Last week the ECB kicked off their much anticipated covered bond buying program. Remember this is the program that has the hedge funds all beared up on the Euro. This expansion of the ECB’s balance sheet will supposedly stop the deflation and usher in a new wave of European growth. Or at least that is what the hedgies believe.
The results of the first week of the program were… how should we say this… underwhelming. On the week the ECB bought €1.7 billion of bonds. Sounds like a lot, right? Well, not really.
Just for kicks I pulled up the POMO schedule for the Fed last year at this time.
The Fed was buying more than that amount 4 out of 5 days each and every week! The ECB’s measly $2 billion USD equivalent is an odd lot. That needs to be a daily fill instead of a weekly amount.
There is a real risk that the ECB will not be able to deliver the needed balance sheet expansion that the market is expecting. I continue to be skeptical of the short Euro trade being the “no brainer” that the hedge funds are placing their bets on.
So long POMO
Yesterday the Federal Reserve made the final purchase of bonds for the QE3 program. They purchased $931 million of 20–25 year bonds, bringing their balance sheet to nearly $4.5 trillion dollars.
Now we get to see if the US economy can stand on its own feet without the help of the Federal Reserve’s garden hose of liquidity.
The previous few times that the various QE programs ended, the Federal Reserve quickly panicked and restarted them in a new form within a few months. I don’t think that this is going to happen this time.
It will be extremely interesting to see how the markets and the economy react to the winding down of this liquidity injection. My suspicion is that the economy will be able to handle it just fine, but that the markets will struggle.
But who knows? Maybe the rest of the world’s Central Banks will step up to the plate and fill the void left from the Federal Reserve’s withdrawal.
Either way, I think you should be careful about any pundits who claim that they know how this will all play out. We are in the midst of some very unique circumstances. We have this massively indebted global economy that is being propped up by various Central Banks who don’t really understand all the ways their actions affect the markets. The recent comments from Fed Governor James Bullard who went from demanding that the Fed step up its removal of the accommodation, to suggesting that the Fed will delay the tapering in less than a couple of months, demonstrates how much they are flying by the seat of their pants.
Don’t forget that a big part of the economy depends on confidence. And these so called animal spirits are very difficult to model. Most of the past couple of years has been plagued with a lack of confidence. There are very few who ever imagine things could spin out of control to the upside. But it is at this very time that you should be worried about what everyone is convinced can’t happen.
Maybe everyone is too bearish on the global economy?
Right now there is an overwhelming gloom about the global economy. There doesn’t seem to be any “green shoots” on the horizon. The bad news seems to just continue to roll in day after day.
But I came across this great chart by @Emergingtrends:
It would be just like the Market Gods to have the economy bottom when no one is expecting it. If that happens, the moves in some of these markets that have priced in a secular stagnation will be outsized.
When the newspapers are onto the story…
Recently I have noticed a lot of articles about how to protecting yourself from deflation. This one from the National Post is typical.
Ask yourself this: if the newspapers are writing articles about how to go about safeguarding your portfolio against deflation, what is the most likely outcome? Let me give you a hint – take away two letters and replace them with an “i” and a “n”.