Fed’s QE3 exit strategy: ECB’s negative rates will force European banks to buy our debt?

Today the markets popped with the announcement of the European Central Bank’s (ECB) new policy of ultra low and negative interest rates for excess bank reserves.  This was done in an effort to combat perceived deflation.

The S&P500 closed at a record high (slightly below average volume).  The NASDAQ was up a strong 1.05% (in average volume) signaling this rally’s first accumulation day (heavy buying by institutional investors).

On the negative side, this accumulation day came 36 days after April’s bottom.  That’s an extremely long time to show investor enthusiasm, but better late than never.

On the positive side, the indexes have not had any days of poor performance since the uptrend started 8 days ago.  That’s an indication that no knee jerk selling has occurred.  The indexes have unspectacularly crept up slowly but deliberately.

The ECB’s low rates may inspire more lending by the European bankers…but, maybe not.  Unlike the US loose money policies, the ECB is not offering any cover or protection to their banking system.  Remember back to the Housing Bubble shenanigans, banks were motivated to make bad loans primarily because they weren’t planning to hold the debt.  The mortgages were sold to Fannie Mae/Freddie Mac or bundled and sold off to unsuspecting income funds.  Even now, 6 years after housing prices started collapsing, US banks are still peddling their bad mortgages to the Federal Reserve (through QE3 mortgages purchases).

European banks are being given no such backdoor exit plan.  They’re simply being penalized for holding cash reserves.  So maybe there isn’t enough incentive for them to take on bad debt.  Let’s face it, if there were profitable loans to be make, those greedy German bankers would be exploiting borrowers without the prodding of the ECB.

The US dollar has been trading up on the rumor of the ECB’s actions but today was down on the news.  Ten year Treasuries are hovering around 2.58%.  I guess the new carry trade will be European banks buying US Treasuries…maybe that’s been the Fed’s QE3 exit strategy all along???

I should know better, but what still concerns me is that after all these years of “recovery”, the global markets still need to be propped up by central banks.   How is that a healthy economy?

Call me a contrarian, but I’m still risk averse.  How about you?  I’m interested to poll your opinion.  Are you in this rally or setting on the sidelines?  Let me know at:  [email protected]

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