21st December 2011: Pass-the-Trash – Helicopter Draghi’s LTRO = Lying To Restore Order. At Last…We’re All Keynesians Now

ECB Pass-The-Trash Shell Game

Quote of the Day:

What if it’s true that, as Kevin Philips recently stated in an article in Harper’s that:

“Ever since the 1960’s Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured.”

Chris Martenson – quoting Kevin Philips

 

But stop and think what it would mean if there were 4% of persistent and undeniable… y’know, you can’t explain away this 4% inflation rate …it would mean that the Fed would clear its throat say, in the marble-mouthed way that it speaks, that… “AHEM! The Party’s Over”.

Jim Grant

Macro Overview

Helicopter Draghi Treads a Fine Line – But Do Not Be Too Quick To Judge

• There are a couple of things that the ECB wants.

1. It wants to preserve its inflation-fighting credibility (its only mandate!) and it wants to be perceived as a bank which keeps inflation firmly under control.
2. Secondly, it wants to help the Eurozone survive. This means it wants to help lower the yields of sovereign debt at the periphery but without the moral hazard of favoritism (i.e. directly purchasing PIIGS paper is a no-go).
• This is the fine line the (Long Term Refinancing Operation) LTRO tries to circumnavigate but it may be achieving the exact opposite. The World’s largest fund manager described it first as a shell game, then later tweeted that it may also mean “Cash for Trash”, “3 card “monti” or all of the above – implying, of course, that it was basically a thinly veiled inflationary monetary response (aka QE – European style).
• What do I think LTRO means? Lying To Restore Order. There is only one thing worse than lying to make things better for everyone… and that is lying to make things worse for everyone! The ECB is truly putting its credibility on the line here, but so far it’s showing signs of actually working… kinda.

• The WSJ featured Tchir of TF Market Adivsors, who thinks that the banks would use the facility to repair holes in their own balance sheets but to purchase new high yield paper in Europe anyway. So it is possible that, rather than preserving the credibility of Europe’s central bank while reducing yields of periphery debt, the LTRO may have the exact opposite effect.
• There is a lot of skepticism in the air on this and, I admit, the ECB is treading a fine line here. But the facility has certainly been well received by the banks and actually the LTRO + Treaty Change combo may be as close to my original multi-layered plan to save the Euro as you are going to get. I still think they are missing the middle piece, which is the collateralization of the EFSF/ESM/whatever-they-think-of-next with real taxpayers’ money from the core, but let’s not beat the Europeans up too much – it does appear for now that they are trying to take decisive and truly penetrative action to stop the contagion of a Eurozone Crisis.
• Never-the-less we should give it some time to see how it sits in the market digestive system. It may be that the German is “able” to pay for the profligacy of peripheral states via an “inflation creep plus a-little-something-extra, perhaps” – as observed in the US shell games and deception.
• The European Central Bank was the last major Western bank to resist cranking the printing press. But it appears that this card may be falling too. Things to watch:
• The German press in response to ECB QE.
• The response/rhetoric from other central banks to ECB’s new stance (including BoE, BoJ, Fed, SNB).
• The commodity markets in response to a global printing frenzy.
• Global Inflation Trends – especially in high inflation-risk economies such as China, Brazil, Arab Spring etc.

Market Overview

Oracle Puts A Spanner In The Works

• Oracle didn’t get the memo – the business cycle is supposed to be turning upward! But the stock went crashing to it’s year lows as it missed earnings. See Chart of the Day.

Commodities Poised For Rally

• Oil was up too today – let’s keep an eye on these commodities now that the ECB has one hand on the printing lever.

Big GDP Numbers Confirmed Tomorrow

• Look out for US and UK GDP numbers out tomorrow to confirm Q3 growth.

Chart of the Day

Oracle Stock (Source: Bloomberg)

Events

Macro Events:

Update:

• Italian GDP negative but in line.

Alerts:

• NetherlandsGDP
• US GDP
• UK GDP

Corporate Events:

Results:

• Nothing Significant

Dividends:

• General Electric [GE]

Reading, Links:

Nothing Significant