Quantitative Easing Gargantuan!

Key News

  • German exports surged at their fastest rate in nearly 18 years in March, surpassing even the most optimistic forecast as Europe’s largest economy shifted up a gear after stumbling over the winter. (Reuters)
  • No doubt the trade was crowded, as the chart below (from Reuters) shows the massive short potiion in the euro before this morning’s short covering:

Quotable

“A child of five would understand this. Send someone to fetch a child of five.”

                           Groucho Marx

FX Trading – Quantitative Easing Gargantuan!

Party time! Excellent! Impressive! European leaders do know how to spike a punchbowl; that’s for sure. Two objectives to this party: 1) stave off the demise of the European Monetary Union, and 2) Punish those nasty speculators and trigger a massive short squeeze.

“The European Union agreed on an audacious €750 billion ($955 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide,” The Wall Street Journal reported.

Looking at prices this morning, there is no doubt Euro leaders achieved objective number 2 from above. Shorts are scrambling for cover. Of course, the key question is: Does this ensure the Euro will be with us for a while? The short answer: No it doesn’t, but it does buy some time.

Collectively the PIIGs have about $2.9 trillion in short-term debt coming due within one year. Loans in the $995 billion range would seem to handle that problem. The longer term debt problem, in the $8.1 trillion range, is where the rubber meets the road.

For Europe’s massive qualitative easing to be successful it will have to change the structure of the experiment in a way it hasn’t yet:

Labor productivity within the PIIGs must change such that they can compete on the world market against Germany if all continue to use the same currency.

The extension of credit isn’t necessarily a bad thing. But it requires that one key element for the process of lending and repayment to be successful: the credit extended must create wealth for the borrower in order to service the loan. It hasn’t happened since 1999.

Instead of the hard grind of reforming labor markets and welfare largesse, the core Eurozone borrowers binged on credit since 1999, buying the goods produced by Germany as its labor productivity continued to rise.

Does anyone else see a problem with Germany competing in world markets against the same countries it is trying to prop up? Does QE change this structural imbalance?

Interesting how badly the Fed and dollar got battered by zeitgeist of Europe when it embarked on its massive quantitative easing program, rocketing stocks and crushing the dollar. How many times have we heard how independent and responsible the European Central Bank is, compared to the lowly Fed, who by the way continues to provide currency swaps to save the European banking system during crunch time. Hopefully, that preaching is over.

Oh yeah, in case you missed it in the paragraph above: The dollar was crushed after the Fed began its QE program back in March 2009. All the smart guys deemed the dollar the new carry currency. Hmmm….Euro carry-trade has a nice ring to it. And if you are a manufacturer in Europe, you likely agree.