A Shocking €1 Trillion LTRO On Deck? CLSA Explains Why Massive Quanto-Easing By The ECB May Be Coming Next Month

Tyler Durden's picture

It is a pure coincidence that following the previous report of stern condemnation of traditional ECB QE in the form of Large Scale Asset Purchases (LSAP) by the Bundesbank, we should follow it up with the latest analysis by Chris Wood of CLSA's famous Greed and Loathing newsletter, in which the noted skeptic does an about face on his existing short European financial trade and covers such exposure, while observing the much-discussed major shift in ECB liquidity provisioning as the catalyst. As he says, "the main reason to do [cover the Euro short fin trade] is the potential for a benign interlude provided by the ECB’s increasingly aggressive liquidity support for the European banking system." And while his trade reco may or may not be right (if we were betting people we would put our money on the latter), what is interesting is the basis for the material change in exposure which to Wood is explained simply by the dramatic shift in the ECB approach toward monetary generosity, courtesy of the arrival of ex-Goldmanite Mario Draghi. The basis is the first noted here massive surge in the European balance sheet (Figure 2) which while not engaging in prima facie monetization, has done so via indirect channels, in the form of an LTRO, which is basically a 1%, 3-year loan, but more importantly, a balance sheet expansion which while having failed to increase the velocity of money in any way (with all of the LTRO and then some now having been redeposited back at the ECB as reporter earlier), has at least fooled the market for the time being that any sub 3 Year debt is "safe" as seen by Figure 1.

And since it has worked once, in the eyes of central planners it should work again, until it fails. Which it naturally will, just like the first LTRO iteration from 2008. But first, it will be expanded to a very ludicrous level, which will lead to the one outcome that Germany wants more than any other - send the euro plunging (remember - the primary correlation of 2012 is the ratio of ECB to FED assets), at least until the Fed steps right back into the currency devaluation fray, which it likely will as soon as March. So just how large will the next LTRO be? "Market talk is focusing on an even bigger amount to be borrowed at the next 3-year longer-term refinancing operation (LTRO) due on 29 February. GREED & fear has heard guesstimates of up to €1tn!" That's right - it is possible that in its quanto monetary diarrhea (but at least it's not printing, so the Bundesbank will be delighted), the ECB is about to increase its balance sheet from €2.7 trillion to € €3.7 trillion, or a €1.7 trillion ($2.2 trillion) expansion in 8 months! And gold is where again?

Chris Wood explains:

By creating a massive incentive for European banks to buy their government’s debt issuance up to three years maturity, the new ECB leader Mario Draghi is clearly seeking to get control over the direction of Eurozone government bond yields. The dramatic decline in Eurozone bond yields up to three years suggests he is getting some traction (see Figure 1). It is also the case that absolute-return investors may be tempted to “front run” coming bond auctions if they think the ECB policy is working. On this point, market talk is focusing on an even bigger amount to be borrowed at the next 3-year longer-term refinancing operation (LTRO) due on 29 February. GREED & fear has heard guesstimates of up to €1tn!

The result is an exploding balance sheet controlled, of course, by an ex-Goldmanite, which can only be halted by Germany, but why when the EUR is crashing, keeping the German export economy vibrant.

True, the above upbeat mood can be undermined in a second by a word from Berlin indicating that Germany does not approve of Draghi’s only too evident easing intentions. It is also the case that criticism is already coming from Germany about the latest draft of the fiscal compact which contains a derisory lack of “teeth” in terms of actual measures to enforce good fiscal behaviour. Still Draghi’s responsibility is monetary policy not fiscal policy. And based on GREED & fear’s observations thus far, it is clear that former investment banker Draghi is a smooth if not slick operator who is adept at saying one thing and doing another. He will also understand that the goal of monetary easing will be undermined if it arouses German opposition. For that reason investors should assume for now that he will have the political skills to keep the Germans onside. Meanwhile, for the moment it is politically correct in Berlin to keep the banking system liquid via ECB extension of credit courtesy of dramatically relaxed collateral standards, even if it is not yet “PC” to monetise Eurozone government debt outright.


The resulting backdoor quanto easing in Eurozone is clear from the recent surge in the ECB’s balance sheet relative to the Fed’s. Thus, the ECB’s total assets have risen by 38% from €1.94tn on 1 July 2011 to €2.69tn on 6 January 2012. While the Fed’s total assets have risen by only 1% from US$2.87tn to US$2.9tn since July 2011 (see Figure 2).



There are two investment conclusions to draw from this. First, investors should assume a continuing weakening in the euro. On this point, one of the key developments so far this year is a decoupling of the euro from risk currencies such as the Aussie dollar (see Figure 3). Second, the likelihood of a significant weakening in the euro creates the clear potential for European stock markets to outperform the S&P500 this year, given the benefits to European exporters of a weaker currency. Meanwhile, one reason GREED & fear is convinced the euro will head lower is based on the view that Draghi will be quite ready to cut rates to zero if inflation data in Europe can justify such easing. Right now the money markets are discounting only a 25bp cut this year.

Clearly, all of the above does not mean that Eurozone crisis is over. There are plenty of potential landmines, for example the continuing negotiation on the Greek debt restructuring. GREED & fear also still believes that market pressure will ultimately force a more concrete fiscal union as a quid pro quo for more outright monetisation. Still with the highly flexible Draghi at the helm, and with the usual want-to-be-bullish New Year sentiment, it is too risky to keep on the recommended hedge since the risk at this juncture is all of the gains made are wiped out by a violent bear market rally.

More importantly to fans of sound currency, the bottom line is that between the ECB (assuming it does proceed with a €1 trillion LTRO), and the Fed (assuming it does go ahead and launch a $600 billion minimum (and as much as $1 trillion) QE3 as every bank expects by June), the global balance sheet will have increased by nearly $3 trillion since July, even as gold has actually declined in price. And if anyone needs the final clue as to what is going on, an increase in the US debt ceiling to $16.4 trillion which is expected to pass imminently, would mean that by simple correlation a fair value for the yellow metal would be just under $2000 per ounce.


So going back to the first paragraph: "And gold is where again?"

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bank guy in Brussels's picture

With Mario Draghi in charge of the mint

The EU will surely, surely print

SheepDog-One's picture

Hell, lets just call it QUADRILLIONS and solve every problem in the world! What could possibly go wrong?

Manthong's picture

Yeah, a guy I know heard that a dude who has a friend over at the waffle joint says two bankers were talking something about "3 septillion yuros" going for some kind of fun or facility or something like that.

I think he said I shouldn't wear shorts or whatever and it would be good to get cold.

Didn't make any sense to me.


nope-1004's picture

When I was a kid, $1Trillion was a lot of money.

Now?  meh...


GOSPLAN HERO's picture

Revelation 13:16 “And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads”

Revelation 13:17 “And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.” ONE WORLD CURRENCY, COMRADES.

NewThor's picture

My brain hurts and my heart is heavy

as I wait for Faithful and True,

down by the levy.

Transformer's picture

Drove my Chevy to the levy

But the levy was dry.

jeff montanye's picture

governments world wide are finding out that the levy has indeed gone dry.

the embankment is levee.  

LoneCapitalist's picture

When the levy breaks, momma you got to go. Oh well, Oh well, Oh well.

Rodolfito's picture

The assholes that are currently crashing the world economy, also wrote the bible in 800 AD, and they need us all to have been programmed to accept the RFID chip (the mark of the beast). I, for one, would rather die than accept their chip. So, I refuse all vaccines (because nano-RFIDs are in them - eg. swine flu vaccine), and when the outbreak of avian flu (H5N1) comes along, this year or next, they will wheel out the pre-prepared H5N1 vaccine / RFID chip combo. Once you have this chip, you are marked for life, trackable, controllable, etc. Only accept it if you can cope with the concomitant slavery.

Transformer's picture

Get your blood serum vit D levels checked, and begin a program of regular vit D supplement, to keep your levels up.  This fights flu and gives you 100-12,000 times the protection of flu shots (from peer reviewed papers on the subject).  If we have a killer flu outbreak, those with high D levels may be the majority of the survivors.  If you come down with a cold or flu, taking 35K units right away, and two more times at 12 hour intervals will usually knock it out quickly.

smiler03's picture

You are a fucking moron who deserves to die from your own lunatic advice. Go ahead and make my day.

SilverRhino's picture

Actually he is dead on. See studies from the 1918 flu pandemic. Vitamin D recipients had a much higher survival rate than non recipients.

Wixard's picture

Never ascribe to malice that which is adequately explained by incompetence -





While It's entirely possible there's a secret society behind the scenes giving suspiscious minds nightmares, it's equally possible and more likily that it's simbly a bunch of idiots.

I think another fitting quote:


"Do you not know, my son, with what little understanding the world is ruled?"
--Pope Julius III

A Dim View's picture

"Man will never be free until the last king is strangled with the entrails of the last priest."
- Denis Diderot (1713-1784)


says it all really...

ebworthen's picture

And the new Kings are Bankers, and the new Priests are Politicians.

Cadavre's picture

Back in the daze your humble narrator was checking out them dirtly little pamphlets in the Dad's bottom drawer and ran accross a really old Playboy with an ad for an upscale watch model #666!

What are those USD shorters going to do - ooooh noooo - the entire US market is a long EUR bet - I guess it will all equalize when the S&P (again) downgrades the land of the dazed home of the schweeeeee ...

Obadiah's picture

The Mark is the "seal" IN your forehead  meaning In your Mind.  It wont be a physical Mark.  GS is much smarter than that.  I mean Satan is...

DoChenRollingBearing's picture

+ 1


Fringe Blogger Bearing explores numbers like trillions (in US national debt) in his new article at his blog.  I look at what 3% inflation means over a longer period of time.  And also look at 11% per year growth in our national debt for a really ugly picture.

"Exponential Growth"

If you would like the link, please gmail me at my name and promise me you will behave.  I make ZH-ers do this runaround in an attempt to keep out robots and spammers (two of the latter have made it through the gates though).  How can 230 Zh-ers be wrong?

s2man's picture

Why bother emailing?  A quick google shows DCRB's blog is http://robertmixblog.blogspot.com . Let the spam begin.

ReactionToClosedMinds's picture

Nice reasonably 'straight' blog

(I say straight since the current trend seems to advocate more and more outrageous views versus reasoned factually based discussion/analysis .... no one possesses ultimate wisdom ... last I knew we are all human subject to the weaknesses of our condition ....... I continue to expect that some day Paul Krugman will make a convincing point even though his batting average is abysmally low).

Regarding Marc Faber's 2011 Barron's investment picks down below 20%.  Go do a cumulative aggregation ..... Faber has had some monster years leaving his counterparts oftentimes in the dust.  Do not judge anybody by last year ...... these are very very different times we live in ... for all the reasons discussed here at ZH.  Ignore Faber at your own peril .... lately (the last 5 years) he has been more on target than almost anyone else .....

Have subscribed to Barron's since late 1980s.  Without question, Zulauf, Faber and Hickey have been ahead of the curve consistently.  That is why they have credibility.  I was saddened to see Archie McAliister had passed away ... he was very good in the insurance sector.  Gabellli is a classic stock-picker and Meryl Witmer I've come to respect as a good picker also.  Abby is essentially  a 'shill' ... and I do not mean that as derisively as it sounds ....  but she is paid by GS to promulgate a line for a variety of internal functions & purposes ..... As long as you recognize that there should be no issue with her.  She is professional and was wonder woman in early 1990s ... so she gets my attention.

Scott Black is ok and you cannot ignore Gross as he (Pimco) and Larry Fink et al at Blackrock are major factors in the Treasury market. 

Abelson, I've increasingly come to dismiss ....... for too many reasons & some that are probably personal.


Santoli, Kopin Tan, Gene Epstein (their economist) and the options column (David Sears I think) keep me subscribed now.




Long time WSJ Onliner (think charter)

IBD Weekend and online ( a must in any structural bull market ... seriously there is a ton of excellent unique info & data)

DecisionPoint subscriber .... excellent without question for pure technical analysis

Aden Sisters ..... have followed them for 15 years and they are excellent on the st, intermed & especially lt trends

The Economist .... used to be fantastic 25+ years ago (FT and Economist were both more purely finance/economics periodicals in a very hard-nosed old British way .... but to me since the 1990s The Economist as well as Fin Times seem to have targeted the New Democrats (see Clinton) as their natural audience versus WSJ/IBD readers and classic Euro-elites (the Euro is the 'answer' crowd) ... so they are a shade more tolerable than NYTimes (which still has some of the best true journalists working there still in an increasingly editorialized 'news' presentation).  Both are as 'wordy' without  really saying much but their style & analysis seems a little tighter  than typical  NYTimes pieces in my personal opinion.

Sy Harding's StreetSmart Report ..... good marks for intermediate timing in a simple clear way ... but am still undedcided ... maybe this year and next will  determine more clearly the value or not


ZeroHedge .... among the best of the blogs and any news site for edgy but highly relevant information..... it has it's ideological predisposition as well .... but much of that revolves around a broader discussion of what 'reality' really is ... versus what the 'overlords' portray to the masses in main stream media.



francis_sawyer's picture

what 'reality' really is...


What 'reality' REALLY is, is that a fiat monetary regime based on fractional reserve banking has NO HOPE... NONE... ...of surviving indefinitely in a world that is arguably packed to the gills with population growth that requires an exponential growth calculus on a planet of finite resources... Have a nice day!

Cadavre's picture

20% inflation is the new 3% inflation ...

Bill D. Cat's picture

Whoa , look at all those space bucks .

-Randy marsh .

vast-dom's picture

This may clobber short positions in short term. We have abandoned all notions of funduhmentals and sound economics -- the only remaining question is how long this vaporizing hopium illusion can last¿

LongBalls's picture

I've learned my lesson. The only short I make is by pulling my money out of the market to go long more beans!

LongBalls's picture

I've learned my lesson. The only short I make is by pulling my money out of the market to go long more beans!


Yes....It was worth repeating.

Ancona's picture

The hopium will last until the screen in the bong gets clogged up. Until then......party on Garth!

cranky-old-geezer's picture



It says "One hundred thousand dollars in gold payable to bearer on demand."

Sounds like a gold standard doesn't it?

It's not.

They can change how much gold $100,000 worth is.  Overnight.  Without telling the public.

If a note doesn't say "X.XX oz of gold .999 pure", it's not a gold standard.

Elwood P Suggins's picture




The ECB's getting quite bold

Or so the market is told

A trillion they say

May be on the way

And then what'll happen to gold


Zero Govt's picture

Draghi prints, prints, prints ...not to save Euro bwankers, but sovereign debt (ie. Goldmans massive derivative and Govt debt exposure)

Goldmans 'Apostles of Destruction' are in poll position to destroy and lay waste to Europe as well as America 

should earn Blankfein a nice bonus

ToNYC's picture

Capitaine Reynaud and Pentangeli say it was the PPT the whole time!

SheepDog-One's picture

The Full Retard ceiling has been rocketed thru, put it all into gold.

Sudden Debt's picture

Here in europe we don't have a ceiling. THE SKY IS THE LIMIT!!

Sudden Debt's picture

AHA!!. Got you again!!

WE DON'T THINK!! .... Hhmmmmm.... That sounded cooler in my head....

DoChenRollingBearing's picture

I gave you both one.  Same reason.

silverserfer's picture

"we dont think we use our PASSION"

constitutionalist's picture

And if you're talking about a debt ceiling in the US I cant find that one either...Its half way through the first month of the year and we're broke, so no debt ceiling. 20 trillion here we come...(by Febuary) 

francis_sawyer's picture

What we really REALLY need is a "Super-Duper Double Secret Committee" of appointed czars, so that they can spend 3 months seeing of they can squeeze out a coupla hundred thousand in budget restraints to keep us under the ceiling... 6 oughta do... We'll pay them each a million dollar bonus for their efforts...

847328_3527's picture

Get those suckers printing!



What's that sloshing around out there?

"...the global balance sheet will have increased by nearly $3 trillion since July...."

ihedgemyhedges's picture

AWESOME!!  I get to answer two questions in the same post:

TD asks: "And where is gold again?" Answer: Wherever TPTB think it is manageable.

847328_3527 asks: "What's that sloshing around out there?"  Answer: Kim Kardashian's ass.  I hear ratings are down and she's having to work harder..............