As you now know, Europe is set to announce a new QE program. I wish
these money printing rocket scientists would call it like it really is,
outright monetization but then again the average non thinking person might
ask questions? The leak yesterday said the size would be 50
billion euros per month, or more (it turned out to be 60 billion).
Thinking about this from a far away view, we can glean a few hilarious
aspects.
First, let’s look at “size”. If the program is “only” (more was
expected) 60 billion euros per month, this will amount to around 720 billion
additional euros outstanding a year from now. From a “money
perspective”, this amount is far less than the QE 3 the Fed just publicly
(privately maybe not) ended and smaller than the current Japanese
operation. The markets may view this as “smaller than hoped for”, I of
course have a different perspective. If we add up the production
of all gold globally from the mines, we come to a ballpark number of a
whopping $100 billion. Compare this to the (newly devalued) figure of
720 billion euros and we can round this off to just over $900 billion.
So, in just one year, Europe will create nine times the amount of trash
currency as the entire world creates of gold …in one year! The ECB
plans to purchase this amount of debt for two years, nearly $2 trillion
worth!
Going just a step further, let’s look at this $100 billion worth of gold
which is produced annually. I am going to tell you that as far as the
“world” is concerned, there is NO new gold produced! How can I say
this? All you need to do is look at how much gold just China and India
combined take off the markets each year. The answer is “all of
it”! Actually, that’s not true unless we add the phrase “and then
some”! So from a size standpoint, Europe is proposing to
create nine times the amount of currency as new gold is produced, yet
none of the gold even hits the market to add to the current stock. Yes
I know, there will be those amongst you who say this is wrong. But is
it really wrong if 100%+ of new gold supply gets devoured and vaulted by China
and India never to see the light of day again? Yes it is “stock” but it
will never in our lifetimes “flow”!
Let’s now look at few of the other “little snags” in this European
brainchild. First, can Europe handle more debt collectively and
what about the ones who cannot? The ECB is proposing a “one for all and
all for one” strategy when it comes to responsibility to this debt, will the
Germans agree to this? What will happens when push comes to shove and
countries with no financial wherewithal just shrug their shoulders when they
cannot make the debt service payments? Does this mean that Germany
becomes the “one for all”? Wasn’t it just a couple of years ago the
PIGS debt was on the verge of collapse and rates were skyrocketing?
Have they really healed their balance sheets or do they now have MORE debt
and HIGHER debt ratios? Are we to believe they are now safer? One
last thought, the ECB is the central bank to Europe, should they really be
prompting their flock into issuing more of the poison that caused the problem
in the first place?
Another question becomes, what about Greece? Will the ECB purchase
their bonds? What if Greece’s elections finish and the winning party
decides to hold the ECB ransom “restructure our debt or we will default …or
just take our ball and leave”? How is this going to be handled?
Another aspect going back to “size” is that the 720 billion euro QE
will be three times or more the size of current issuance, isn’t this the
reason the Fed was more or less forced to stop QE …because they were taking
too much collateral out of the system? Will this force banks to
purchase lower credit quality debt in their reserves or does it just mean
interest rates all throughout Europe will be negative? Does this mean
investors will “pay” interest to insolvent deadbeat nations like Portugal,
Spain and Italy amongst others? I know it sounds quite strange to have
to pay interest on your lent money to an insolvent entity, but this is where
we are headed!
While we are on the topic, what about “negative interest rates”? To
begin with, if you think about it negative interest rates cannot last forever
or even for a long time because it means the lenders in the end will lose all
their money. (From a humorous standpoint, maybe this is a good thing
because at least they lose all their money “slowly” rather than all at
once!) Also from a Mother Nature standpoint, only the very best money
does not need to pay interest, all the rest do and the interest rate is
decided by the risk of creditworthiness and strength of currency. In
this instance, they are all the same sloppy currency but Greece is not
Germany even if they do both begin with a G. If negative interest rates
were normal, borrowers would end up with everything and lenders would become
extinct.
Also, wouldn’t this hurt the banking sector in another way than just
making collateral impossible to find? Wouldn’t the smart ones just go
into their bank and withdraw everything and hoard the cash which wouldn’t
require the constant haircut of negative rates? What does this say
about velocity?
All of the above questions and thoughts were things the Swiss have thought
about for years. The “commonality” was a problem for them and they
decided not to join the EU in the first place. Now, the Swiss National
Bank has looked at this current scheme and decided to cut their losses.
Why should they continue to purchase euros if they know the official policy
is to debase and ultimately ruin them? The Swiss have made a
decision, my topic for tomorrow will be “The ‘neutral’ Swiss seem to have
chosen sides” as they announced a new renmimbi hub based in Zurich. Do
you think they might have known about this last Thursday when
they pulled the plug (peg) on the euro?
One more question or two before we finish, why does Europe even need to do
this now anyway? Hasn’t their currency already substantially weakened
versus the rest of the world and grossly versus the Swiss? Isn’t this
“REALLY” what QE is all about? Weakening your currency faster than your
neighbor so you can steal his market share of exports?
In reality, Europe is playing Russian roulette with a fully loaded
gun! Their currency is already weak, yet they want it weaker.
They are already broke, yet they want to become broke(r). Rates are
already substantially negative but apparently not negative enough. Good
(if you want to call it that) quality collateral is already scarce, yet they
want to take more from the banking and shadow banking systems. Germany
is already not in such a good mood as to what has already been done, yet the
ECB wants to rub salt in the wound of the very core of Europe.
In my opinion, this announcement of QE is a very bad choice and very poor
experiment. QE has not worked anywhere else in the world, why will they
be any different? Before they even announced this they had
already received two very important and fully negative votes. The
Swiss have abandoned them and gold has exploded higher and broken out to the
upside. Maybe they are more fearful of the market hearing Mr. Draghi
say “we were just kidding”? He has promised this bazooka for several
years and jawboned the markets higher each time it looked like full out
collapse was imminent. Now they will fire this so called bazooka, the
worst possible immediate outcome would be for their markets to
spasm downward in response. Speaking of “response”, isn’t it
curious the ECB “leaked” 50 billion euros yesterday? I am here to tell
you, they floated that trial balloon because they were fearful of the
response. When the market didn’t go spastic, they upped it another 10
billion for good measure! The ECB is in a panic, otherwise no “leak”
would ever have appeared. They have lost control, they know it, it is
only a matter of time before the markets realize it.
We have already experienced huge volatility which has certainly made some
participants insolvent. As I see it, this new episode lays the track
towards even more volatility. High volatility in a system that’s quite
low on liquidity and quality collateral in the first place is a toxic
recipe. This will definitely not end well though it may end very
abruptly when it does!