The Fed vs The ECB - Presenting "The Correlation Of 2012" And What It Means For Gold

Tyler Durden's picture

If there is one cross asset correlation that defined 2011 (and the greater part of 2010), it was that of the Euro-Dollar (EURUSD) currency pair and the S&P 500, which have correlated with near unison nearly all of the time. And yet, the stability of this correlation may be getting unglued, because as Goldman insinuated in its market roundup note from yesterday, it is "reasonable to think that the ... reflexive relationship between EURUSD and SPX...will take some time to break, but this correlation should start to fray." Why? Because, "like the FED before them, the ECB is aggressively expanding their balance sheet." Which brings us to the point of this article: much to the dismay of the armies of disgruntled bankers and investors demanding that the ECB print right now, the ECB has in fact been printing, as shown the other day. Only it has not done so in the conventional sense where it assumes an "asset" on its balance sheet while expanding a monetary liability, but indirectly through shadow conduits, such as repo and other liquidity backstops, also as shown yesterday, where no new currency actually enters the system, yet whereby the balance sheet expands just as efficiently (and in doing so, dilutes the underlying currency). It is well known that it has been our contention that in this centrally planned world the only thing that matters is the global provisioning of liquidity by the monetary authority, as the ultimate marginal determinant of Risk On behavior (and inversely Risk Off), is how much ZIRPy cash do speculators (and more importantly Prime Brokers) have at their possession (for outright and (re)hypothecated purchasing purposes). So here we would like to make a distinction: it is not so much how much cash one global monetary central planner will provide to markets, but how much the various standalone central banks will inject, in whole or in part. We contend that for 2012 the key qualifier will be "in part" with the ECB and the Fed printing (either outright or via repo) in staggered regimes, and thus the primary determinant of "risk", the EURUSD, will be the relative ratio of the two balance sheets. This can be seen on the charts below, the first of which shows just how dramatic the ECB expansion has been in the past 6 months, and the second showing the correlation between the EURUSD and the ratio of the Fed to the ECB.

First, the balance sheet of the ECB vs the Fed:

And second, the correlation of EURUSD vs the relative central bank sizes: i.e "The correlation of 2012"

And where the EURUSD goes, broad risk will follow as all it indicates is a willingness of the respective monetary authority to increase liquidity. It also explains why the EURUSD is likely to trade in the 1.20-1.50 corridor for a long time, as any time the EUR currency plunges, the US economy experiences a dramatic slow down, and inversely, whenever the EURUSD approaches 1.50, Europe, and specifically Germany, sees a substantial slow down in economic output. As such, this range will specify the probable willingness of either central bank to engage in aggressive monetary easing. It is no surprise that since the ECB started "printing" in all but name in July, the EUR has seen a gradual and consistent decline.

There is another corollary: while gold has been stagnant and dropping since peaking in September on disappointment that the Fed did not proceed with outright unsterilized printing and instead engaged in offsetting LSAP-LSAS QE3 under the guise of "Operation Twist 2", gold has completely failed to notice that while the Fed has been net silent, another bank has injected a whopping €500 billion in the past 6 months, or more than the Fed did in all of QE2! Ironically, the broader "risk on" crew has not missed this, and while gold continues to be stuck in the old paradigm, it refuses to comprehend that explicit guarantees of trillions in debt (such as the LTRO repo operations), is an equivalent operation to printing money.

We fully expect the correlation arbs, which usually need someone to point out the glaringly obvious to them before they encode given relationships and correlation pairs into buy and sell signals, will very soon comprehend why the one most underpriced asset at this point, by orders of magnitude, is gold. For the simple reason that currency debasement has been going on feverishly, if behind the scenes, for the past 6 months, and gold is nothing more, or less, than a hedge against monetary dilution. By anyone. That most certainly includes the ECB as well.

We, also, for one, hope to be fully prepared for the instant when the "Eureka" moment strikes.

And here, for the benefit of said slowish arbs, to explain just why liquidity provisioning is the same as bond buying, is SocGen with an expanded narrative on how Draghi took away the bazook and replaced it with a thousand just as effective slighshots.

From SocGen:

There continues to be an expectation that the moves to a more disciplined fiscal union will clear the way for a significant increase in the scale of the ECB’s support for the bond market. However, at December’s press conference, ECB President Mario Draghi, emphasised that the Lisbon Treaty forbids the monetary financing of sovereign debt. We also believe that the ECB wants to avoid the moral hazard implicit in large scale bond purchases since this would potentially reduce the pressure on national governments to undertake the necessary reforms. Jens Weidmann, the Bundesbank Chairman for example, has repeatedly argued that Italy “can live with interest rates over 7% for years.” This is a reference to the yield curve simulations included in the latest BIS quarterly review for example, which demonstrate that even if the yields reached on 9 November were sustained, the relatively long maturity of Italy’s debt stock (around 7 years) means that it would take years for the debt service costs to snowball significantly. This is a clear indication, that in the Bundesbank’s view at least, the ECB will not be intervening to set a ceiling for bond yields.


In our view therefore, any increase in ECB bond buying is likely to come in the form of greater longevity rather than an increase in size, although the ECB may not acknowledge this explicitly. Even so, we envisage the ECB’s SMP continuing at roughly its current volume throughout 2012 and potentially into 2013. This probably implies a further €200-250bn of bond purchases over the next twelve months which would mean the ECB is effectively absorbing the new gross supply from Spain and Italy. This implies roughly a doubling of the SMP to the €500bn mark over the next 12 months. Overall, when one takes into account all of the ECB’s policy initiatives then amounts involved are indeed adding up. Taken together with the relaxation of reserve ratios, which we think is worth about €100bn, the roughly €300bn of excess liquidity the ECB and the ECB’s covered bond purchase programme (currently just over €60bn but planed to increase by another €40bn), then the ECB’s interventions are actually very sizeable. The extension of the ECB’s money market operations to 3 years may also prove to be significant since this will provide banks with additional funds that are in turn likely to be invested in sovereign bonds up to a similar duration – something that the French Central Bank Governor, Christian Noyer has described as “our bazooka”.


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Roubini must be looking at this data to proclaim gold was a bubble. ;)

strannick's picture

Great article.

While the stock markets sit on edge and disappointedly wait for  Bernanke's mouth to say 'QE3', he twists and swaps QE3 into the monetary system.

Likewise the market twiddles its thumbs waiting for the ECB debt monetization of deadbeats, it LITRs more QE than even the FED (la bazook).

Eventually all this inceditary paper is going to light a fire under golds ass, and send it leaping over the moon

I think I need to buy a gun's picture

i can tell by all these articles and the comments everywhere that everyone is anxious now about gold.......this is it people the paper market is done,,,,,,,it could come anyday now,,,,,,its almost all over

Oh regional Indian's picture

"The Lisbon treaty prohibits the monetary financing of debt". Paraphrase. Therefore, ergo etc., all the slosh wil come through back-doors. Which no one can see.

And gold's price correlation matrix has Oil and Petrodollar as it's key off-sets.

How are they doing? How are they going to be doing? 




fnord88's picture

A Christmas carol for our times: Granny got indefinatley detained

PulauHantu29's picture

Gold price up ~35% in euros:

So the yellow metal does reflect the expamsion of the money supply in the EU when priced in euros. Right now the dollar is strong so it has pulled back temporarily in dollars...imho.

JumpinJonnyK's picture

Ron Paul supporters sign the pledge at  Dont let the media steal this election!

Teamtc321's picture

Ron Paul supporters can also use to get the word out. 

Freddie's picture

Anyone know if Ron Paul has come out and said he would repeal that military/govt rentetention/arrest of Americans?  I know based on The Constitution that Congress should undo it.  All the GOP candidates should take the pledge to dump that.

Gingrich is the worst of the bunch.


GMadScientist's picture

Demoncrats: 141 Y, 96 N

Repugnants: 234Y , 46N

Yeah...good luck with that!

DaveyJones's picture

I guess they voted down the fact that you posted their votes, weird

Silver Bug's picture

Gold of course is incredibly under valued. Nothing has changed in this last month, the paper pushers have sent a massive amount of the western gold east in this last month. They and unfortunately us, will regret that in the coming years.

xela2200's picture

There was a lot of emotional damage inflicted on bulls. Another way of looking at also is that gold and silver have been beating to a strong support level, and it is now like a coiled spring. I don't think that the Dollar index will go up too much higher than 80 because of the Euro at 1.30. Zero Interest rate, Insolvent banks, debt ceiling, and real estate are good arguments for prices going up. Not least, who wants a down stock market on an election year (spill over)? As a caveat though, in a market with so much uncertainty (FED/Government/Manipulation) it is a bit of a gamble.

It is unbelievable the amount of gold central bankers had to dump to cause that fall just to give "value" to the money they are printing. They literally gave China, Russia etc such a generous x-mas gift. The transfer of gold just blows my mind.  The Chinese are building the back bone of their future currency, and they got it wholesale from ours. That is an incredible act of desperation and disregard for their own people. Unelected bureaucrats selling their countries' assets which are doing more economic damage than a war.  If you through all of them down a well, all that You would hear is me me me

I believe that on the long run the markets will impose themselves like a force of nature. Hopefully, I am still around to see that day.

Merry x-mas expendables

SheepleLOVEcheddarbaybiscuits's picture

nothing else vacation is on right now

philipat's picture

I am amazed that even the financial media are not calling the ECB action QE. If the Fed pushed EUR 500 Billion into the PD's it would immediately be described as QE. But if the ECB pushes the same amount into the European banking system, is it somehow NOT QE? If NOT QE (IE Printing) where do they think the "Money" cane from. The tooth fairy perhaps?

ACP's picture

Jesus Christ. All this means is that the Fed will have to come up with some more complicated ways to fuck with investors who invest in things that SHOULD increase in value.

spiral_eyes's picture

2012 will be a fun year.

"There’s one thing I can’t help noticing: a third world country with America’s recent numbers — its huge budget and trade deficits, its growing reliance on short-term borrowing from the rest of the world — would definitely be on the watch list.

So is America safe, despite its scary numbers?

Third world countries typically suffer from institutional weaknesses. They have poor corporate governance: you can’t trust business accounting, and insiders often enrich themselves at stockholders’ expense. Meanwhile, cronyism is rampant, with close personal and financial links between powerful politicians and the very companies that benefit from public largesse.

The crisis won’t come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out.

But at a certain point we’ll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.

What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government’s access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.

I know: it all sounds unbelievable. But would you have believed, three years ago, that the U.S. budget would plunge so quickly from a record surplus to a record deficit? And would you have believed that, confronted with that plunge, our leaders would offer excuses rather than solutions?"

— Paul Krugman (2003)


LowProfile's picture

One of your blog's commenters summed it up neatly:  "I think Krugman is more a Democrat than an economist – to him Bush’s deficit is warning but Obama’s is good for the economy."

onebir's picture

"Third world countries typically suffer from institutional weaknesses. They have poor corporate governance: you can’t trust business accounting, and insiders often enrich themselves at stockholders’ expense. Meanwhile, cronyism is rampant, with close personal and financial links between powerful politicians and the very companies that benefit from public largesse."

Not sure whether he meant to or not, but I think Krugman just said the US is a third world country. :)

DaveyJones's picture

"We, also, for one, hope to be fully prepared"

where have I heard that?

BigDuke6's picture

Maybe they mean they got plenty of lead to look after that gold

n8dawg84's picture

I'm undecided on 9mm or .45.  my buddy says 9mm cause its cheaper and is used worldwide.  I lean towards .45 cause of the stopping power.  I guess it's personal preference, but I'd like some input from the ZHers regarding this matter, please.  Thanks in advance

ThrivingAdmistCollapse's picture

If we have a full scale economic collapse followed by a mad max world, then perhaps copper wrapped lead would be a good commodity investment :P

ultraticum's picture

.308 battle rifle's the way to go.  That is, if you can't get to your .50 cal.

Snakeeyes's picture

I wrote this a few days ago. This will NOT end well.

Clash of the Titans: Fed Versus ECB Balance Sheets. ECB Offers As Much Money As Banks Want for 1,124 Days!

navy62802's picture

The currency wars have begun. Got gold??

UnderDeGun's picture

Got food and toilet paper?

greedo's picture

So basically "central banks" have injected €500 billion or about $700 billion in extra liquidity, since June and gold has gone... down?

And all those chatterboxes on TV are talking about gold dropping because it took out some daily moving average?

And we have to learn about this from a blog?

Mad Marv's picture

Blogs are the new media.  I think of the major TV networks as those Telescreens in Orwells 1984. 

mayhem_korner's picture



You left out the coordinated margin calls.

Sam Clemons's picture

From my limited experience, investing requires anticipating action.  Price generally increases before the causes become apparent. 

Gold started rising around 2000 when I believe people were proclaiming how great it was that Clinton balanced the budget.

And even now, buying gold still doesn't seem that strange because there is so much debt in the system that all the world's central banks are going to have to loan more money into existence to cover.  What about funding those $100Tr in unfunded liabilities?  Magic?

mayhem_korner's picture

investing requires anticipating action. 


Don't confuse investing with trading.  Investing is about preserving and augmenting future purchasing power and subordinates temporal price movements to fundamental drivers. 

Vint Slugs's picture

"..subordinates temporal price movements to fundamental drivers."

What kind of intellectual slop are you talking?  How about spelling out for us how you have "invested" so as to preserve/augment future purchasing power?  And let's not hear about buying gold or silver in the past 5 years.  Let's hear about that "investing" that you did back in the 20th century - preferably before 1990.

mayhem_korner's picture



Maybe dose down the xanax there, slug.  I was just offering my view that "anticipating price action," like charting, is a perspective for trading (monetizing short-term price movements based on speculation about sentiment, trends, etc.).  I don't believe that chasing returns (trading) will matter much when the collapse takes hold if you can't access those holdings and convert them to useful things.  Between now and then, the game is staying liquid while accumulating tangible assets.

Since you asked, the main thing I've invested in is a diversified client base.  My from-scratch business has provided a good return, and the primary thing to preserve future value from that is to ensure it isn't wiped out by some sector-specific plague.  That investment has allowed me to accumulate things in which to store that value, including what most here would consider significant holdings of physical gold and silver, plus stockpiles of hard assets and real estate.

disabledvet's picture

"thought thiefs" will fund the deficit. imagine the spending reductions in such a world. We all are forced to tell the truth no matter what? that would mean a lot of guilty pleas. the Court System would immediately be "de-clogged." One could "conquer a country with an Army of Actors." Truly AWESOME amount of power...and one the entire planet has already..."bought into" i might add. Should we be afraid of that world? Where people feel "compelled to tell the truth unless they were acting" because "that internet thing knows what i am thinking"? I would not be a buyer of what Wall Street is selling in this world of course. Since when did they ever tell the truth? They do have an "impressive megaphone" however. Believe me when i tell you ..."when those guns go silent it will be as if they were never there ever." Try it sometime. "Turn off your television for one week and see how you feel." You will become angry, irritable..and then suddenly "you'll feel this amazing sense of freedom. like i never needed it at all." And of course you don't!

Oh regional Indian's picture

DV, for the record, I find your comments incisive and/or funny. Most of the time. :-)


earleflorida's picture

some blog - how dare you!

this is ZeroHedge, not some shit-ass blog

that is tyler speaking not some con artist fwiw

bob_dabolina's picture

If gold goes up, stocks go up; stocks pay dividends.

mayhem_korner's picture



Try yer correlation matrix, bd.  I'm guessin' it's not quite an IID diagonal, given that gold's up 14% YTD and stocks are flat.  :D

AC_Doctor's picture

Can we all pitch in together and get this a-hole a one oz. AG Eagle so he can shut the fuck up?

jez's picture

And we can't eat our gold, right Bob?

UnderDeGun's picture

5% of zero is still nothing when the spark evaporates the markets. Gold requires seriously high temps to turn to vapor.

trentusa's picture

The ECB commenced w/ the LTROs the day after Bank of America dipped below $5 into junk status.


Did the ECB just bailout BAC, or is that timing a coincidence (bc i thought for a min Germany wasn't going to let them print)??

Goldilocks's picture

About SocGen: (Without getting into specifics...)... WTF !?!

Vint Slugs's picture

I agree.  SocGen presents pretty graphs but reality doesn't conform (or confirm).