Global Economic
Trend Analysis

Recent Posts

Friday, September 05, 2014 12:34 AM

ECB Now a Hedge Fund; €1T Bazooka; ECB Promotes Euro Carry Trade; Draghi Has it Backwards

Mish Moved to MishTalk.Com Click to Visit.

Draghi Has it Backwards

A director at a global financial company with offices worldwide pinged me in response to my post ECB's €40bn Stimulus Gamble: ECB Pulls Out Bazooka, Cuts Rates, Buys Assets; Will this Stimulate Lending?.

Hello Mish,

Mario Draghi is an idiot. Banks create money when they lend. The loans create a requirement for reserves which ultimately reverts back as deposits at the ECB. The negative interest rate is therefore a tax on capital and a tax on lending. This not rocket science.

I’d start a charity whereby every newly appointed central bank board member is sent a free copy of Rothbard’s Mystery of Banking except I am beginning to doubt their ability to read.

Name Withheld by Request
Bond Bubble Grows

I responded to "NW" with "I  agree 100%. All they have done is give banks the incentive to park money on sovereign bonds with diminishing yield. The bond bubble grows."

It is ridiculous that Spanish and Italian 10-Year bonds trade at a lower yield than 10-year us treasuries, yet that is the current state of affairs.

Is there 0% risk of a Greece- or Cyprus-like disaster in Spain, Italy, or Portugal? That's exactly what those yields suggest.

European banks, already leveraged to the hilt in their own nation's bonds, will now buy more to avoid receiving -0.2% interest on funds parked at the ECB.

Moreover, European banks under pressure to help SMEs (small and medium businesses) will no doubt make poor lending decisions. Bank losses will grow,

€1 Trillion Bazooka

How big is that Bazooka? An Independent headline reads ECB's €40bn stimulus gamble to boost European economy.

It now appears €40bn is orders of magnitude off. Please consider an ECB Press Conference Q&A (not available when I commented yesterday).
Question: Mr Draghi, you said that the new measures and the TLTROs will have a sizeable impact on your balance sheet. Could you give us more insight into how much you expect the impact to be for the new measures? And my second question is, following your speech in Jackson Hole, did you discuss QE today?

Draghi: On the first question - you know, this is quite a complex package of measures. You have the TLTROs which are going to unfold over several operations over two years initially, then two more years. So that’s one thing. Then you have the ABS, which is in a sense a very novel programme. Then we have the starting again of a covered bond purchase programme. As you all know, it’s not a new thing, but the purposes of this programme are very different from the previous programmes.

So all this makes a precise estimate of the impact that these transactions will have on our balance sheet very complicated, especially at the stage when none of these operations have as yet been undertaken. So we may be more precise especially once the TLTROs, at least the first two TLTROs, have taken place.

The aim here, however, is twofold. The aim is to increase the measures that produce credit easing for the banking industry and banking sector, which as you know represents more than 80% of total intermediation, credit intermediation, in the euro area. The second aim is to steer, significantly steer, the size of our balance sheet towards the dimensions it used to have at the beginning of 2012.
An increase in the ECB's balance sheet to that size would imply something on the order of one trillion euros.


Draghi confirmed the asset purchases would "include the real estate, the RMBS, real estate ABS. It would also include a fairly wide range of ABS containing loans to the real economy," but only "the senior tranches, and the mezzanine tranches only if there is a guarantee."

Can I ask: Who provides the guarantee, and why should any such guarantee be considered any good?

Short-Term Rates Go Negative in 4 Eurozone Countries

In ECB Opens Liquidity Spout, Reuters reports ...
The euro was deep under water on Friday having suffered its steepest daily fall in three years after the European Central Bank stunned markets by cutting interest rates and embarking on a trillion-euro asset-buying binge.

The aggressive shift sent short-term bond yields into negative territory in Germany, France, the Netherlands and Austria, giving investors an overwhelming incentive to sell euros for higher yielding assets elsewhere.
ECB Promotes Euro Carry Trade

Lovely. By creating an incentive to sell euros, the ECB is effectively promoting a Euro-based carry trade.

Since a yen-based carry trade did nothing to stimulate lending in Japan, why is a carry trade supposed to stimulate lending in the Eurozone?

Moreover, it's one thing when global interest rates are high enough to cover a significant portion of currency fluctuations, but what does one do when 12-month US treasuries yield less than 0.1% and 2-year treasuries yield only 0.54%?

The answer of course is to plow in to risky emerging markets at a time of already heightened risk.

I confidently predict some hedge funds will blow up attempting such a maneuver with leverage.

ECB Now a Hedge Fund

The comment of the month award goes to Guru Huky at Guru's Blog for his accurate assessment of Thursday's surprise announcement by the ECB.

Guru says Draghi Turns the ECB Into Hedge Fund While Lowering Rates to Record Low of 0.05%

To those who think this stunning ECB maneuver will end well, I offer this simple advice "It won't".

Mike "Mish" Shedlock

Last 10 Posts

Copyright 2009 Mike Shedlock. All Rights Reserved.
View My Stats