Two days ago I asked if everyone was having fun. Today I can ask the same question. We know we are in a market dominated and controlled by news from Europe – whether you like it or not.
First, we got news China cut its reserve requirment. This motivates the banks to lend more aggressively. By itself this would give the market a little boost.
But the big news came later. Six central banks (the European Central Bank, U.S. Federal Reserve, Bank of England and the central banks of Canada, Japan and Switzerland) announced a coorindated effort to provide liquidity to the global financial system. The key is that it’s a coordinated effort, that a committmment has been made by numerous entities. Europe has help; they will not have to fend for themselves.
So what specifically does this mean?
Central banks loan money to each other. The US Fed effectively lowered its rate by 50 basis points. That means the ECB can borrow at a lower rate, then convert the dollars to euros, and then lend those euros to countries that are having a hard time raising money in the open market. It’s the equivalent to lowering the discount rate here in the US. It means when Italy is having hard time raising money in the private market (or when rates get too high), it can turn the the ECB for a low-interest loan. There isn’t enough money in Europe to bailout all the troubled countries, so in steps the the US Fed and other central banks with a promise to loan money to the ECB when the ECB needs it.
Italy will need to raise $400 billion euros in 2012. Currently the IMF has $100 billion euros that it can devote to Italy. Obviously this is a major issue. With the lowered rate, Italy indirectly has improved access to money. The US Fed has become the lender of last resort.
The market cheered this news. Instead of Italy and Spain missing a debt payment and setting off a negative chain reaction, they’ll have access capital when they need it. The market gapped up huge, held its gains all day and then rallied into the close. The Russell small caps rallied 6%; the Nas 100 lagged but still gained almost 4%. Every group I follow (there are over 100) moved up more than 1% and most gained 3 or 4% or more. Volume was huge. Wall Street breathed a huge sigh of relief – the world isn’t coming to an end…or so it seems.
But this doesn’t solve any problems. It doesn’t help Italy or Spain with their debt issues. It helps them make debt payments in the near term but doesn’t solve any other issues. It is a short term fix. All it does is buy a little time. Isn’t that the definition of kicking can down the road?
To me this news is nothing but a major warning, or admission on the part of the central banks that Europe is in trouble. Central banks are always calm and never show much emotion (think Alan Greenspan testifying). When things are good, they don’t get overly excited. When things are bad, they don’t want to cause a panic, so they don’t let on to how bad things are. But actions speak louder than words. It’s hard (or impossible) for the central bankers to justify this coordinated effort if things in Europe weren’t dire, if Europe weren’t about to unravel.
From a stock market standpoint, the effort is good news – the central banks are not going to let the system collapse. But what the move implies in not even slightly comforting.
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All it means is that some day in the not too distant future, “The Chickens Will Come Home To Roost!”
Will it be in the not too distant future…or will they succeed delaying the inevitable for a long time?
ECB loans dollars and not euros. They borrow Usd at fed and then loan dollars to interested parties.
After specified time, they must unwind swap lines.
I hate the term “kick the can down the road” so not gonna say it. So they bought some time. Kinda like the “super committee” was supposed to do. Hope the results are different, but my gut says don’t bet on it. We’re seeing protesters in all of the countries saying “hands off my pension” and “gimme more.” Attitudes like that won’t change, especially after today’s reprieve. They’ll keep demanding and the chicken politicians will keep giving. There’s a day coming when the piper will need to be paid, and it’s gonna be ugly.
I agree…every day that goes by that the inevitable get delayed just means the pain will be that much greater in the future. When things get ugly, I’d like to be on a farm/ranch with a natural water source…an really good security dogs.
I’M already there and have food and essentials saved just in case.
Great post Jason and my sentiments exactly.
I’m sick of the band aids. The whole systems needs to be allowed to crash and burn before it can rebuild on any sound footing – if that is at all possible any more.
Had it been allowed to happen during the GFC we would have been well on the way to rebuilding by now. Every market – no matter what it is – left to its own devices always finds its own level.
Will these idiots never learn!
Yeah, nothing has changed–blah-blah-blah-but we’re traders–take advantage of it. Yeah, maybe the piper will have to be paid, worry about that when it comes–the charts tell all,
forget all the other b/s.
Jason
I don’t look at it the same way but the results are the same. Two days of an updraft like this one will come to an end. I am long term bullish and I picked the bottom again. Now is time to take some longs off of the table. When the NASDAQ is up 4% in one day don’t look for it to last.
Uh, no. Not even close. The swap lines allow banks to access dollars through the ECB assuming they have appropriate collateral to post in return. They have nothing whatsoever to do with directly lending Italy (or any other country) dollars. This is merely to relieve dollar funding pressures on the European banks while the politicians attempt to scheme another kick-the-can measure.
I fully agree in your statement ! This is a major warning sign.Greece going bankrupt december 10, if they do not get the extra 8 billion euroes.This could be compaired to a nice night in town,joying yourselves in the bar, when the division bell hammers you in the morning well..Was it then worth all the trouble ?
I would say NO ! We are facing hard times !
I love volatility! $$$$$$
nothing has changed because you can,t extinct a fire with gasoline. The basic problem is the loan system we have that creates money out of nothing. To pay the interest and the combined interest rates which was not created by the creation of deposit money with the loan itself, we always need new loans to pay interest and combined interest rates for old loans. This is a vicious circle and you never will be able to pay back all debts. Sooner or later the system has to bankrupt because that is the only way to release pressure lenders and debitors.