Finally the details . . .

The ECB said the combined monthly purchases which includes ABS and covered bonds and now include sovereign and agency bonds will total 60b euros per month and will continue to do so “until we see sustained inflation improvement.” The ratio will be based on the capital key where about half is made up of Germany, France, Italy and Spain. The ECB will coordinate the purchases but will be implemented decentrally which means at the national level. European institution paper (such as EFSF paper will be subject to loss sharing but national central bank purchases of other sovereign debt will not be subject to loss sharing which appeases the Germans). They also lowered the rate at which the TLTRO will be lent at to .05% from .15%.

Bottom line, as I doubt even the ECB believes that this news will directly increase bank lending, it is likely all about further weakening the euro. In trying to gauge what has been priced into markets, the euro is the main thing we should be watching which is down slightly after being up slightly. Second to that is the European sovereign bond market where the action in German and French bonds (making up 1/3 of the capital key) seems to have priced the news in as the 10 yr yields in both are little changed.  On the flip side, the bonds of Italy and Spain are higher with yields lower. The action in stocks are just pavlovian to any form of central bank accommodation and today is no different. The transmission though of these newly printed euros into actual stock purchases is specious and thus buying stocks on ECB QE news is more superstition than based on substance in the US. European multinationals will at least benefit from a lower euro. Lastly, I’ll repeat again that we are today witnessing the final climax in the more than 6 years of historic central bank action and thus asset prices are extremely vulnerable, particularly the riskiest kind, stocks if the underlying economic and earnings fundamentals don’t support current multiples which I believe they don’t.

One last point on today’s news from the ECB. As I stated the other day, Draghi had a goal of getting the ECB balance sheet back to the level of around 3T that it was at in early 2012. He thus reiterated that goal in his press conference and the further initiatives announced today will help him get there with a total of about 1-1.1T of purchases of sovereign, agency, ABS and covered bonds. Thus, today’s news came because the previous initiatives weren’t going to get them there on their own and thus more assets needed to be purchased. Therefore, the only thing that really changed today was the composition of assets that will get to the ECB’s goal stated last year of a 3T euro balance sheet. Since my last email, the euro has weakened to below 1.15 and European bonds are now rallying across the board even though there doesn’t seem to be that much new information that we are getting that’s different from what’s been highly speculated.

Draghi is also saying that the ECB will buy bonds with a negative yield. I’m sure the Germans loved that idea I say sarcastically.

Peter Boockvar, Chief Market Analyst

The Lindsey Group LLC

Direct: 973-251-2063

E:  peter -at-

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  1. Willy2 commented on Jan 22

    IF the ECB wants to weaken the EURO, then it’s doing PRECISELY the opposite what would be necessary for making the world economy stronger. IF the ECB wants to make the world economy stronger then it should make the EURO STRONGER !!!!!

    • VennData commented on Jan 22

      Which currencies should go down? Any of them? Should they all go up then? How do we do that?

      Gold is not a currency, neither is palladium, uranium, Einstienium, or iron ore.

    • Futuredome commented on Jan 22

      You can’t make the Euro “stronger”. It would cause defaults which would destroy the Euro and open up deevaluations among the European countries.

      This is the paradox many people still don’t get.

  2. orsogrigio commented on Jan 22

    Well, Willy2, I buy your word, but please let me understand the rationale, unless you’re a CEO of a US manufacturer selling to EU. I’m simply think that a cup of coffee in NYC should be more expensive than the same in, say, Cosne-Cours-sur-Loire ….

  3. Concerned Neighbour commented on Jan 22

    “Lastly, I’ll repeat again that we are today witnessing the final climax in the more than 6 years of historic central bank action and thus asset prices are extremely vulnerable, particularly the riskiest kind, stocks if the underlying economic and earnings fundamentals don’t support current multiples which I believe they don’t.”

    No one cares about valuations anymore. They are a relic of history. Oh sure, most of us know that most asset classes are overvalued by a significant margin, but that attitude is inconsistent with front-running the “temporary, emergency” stimulus that is ever-flowing from one central bank or another. Price paid is of no consequence anymore in a world where asset prices are only allowed to go up.

    For central bankers, assets will never be overvalued. Wasn’t Draghi asked this today, only to respond that he didn’t see any problems? I’d say this perception is unbelievable, except for the fact it is all too predictable and believable.

  4. VennData commented on Jan 22

    Peter has stopped using the word “infinity” since the success of US QE.

    Thanks again for telling us stocks are overvalued as you did in ’09, ’10, ’11, ’12, ’13, and ’14.

  5. slowkarma commented on Jan 22

    It strikes me that as QE spreads (as opposed to when it’s used as a short-term emergency measure) what we are seeing in a disguised form is nothing other than an old-fashioned trade war. One thing I know about old-fashioned trade wars is that they usually end badly for everyone.

    We’ve seen recently stories about how the American economy seems to be recovering. I don’t know enough to argue about that, but I do know that some people are bragging that we’ve managed to drive the unemployment rate down to 5.6% or whatever it is. They don’t brag about the fact the American workforce participation rate in Dec. 2014 was 62.7%, while in 2008 it was up in the 66% range.

    We’re not doing well. It seems to me that the artificial boosting of the stock market through QE is disguising the fact that we need to do something else, and quickly.

    • Futuredome commented on Jan 22

      I don’t agree. The stock markets current rise didn’t even start to May 2013 when imo, economic growth started taking off. We are doing pretty well in the face of headwinds. Total population in the labor force is declining and will continue to decline with the end of the Boomers. Why you even bring that up is sad. It was 58% up into the 60’s before the Boomers/Rise of working women. My guess it bottoms at 61% cycle adjusted.

      Your trying to hard and ignoring demographics.

    • Iamthe50percent commented on Jan 22

      Gee, I didn’t know my unemployed grandkids and my unemployed daughter & son-in-law were baby boomers like me. That must be why they are not in the work force. But then as a boomer, I’m not either? Despite working full-time?

      Let me tell you something that I learned as a boy in Chicago. Politicians lie.

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