Stop us when this sounds familiar:
What a no-brainer to suck at the
teat and go long some very transparent and liquid debt that matures in less
than three years (how can there not be a rally in global risk assets when
Europe's central bank pumps a combined $1.3 trillion into the financial system?
Not to mention a second bailout for Greece we were told a year ago there
wouldn't be any!). This must be the safest carry trade ever, or at least
that is the perception (1% LTRO loan for a 5% Italian bond or a 2% short-term
note even ... back up the truck!). Put up a tiny bit of capital and lever it
up. It is incredible that we live in a world where the difference
between going out of business as a bank and prosperity lies with cheap money
being accessed from the central bank balance sheet.
At least LTRO1 was dealing with a
possible breakdown of the system since the banks weren't lending to each other.
LTRO2 is clearly an overt policy move from the traditional central bank role of
being the lender of last resort (which even LTRO1 was to a point) to being the
lender of first call, as Peter Tchir aptly puts it. There is no such thing as a
free lunch, but there is such a thing as the law of unintended consequences.
I
can't say I know for sure what they will be or when they will show up, but
there are going to be repercussions from a central bank morphing from a bona
fide lender of last resort to a gift-giving institution.
Somehow a long gold, short euro
barbell looks really good here. Bernanke, after all, now seems reluctant to
embark on QE3 barring a renewed economic turndown while the ECB is moving
further away from the role of a traditional central bank to take on the role of
quasi fiscal policymaking, The German central bank, after all, is responsible
for 25% of any losses that would ever be incurred by the massive Draghi balance
sheet expansion. Why would anyone want to be long a currency representing
a region with a 10.7% unemployment rate, rising inflation rates and free money?
Mind you — the same can be said for the US (where U-6 jobless rate is even
higher), which is why the best currency may be physical gold (or
the producers that trade very inexpensively here and you pickup some leverage).