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Why JPM Sees A "Lot More Printing" By The ECB

Tyler Durden's picture




 

While the catalyst for much of the recent rally in risk assets seems to have been on the back of Europe clambering back from the edge of the abyss (and admittedly hope for better global growth and US decoupling), JPMorgan's Michael Cembalest notes that Europe remains very much an Achilles Heel going forward. With former ECB member Stark's recent comments on the already 'shocking' quality of the ECB's balance sheet, it is the outflows (or net balance of payments) from the periphery that means the ECB will simply have to keep printing. ECB funding of Spanish and Italian banks is still a relatively small part of their liabilities and should we see even a crack in the resilience of these knife-sitting nations, the retail depositors, bondholders, and non-local wholesale/retail money is unlikely to stay put (especially if there is the continued lack of growth that seems inevitable). The latest Spanish data is dreadful, as Cembalest notes, but the economic situation in France remains weak and while JPM's analysis looks for a gradual closure of the periphery's current account deficit by 2015, the ECB's need to finance the gap in the interim raises a critical question. Since the ECB's printing has boosted the US stock market primarily, will the Fed now take the lead and return the favor (QE3 or more) to help its European partners grow their (net trade) way out of this hole?

J.P.Morgan's Michael Cembalest

While Europe was the primary catalyst for the rally since November, it remains an Achilles heel. ECB repo operations have been life-savers for European governments and banks, but will Europe keep printing its way out? Bundesbank head Jens Weidmann reportedly sent a strongly-worded letter to ECB head Mario Draghi regarding Germany’s concerns about ECB financing being permanent, and on declining ECB collateral standards. Former German ECB member Stark chimed in this week, calling the quality of the ECB’s balance sheet “shocking”. However, I am inclined to view Weidmann as a paper tiger, and not just because he sent his letter after ECB operations already took place. Why believe Weidmann would be any more successful in changing ECB policy after 2 German predecessors already resigned from the ECB over the same thing?

Here’s what Weidmann is up against: the ECB may need to print a LOT more. I asked our Chief Economist Michael Vaknin to convert what the ECB is doing into a single chart (above). The bars in the chart above show the net balance of payments in the periphery, combining their current account and capital account deficits; money has been flooding out. The red triangles show how much of these outflows were financed by the ECB. There would probably already have been a banking crisis/default had these rescue operations not taken place. There may be a lot more left for the ECB to finance; our estimates of future outflows are the yellow bars (We assume a gradual closure of the periphery’s current account deficit by 2015 (through further improvements in net trade), but that the ECB has to finance the gap in the interim. For the capital account, we assume that foreign lenders only roll half of their maturing positions). Will the ECB keep printing? We think they will, but this issue admittedly lies beyond the scope of fundamental investing.

Here’s another way to think about how much heavy lifting the ECB may still have to do. As shown above, despite 645 billion Euros in emergency lending to periphery banks since 2009, the ECB still represents a small portion of bank borrowing in Italy and Spain. Assume that retail depositors stay put, as do local interbank lenders. What about bondholders and non-local wholesale/retail money; will they keep leaving? It might depend on whether Europe starts growing again. Here, the news is mixed at best. The latest from Spain is dreadful, but enough of that; let’s focus on France instead.

The economic momentum in France is only modestly better heading into the election. Sarkozy has trailed Hollande consistently in second-round polling since January, by 56 to 44. The debates may change that, but as things stand now, Hollande is in the lead, and promises to shelve Maastricht 2.0 and start from scratch. A Merkel-Hollande summit would be worth the price of admission, that’s for sure. Current IMF and OECD forecasts for French growth this year round to zero, which sounds about right given the data above.

 

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Fri, 03/09/2012 - 11:22 | 2239558 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Fiat is King, bitchez!

Fri, 03/09/2012 - 11:26 | 2239568 Harlequin001
Harlequin001's picture

You know, I would never have believed this...

There are some rather good articles written on the run up to the Weimar fail. eerily similar isn't it...

Every one hoards cash, and then everyone offloads cash, all at the same time. Stunner...

I can't see this one coming at all, no way...

Bullish.

Fri, 03/09/2012 - 11:27 | 2239576 resurger
resurger's picture

me 2 ...

Fri, 03/09/2012 - 11:31 | 2239603 Harlequin001
Harlequin001's picture

In fact, I'm feeling so good about this whole bailout thingy I'm goiing looong GGB2's.

Oh wait... my bank manager says I can't afford that one anymore...

Not after my GGB1's anyway...

Still, hopefully the ECB will bail me out, not...

Fri, 03/09/2012 - 11:22 | 2239561 q99x2
q99x2's picture

Someone's gotta pay for the Morgues losses.

Fri, 03/09/2012 - 11:27 | 2239564 battle axe
battle axe's picture

"the quality of the ECB's balance sheet is shocking" No shit Sherlock.

Fri, 03/09/2012 - 11:28 | 2239589 GeneMarchbanks
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I think they found some old movie ticket stubs in there...

Fri, 03/09/2012 - 11:30 | 2239600 HarryM
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"Will the Fed now take the lead and return the favor (QE3 or more) to help its European partners grow their (net trade) way out of this hole?"

 

Was that a rhetorical question?

Fri, 03/09/2012 - 11:27 | 2239578 DaveyJones
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CNBC / ONION HEADLINE: Most Wealthy Americans think US Economy Still in Recession

What a coincidence, the least wealthy think the same thing... 

Fri, 03/09/2012 - 11:27 | 2239579 disabledvet
disabledvet's picture

First off "gold is down today." Second: "before I'd start negotiating Weedman" I'd take a toke of some of the you know what...

Fri, 03/09/2012 - 11:40 | 2239628 Hulk
Hulk's picture

Au up 30 bucks now (from the low). Started about the time Krastings posted his 160% debt to GDP ratio...

Fri, 03/09/2012 - 11:27 | 2239582 Ted Baker
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IN ESSENCE IS THE JOB OF THE FED "LITERALLY" TO FUND THIS GAP IN EUROPE. IN THE MEAN TIME WATCH FOR THE MEXICAN PESO (11.50 EXPECTED VS. USD) AND CANADIAN DOLLAR (0.93 VS. USD) OVER THE NEXT MONTH OR SO BEFORE THE FED PRINTING BECOMES CLEARER...

Fri, 03/09/2012 - 11:33 | 2239609 Moneyswirth
Moneyswirth's picture

THIS IS BRILLIANT.  KEEP TYPING IN ALL CAPS, IT'S FUCKING AWESOME

Fri, 03/09/2012 - 11:48 | 2239661 Schmuck Raker
Schmuck Raker's picture

THAT FIRST SENTENCE "DIDN'T" EVEN MAKE SENSE TO ME.

BUT THAT IS JUST BECAUSE TED BAKER IS A GENIUS AND I AM NOT!

Fri, 03/09/2012 - 11:29 | 2239591 LongSoupLine
LongSoupLine's picture

JPM can fuk off...period.

Fri, 03/09/2012 - 11:41 | 2239630 LongSoupLine
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and whomever junked me can fuk off too.

Fri, 03/09/2012 - 11:30 | 2239597 Aunty Christ
Aunty Christ's picture

And how would QE3 ( weaker $, stronger Euro) help Europe's growth prospects??

Fri, 03/09/2012 - 11:33 | 2239607 Harlequin001
Harlequin001's picture

What makes you think the Euro will get stronger...

Fri, 03/09/2012 - 11:32 | 2239605 PaperBear
PaperBear's picture

The nonsense dip in gold/silver following the NFP seems to be over.

Fri, 03/09/2012 - 11:36 | 2239614 Harlequin001
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Instead of calling it 'Non Farm', why don't they just call it 'McDonalds'...

Fri, 03/09/2012 - 11:36 | 2239615 the 300000000th...
the 300000000th percent's picture

Its a race to the bottom and the ECB is a little behind looks like the big players Japan and the good ol US of A are in the lead but if you take into account the gdp to debt ratios The ECB looks to be in the lead. The end game will be Greece=Spain=Potugal=USA=Japan=All of Europe= Worthless and the game will continue to move to Asia and a new casino will fluorish over there for a while. That is IF we don't have WW3 in the meantime.

Fri, 03/09/2012 - 11:44 | 2239642 AndrewCostello
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All these fraudsters know how to do is print money and declare it as "growth".  Sooner rather than later, we're going to see some pretty serious inflation.  I'm amazed at how similar the newspaper articles leading up to German Hyperinflation and World War 2 are to the ones we read now - a corporate media saying "everything is fine and dandy", while the alternative press point out all the problems.

It appears that nothing has changed.

 

Protect yourselves.  I do.  Read this book and follow it to the word every day of your life.  You'll be far better off than believing the fantasies of the paper market.

 

http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref

Fri, 03/09/2012 - 11:48 | 2239662 Peter K
Peter K's picture

And let's not forget that they will have the entire Greek society that they will need to fund post Bailout3/PSI2 :)

Fri, 03/09/2012 - 11:49 | 2239666 dvsteenk
dvsteenk's picture

even new printing doesn't matter anymore i guess

there's already loads of "free" money circulating, they're drowning in it, and it is being used to manipulate markets non-stop by insiders behind non-existing chinese walls

not to deleverage, but to "recapitalize" by stealing it from the unknowing

next week's Opex is being prepared already, another round of stealing from holders of puts, short ETF's and other bearview derivatives, while they least expect it

because how on earth can this "market" not go down in the current economic situation, no? That's exactly what they want you to think, so they can squeeze your gut

 

Fri, 03/09/2012 - 11:54 | 2239684 johngoes
johngoes's picture

Hollande may get elected on the dump Maastricht platform, but I'd bet he toes the line. Look at Ireland - they voted in an anti-bank person and someone got him by the balls shortly after the election and he toed the bank rescue line. IMO there's something hidden the in the banking ether that scares the crap out of those in power and thus the pretend and extend keeps rolling along, no matter who's in power.

The only country that hasn't toed the line is Iceland. I guess they're too small fry to matter.

Fri, 03/09/2012 - 11:56 | 2239686 LawsofPhysics
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JPM is the ultimate insider.  They know everyone is insolvent, of course they see more printing.  Sheesh.

Fri, 03/09/2012 - 11:55 | 2239689 Eddyspain
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France has surpassed the PIIGs in the sense that it has managed to achive both an increase in unemployment AND in its trade balance deficit, at the same time. 

Fri, 03/09/2012 - 12:08 | 2239726 gatorengineer
gatorengineer's picture

Frog Elections, German Elections, US Elections......  Nuff said.  Printing will continue at least until the US election.  Market illusion must be maintained.

Can you see why the Republicrats didnt want the Whitehouse this time around?  When they run outta ink its gonna get Ugly.

 

Fri, 03/09/2012 - 12:14 | 2239742 yogibear
yogibear's picture

More printing means higher and higher average oil prices. 

Europe and the US will get much more inflation then they bargained for. No free lunch.

 

Fri, 03/09/2012 - 12:28 | 2239836 rubearish10
rubearish10's picture

The fact that FED CTRL+P is still "in play" is the primary reason for the stubborn 130 handle in the Euro. The game continues.

Fri, 03/09/2012 - 12:50 | 2239947 alfred b.
alfred b.'s picture

 

  I just can't stop laughing... BNN, the cnbc of the north, is now commenting about the "US improving economy"....another mouthpiece for the bankster system at most times!

Buy physical gold and silver!!!

Fri, 03/09/2012 - 12:52 | 2239960 flyingpigg
flyingpigg's picture

Yes, punk, this is dirty Mario.  I know what you're thinking. "Did he fire six shots or only five?" Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a LTRO, the most powerful money printing machine in the world, and would blow your head clean off, you've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?

Fri, 03/09/2012 - 12:54 | 2239972 trilliontroll
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" Here’s what Weidmann is up against: the ECB may need to print a LOT more. "

As I said before , a 10 000 000 000 000 € LTRO is necessary.

Fri, 03/09/2012 - 13:37 | 2240162 highwaytoserfdom
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JPM    is insolvent... 75T DERIVATIVES  We can only guess on the peek a boo on stress test..   BLS did a downgrade on Massachusetts 2011 job growth....  from 40,000 to 9,000    only a miss of 444%.  Liesman on CNBS says 1,000.000 people leaving jobs is good? WTF first in first out on cost cutting by corporations... Goodness knows top line is not contributing....  

NOTIONAL AMOUNT OF DERIVATIVE CONTRACTS

Note: Credit derivatives have been included in the sum of total derivatives.

SEPTEMBER 30, 2011, $ MILLIONS

 

BANK                       tOTAL DERIVATIVES

 

1 JPMORGAN CHASE BANK      $75,351,583 

2 CITIBANK NATIONAL ASSN    55,607,201 

3 BANK OF AMERICA N         55,123,036 

4 GOLDMAN SACHS             46,453,719 

5 HSBC BANK                  4,441,859 

6 WELLS FARGO BANK           3,921,372 

7 MORGAN STANLEY BANK        2,064,468 

8 STATE STREET               1,469,244 

9 BANK OF NEW YORK MELLON    1,405,490 

10 PNC BANK NATIONAL           261,236 

 

 

www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives...

Fri, 03/09/2012 - 13:38 | 2240166 falak pema
falak pema's picture

these figures seem to show a lower cumulative balance sheet for the ECB than the 3.5 T that has been bandied around. Not saying it ain't already gone viral!

Fri, 03/09/2012 - 15:10 | 2240581 rosebud
rosebud's picture

seeing more and more library monitors with zero hedge on the screen    SUCCESS!

Fri, 03/09/2012 - 23:49 | 2242409 holdbuysell
holdbuysell's picture

"the ECB may need to print a LOT more."

Call me slow, but that's JPM stating that the ECB is printing.

I KNEW IT!

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