Tomorrow is LTRO DAY in Europe as the ECB will reveal the size of its next tranche of 3-year loans made available at the BALANCE SHEET RECESSION rate of 1%. Several rumors tried to upset the market today as “insider gnomes” floated one story after another that the size of the LTRO would be 280 BILLION EUROS, which is at the low-end of current GUESSTIMATES. Each time the equity markets broke on the rumors, they snapped immediately back as the global financial system is floating on an ocean of liquidity. Higher OIL? NO PROBLEM, MAN! SOVEREIGN SOLVENCY ISSUES? NO PROBLEM!
The developed world’s central banks are providing all the money that is needed to maintain levitating asset prices: grains, precious metals, copper and equities are all rising in lockstep to the financial largesse of the world’s lenders of last resort. Even U.S. Treasuries can float higher on this sea of money. How much more will be available through LTRO? Only President Draghi knows but don’t be a hero when the number is released at 4:15 a.m. CST. If the LTRO is on the low-end of conjecture, the markets will sell off but watch support levels to see where a short-term correction holds. The 2/10 curves in Europe will tell us a great deal about market perceptions of the significance of LTRO II.
An addition at the top end of the range–700 to 800 BILLION EUROS–will probably see the EURO rally in the RISK-ON paradigm but the EURO should be sold on the crosses as the FUNDING FUNCTION comes back into play (as so many EURO shorts have been driven from positions). Again, PREPARE THE TECHNICALS FOR EURO RESISTANCE LEVELS. NO HEROES, BUT BE PREPARED FOR MINIMUM RISK FOR MAXIMUM REWARD.
***Irish Prime Minister ENDA KENNY caused the EURO to sell off for a brief second today as the IRISH GOVERNMENT announced that the Irish Constitution required the newly crafted EUROPEAN FISCAL TREATY to be put to a vote. Remember that it was the desire of former Prime Ministers Papandreou and Berlusconi to call referenda on the AUSTERITY PLANS that led to their replacements with handpicked technocrats. France and Germany are extremely fearful of the referendum being desired by their own citizens, thus the ultimate popular view on the whole EURO EXPERIMENT.
There is far too much at risk, politically and financially, to bother to poll the will of the people. In a Financial Times article by Peter Spiegel (who is becoming a favorite Euro journalist),the article raises a very salient point:
“EU officials believe by holding a referendum Dublin could increase its leverage over the EU to force new concessions on winning debt relief on its banking debt and resisting pressure from France, which wants Dublin to increase its corporate tax rate.”
It seems that Mr. Spiegel has it perfect as the present Irish government will appear as national heroes by extracting a far better bailout deal for the Irish than the previous government. ENDA KENNY‘s FINE GAEL will do a great political act by lessening the severity of the previous bailout agreement. All IN THE NAME OF PREVENTING A REFERENDUM.
***Milton Friedman was known for saying that there is no such thing as a free lunch. All policies have some trade-off and it is of course just a question of who receives and who gets screwed. The WALL STREET BAILOUT has greatly harmed the nations savers as the zero interest rate policy has forced interest rates so low that savers have had to tighten their purse strings or search out return in far riskier venues: THE PORTFOLIO BALANCE CHANNEL.
In a BLOOMBERG article (hat tip JG), it is revealed that the DEFINED BENEFIT PLANS of large corporations have been crushed by the low interest rates and some of the supposed huge cash hoards are going to shore up the underfunded pensions. The article by Thomas Black, quotes a consulting actuary at Seattle -based Millman: “They are going to have to kick money in. We’re basically seeing historically low interest rates driving historically high employer contribution requirements.”
ZIRP CERTAINLY HAS A PRICE TO PAY FOR SOME ACTORS IN THE ECONOMY, CAUSING CONTINUED UNDERSAVING AND A STRETCHED CONSUMER. Hey BEN! Savers are certainly having their lunch eaten. Oh well, 6 1/2 months to Jackson Hole. Oh yes, and tomorrow Chairman Bernanke goes to the House Financial Services Committee for semi-annual testimony. RON PAUL. PAGING RON PAUL.