Urgent Crash Bulletin After Today’s ECB Announcement

Despite our little mistake with time zone differentials, the ECB did what we warned you it would. It announced a cut in its QE purchases, and a target date for ending them altogether. 

I have been telling you since January when the ECB cut its purchases from €60 billion to €30 billion, about the scuttlebutt that the ECB would end its purchase program in September. Well, they won’t end it in September, but they’ll cut to €15 billion per month in purchases, with a target date of year end for ending those purchases altogether.

First of all €15 billion is as good as zero. It won’t even cover European sovereign debt issuance, let alone leave enough left over for investors to send to the US to buy any Treasuries. So €15 billion or zero doesn’t matter. Although zero will certainly add to the downward pressure on asset prices.

Meanwhile the ECB is keeping its negative interest rate policy (NIRP) in force indefinitely. That just punishes banks who hold reserves at the ECB. So they either try to pass it on to depositors, or get rid of the hot potato that’s costing them money.

Both the banks, and the depositors stuck with paying those rates, have an incentive to get rid of deposits. They can, and do, do that, by using those deposits to pay off existing loans. That slows money growth, and leaves less money for investing in financial assets. We’re seeing it show up this year in flattening of European deposit growth, despite that €30 billion per month ECB printed money being forced into their banking system.  When the ECB cuts to €15 billion per month in printing, along with NIRP, no doubt, bank deposits in Europe will shrink. Again, less money for investment in financial assets.

For now, however, they’re staying at €30 billion. The problem at hand in the short run is that the Fed goes to $40 billion in banking system money extinguishment in July. That’s scheduled under its medieval bloodletting operations that it calls “normalization.”

The ECB’s €30 billion in purchases will no longer be sufficient to offset that. As a result I expect systemic macro liquidity growth to hit zero in July.

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With zero liquidity growth, the money to pay for new US Treasury issuance averaging $100 billion will need to come from existing money stocks. That will necessitate liquidation of some existing holdings whether bonds or stocks. The noose will tighten, and I think that it will hit not only the bond market, which has been getting pummeled since last year, but it should start to hit stocks as well. 

The rising pressure since the Fed started pulling money out of the market last October has been evident it the T-bill markets, where rates have risen relentlessly. This has happened despite the help the market got from the ECB printing €30 billion per month, some of which flowed straight into US Treasuries.  4 week bill rates have risen in a straight line trend regardless of whether or not the Fed raised the Fed Funds target in any given month.  You can see this clearly on a semi-log chart. 

Money is tightening because the Fed is pulling money out of the markets.  That will get worse as the offset from the ECBs QE program shrinks, and soon goes away.

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The Fed pretends to control rates, but it doesn’t. The balance sheet “normalization” program does because it relentlessly reduces the supply of money, while the US Treasury relentlessly absorbs more and more of whatever cash investment capital is still around. The Fed told us earlier this year that the bloodletting schedule under “normalization” is on autopilot, and that they wouldn’t even talk about it any more. In other words, “Nothing to see here. Move along!”

While the cop on the beat is telling us to move along, we’re actually gawking at an ongoing monetary crash, and we are transfixed. It’s going to get gory as it turns into a multicar pileup.  Put on your crash helmets.

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Lee Adler

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