Thursday, March 5, 2015

Mario Draghi's Bold QE, Bank Stress Tests and February Payrolls

Thursday was a fascinating day for the world of finance ad markets (what's left of them), kicked off by the ECB rate announcement and finished up by US bank stress tests, released, cynically, after the close of equity markets.

And, the markets were largely unresponsive to what was happening in Europe because of their anticipatory stance toward the February Non-farm Payroll data due out on Friday.

Consequently, there were no major catalysts to propel markets in either direction generally, though, if one were to believe in the gospel according to Draghi (Mario Draghi, head of the ECB), al of Europe should be celebrating the prospect of EQE (European Quantitative Easing), because Draghi ad his cohorts see inflation rising by 1.5% in 2016 and GDP in the eurozone galloping ahead once the bond flow gets eaten entirely by the ECB.

This view is highly ignorant of facts, despite Draghi and the ECB having access to the best data in the world outside the Federal Reserve. First, the ECB should be well aware that QE has not driven either growth or inflation either in the United States or Japan (where they've been QE-ing it up for 20 years). Second, the amount of issuance of sovereign debt that the ECB proposes to purchase from the various government comprising the Eurozone might cause some significant crowding out of legitimate buyers of such debt.

QE is nothing more than a classic Ponzi scheme, with some big, fat-cat organization - be it the Fed, the BOJ or the ECB - striding atop government cash calls (bonds=debt). The central banks distribute the proceeds back into the system in whatever haphazard ways they can, the usual transmission mechanism being repos and open market "operations" directly to primary dealers (TBTF banks) that ends up in equity markets.

Presto! Government expands, stocks soar, while the general economy flummoxes, falters and fails. As is the usual case with all Ponzi schemes, everywhere and always, the last "investors" are left holding the bags of worthless paper. With the massive bond-buying monetization of government debt, the eventual losers will be regular people, whose pensions will be raided, whose cost of living will be untenable, whose lifestyles will be unstable, whose bank accounts will be bailed-in, whose futures will be null and void.

So, pay close attention to what's happening in Europe and Japan, because it eventually will find its way across both big ponds to the shores of North America. There is no doubt that QE and its after-effects will be crushing to ordinary people. The worst part of the story is that there will be nowhere on the planet to hide.

Well beyond the close of the moribund US equity markets, the Federal Reserve unleashed the current round of stress tests for the significant financial institutions.

All 31 banks passed. Halelujah!

These "tests" are nothing more than job security for CFOs and other executive who hang out in cushy corner offices. They are completely meaningless, especially since bank balance sheets are so opaque nothing of substance can be seen.

As far as the February, 2015 Non-farm Payrolls (due out at 8:30 am on Friday) are concerned, they'll contian the usual lies nd obfuscations that the BLS has become so famous for over the years. Ideally, the US will be shown to have created a couple zillion new jobs, but everybody will know that the numbers are wholly fiction and the economy is on its last legs. Wall Streeters will rejoice and send the major indices into the stratosphere, so that Fed Chair Janet Yellen can echo Greenspan and Bernanke by proclaiming the goodness of the "wealth effect."

Of course, most Americans will hardly notice said effect, as they struggle to make car and tuition payments.

Dow Jones 18,135.72, +38.82 (0.21%)
S&P 500 2,101.04, +2.51 (0.12%)
Nasdaq, 4,982.81, +15.67 (0.32%)

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