets until the cows come home (indeed, until you break the market), but virtually all of the evidence from the global, post-crisis experiment in unconventional monetary policy suggests that you will have i) little to no effect on inflation expectations, and ii) a muted effect at best on aggregate demand. In fact, one would think that the ECB would have learned something from the fact that they've been buying bonds since early March and the bloc is now back in deflation. 

In the end, all that will happen is the EMU's neighbors will be forced further into NIRP and the ECB will end up with a nightmarish balance sheet full of stocks, corporate credit, munis, and God only knows what kind of loans purchased from banks, and all of which will have been bought at or near the top. As Gallo notes, "the larger the balance sheet and the riskier the assets a central bank buys, the higher the potential for losses".

 Indeed, and that sets up the possibility that central banks could end up being forced to operate from a negative equity position. In other words: it sets up the possibility that they'll technically go broke. As for what happens next, we'll leave that for another post.

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JustObserving's picture

The Fed has been buying stocks for how many years now?  Since the PPT was formed in 1988?

Secrets Of The 
Plunge Protection Team

JRobby's picture
"ECB Could Buy________Stocks"

Left out the word "More"

Bloppy's picture

Time to arrest central bankers, every last one of them, US, EU, Japan, all in one day. Round 'em up.







Megyn Kelly to Jeb: what would it take to get you out of the race?

Sudden Debt's picture

And it gives also a clear view of the future as they can't ever stock because if they would ever stop and their stocks go down, the central banks go bankrup.


But there's a rule now that gives them a limit and that rule says you can't own more then 3% of a company stock without making your intentions clear in the boardroom. And if they do cross that, how will they influence all those corporate strategies? 

They'll no doubtetly introduce a more bureaucratic structure, killing them even more.

And how do you call a central bank steered economy? Communisme is government run but central banks aren't government run.

And how does a dividend for central banks sound when they bouht the stock that needs to be repaid by taxpayers?

Perimetr's picture

Newsflash, the Central Banks are already buying stocks with their electronic funds.

wisebastard's picture

they could buy stocks from their buddies so they can get rich...................but its all cool..............its not like the rich are fucking the poor

Hype Alert's picture

Hey, why not?  We're less than 3% off the S&P 500 peak, ever. 


Queue Cramer: "They're dying in the streets!"

Spitzer's picture

Remeber this is the ECB that raised interest rates twice from 09n to 2011. But then Goldman took over.


Draghi should be shot in the head.

matinee55's picture

these criminal MF have been buying stocks for years

casey13's picture

They should buy Volkswagen.

YesWeKahn's picture

Why do we need innovation, research, invention, we can just print and buy all the stocks higher and higher, problem solved, cancer cured.

Bunga Bunga's picture

Buy Italian stocks please!

Osmium's picture

If I bought stocks with money I printed myself, I would go to Jail.  WTF?

JenkinsLane's picture

It's the New Normal. What used to be called counterfeiting is now called Quantative Easing.

RopeADope's picture

If only you could buy respect in addition to stocks...

pebblewriter's picture

God help us if they do. 

In addition to BoJ's $60 billion, the GPIF owns another $600 billion.   That's equal to almost 15% of Japan's GDP tied up in stocks. 

Obviously, it leaves them susceptible to huge losses.  But, it also traps them in a permanent state of plunge protection.  If it were to happen in eurozone, too, the US wouldn't take long to join in (maybe it already has -- though the captive financial press hasn't seen fit to ask for details on the PPT.) 

This happens, and price discovery might be something you learn about only in history class.

TaxMeIAmCanadian's picture

The end game has arrived. This is going to end very badly. I've always said that the shit floats to the top in any large organization because the promoter will never promote someone that might threaten the promotion path of the themselves. We are witnessing the result of this now. Everywhere you look, we've got people with shit for brains making decisions that will ultimately be the undoing of the financial system. Fucking idiots. All of them are FUCKING IDIOTS!!!!

yogibear's picture

"that will ultimately be the undoing of the financial system."

So far it's one huge joke to the CBs. If someone can push the derivatives over the edge.

yogibear's picture

Bloomberg comentation says Risk-on. 

What a hoot for the bulls.

"It's a Global reload of the punch bowl"

Playing it as they go.



Bluz's picture

2nd biggest foot kicking the 2nd biggest can. They will eventually run out of road.

newworldorder's picture

What money will Dragi use to buy stocks with?  Has Germany given him the money or is he taking up a collection within all EU States?

Kaervek's picture

He will print it, thereby devaluing the Euro, forcing the EU citizens to pay for it in the end

taopraxis's picture
taopraxis (not verified) Oct 23, 2015 2:34 PM

Too funny, as if the ECB is not already buying these markets. Shut down the cartel. I want to see where markets go when left to their own devices.

matinee55's picture

Frig, they own everything now don't they, mafia bastards

yogibear's picture

The flood of middle eastern refugees are going to kill Draghi's pipe dream and the EU.

The next EU financial leader will the Ayatollah.

nakki's picture

People think I'm crazy but all the CB are owned essentially by the same people. Those people can print money from nothing to buy stocks, government debt and real estate. When things go south they print more money to buy more stocks, governments will give up lands (national parks) government holdings and the banks will own everything. 

Funny how the CB wants 2% inflation but discounts everything everyone uses every day, and pretends that a rising housing market (good) or a rising stock market (really good) isn't inflationary. How is that even close to being logical. Fuck even Janet said the average family should own more securities. How the fuck is a family making 60k a year supposed to have children pay for insurance, a mortgage, taxes and buy Amazon at $600 a share? How about a hundred shares of SPY for $20,700? 

In the end, anyone with half a brain knows what will happen. Less and less people owning more and more. The future will be the past and 2030 will look like 1890. 

polo007's picture

More QE Would Be a Reward to Banks

By Roger Arnold
Oct 22, 2015 | 4:00 PM EDT
In the past few months, I've written several columns concerning the recessionary trajectory the U.S. is on and how the Fed would respond if that continues.

Although a recession is not yet inevitable, the preparation for how the Fed will respond, if required, has begun.
On the recession issue, the Chicago Fed National Activity Index (CFNAI) released this morning validates the recessionary trajectory with the opening remarks of:

"The Chicago Fed National Activity Index ticked down to -0.37 in September from -0.39 in August. Two of the four broad categories of indicators that make up the index decreased from August, and all four categories made nonpositive contributions to the index in September" (emphasis is mine).
On the monetary response issue, as I discussed earlier this week in the column, "When Bad News Is Exactly That -- Bad," the San Francisco Federal Reserve Bank has already indicated that a probable response by the FOMC will be negative short-end rates coupled with another round of quantitative easing (QE).

As I discussed in 2011, monetary and fiscal policy come in two basic forms, pull through and push through, which may also be considered reward and punishment.
In that context, the implementation of another round of QE may be considered the pull through; a reward provided to the banks for agreeing to accept the push-through punishment of negative short-end rates.
The first issue to deal with is the potential structure of what another round of QE would involve and when it would be supplied.
The last round of QE involved the purchase of agency mortgage-backed securities. The idea was to allow the Fed to purchase what had become illiquid mortgage securities from the banks in order to provide the banks the capital necessary to make new mortgage loans and in the process drive the mortgage rates down to stimulate consumer demand for home purchases.
As I've noted previously, that structure required approval by the U.S. Treasury, and the next round of QE will, too, because the Fed's mandate has not been expanded by Congress to allow it the opportunity to purchase other than Treasury securities without first getting approval from the Treasury secretary.

The next round of QE will likely require the Fed to go beyond mortgage securities and into purchasing other kinds of bank loans that will likely become illiquid as a result of the economic deterioration.
Those loans will likely be concentrated in autos, commercial real estate mortgages and commercial and industrial.
This, too, will require Treasury secretary approval.
However, it is also likely the Fed will use the potential for it to expand into those areas by requesting that the executive and legislative branches coordinate and supply a fiscal response this time that is complementary to the goals of the monetary efforts.
In addition to requiring the fiscal support, the Fed will require the banks to agree to accept negative short-end rates in order for a round of QE targeted at these other kinds of loans.
The next issue concerns the timing of the Fed moving forward with a round of QE structured this way.
Until the bankers agree to accept the negative short-end rates and the government agrees to provide a complementary fiscal response, the Fed will wait to implement the next round of QE, even if the Treasury secretary approves.
The executive and legislative branches won't have the political support necessary to coordinate and respond with a complementary fiscal stimulus package, however, until there's been enough of a deterioration in economic activity and capital markets to afford for such.

That's a normal part of the political process, though, as there is too much risk to the continued viability for re-election faced by individual legislators to warrant even attempting a pre-emptive fiscal stimulus measure.
A fiscal package is only politically viable as a reaction to economic and market events that have already caused the electorate to not only acquiesce to the necessity of it, but request it.

The most important part of this process for investors, as I wrote about earlier this week, is that the current expectation of a pre-emptive monetary response to market instability or weak economic reports indicating an imminent contraction in private-sector activity is imprudent.
The Fed is telegraphing its willingness to supply a monetary response as the legislative mandate requires, but the experience of the past seven years has also proved that a monetary response provided in the absence of complementary fiscal measures is not just inviable but actually counterproductive.
At this stage, the most likely catalyst for encouraging the required response by bankers and fiscal authorities will be a decline in oil prices, but it may instead first be evidenced by continuing deterioration in the biotechnology and technology sectors.


nakki's picture

Psychopath Krugman said that the reason, after all these QE's, that there was no hyperinflation (making fun of those who said there would be) was the banks are sitting on 2 trillion dollars at the FED, you know shoring up there books. Funny I thought the FED printing money was to help mainstreet. Banks counterfeit money, hoard it, or use it to buy equities, high end real estate, and government bonds, and don't loan to mainstreet. Corporations buyback stocks, cut R&D and downsize and the US taxpers foot the bill to protect their interest around the globe via the MIC and the US armed forces. Yep sounds like a mafia monopoly to me.

Grandad Grumps's picture

I think we need to double down on straight jackets and padded cells.

Aussie Battler's picture

Can you fight Central Banks or should you just thrown in the towel in the join them and borrow as much as you f'ing can and buy real estate and stocks. This is creditism, free market capitalism died years ago.

These Central Bankers should be rounded up Nuremburg Style.