Notes From Underground: Today, LTRO Was Nitro

The power of the ECB’s 3-yr LTRO program was in full force today as the Spanish 3-month BILL AUCTION provided the spark to ignite the kindling of the massive amount of liquidity provided to the banks via the LONG-TERM REFINANCING OPERATION. This has not been a secret as we have repeatedly discussed how the 2/10 YIELD CURVES HAVE RECENTLY GONE FROM INVERTED TO POSITIVELY SLOPED. The move has been so dramatic that the Italian and Spanish curves are almost the same as the German. Bloomberg had the closes on the Italian at +164, the Spanish at +172 and the German at +174. This movement is quite dramatic and the Spanish auction today merely confirmed the power of the recent ECB action.

Violent moves in the curve pushed the global equity markets substantially higher and the DOLLAR was sold off as the RISK-ON paradigm was back in vogue. The only problem with the paradigm is that the EURO CURRENCY put on a very lackluster rally relative to the EQUITY MARKETS. When the S&Ps has rallied 3% as it did today, the EURO would have generally kept pace, especially as the newswires have been reporting how so many investors/traders are SHORT EUROS. The fact that the EURO failed to stage a more significant rally may be an indicator that the ECB action is actually aiding the desire to weaken the EURO and the risk-on matrix may be losing one of its main indicators.


The answer is of course no as the 10-year notes of ITALY AND SPAIN are still close to the recent highs in yield. Also, the FRENCH/GERMAN 10-year differential is still out more than 100 basis points, indicating that there is still a great amount of unease in buying longer term French paper. Again, pay close attention to the EURO in relationship to the RISK-ON PARADIGM. As George Harrison wrote:

Watch Out Now,take care,
Beware of thoughts that linger
Winding up inside your head*
(Leon Russell also recorded Beware Of Darkness)
***A quick follow-up to Sunday’s BLOG, PEPPER SPRAY DAVOS. In today’s WSJ, there is a very disturbing article by Brody Mullins and Susan Pulliam titled, “Inside Capitol, Investor Yields Rich Tips.” The article details out how large investors and hedge funds have access to LEGISLATORS who provide information on legislation before it becomes a public announcement–“private meetings between hedge funds and officials, including lawmakers ans their aides.” The insiders are given information long before the rest of the trading community receives it and this is all okay. One firm who peddles “inside information” no longer takes a direct fee but if their clients glean anything beneficial in these face-to-face meetings they are expected to trade through the firm and pay commissions. (GEE, I WONDER WHAT THAT RATE IS.)
The article reports how the practice is so pervasive that even that self-righteous CONGRESSWOMAN Carolyn Maloney is in on the act. In a statement to the reporters Ms. Maloney says “she met with investors ‘because many were constituents and it was an opportunity to express my strong support for the financial reforms we were working on.'” Yes, that is correct Ms. Maloney. Your constituents work on Wall Street so they need a leg up on the rest of us. How about the public pension funds? Are they damaged by this blatant act of insider trading? Is there any wonder why the small retail trader has placed their funds in TREASURIES.
The idea that this is business as usual makes me long for the days of TEAPOT DOME. Thanks for all the people on the HILL fighting for the little guy. PEPPER SPRAY DAVOS!

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4 Responses to “Notes From Underground: Today, LTRO Was Nitro”

  1. MattW Says:

    Anither great post. Thanks for providing some concise analysis among the noise. I agree with the paradigm shift in EURUSD as a risk metric but maybe gave up on it too quickly, while your note here has given me pause. I’ll be watching… Although as you said, ECB balance sheet expansion and loosening of credit markets there would lead us to believe that is Eur negative. My question is what kind of upward pressure will be placed on usd, if any, if eur does indeed weaken, considering both being used so widely in fx reserves.

  2. asherz Says:

    If Congressmen can legally trade on inside information, why should they be foreclosed from sharing their largesse with their campaign contributing constituents? At Teapot Dome Secretary of the Interior Albert Fall was convicted and made to pay for his indiscretions. We haven’t seen anything done to the Dodds, Franks and insider tipsters who have made a mockery of our security and banking regulations.

  3. yra Says:

    Mattw: A good discussion and a very good question as we go forward.The DOLLAR does benefit in the SHORT TERM as the present winner of the safe haven beauty pageant,but as Howard would say –the man with one eye is the king in the land of the blind.Dollar assets are in demand in a collateral challenged world.There was a good piece by John Glover of Bloomberg [hat tip JA] about the ECB being the recipient of good collateral and it is a problem because the ECB does not rehypothecate,thus the effect is strangling the repo market.Thus DOLLAR assets become desirable for lending purposes which is annoying all those trying to short the U.S. Treasury market.This problem is causing Ben Bernanke and Tim Geithner major agita

  4. yra Says:

    Asherz:The problem with Wall Street-Washington Nexus was well discussed in Simon Johnson’s magnificent piece in the April,2009 Atlantic–“The Silent Coup”.The best book on understanding the Wall Street mind set is the book by Frank Partnoy–F.I.A.S.C.O.The idea that no talking head on T.V. discusses Partnoy’s book is the act of lazy “journalism”.

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