"Super Mario" Unleashes the Bazooka

[Virgil Showlion]

For those that haven't been paying attention, Europe (specifically, the Eurozone) has been melting down at a spectacular rate over the past few years. Today was the do-or-die day for the ECB: either keep the party going (and the Euro crashing) by firing the equivalent of a monetary bazooka at European banks and lenders, or admit failure, prevent further growth of the problem, and unleash the already-monumental consequences of stopping the music.

Predictably, they chose the former option. What wasn't predictable was the unprecedented size of the bazooka they're using. Courtesy of ZH:

Moments ago the ECB announced not only a 10 bps cut to the deposit rate expected pushing it to -40%, but also announced a 5 bp rate cut to the refinance (pushing it to 0.00%) and the marginal lending rate (now at 0.25%), and also boosted QE by €20bn to €80 billion per month, the addition of afour new targeted TLTROs each with a maturity of 4 years, but the most surprising announcement was that the ECB would also for the first time include investment grade euro-denominated bonds issued by non-bank corporations along the list of assets that are eligible for regular purchases.

For those unfamiliar with the language, the above basically boils down to:

• The ECB is coercing European banks to flood the Eurozone with credit. Essentially, they're penalizing banks (and by extension, bank customers) that save money, coercing banks to loan out as much money as possible to whoever will take it.
  
• The ECB has increased the rate at which they're buying European debt for monetization. In layman's terms, they're increasing the rate at which they're printing money.
  
• They're expanding the scope and the permissiveness of the kinds of junk assets they'll buy (and from whom) in exchange for (you guessed it) issuing more Euro-denominated credit.
  

The goal of all of three steps is simple: flood Europe with Euros. Depreciate the currency as much as possible. This has several effects, but the ones central banks are specifically looking for are: i) some economists believe that (contrary to all evidence) flooding markets this way stimulates real economic growth; ii) increasing the rate of inflation reduces the value of Euro-denominated assets (most of which are liabilities of European governments) held by the European middle class who can "afford to" have their pensions, retirement income, savings, etc. eaten away; and ii) depreciating the Euro with respect to other world currencies is favourable for European exporters and forces more Europeans to buy locally. The effects of the declining Euro have already been observed in record collapses in import trade from other nations.

What does this mean for the US?

In the short term, it means the US dollar, US stocks, US everything is going up. Everyone will jump from a rapidly sinking ship to one sinking less rapidly. In the long term, the ECB's use of the money bazooka is going to put more pressure on the US Federal Reserve to take similar measures to prop up the US's flagging economy. The Fed really doesn't want to do this, because unlike the ECB, they're actually liable for certain inflationary losses.

In any case, the consensus prediction from among the ZH peanut gallery seems to be a +350 pop in the Dow today as a reaction to the ECB "Hail Mary". What actually happens will depend on how investors see the move: will they celebrate because the party is still on, or will the the fact that the end is nigh spook them?

We shall wait and see.

[Virgil Showlion]

Not out of ammo yet, apparently.

[NoNamePerson]

Mar 10, 2016 9:35:21 GMT -5 Virgil Showlion said:

For those that haven't been paying attention, Europe (specifically, the Eurozone) has been melting down at a spectacular rate over the past few years. Today was the do-or-die day for the ECB: either keep the party going (and the Euro crashing) by firing the equivalent of a monetary bazooka at European banks and lenders, or admit failure, prevent further growth of the problem, and unleash the already-monumental consequences of stopping the music.

Predictably, they chose the former option. What wasn't predictable was the unprecedented size of the bazooka they're using. Courtesy of ZH:

Moments ago the ECB announced not only a 10 bps cut to the deposit rate expected pushing it to -40%, but also announced a 5 bp rate cut to the refinance (pushing it to 0.00%) and the marginal lending rate (now at 0.25%), and also boosted QE by €20bn to €80 billion per month, the addition of afour new targeted TLTROs each with a maturity of 4 years, but the most surprising announcement was that the ECB would also for the first time include investment grade euro-denominated bonds issued by non-bank corporations along the list of assets that are eligible for regular purchases.

For those unfamiliar with the language, the above basically boils down to:

• The ECB is coercing European banks to flood the Eurozone with credit. Essentially, they're penalizing banks (and by extension, bank customers) that save money, coercing banks to loan out as much money as possible to whoever will take it.
  
• The ECB has increased the rate at which they're buying European debt for monetization. In layman's terms, they're increasing the rate at which they're printing money.
  
• They're expanding the scope and the permissiveness of the kinds of junk assets they'll buy (and from whom) in exchange for (you guessed it) issuing more Euro-denominated credit.
  

The goal of all of three steps is simple: flood Europe with Euros. Depreciate the currency as much as possible. This has several effects, but the ones central banks are specifically looking for are: i) some economists believe that (contrary to all evidence) flooding markets this way stimulates real economic growth; ii) increasing the rate of inflation reduces the value of Euro-denominated assets (most of which are liabilities of European governments) held by the European middle class who can "afford to" have their pensions, retirement income, savings, etc. eaten away; and ii) depreciating the Euro with respect to other world currencies is favourable for European exporters and forces more Europeans to buy locally. The effects of the declining Euro have already been observed in record collapses in import trade from other nations.

What does this mean for the US?

In the short term, it means the US dollar, US stocks, US everything is going up. Everyone will jump from a rapidly sinking ship to one sinking less rapidly. In the long term, the ECB's use of the money bazooka is going to put more pressure on the US Federal Reserve to take similar measures to prop up the US's flagging economy. The Fed really doesn't want to do this, because unlike the ECB, they're actually liable for certain inflationary losses.

In any case, the consensus prediction from among the ZH peanut gallery seems to be a +350 pop in the Dow today as a reaction to the ECB "Hail Mary". What actually happens will depend on how investors see the move: will they celebrate because the party is still on, or will the the fact that the end is nigh spook them?

We shall wait and see.

Is this another reason for us to be moving to Canada since we (the US) will be the only one affected by this

[Virgil Showlion]

Mar 10, 2016 9:40:05 GMT -5 NoNamePerson said:

Is this another reason for us to be moving to Canada since we (the US) will be the only one affected by this

The whole world is going to be affected by this. Canadian markets are going to pop and the Canadian dollar is going to gain value with respect to the Euro, the same as the US dollar.

The move might hurt the US more than most since the dollar is still seen as a "safe haven" (insert laugh track here) for wealth, meaning more USD will be bought than other currencies in response to the announcement, meaning the USD will gain value with respect to other currencies, which will hurt US exports.

There's nothing you can do about it, so don't lose any sleep. But be aware that it's happening.

[bean29]

Virgil,

How does this affect US Residents who may be looking to buy or sell real estate?

Example: My MIL has a duplex which she was going to put on the market soon. I am thinking she should get it listed ASAP b/c real estate values could go down. I take it from what you said though that the moves in Europe will not cause Mortgage Lending rates to increase but rather to decrease?

I guess it is too late for me to the international funds in my 401K

[Virgil Showlion]

You can't make this stuff up:

Draghi Blew It - Euro, Stocks Retrace Bazooka Bounce

Within an hour of unleashing the yuuge bazooka, Draghi blew it by failing Central Planning 101:

      *DRAGHI DOESN'T ANTICIPATE MORE RATE CUTS BASED ON CURRENT VIEW

As we tweeted - you never close an open-ended monetary stimulus package...

EURUSD has entirely retraced the plunge and Dow futures are tumbling back to reality.

For the layman: "Super" Mario Draghi, ECB President, basically killed the "party's still on" rally by carelessly mentioning that the ECB might not keep the party going the next time they're needed.

I'm guessing within an hour or two we'll get a "What I really meant to say was..." ...the party's on forever. Trust me. And the rally will be back on!

[Virgil Showlion]

Mar 10, 2016 9:54:30 GMT -5 bean29 said:

Virgil,

How does this affect US Residents who may be looking to buy or sell real estate?

Example: My MIL has a duplex which she was going to put on the market soon. I am thinking she should get it listed ASAP b/c real estate values could go down. I take it from what you said though that the moves in Europe will not cause Mortgage Lending rates to increase but rather to decrease?

I guess it is too late for me to the international funds in my 401K

I'm sorry, I can't and won't give you real estate advice. Too many variables.

FWIW, I don't see that Europe's problems will affect lending rates in the US for a while yet. The US Fed is sick of low rates and they're going to fight any attempt to decrease them, even if Japan and now Europe have gone deep into negative interest rate territory.

[verrip1]

ZeroHedge.  Proof positive that a broken clock is right two times a day.

But not at today's US stock market closing where the DJIA was not up 350 points as predicted.  Or up 300.  Or up 250.  Or up 200.  Try minus 5.  Was down about 200 points near midday.

Yet again the faulty premises and conspiracy theories of ZeroHedge are proven wrong by the data.   All the drama talk about bazookas and floods and Hail Marys and the end is nigh clearly shows the inability to present actual arguments, and instead have to resort to injecting fear into those who don't really follow markets much, but who are susceptible to calls for the end of the world as we know it. 

[Virgil Showlion]

Mar 10, 2016 19:37:14 GMT -5 verrip1 said:

ZeroHedge.  Proof positive that a broken clock is right two times a day.

But not at today's US stock market closing where the DJIA was not up 350 points as predicted.  Or up 300.  Or up 250.  Or up 200.  Try minus 5.  Was down about 200 points near midday.

Yet again the faulty premises and conspiracy theories of ZeroHedge are proven wrong by the data.   All the drama talk about bazookas and floods and Hail Marys and the end is nigh clearly shows the inability to present actual arguments, and instead have to resort to injecting fear into those who don't really follow markets much, but who are susceptible to calls for the end of the world as we know it. 

First of all, ZH didn't make a prediction on a market move. The commenters did.

Secondly, ZH reported on the markets popping immediately after the bazooka was fired, and they reported on the markets crashing minutes after Mr. Draghi stuck his foot in his mouth. Neither report was a prediction, simply a report of reality as it unfolded.

Thirdly, had the stock markets actually popped, it would mean that central bank intervention was still somewhat effective. The fact that the ECB is demonstrably impotent is far more consistent with "calls for the end of the world as we know it".

Hence your criticism fails on three levels.

I agree with you that the commenters there aren't the most insightful lot, but the site itself is a goldmine.

[verrip1]

I attributed my comments to ZH to avoid the accusation that I was wrongly being personal in my criticisms.  It is unclear in the OP exactly what is being attributed to ZH, to their commentators, the OP author or to the Man In The Moon.  The various comments in the OP were attributable to somebody/somebodies (not specified by the OP's author), and 'somebody/somebodies' were grossly in error as to the short term impact of the ECB action, and 'somebody/somebodies' used fear mongering language (even later continuing the bazooka motif of extreme damage and militarism) to justify their emotional position(s) instead of relying on rational argument(s).  As to the third point raised, it is nothing more than a second down punt to run away from a grossly failed prediction.  By somebody/somebodies. 

Therefore my criticism was and is actually successful on all those three levels, however the opponent designation may have been somewhat hazy due to, shall we say, other considerations.

On a separate point, it seems odd to me that this subject should be on the Current Events page instead of any of the money/economics/investment pages of YMAM where folks who focus on such matters, and have a lot of applicable experience, post.  Let's hope it was just an oversight. 

[Virgil Showlion]

Mar 12, 2016 2:23:15 GMT -5 verrip1 said:

I attributed my comments to ZH to avoid the accusation that I was wrongly being personal in my criticisms.  It is unclear in the OP exactly what is being attributed to ZH, to their commentators, the OP author or to the Man In The Moon.  The various comments in the OP were attributable to somebody/somebodies (not specified by the OP's author), and 'somebody/somebodies' were grossly in error as to the short term impact of the ECB action, and 'somebody/somebodies' used fear mongering language (even later continuing the bazooka motif of extreme damage and militarism) to justify their emotional position(s) instead of relying on rational argument(s).  As to the third point raised, it is nothing more than a second down punt to run away from a grossly failed prediction.  By somebody/somebodies. 

Therefore my criticism was and is actually successful on all those three levels, however the opponent designation may have been somewhat hazy due to, shall we say, other considerations.

On a separate point, it seems odd to me that this subject should be on the Current Events page instead of any of the money/economics/investment pages of YMAM where folks who focus on such matters, and have a lot of applicable experience, post.  Let's hope it was just an oversight. 

What seems odd to me is that out of a page-long OP, you jumped on the comments from "the ZH peanut gallery" in the final and least relevant paragraph, and you interpreted their cynical prediction of a pop in the Dow as doomsaying when a such a move indicates precisely the opposite.

The "peanut gallery" refers to the commenters on ZH. There are many thousands of them and they have nearly as many opinions. I don't place any particular stock in what they have to say, which is why I stated "What actually happens will depend on how investors see the move: ...". My apologies if this wasn't clear.

The "bazooka" meme was started by "The Economist", one of the most widely-read economic magazines in the world, hence take it up with them.

If you want to know which opinions are mine, which are ZH's, and which are the peanut gallery's: the +350 Dow prediction was the peanut gallery (a few commenters were cynically predicting this, hence it would be more accurate to say "a few commenters"); you can read the actual article to find out ZH's opinions; mine are anything left over.

This thread isn't meant to be about the markets, which is why I put it in CE. I'm not making any market predictions, neither is ZH, and I consider the markets to be largely a fiction now anyway. I care about the underlying systemic problems and what this move by the ECB means in terms of the integrity of Europe's economy. That's what I want to talk about.