Print, Rally, Then What?

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors

The demand that the ECB becomes the lender of last (and only) resort has reached a crescendo.  Virtually everyone in the world is pleading with Germany to allow the ECB to print money and buy massive amounts of Spanish, Italian, Portuguese, Irish, Belgium, and possibly Austrian debt.  But as far as I can tell, the analysis doesn’t go beyond buy and the problem will be solved.

Seriously, read the articles, look at the headlines, listen to the guests on TV and radio, and all you discover is that the ECB must be allowed to buy but nothing about what will happen once they do.  That to is a huge problem.  At every step of this crisis, the popular demand to avoid immediate pain has been followed and has NOT worked.  Right from the start, a core of people thought the system could handle a Greek default.  Too many people, most of them powerful with a lot at stake, convinced the politicians that letting Greece default would be a disaster and lead to contagion.  We don’t know what would have happened had Greece been allowed to default, but we do KNOW that not letting Greece default HAS lead to disaster and contagion.

Too many decisions are being made on the “one and done” theory.  Avoid default and all will be good.  Create EFSF and ESM and all will be good.  Enhance EFSF and all will be good.  Why will ECB acting as lender/printer of last resort ensure that all is good?  I am willing to believe that the initial reaction to the decision will be big and positive.  Risk assets will rally strongly but then what?

What will the world look like after the printing press has been turned on?  How will investors respond?  Is it really all positive, or are there consequences, and is it possible that these consequences are far worse than not printing in the first place?

Some work has been done about what the world would look like if we don’t print.  Again, most of the analysis is of the variety of “print or die”, but some have laid out the consequences of not printing.  Most of that analysis is of the extreme doom and gloom variety (published by banks that will benefit the most from massive taxpayer funded printing) but as a whole, there will be some consequences from not printing.  Banks will be under pressure, some will fail, the stock market will go down, fears of recession will grow and the Central Banks and governments will have to act.  This is where I believe that people go too far in their doom and gloom analysis.  I believe that once the initial shocks go through, the central banks and governments will be in a much stronger position to implement policies that can help.  The problem of solvency will have been reduced through restructurings and write-offs, and then with assets cheap enough, and liquidity provided by central banks, a new, cleaner, less complicated, stronger financial system can be allowed to grow.  The banks (and most will survive, and some will thrive) can be told that no matter what they want, derivatives will be exchange traded, and anything OTC will carry large capital and margin requirements.

So, we have some idea of what happens if the ECB doesn’t print.  There is agreement that it will cause some short term pain, but from there, the views range from dire predictions, to ones that are more manageable and optimistic that it can be contained and used as a new base for growth.

We don’t know what will happen after the ECB opens the floodgates.  After the initial rally what really happens?  The FED mostly bought assets that had a low risk of default.  The ECB will be buying bonds that are unlikely to be repaid other than by the ECB buying new issues to pay off the old bonds.  Is there really no consequence for that?  Will we really just rally and not get nervous about the ECB’s balance sheet or about Germany and France?  Will inflation run rampant?  I think the Euro might rise at first on the “all saved” theory, but won’t it then weaken?  In fact, shouldn’t it weaken massively as trillions have to be printed, and it is being printed for debt that might otherwise have defaulted?  And yes, it will be trillions.  Anyone who thinks that just the threat of printing is enough is wrong.  Banks are bloated and will need to sell.  This printing will reduce their losses on sales, but they will need to sell.  The rally will last only as long as the ECB buys unlimited amounts, and that will be tested.  As the ECB prints and the Euro declines and inflation rises, then what?

Will Italy and Greece really cut back pensions when inflation is rising?  Will Germany be forced to raise their social benefits to catch up to Greece and Italy?   Printing takes off the pressure, and inflation ensures that the higher levels of benefits are necessary.  Will this actually become self fulfilling inflation as the austere countries race to provide benefits similar to those frivolous countries?  I don’t know, but I have seen ZERO analysis on the subject since people are just happy with the print and all must be good solution.

What will the Fed do?  Will we have to embark on our own printing program to ensure that we can keep the exchange rate with Europe from getting too low?  How will we export our way out, if the Euro is cheap?  Oil is already above $100, where will it go if we embark on our own printing program?  QE worked really well for stocks in the US.  The Fed created money which found its way from the treasury market into risky assets and made the dollar weaker, helping exports and making our risky assets look cheap to foreigners.  Will EU QE be good for US stocks?  The consensus is that stocks in the US will rally if Europe embarks on a massive printing program.  I’m not as convinced.  First, the money created by selling bonds to the ECB is unlikely to find its way into riskier assets.  These are already risky assets and the newly minted money will be used to reduce risk and leverage.  Europe will use the printing to deleverage – which is good long term – but this may not give the same benefit to stocks we saw in the US where it was low risk assets being purchased and the banking system didn’t need to deleverage as desperately as European banks need to.  Also, if the Euro gets cheaper, won’t that hurt US exports?  Won’t our companies become less competitive?  Won’t our stocks look expensive relative to European stocks if the Euro declines?  Again, some argue that the Euro will rise, but that argument seems to involve some hand waving; whereas, saying massive printing will weaken the Euro makes more sense.

What will the BRIC’s do?  If inflation starts to hit and Europe devalues, and the US rushes to keep pace with the devaluation on a global scale, what happens to the developing countries, where daily poverty is still a real problem?  How much inflation could China or India sustain?  Do they retaliate in some way we haven’t thought about?  Do we see problems in the commodity world?  Does this heighten the tensions in the mid-east?  Does China take steps to secure supplies beyond the land and resource purchases they have already made in other countries?  There is a reason Germany is so worried about printing.

Before taking the step to print, all that I can hope for is that someone will actually do some serious analysis of the potential consequences, beyond the immediate relief rally.  We need to make a decision based on the risk/rewards of the various steps we can take.  We need to give MORE weight to the longer term than the shorter term.  Too much that has been done to avoid short term pain, has led to bigger problems down the road – and not as far down the road as initially thought.  On Greece I was quite certain that default would have been better.  On EFSF I was completely certain it wouldn’t work in the way they said it would.  On printing, my gut feel is that it will actually turn out far worse than people expect, but I’m not convinced.  I am open to the idea that it could work, in spite of my concerns, maybe the arguments are persuasive, but we need to have those arguments.  We need to realistically look at potential outcomes of printing, including the bad ones, and see if they can be mitigated.  It may be the best solution, but until I see some real analysis convincing me the consequences of printing have been thought out, I will remain in the camp that letting some defaults, break-ups, write-downs, is the best longer term solution in spite of short term pain.

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spiral_eyes's picture

print, rally, then slump, then print some more, then rally, then...

in the end, saving zombie institutes begets a zombie economy with elevated unemployment and no growth. japan, and now america are empirical evidence of that.

http://azizonomics.com/2011/11/15/zombie-economics/

SGS's picture

Bankers dont get bonuses with write downs.  They will print.

spiral_eyes's picture

then europe will zombify.

the key difference is that moreso than america and unlike japan, europe is a tinder-box of discontent, nationalism and old rivalries ready to explode.

the euro was the worst idea since making germany pay all those war reparations.

GeneMarchbanks's picture

'then europe will zombify' doesn't really match up with:

'the key difference is that moreso than america and unlike japan, europe is a tinder-box of discontent, nationalism and old rivalries ready to explode.'

We've 'zombified' years ago now it's the snapback that's next.

Yeah, deglobalization's a bitch.


Fukushima Sam's picture

We've already started printing, so we will continue to print until inflation is so bad it seizes-up the gears of commerce.  It is inevitable.  The only question is timing and the amount of hand-wringing along the way.

The Limerick King's picture

 

 

We've entered the "print or die" phase

Which creates an unsolvable maze

All truth will be spin

Until Kleptocrats win

The collapse may be measured in days

GeneMarchbanks's picture

'Before taking the step to print, all that I can hope for is that someone will actually do some serious analysis of the potential consequences, beyond the immediate relief rally.  We need to make a decision based on the risk/rewards of the various steps we can take.  We need to give MORE weight to the longer term than the shorter term.  Too much that has been done to avoid short term pain, has led to bigger problems down the road – and not as far down the road as initially thought.  On Greece I was quite certain that default would have been better.  On EFSF I was completely certain it wouldn’t work in the way they said it would.  On printing, my gut feel is that it will actually turn out far worse than people expect, but I’m not convinced.  I am open to the idea that it could work, in spite of my concerns, maybe the arguments are persuasive, but we need to have those arguments.  We need to realistically look at potential outcomes of printing, including the bad ones, and see if they can be mitigated.  It may be the best solution, but until I see some real analysis convincing me the consequences of printing have been thought out, I will remain in the camp that letting some defaults, break-ups, write-downs, is the best longer term solution in spite of short term pain.'

You do comedy now? Well, good for you.

Hank P 2.0 ... only different continent same empire.


spanish inquisition's picture

"But we want to finish the new world order NOW! If we allow stuff to default, we will have to rebuild and never see it in our lifetime." - Coalition of all groups united, living and dead to secure our place on top of the heap for at least, say 1000 years?

SWRichmond's picture

We don’t know what would have happened had Greece been allowed to default, but we do KNOW that not letting Greece default HAS lead to disaster and contagion.

One-line illustration of the problem of managed economies: the managers can't do "nothing," as that would reveal their incompetence, and the fallacy of the managed-economy model.  So, they will keep doing "something" until it all blows up. 

i-dog's picture

I still have this picture in my mind of monkeys loose in the control room ... pulling levers and turning knobs ... and chattering excitedly to each other ... while the pressure gauges just continue to climb well into the red....

Mike2756's picture

They'll probably print just enough to cap rates along with writedowns and austerity. Might be enough to keep things stumbling along.

Global Hunter's picture

Liesman just said that 388k initial claims is positive and shows payroll growth in the US so rally on

Josh Randall's picture

It's hard for him to talk this early usually when he's on jelly donut number 29 -- are you sure thats what he said ?

Global Hunter's picture

he definately used the phrase "payroll growth in the US" and he might have said "mildly positive" rather than positive or "more positive" but yes that's pretty much what I heard.

firstdivision's picture

Are these numbers better than expected?  Yes, even unadjusted numbers fell.  Does it mean all is well and rally on?  Nope, not even close.

Global Hunter's picture

I didn't put my sarc button on

firstdivision's picture

Apologies, my sarc detector batteries need recharged.  Now in process *shot of vodka*

The Axe's picture

Billy Miller...out on the porch.....Legg Mason has had enough.....long tee times

DormRoom's picture

lol.. Does anyone else notice a German BDSM thematic to this whole crisis.

cossack55's picture

To print or not to print? That is the question. Weather tis nobler to spread the ink and save the corrupt and criminal bankers and screw the people...... sorry. The Bard always gets me going.

Carlyle Groupie's picture

"I will remain in the camp that letting some defaults, break-ups, write-downs, is the best longer term solution in spite of short term pain."

These logical conclusions have no place in our current reality. It's called The American Dream for a reason.

GoldBricker's picture

Be contrarians, bitches!

equity_momo's picture

The Germans reluctance to allow the ECB to print is the last hurdle preventing Gold from making its moonshot. It will make its moonshot eventually but ECB printing will be the trigger for a disorderly unwind of all paper. The Germans are about the only sane people left in the Western World. Alanis Morrisette had a song about that.

Iam_Silverman's picture

"The Germans reluctance to allow the ECB to print is the last hurdle"

This is the corner that Angela Merkel has deliberately painted herself into.  If they are the lone country dissenting to Euro QE, then that sets the stage for them to politely withdraw from the EMU and go on their merry way.  As long as they maintain this stance, they will be setting the stage for them to be "excused" from the EMU - thus all parties save face, the Germans keep their economy intact, and the rest circle the drain (even though they won't admit/notice it).

 

Well played, Sir Angela, well played!

reload's picture

Definately - that may be a possibility.

I am pondering what the oucome of that would be.

I get to - new German DM - very strong, enabling a massive bail out/ re capitalisation of German Banks.

Printing of Euros for the weak euro nations - all of them. Euro gets toasted and Germany looks east to old Mother Russia and ex USSR (Ukrain etc) countries for export demand and energy security.

It could work for Germany, but I am not convinced they have the strength of character.

Peter Pan's picture

The Germans may be disciplined, but like China they have been enjoying their surpluses regardless of the effect on the rest of the system. It looks like all those surpluses wil now amount to a big fat zero.

equity_momo's picture

Depends who owns the gold and the industry. Theres always a need for industry , especially with a likely war effort coming. German companies will remain relatively competitive no matter what.

China have little to feel good about. Just alot of paper and peasants and plastic. Unless they invade Russia for her oil and gas the only real advantage China has on the World is its rare earths.

The Deleuzian's picture

Then what...Food Stamps at Taco Bell/Pizza Hut!!!

El Viejo's picture

Soon, all restaurants will be Taco Bell.

El Viejo's picture

You left out Collapse.

Collapse, Print, Rally, Then What?

Carlyle Groupie's picture

Collapse, Print, Rally, Then What?

Corpse.

Collapse, Print, Rally, Corpse.

“Once we squeeze all we can out of the United States, it can dry up and blow away.” — Israeli Prime Minister Benjamin Netanyahu, 2002.

Peter Pan's picture

This is a serious quote. What is the source?

i-dog's picture

It never ceases to amaze me how some people have no idea that google is used for searching! WTF do they normally use it for!?!

ziggy59's picture

less loss is positive only in 3 places, Crap, Nothing But Crap, and FED speak, and the 535 during erection [sp]year

Caveman93's picture


Print, Rally, ThenPrint, Rally, ThenPrint, Rally, ThenPrint, Rally, ThenPrint, Rally, Then...

Peter Pan's picture

Printing will not solve the problems we face, but it will at least hasten the end game.

DormRoom's picture

let creative destruction happen.. Stop propping up failed banks, which prop up failed structures & inefficent enterprises.  Let the capital flow to credible, innovative start ups (not Groupon/web 2.0 build to flips).  WE must reform the mechanism of capital distribution (big banks) for capital to properly flow again.  Thus government should start its own bank for this purpose.  Then privatize it once the economy, and debt levels are sustainable.

Zgangsta's picture

It's just the Soviet Union in a new hat.

SofaPapa's picture

+10.  Perfectly stated.  Both the US and Europe.  I don't care if you call it capitalism or communism.  Central planning doesn't work.  Never has, never will.

eddiebe's picture

TPTB will one way or another create crisis after crisis in various areas and asset classes til they have everyone totally confused and broke. Then they will let us bow down before them and accept the scraps they hand out after they have stolen everything while we were watching the news they were fabricating for us.

Nate Taggart's picture

"They will print to infinity or this fucker is going to zero"  -Bears

Peter Pan's picture

So much printing and so little cash. Where is it all going?

DrunkenMonkey's picture

Into central bank deposits to make the leverage numbers look less insane.

jhm's picture

As a german citizen my answer is NO.

Printing is not an option. Period.

I am not responsible for that ponzi scheme the whole planet is engaged in and i am not willing to pay further. So sorry.

Let them bankster bastards drag us germans into a third war. They managed to get us into utter destruction often enough and always found good reason and enough blame and guilt for half the universe to suffer for generations. Of course, we alone, and only we alone, and absolutely without the shadow of a doubt we alone have been the single definite root and cause for all evil in Europe whatsoever since the start of the ice age. No one else. Only and always and surely the germans. Always!

We are used to be scapegoat and, hence, eternal paymaster, and we survived far worse before and will do so again.

Honestly, i don not care at all anymore if whatever country, mine included, blows due to this whole mess. Let everything fall apart, it will not be the end of the world as long as the planet does not stop rotating, generations before have managed in far worse circumstances, we will do so as well, if we like it or not.

Sooner or later the truth will come out and the schemes of the bastards will be dragged into light. Oh that will be a day, when sheeple wake up.

shortus cynicus's picture

As German citizen you have nothing to say, Sir !!!

Just follow orders until Endsieg is reached.

Natural selection takes care of the rest.

reload's picture

Well said -

Out of interest do you think your views are fairly mainstream or becoming more mainstream?

Is there growing pressure on German politicians (we only ever get Euro friendly Germans on UK tv)

to do the right thing and keep the ECB operating according to its charter?