Get your rally hats on, boys.
My long standing prediction was that the EU would require €3 trillion in funding in order to get them to 2014. You may refresh yourself on this postulate, here.
We got the first trillion in LTRO’s 1 and 2 as direct funding to Europe’s banks.
Today, the seeds for the next two trillion – minus whatever pittance is sitting in the EFSF\ESM joke-of-a-failure – have been planted by Mario Draghi.
We will run higher on this news, as men and women with intellectual deficiencies run with the false assumption “printing = higher prices”. However, although it is flawed, do not doubt the ability of this false premise to ramp us another 10% higher.
In the real world, this news will crush the euro, sending the EURUSD below 1.2. At the same time, America’s exports will be taken for a short trip down river – never to be seen again.
Meanwhile, this monetary easing will not do anything for Europe’s economy, in a seeming-contradiction that will make the ECB’s amateur statistician’s heads explode.
The reason is because all of this money is slated to be consumed by the entitlement machine that is “European stagnation”. It was already promised to the people, and its effect is passively witnessed on the EU civilizations every single day. Giving someone what they already expect to receive does not change behavior.
Europe will continue to contract, as demand will not be stimulated and prices throughout the EU will ramp higher – strangling the people.
Here in the US, dollar strength is slowly setting the stage for the next bleed out. China is in a similar boat.
These purchases by the ECB will in time be shown to have actually made things worse for Europe. They are giving themselves 3 years’ worth of funding, conveniently getting them to 2015. However, the activity itself undermines confidence in the euro and any reason for long term investors to step in (not that they were going to anyway).
Thus this is a bastardized tradeoff: 3 years of short term funding in exchange for 30 years of long term funding. Imagine it like a wave…a tsunami…rolling through the short term paper, pulling the tide out on the long end, and crashing through anything that comes in its path – all budgets will be swallowed whole by this destructive force.
I will conclude by saying, prepare for a ferocious rally that will last through the holidays…probably. But have lots of spare cash on hand. Because as soon as the first round effects of this pump are exhausted, we will have to face that the state of affairs have been worsened from Draghi’s intervention.