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Four words for the ECB - No Easy Way Out!
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Four words for the ECB - No Easy Way Out!
Tuesday 11th May, 2010
Morning all.
The ECB played for the big win yesterday - a $1 trillion liquidity package, designed to not only support bank liquidity but also scare off the large spec shorts currently decimating the Euro. Of course, the funds come with conditions attached to them - mainly that the member states who need the help, must work out a solid plan to reduce their debt in a sustainable manner. However, in the short term - make no mistake the Sunday night announcement was purely designed to shock and awe the short players.
Well how long did that last? As I said yesterday, 1.3150 would not be broken. Well look at the price action here - the EUR/USD pair is now below where it was when the deal was announced. Oh dear what will the ECB do now?
See the problem here is that they need to keep printing money or they risk defaults. It's perpetual printing or nothing at all. It would be one thing, if the money was being used to help the countries but really, as I said yesterday, it's pure panic to avoid the banks taking the counter-party hit. The money is being printed to help the banks. Full stop. The market knows this and it will take advantage of this. The very banks who are getting the liquidity from the central banks, can just keep shorting the Euro - knowing full well, that more money will be printed to stem the tide. The moral hazard implications are huge.
As for the hyperinflation maniacs out there - just try to, for one minute, understand how the monetary system works. You can't get hyperinflation in this situation - as the money is all going towards the cost of rolling forward the debt contracts and into the markets. It's replacing 'money' that has been destroyed. Until it enters into circulation with a money multiplier constantly above 1 and trending up, you can't possibly get hyperinflation. More worryingly, the austerity measures will require spending cuts - which in turn will increase unemployment, aggregate demand and therefore reduce tax revenues - which in turn should cause a deflationary landscape to unfold.
That's what you get, when you try to fix an, unfixable problem. If the Euro is to work as a single currency, the member states must stick to the rules of the game. If they don't, they must be removed as per the rules.
Sorry Trichet, Merkel, Sarkozy - you have no easy way out....keep printing is all you can do now. The big question will come, when all these funds need to be unwound from the markets - how will they achieve it, without causing total carnage? (The answer is that they can't)
I leave you with this classic...
Happy trading for today - as you saw yesterday, the market was up significantly but today I expect a pullback, before a minor rise to test that 10900 and 1080 level on the Dow and the SPX respectively - (although I wouldn't bet on them being hit with a long - the levels are more, so that you shorts are prepared for a squeeze). After that, we should see the downfall occur to test last Thursday's lows. As always, stay nimble.
Darshan
ps. Read yesterday's post here if you like :
The $1 trillion Bail-Out Package - Everybody's Starry-Eyed! My thoughts today...
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Edited: May 11th, 2010
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