"Investors are getting strangely
bullish.
If you’ll recall, the entire
European banking system nearly imploded just 8 weeks ago. Things were so dire
that we even had a coordinated
Central Bank intervention among other measures to try and prop things up over
there.
The Powers That Be have since
launched the Long-Term Refinancing Operation or LTRO: essentially a program
through which European banks can borrow from the ECB at just 1% for up to a
year. The whole thing is essentially just another liquidity handout and it’s
telling that those firms which do borrow from the LTRO are parking almost all
the borrowed cash at the ECB soon after.
And while the LTRO has been
beneficial in terms of some liquidity concerns, it’s done nothing to address
Europe’s solvency issues. Case in point, European banks in general are leveraged
at 26 to 1. At that level even a 4% drop in asset prices wipes out all
equity.
In this environment, the ability
to borrow more money doesn’t accomplish anything from a balance sheet
perspective. It’s simply a matter of common sense: you cannot solve a debt
problem with more debt.
But since the ECB cannot directly
monetize EU bonds without Germany pulling out of the EU, and since the German
rules Euro-bonds as illegal, the LTRO is about the best the ECB can do in these
circumstances.
What’s truly concerning however,
is the fact that investors have piled into risk assets based on the LTRO (and
misguided hopes of more QE) as though none of these issues exist.
Folks, just a few months ago, no
less than the IMF, Bank of England, and others warned that we were facing a
global meltdown and the worst financial crisis in history. Do you really think a few liquidity programs
have solved all of this?..."
