The ECB went from loading up on sovereign debt and making a huge mess of it when Greece defaulted, to the LTRO program which has not made a big mess yet but will. Things are about to go full-circle as the ECB threatens once again to make another mess of things with sovereign bond purchases.
The Bundesbank, Germany's central bank protested bond purchases the last time (correctly), and will do so again, likely to no avail, and with the same predictable results.
CNBC reports ECB Official Says Bond-Buying Program Available
ECB Executive Board member Benoit Coeure, the ECB board member in charge of market operations, said the central bank still had the Securities Market program (SMP) in place allowing it to purchase debt of euro zone nations, should the need arise.Preposterous Statements
"We are seeing today growing signs of normalization on a whole group of market segments ... but the situation in recent days shows that this normalization remains fragile," Coeure told a conference in Paris.
Referring to Spain, where sovereign debt yields have spiked amid concerns over the government's ability to cut its deficit, Coeure said: "The political will is there, which makes me think that what is happening at the moment in the market does not reflect the fundamentals."
"There is no reason why the situation does not normalize in Spain as well."
"We have an instrument for intervention, the SMP, which has not been used recently but which exists."
His comments appeared to open the door to the ECB reactivating its bond-buying program — a policy option which would meet strong resistance from the Bundesbank and other ECB policymakers from the euro zone's healthier "core" economies.
It's difficult to tell if Benoit Coeure is a liar or an idiot or some combination thereof, but the idea that "fundamentals" in Spain are good, and the idea that there are "growing signs of normalization" are both preposterous.
It has taken trillions of dollars of intervention to make things look stable, but stable they aren't. Yields in Italy and Spain rose substantially the moment the LTRO ended.
Spain now appears poised to make matters much worse for itself with a disastrous tax hikes. For details, please see Slow Road to Hell: Spain Entertains VAT Hike
Deja Vue All Over Again
Steen Jakobsen, chief economist as Saxo Bank in Denmark, borrows a phrase from baseball manager Yogi Berra and says it's a case of "Deja Vue all Over Again". Via email ...
It seems the long awaited pay-back to: extend-and-pretend policies has started. The problem list is forever increasing, but my ranking would be:Front-Running the Sweet Talk
Spain: The government played an extremely bad hand of Poker and lost. First response to this crisis will be 'bad bank' rescue funded by EFSF most likely (but with tough conditions due to Spain bad behavior). The Spanish government has been playing hike-and-seek and is losing even Brussels support.
The 10-year bond yield closed around 6 pct yesterday after 4.5 pct less than two weeks ago. Please also see my piece from last week: The rain in Spain is mainly in the plains
French Election: Sarkozy has been bad news forever and looks to be even more bad news post April 22nd. His opponent is playing the 'Mitterand card' - replaying the Grand Times of France in Europe. Sarkozy is improving in the polls but still trails in the May 6th 2nd round by at least 10 percentage points.
Bad Economics: As indicated in our Q1 Outlook - Perfect Storm - the economic reality will and should ultimately catch up to bad policies.
Compounding macro mistakes not only crowds-out the micro economy but it also place false hope in voters and investors instead of a resolution for reforms. Europe is in free-fall economically and the six cylinder engine is down to only one or two working.
Asia: Data, mainly China leaves less than needed room for cuts and the general easy monetary policy which the market hopes for.
The new 'openness' brought forward by the outgoing elite is sign of weakness not strength. The internal dynamics is falling apart as housing bubble does its Third Act in China ( after First and Second Act in Europe and the US) - house prices and sales down 15-25 pct in latest surveys.
Lack of Policy Tools: The slower growth and falling markets have made market increase probabilities of more QE either sterilized or not. However ....
- FOMC is split down the middle - more so than generally accepted by the liquidity junkies
- The actual amount needed to make an impact is GIGANTIC – The FED have increased its balance sheet to in excess of 3 trillion US dollar, so to make a 'dent' they need to print/buy another 1 trillion - unrealistic! We will get more but only to keep the 'game going' and not enough to make an impact.
- This means Bernanke and FED will try to sweet talk market into believing they can do more. Academic papers clearly show the initial talk of QE (before implementation) is 75 pc of the net effect!
What Remains is More of the Same
- Under financed government funding
- Undercapitalized banks
- An economic situation which looks, feels and taste like 'Japanisation' with decades of printing, low growth, and no reforms
- Lack of reforms - but more austerity (saving ourselves to prosperity)
If I was concerned in December 2011 then I am getting more scared now. Policy makers are left with nothing but to talk-and-pretend, and they will. However, time is running out and all we got coming is some more easy money, the exact reason we are here entering into the third or fifth wave down.
For the balance of this week the market is oversold and looking for more QE, but ultimately we risk that we are now repeating the trading patterns of 2010 and 2011 with tops now in place, the only difference being, everything has been tried before. As the quote goes: History repeats itself, historians repeat each other (Phillip Guedalla).
Time to bring the alertness to RED I am sorry to say.
Steen
75% of the benefit of QE comes before implementation because banks are tipped off in advance of the program before anyone else with details as to the size and scope of the Fed's operations.
The banks front-run the trade knowing what and when the Fed will buy, then start unloading when the Fed becomes the buyer of last resort.
At some point however, sweet talk and sweet actions will no longer work as I said yesterday in Lollipops and Tantrums; Is the Fed Promoting Recovery or Desperation? QE "Appears" to Works Until It's Obvious it Never Did
One Lollipop Too ManySweet Talkin' Guys
One of these times, and I have to admit I expected it long ago, the market will not be satisfied with another lollipop. At that point, instead of cheering another lollipop, the market will throw up like a child who has eaten three donuts and five lollipops too many.
For now, in honor of the Fed, the ECB, and the Central Bank of China, I offer you this tribute to Sweet Talkin' Guys.
Link if video does not play: The Chiffons - sweet talking guy
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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