LTRO is the new QE

[Gumby]

While the economy has improved in recent months, much of the run up in stocks can be attributed to the increased liquidity coming from LTRO.

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Makes you wonder what will happen when LTRO ends. The last scheduled LTRO was today. Perhaps instead of asking if/when QE will happen again, we should be asking if/when LTRO will happen again.

[Gumby]

The Contrary Investor just published an article on the exact same observation I noted above...

See: Contrary Investor (Feb '12) : It Don't Mean A Thing If You Ain't Got That Swing

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When you combine the Fed/ECB's Euro/Dollar swap lines with LTRO, you get a QE-like dollar-liquidity event in the stock market.

[stone]

Gumby LTRO is $640 billion USD, the UK QE we have now is open ended I think but they say "it may need to be £500B" so the UK QE is also a major slew of money to sling around, to and fro, bidding up prices, keeping all the plates spinning.

[Gumby]

Yep. I just find it interesting that LTRO (combined with the Dollar/Euro Swap Lines) had an immediate effect on the Total Stock Market.

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You can see how it masked over all that crazy volatility we were seeing before LTRO. It made it very easy for European banks to park extra (and likely leveraged) liquidity into US stocks.

[stone]

Gumby, its global stocks that have been floating up isn't it? I just have UK and emerging market stocks and they have both been floating up. Gold got a smack down today though.

[Gumby]

Gumby, its global stocks that have been floating up isn't it? I just have UK and emerging market stocks and they have both been floating up. Gold got a smack down today though.

Yes. The point is that these swap lines have made it much easier for extra LTRO liquidity to be converted into any currency (the swaps aren't just for dollars). So, LTRO, along with those swap lines, have basically turned into a global QE — with extra liquidity being dumped into nearly every stock market.

Notice how stocks started rocketing the day after LTRO started?

I'm not sure most people thought that the Swap Lines alone, and LTRO alone, would have had this much effect.... but it seems that the Forex Swap Lines, combined with LTRO, have caused a substantial global stock spending spree.

Again... Contrary Investor (Feb '12) : It Don't Mean A Thing If You Ain't Got That Swing

[stone]

Gumby, from your link:

As you may know, the S&P began 2011 at 1257 and wildly enough ended the year right there at 1257 - neither up nor down even one point for the year.  But if one were to look at the total points traveled by the S&P each and every day during 2011 (simply the high price minus the low price), the S&P “traveled”? a total of over 5,000 points last year to go….absolutely nowhere!

I really think the monetary stimulus fuels volatility and that gets harvested by HFT very nicely. It is a total bonanza. Imagine what gets reaped by minute by minute rebalancing.

[Gumby]

Gumby, from your link:

As you may know, the S&P began 2011 at 1257 and wildly enough ended the year right there at 1257 - neither up nor down even one point for the year.  But if one were to look at the total points traveled by the S&P each and every day during 2011 (simply the high price minus the low price), the S&P “traveled”? a total of over 5,000 points last year to go….absolutely nowhere!

I really think the monetary stimulus fuels volatility and that gets harvested by HFT very nicely. It is a total bonanza. Imagine what gets reaped by minute by minute rebalancing.

Well, LTRO is really an infusion of credit and liquidity — not bonafide stimulus. So, I assume the effect would end once the policy stops. And since European banks have leveraged their liquidity from LTRO, I imagine this could get ugly if the market comes back down.

And in terms of volatility, I assume you mean long-term volatility — since overall volatility (and trading volume) has dropped considerably since LTRO started.

This whole credit-fueled stock bubble feels so artificial, particularly since overall volume is the lowest it's been in years.

EDIT: Today was one of the highest volume days in months. Reports of (the end of) central bank liquidity seems to be moving global markets — including gold — more than anything else right now. The market craves these massive liquidity/credit injections. Take those injections away and the market has to rely on "fundamentals".

[MediumTex]

The market craves these massive liquidity/credit injections. Take those injections away and the market has to rely on "fundamentals".

Here is a snapshot of the market you are describing:

[moda0306]

Gold, MT... pure gold.

[Gumby]

[Gumby]

Uma represents the Stock Market...

The Suitcase represents Gold...

[moda0306]

What does The Gimp represent?

[MediumTex]

What does The Gimp represent?

Bernanke?

Geithner would definitely be Zed:

[MediumTex]

What does The Gimp represent?

Wait a second, no, Bernanke would be John Travolta since he was the one who administered the shot.

BTW, here's a picture of the economy between liquidity injections:



Back to the Gimp.  I think that a good Gimp in our current system might be the American middle class.  The middle class is asleep in many ways, is under the influence of dark forces with questionable motives, and there is clearly some backdoor action happening with the way many of these policy responses are affecting the middle class.

[clacy]

The Central Banks around the world have successfully reflated asset bubbles in almost all asset classes.  I'm really not sure what is cheap right now???  I'm probably missing something but it all seems extremely artificial.

The problem is where these asset prices go from here, when the stimulus is reigned in.  I see a crash ala 2008, however I'm not sure Bonds will be the safe haven that they were then. 

[moda0306]

Marsellus Wallace... Former kingpin who ends up getting "screwed over":

- Home and stock market speculators


Butch... Every time he looks like he's about ready to get knocked off, he delivers a blow and surprises everyone:

- Treasury bond market


Jules... Somebody living a chaotic life he never really felt comfortable with, when one day he comes too close to losing everything, has an epiphany, and chooses to never go back to his old ways again:

- PP Investors


The Wolf... Completely calm and consistent in the face of extremely volatile situations.  The mere mention of his name puts people at ease.

- The Permanent Portfolio


Christopher Walken's Character... Can monologue like no other, both brilliant in his delivery and simultaneously deep and hilarious to witness:

- Medium Tex


MT,

Get all this in the book, would you?

[KevinW]

I'd say the middle class is the contents of the briefcase. Because everyone important claims to deeply respect it, but as far as I can see it's imaginary, and there's no evidence to the contrary.

[Gumby]

More evidence that this rally is a product of central bank intervention. Stocks and Bonds have diverged.

http://yottapoint.typepad.com/blog/2012 ... verge.html

Normally bond yields should rise as people sell bonds to buy stocks.

Obviously the Fed is performing its ZIRP (Zero Interest Rate Policy), but holding ZIRP steady through the rally makes the rally even more artificial than it would otherwise be. If yields were allowed to rise in a "free" market, the rally would be muted.

It's like Uma has two adrenaline syringes stuck in her sternum. One for liquidity injections and one for ZIRP.

[Lone Wolf]

Christopher Walken's Character... Can monologue like no other, both brilliant in his delivery and simultaneously deep and hilarious to witness:

- Medium Tex

I'd say that Walken's character is just a man who understands the importance of properly securing physical gold.  Those of us who use safe deposit boxes are just wannabes compared to this man.

Obviously the Fed is performing its ZIRP (Zero Interest Rate Policy), but holding ZIRP steady through the rally makes the rally even more artificial than it would otherwise be. If yields were allowed to rise in a "free" market, the rally would be muted.

It's like Uma has two adrenaline syringes stuck in her sternum. One for liquidity injections and one for ZIRP.

I get why it was easy to get over-aggressive during the bull market of the 1990s.  But during times like these it's hard to understand how people fail to see the value of defensive, diversified investing.  Wild times.

[stone]

Gumby, the "liquidity injections" may "calm the markets" whilst the plunger is actually being pushed but it is rocket fuel for whatever "the markets" choose to do. If they choose to crash, then it is power to their elbow for that. I think it is a huge mistake to think that the immediate consequence indicates the overall consequence.

[Gumby]

Gumby, the "liquidity injections" may "calm the markets" whilst the plunger is actually being pushed but it is rocket fuel for whatever "the markets" choose to do. If they choose to crash, then it is power to their elbow for that. I think it is a huge mistake to think that the immediate consequence indicates the overall consequence.

I find that surprising, and highly contradictory, coming from you. You've always argued that increased liquidity creates bubbles (i.e. everything goes up). They do.

The presence of the liquidity injections themselves are bullish for the markets. The evidence for this is overwhelming. This is why markets rise whenever the injections are announced and fall whenever they end. The trading algos are actually programmed to respond this way. And the bubble ensues.

[Gumby]

Let's keep mind that the market has not had more than a 0.6% drop since 2012 began. Any good news results in stocks going up. And any bad news results in stocks holding steady.

Stone, by your logic, stocks should rocket down whenever there is bad news. But, that's not been the case during 2012. The added liquidity just gets leveraged to buy up assets. Eventually this bubble will pop, but as the liquidity goes in, the bubble only seems to move in one direction... UP.

[stone]

Gumby, they will and do periodically stop the liquidity injections. Then it crashes, then they rinse and repeat. If you throw a teapot up in the air you are responsible for it smashing on the ground just as much as if you threw it at the ground. Isn't it fair to say that the main problem with bubbles is that they burst? Do you think that even if they continued QE as one continuous never ending process at the rate it is being done now, the stock market would smoothly float ever upwards? Would the P/E go to 20 then 50 then 100 then 500?

[Gumby]

Now you seem to be contradicting yourself again. First you were saying that liquidity injections can also crash markets faster, over the short term — when there is no evidence to suggest this is true.

Now you're saying that liquidity injections cause markets to go up and then crash — which is what everyone already knows is true.

What exactly are you trying to say?