Podcast: Play in new window | Play in new window (Duration: 13:15 — 6.1MB)
DOW + 3= 17,515
SPX + 3 = 2022
NAS + 20 = 4654
10 YR YLD un = 1.81%
OIL – 2.30 = 46.39
GOLD + 13.90 = 1295.20
SILV + .19 = 18.08
Wall Street loves free money; they love free money from the Federal Reserve and for the past 5 years Wall Street has rallied on bailouts, QE, and ZIRP. The bailouts are over and the government promises they will never give away your money to the big banks again; QE, or quantitative easing is also finished and the Fed says they are out of the bond buying business for now; and ZIRP, or Zero Interest Rate Policy will patiently be replaced by slightly higher interest rates.
Remember, Wall Street loves free money, so you might expect Wall Street might throw a tantrum at the prospect of no more QE and higher interest rates; we’ve seen taper tantrums in the not-so-distant past; and that might be what we’ve been experiencing to start the New Year. But the Federal Reserve is not the only central bank with a stimulus scheme. The Bank of Japan has its own QE program called Abenomics. And the European Central Bank is finally expected to launch its own QE program on Thursday. ECB President Mario Draghi has been saying he would do “whatever it takes†for the past 2 years. Now, the markets expect him to act.
In a Bloomberg survey from Monday, 93% of economists polled think Draghi and the gang will announce at least a 550 billion-euro ($640 billion) bond-buying program this week. Draghi is on the hook to deliver, and expectations are high. And it is fairly certain that there will be disappointments. First, if the plan is not clear and precise and clearly explained, everyone will be disappointed. If the bond buying program is less than €550 billion, expect a tantrum; if the scheme is significantly more, then you can expect fear that the economic problems were greater than anyone imagined.
If the bond buying program is delegated to national central banks, rather than sitting on the ECB’s balance sheets it might send an unsettling message that QE might not be shared among member states. Germany will be disappointed in Greece. Greece will be disappointed in Germany. The Germans hate the idea because they hate the notion of the ECB printing money and they think every other country should focus on cutting debt. Don’t forget that the Germans have the largest economy in the Eurozone. The Greeks hate the idea of being forced to cut their debt because cost cutting has only made the Greek economy slow while increasing the debt. There will be an election in Greece on Sunday and the Greeks may vote for a political party that wants to have debt forgiven.
