And so the ECB's balance sheet, once upon a time clean of any monetization interventions, continues to deteriorate, and has now grown to a record €143 billion, after the bank disclosed €13.96 billion in PIIGS debt purchases in the prior week. This is an additional €70 billion since the SMP was expanded to purchase Italian and Spanish debt in early August (predicated by Italy complying with an Austerity prgoram that it has since made a complete mockery of). So for those complaining about the ECB pursuing Quantitative Easing, we wonder what one would call nearly $100 billion in bond repurchases in the open market in the past month: this is about as much as the Fed would purchase in its most active monetization month during either QE1 or QE2!
Alas, this is not enough for Morgan Stanley, which like the faitful copycat it is, has now joined Goldman in officially demanding more QE from Jean Claude Trichet.
Morgan Stanley's summary:
Bottom Line: As DM economies reach the end of their debt supercycle it really is different this time. Consequently, equities are unlikely to trough until long lasting solutions are found. We think this requires QE from the ECB, a new approach to fiscal policy and more debt write-downs.
This time it’s different
There has been a structural deterioration in the outlook for stocks given the relapse in growth and further escalation in the euro-zone debt crisis. We believe DM economies are now at the end of their debt supercycle.
Equity valuations have further to fall
Market sentiment and valuation are low in a historical context, but are not yet at extreme levels of bearishness – for example, there is still 10% downside to a single-digit Shiller PE for Europe. Furthermore, equities are unlikely to bottom until we get evidence of fundamental improvement.
What we want to see to turn more constructive
Given the size of problems facing DM economies we believe equity investors are increasingly looking for long lasting structural solutions. In our opinion, stocks are unlikely to trough until we see all of the following: #1 Large-scale QE from the ECB; #2 New fiscal policy to provide short-term boost and longer-term sustainability; #3 Debt write-downs for over-levered entities.