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Is QE with a European Twist Driving Markets?
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Posted on 01/19/2012, 20:27
By Mike Larson
Low volume stock rallies driven by nothing fundamental ...
A steady upward move in bond prices, and decline in interest rates ...
Levitation in hard assets, and a relentless decline in select currencies.
I'm no Sherlock Holmes. But I'd say these market clues point in one direction — that we're getting stealth Quantitative Easing, this time with a European twist!
Low volume stock rallies driven by nothing fundamental ...
A steady upward move in bond prices, and decline in interest rates ...
Levitation in hard assets, and a relentless decline in select currencies.
I'm no Sherlock Holmes. But I'd say these market clues point in one direction — that we're getting stealth Quantitative Easing, this time with a European twist!
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Is the ECB Following in the Fed's Footsteps?
It Sure Looks Like It!
"QE" is Wall Street jargon for money printing. We've seen two rounds of it here in the U.S., one that ran from November 25, 2008 to March 31, 2010, and one that ran from November 3, 2010 to June 30, 2011.
QE1 caused every asset on the planet to levitate for months on end. The exception was the U.S. dollar; it fell in a virtual straight line. QE2 had a similar, but more muted impact.
Over in Europe, central bankers and other policy makers griped about the impact the Fed's money printing had on commodities and the threat a falling dollar posed to their export industry. And more recently, several policymakers publicly disavowed money-printing as a strategy to combat the sovereign debt crisis.
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| ECB's massive LTRO gave risk assets wings. |
Yet late in 2011, the European Central Bank (ECB) conducted the first of two planned long-term refinancing operations, or "LTROs." The scheme flooded banks with 489 billion euros of cheap money, which they were "strongly encouraged" to use to buy sovereign bonds. The second LTRO is scheduled for next month, and there's talk we could see 1 trillion euros — or more — in demand.
As a result of the LTRO and other ECB moves to combat the crisis, its balance sheet has exploded in size — to 2.67 trillion euros ($3.42 trillion) from 1.95 trillion euros ($2.5 trillion) just 6 months ago. The Fed's balance sheet, by comparison sake, has ballooned to $2.9 trillion. That compares to $924 billion before the Lehman Brothers crisis.
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Long story short: All signs point to the ECB pursuing — in a roundabout way — the same strategy the Fed did before it!
QE-E Sure to Fail
Just Like Ours Did!
Albert Einstein supposedly said the definition of insanity is doing the same thing over and over again, and expecting a different result. But it looks like central bankers the world over haven't gotten the memo.
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Despite the failure of two rounds of U.S. QE to stimulate the economy in a lasting meaningful way ... and the failure of two rounds of QE in the U.K. to accomplish anything either ... we now appear to be getting "QE-E" — QE in Europe.
It's guaranteed to fail miserably if history is any guide. But it could also continue to inflate the asset markets short term, and drive the value of the euro currency even lower — just as U.S. QE drove the dollar down. So keep those trends in mind when you're picking your investing spots!
Until next time,
Mike
P.S. My Safe Money Report members are already profiting from the euro's decline. And you can join them for as little as 12 cents per day. To find out how, click here and watch Martin's latest video.
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