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Monday, January 26

Credit Guest: "Stimulant Psychosis"


Here's the latest cross-post from Macronomics:




Credit - Stimulant psychosis

"Every form of addiction is bad, no matter whether the narcotic be alcohol or morphine or idealism." - Carl Jung
Watching with interest our "Generous Gambler" aka Mario Draghi finally firing his "Chekhov's gun" and unleashing QE in Europe, pushing in effect more government bonds towards negative yields, we reminded ourselves, when choosing this week's analogy for our title of a specific kind of psychotic disorder called "Stimulant psychosis" that occurs in some people who use stimulant drugs:
"Stimulant psychosis commonly occurs in people who abuse stimulants, but it also occurs in some patients taking therapeutic doses of stimulant drugs under medical supervision." - source Wikipedia

While the symptoms of stimulant psychosis may vary slightly depending on the drug ingested, it generally include the symptoms of organic psychosis including hallucinations, delusions, thought disorder, and, in extreme cases, catatonia. We can already see in the MSM (Mainstream media) and in most of the comments from the European political "elite" symptoms of hallucinations, delusions and of course thought disorder of the highest order but we ramble again...

As a reminder of our conversation "Pascal's Wager" from October 2014, we pointed out the strength of the deflationary forces at play:
"In terms of the implication for Europe (as discussed in the "Coffin Corner"), the aggressiveness of the Japanese reflationary stance spells indeed more deflation for Europe, unless the ECB of course decides to engage as well in a QE of its own:
"Moving on to Europe, we are unfortunately pretty confident about our deflationary call in Europe, particularly using an analogy of tectonic plates. Europe was facing one tectonic plate, the US, now two with Japan. It spells deflation bust in Europe unless ECB steps in as well we think." - Macronomics - 27th of April 2013."
Of course in this week's conversation, we would like to review the supposed impact of what QE will bring to Europe, and we would like to point out the implications of the unleashing of the "Chekhov's gun by our "Generous Gambler" and the major difference between QE in Europe versus QE in the US, because once again the Devil is indeed in the details. 

Synopsis:
  • The ECB has become the world's fastest QE gunslinger!
  •  Rentiers seek and prefer deflation - European QE to benefit US Investment Grade credit investors.
  • The on-going "Stimulant psychosis" experience led by our central banks deities is leading to more pronounced "Cantillon Effects" aka asset price inflation on a grand scale.
  • In similar fashion to what we wrote about Japan in general and credit versus equities in particular in our April 2012 conversation "Deleveraging - Bad for equities but good for credit assets"
  • The result of course is that the unquenchable hunt for yield is not only pushing investors towards the higher quality spectrum but also extending duration exposure
  • When it comes to the "euthanasia of the rentier", what our central bankers deities are not realizing is that capital with ZIRP is not being deployed but merely destroyed
  • We would like to re-iterate, investors shorting US Treasuries will continue to be punished!
  •  European QE, the Devil is the detail and the future of the Euro lies in Germany's liability exposure

Talking about the Devil, it reminds us as well of the quote we used back in September 2014 in our conversation "Sympathy for the Devil":
"The greatest trick European central bankers ever pulled was to convince the world that default risk didn't exist" - Macronomics.
In fact in our previous conversation we indicated the following:
"Investors have indeed Sympathy for the Devil we think, as they continue to pile up with much abandon and more and more getting "carried away" in their insatiable hunt for yield. In that sense Baudelaire's 1869 poem rings eerily familiar with the current investment situation in the sense that investors have been giving our "Generous Gambler" the benefit of the doubt (OMT - and now full blown QE) and shown their sympathy and their blind beliefs in "implicit" guarantees, rather than "explicit" (such as the German Constitution as we argued in various conversations):
"If it hadn't been for the fear of humiliating myself before such a grand assembly, I would willingly have fallen at the feet of this generous gambler, to thank him for his unheard of munificence. But little by little, after I left him, incurable mistrust returned to my breast. I no longer dared to believe in such prodigious good fortune, and, as I went to bed, saying my prayers out of the remnants of imbecilic habit, I said, half-asleep: "My God! Lord, my God! Please make the devil keep his word!"
But as years have gone by in the European tragedy, we have become somewhat immunized from our great magician's spells. Many investors have indeed shown the greatest sympathy in respect to piling up on European Government Debt in the process, while banks have been shedding assets leading to outright credit contractions leading in the past two years European banks to cut their lending to businesses by about 8.5 per cent." - source Macronomics, 9th of September 2014
  • The ECB has become the world's fastest QE gunslinger!

While we pointed out in our conversation "Chekhov's gun" that the BOJ and the FED had been QE fast drawers with the SNB front running aggressively the ECB as of late, as pointed out by Bank of America Merrill Lynch European Credit Strategist note from the 23rd of January entitled "QE Sera, Sera", the ECB has become the fastest gunslinger around:
"And so it begins…
The dawn of QE in Europe. Yesterday’s ECB meeting lived up to expectations, plus more. The central bank unveiled asset purchases of €60bn a month across Eurozone sovereign, agency, covered and asset-backed bonds. Banks were boosted by the TLTRO being made cheaper and thus more tempting. But the biggest victory for Draghi, in our view, was the open-ended feel that he was able to convey towards the programme.
Risk assets gave the ECB a vote of confidence by the end of the day, and understandably so – the ECB will likely now have the fastest growing balance sheet across the globe (chart 1). 
Stocks finished up yesterday, sub banks rallied and high-yield tightened. CCCs in particular were very strong, up 2-3pts, the first time in a number of months that the asset class has seen a big move.
But what of credit?
For credit investors, there was no pledge to buy corporate bonds. We had wondered whether the ECB might “tag on” corporate purchases just to make their asset gathering process easier. The dream could still live on if the ECB struggle to buy €60bn a month (note our rates team’s net Eurozone government bond issuance forecast of only €275bn this year). But for now, credit will not be bought.
Yet, there were few signs of weakness, or knee-jerk moves wider in corporate bonds yesterday. If anything, the need for income remains as intense as ever in Europe, with the backdrop of huge amounts of negative yielding government debt (chart 3), and note that the Danish Central bank lowered its deposit rate yesterday (the second cut in a week!). 
The race below zero by central banks is in full force, and so is the movement of money “up the value chain” in search of positive returns. Credit should benefit tremendously from this over time, we think.
The ECB is also becoming a prolific asset gatherer just at a time when financing needs, generally, are in decline. Sovereign funding needs have shrunk as budget deficits have reduced, bank funding needs have also dwindled amid deleveraging and the ECB’s focus on rejuvenating the loan market will mean less corporate supply over time, especially in high-yield (note SME lending rates are falling quickly now, chart 2).
 Chart 4 shows the net supply of fixed-income instruments in Europe on a yearly basis (we use sovereign debt, covered, senior banks and quasi-sovereigns), versus the net growth in the ECB’s balance sheet.

The bottom line is that the ECB is expanding its balance sheet just at a time when assets are being produced at a slower rate. As central banks exacerbate the demand/supply imbalance in asset markets, we see this as a backdrop for prices generally to rise, and by extension – credit spreads to rally." - source Bank of America Merrill Lynch
Of course we agree with the above when it comes to the value proposition of credit in Europe thanks to the on-going "japanification" process, with the slow "euthanasia of the rentier" to paraphrase Keynes from his 1936 "General Theory" book. On that subject we read with interest Andrew McKillop's January 2013 article entitled "Keynes Said: Euthanize The Rentiers, Instead We Euthanized The Economy":
"The bases of the French Revolution of 1789 had been set because even at that time, rentiers were struggling to defend the purchasing power of their interest income and at least preserve the capital value of their wealth. This put them in open conflict with the "traditional rentiers" of the monarchy, nobility, religious orders, and a few other players, who for political survival engaged in creating new and allied rentiers, giving them what French call "une rente de situation" for their personal political benefit, as well as personal financial or economic benefit. This was nothing to do with the national interest, it almost goes without saying.
Inflation is the first enemy of the rentier, but was also the friend of the state - basically the monarchy - in France throughout the 18th century. The very first "asset bubble" organized for and on behalf of the French monarchy by Scotsman John Law, before 1720, the Mississippi Company bubble, was aimed at destroying the real cost of debt owed by the monarchy and its associated nobility, to "the rentiers". Law's action, a Ponzi-type scam, had overkill effects. Some historians argue this first modern asset bubble, aimed at firstly inflating paper asset values, exchanging them against debt owed by the monarchy to rentiers, and then collapsing the bubble helped sow the seeds of the 1789 revolution through decades-long unwillingness of "the rentiers" to lend, after this asset implosion.
Rentiers seek and prefer deflation. They prefer conservative government policies of balanced budgets and deflationary conditions, even at the expense of economic growth, capital accumulation and high levels of employment. As early as 1820, this was a major theme of David Ricardo. Today, especially in Japan, it is intense daily action by the state and its central bank, seeking by all means to create inflation because "when there is inflation, the economy is still alive", and of course the cost of debt in real terms will fall.
This underlines the fatal flaw in Keynesian-type economics: high inflation, and-or extremely low or zero interest rates, "for prime borrowers", firstly needs rentiers to supply the capital to borrow. Before that, the capital has to be formed or accumulated. If both processes are unsure, uncertain, or inoperative the result can only be economic decline.
The problem today is starkly simple. Without massive money printing and issue, the dearth of capital would be so striking that the New Poverty of the world would be impossible to ignore. The global banking system, at latest since 2008, has vastly overvalued collateral or "assets", and a long-term basic trend, intensifying since 2008 of deflating balance sheets. Governments of all major OECD countries with a combined GDP of about one-half of the world's total output, through their central banks, are each day back-stopping the banks, which are insolvent institutions, flooding them with sovereign debt and fiat money, and manipulating credit markets to maintain apparent valuations.
THE NEW POVERTY OF NATIONS
Without this "window dressing", the reality is that the private sector economy is still contracting four years after the credit bubble burst. It is only concealed by the expansion of government spending and fiat money issue. Governments possibly do not understand they are in the midst of an economic collapse and will be the last to admit it, but as in previous epic struggles between the vested interests in play in a society and its economy, for example in the run-up to the French Revolution, the manipulation of credit, values, money and prices has made it impossible to accurately monitor the economy." - source  Andrew McKillop
When it comes to our contrarian take on US yields since early January 2014 we argued the following in our conversation "Supervaluationism" back in May 2014 it comes from us agreeing with Antal Fekete's take from his paper "Bonds Defy Dire Forecasts but they are not defying logic":
"The behavior of the bond market has been consistent with Keynesianism. By his compassionate phrase “euthanasia of the rentier” Keynes meant the reduction of the rate of interest, to zero if need be, as part of the official monetary policy to deprive the coupon-clipping class of its “unearned” income. Perhaps it is not a waste of time to repeat my argument why, in following Keynes’ recipe, the Fed is acting contrary to purpose. While wanting to induce inflation, it induces deflation.The main tenet of Keynesianism is that the government has the power to manipulate interest rates as it pleases, in order to keep unemployment in check. Keynes argued that the free market economy was unstable as it was open to the swings of irrational investor optimism or pessimism that would result in unpredictable and wild fluctuation of output, employment and prices. Wise politicians guided by brilliant economists − such as, first and foremost, himself  −  had to have the power “to prime the pump” (read: to pump up the money supply) as well as the power to “fine-tune” (read: to suppress) the rate of interest. They had to have these powers to induce the right amount of spending needed to put people to work, to entice entrepreneurs with ‘teaser interest rates’ to go ahead with projects they would otherwise hesitate to undertake. Above all, politicians had to have the power to unbalance the budget in order to be able to help themselves to unlimited funds to spend on public works, in case private enterprise still failed to come through with the money.However, Keynes completely ignored the constraints of finance, including the elementary fact that ex nihilo nihil fit (nothing comes from nothing). In particular, he ignored the fact that there is obstruction to suppressing the rate of interest (namely, the rising of the bond price beyond all bounds) and, likewise, there is obstruction to suppressing the bond price (namely, the rising of the rate of interest beyond all bounds). Thus, then, while Keynes was hell-bent on impounding the “unearned” interest income of the “parasitic” rentiers with his left hand, he would inadvertently grant unprecedented capital gains to them in the form of exorbitant bond price with his right." - Antal Fekete
  •  Rentiers seek and prefer deflation - European QE to benefit US Investment Grade credit investors.
In our October conversation "Actus Tragicus" we disagreed with Bank of America Merrill Lynch' s credit team in their Credit Market Strategist note from the 10th of October entitled "Breaking up is so easy to do":
"We find it unlikely that the existence of big global yield differentials will accelerate inflows to US fixed income for two reasons. First, while we would indeed expect inflows in a high return environment of both high and declining US yields, with rising US interest rates – which our interest rate strategists expect – returns are much less attractive, despite the higher yields. Second, there appears to be little mean-reversion in interest rate differentials – at least between US and German interest rates." - source Bank of America Merrill Lynch

We correctly argued at the time:
"We therefore do think (and so far flows in US investment grade are validating this move) that interest rate differential will indeed accelerate inflows towards US fixed income, contrary to Bank of America Merrill Lynch's views. We do not expect a rapid rise in US interest rates but a continuation of the flattening of the US yield curve and a continuation in US 10 year and 30 year yield compression and therefore performance, meaning an extension in credit and duration exposure of investors towards US investment grade as per the "Global Credit Channel Clock" (although the releveraging of US corporates means it is getting more and more late in the credit game...)."
"When the facts change, I change my mind. What do you do, sir? - Sir John Maynard Keynes
 What is of interest is that, when the facts change, Bank of America Merrill Lynch do change their mind given that in their latest Credit Market Strategist note from the 23rd of January 2015 entitled "All but corporate bonds" they argued the following:
"US IG credit benefits from the ECB action as investors are sent our way. First, the greater than expected expansion of the ECB’s balance sheet implies that for non-official European fixed income investors the investment opportunity set shrinks. The effect is that more European investors will be forced into US IG. Second, while the absence corporate bond purchases removes the potential for a big move tighter in spreads, in the short term certain sectors in US credit could benefit as investors unwind their expressed views that the ECB would buy corporate bonds. For example an investor that wanted exposure to a certain name that had both EUR and USD bonds outstanding might have been willing to give up spread by buying the EUR bond, in order to profit more from an ECB corporate bond buying announcement. Now with that upside potential eliminated the investor may rationally swap to the generally more attractive credit spreads offered in USD tranches."

- source Bank of America Merrill Lynch

  • The on-going "Stimulant psychosis" experience led by our central banks deities is leading to more pronounced "Cantillon Effects" aka asset price inflation on a grand scale.

As we posited in our conversation "Pascal's Wager":
"The only "rational" explanation coming from the impressive surge in asset prices (stocks, art, classic cars, etc.) courtesy of QEs and monetary base expansion has been to choose (B), belief that indeed, our central bankers are "Gods"."
To further illustrate the "inflationary" bias of current monetary policies on asset price bubbles coinciding with "exogenous" (central banks) monetary policy, apart from the Art market, one could simply look at the price evolution of "classic cars" clearly indicative of "pure" Cantillon Effects (detached from the capital structure). To that effect and courtesy of United Kingdom Classic Cars magazine  please find enclosed a good illustration of this "effect" on the price evolution of a Citro├źn DS classic car:
- source Classic Cars Magazine

"Financial credit may be the next big opportunity
The build-up of corporate leverage in the 2000s was confined to financials which, unlike other corporates, had escaped unscarred from the 2001 experience. However, this changed in 2008. Judging by the experience of G3 (US, EU, Japan) non-financial corporates, there should be significant deleveraging in banks going forward. Indeed, regulatory pressures are also pushing in that direction. All else being equal, this should be bullish for financial credit." - source Nomura
This is what we wrote in June 2014 in our conversation "Deus Deceptor" when it comes to the value proposition of investment grade credit we discussed as well in "Quality Street":
"The "japanification" process in the government bond space continues to support the bid for credit, with the caveat that for the investment grade class, there is no more interest rate buffer meaning investors are "obliged" to take risks outside their comfort zone (in untested areas such as CoCos - contingent convertibles financials bonds)."

  • The result of course is that the unquenchable hunt for yield is not only pushing investors towards the higher quality spectrum but, also extending duration exposure:

The result of course is that the unquenchable hunt for yield is not only pushing investors towards the higher quality spectrum which is in great demand as indicated by the additional +$1.2 billion in Investment Grade inflows in the week ending on the 21st of January versus -$445 million of outflows in High Yield, but, it is also leading to duration extension as indicated by Bank of America Merrill Lynch's chart from their recent Follow the Flow note from the 23rd of January entitled "It's Europe time":
"Quality yield and some growth down the line?
Pre-ECB, the big flows were into European equities, with the expectation that monetary policy will lead to stronger growth down the line. Equity funds saw a $2.3bn inflow, the largest since June last year while the inflow into equity ETFs was the strongest since May’12.
Income remained a dominant theme: investment-grade registered its 57th straight week of inflows. Money market funds have also seen 4 straight weeks of inflows – the best streak since mid-2013 – as negative deposit rates force money “up the value chain”.
High-yield has yet to get a boost from the income theme though: the asset class saw small outflows of $445m over the last week, and has seen $2.4bn outflows YTD.
European commodity funds recorded their biggest inflow ever, with oil stabilizing and with the bid for gold in the wake of the SNB rate cut. EM debt suffered another weekly outflow, the seventh in a row."

- source Bank of America Merrill Lynch

  • When it comes to the "euthanasia of the rentier", what our central bankers deities are not realizing is that capital with ZIRP is not being deployed but merely destroyed as we have argued in our conversation of November 2012, "The Omnipotence Paradox":

"Fixed Income, Floating Expenses...We are more concerned about the "Profits Cliff" or "Peak margins" effect given that companies can't figure how to make use of their cash hence the flurry of buy-backs which we greatly dislike. Indeed, the "unintended consequences" of the zero rate boundaries being tackled by our "omnipotent" central banks "deities" is that capital is no longer being deployed but destroyed (buy-backs being a good indicator of the lack of investment perspectives)"
 As illustration of the destruction of capital and the supposed recovery in the US, we would like to point to a small conversation our Macronomics fellow blogger and good cross-asset friend "Sormiou" had with a US derivatives sell-side practitioner on the micro news on the employment front:
"Sormiou": “In less than a week in the US:   SLB (-7k jobs/ 7% workforce)  / BHI (-9k, 12%) / EBAY (-4k / 7%) / AmEXpress (-4k, -8%) Oil sector of course, but not only.   We are  hearing the "wage growth / employment pick-up" consensus argument from many sell-side strategists, but on the micro front, things do not look as rosy to us, even though a few announcements do not make a trend yet... thoughts?”
Him: “First is on the macro level = Yellen (and other doves) have flagged, under-employment is still much too high.  the U6 number (USUDMAER in Bloomberg) is still 11.2% vs 8% pre-crisis.  The U6 is a measure of the unemployed and the "under" employed-those folks who want full time, but can only get part time...as well as people who have been unemployed for so long they have fallen off the headline U3 number of 5.6%.  In fact, underemployment has been a major argument for postponing rate rise by the doves.  Point here is I think you are exactly correct in digging -the U3 headline number of 5.6% is absolutely not telling the entire story! More worrying maybe is the unemployment rate dissected across demographics. Unemployment among US youth is shockingly high.
Second is on a company level as you have flagged. Much of the earnings growth over the past few years can be attributed to cost cutting rather than organic growth to operating income.  Once costs were more "in control" for some companies, they turned to M&A to help generate returns - again to increase / boost slack organic operating income growth.  This earning period I think will certainly be more interesting than the last few because there is only so long you can mask sluggish organic growth...and we are seeing it in a few names that have reported.  In general, earnings are coming in 50bps below estimates (according to FactSet numbers).  Granted, we are still early in the earning cycle so too early to call...but if M&A doesn't get you what you need via a bolt on...and organic growth is still lackluster then the only thing to do is turn to is costs again - which is what I think we are seeing (and what you have flagged).”
Could companies focusing on costs again be the reason on why US Weekly jobless claims in the US are remaining above 300K for the third straight week? This is indeed a point to closely monitor we think, going forward.

  • We would like to re-iterate, investors shorting US Treasuries will continue to be punished!

We would like to re-iterate why investors shorting US Treasuries will continue to be punished because they do not understand the game being played, On that specific matter we will simply quote again Antal Fekete from our July 2014 conversation entitled "Perpetual Motion":
"Moving back to the important notion of the difference between stocks and flows we do agree with Antal Fekete's take in May 2010 in his article "Hyperinflation or Hyperdeflation" being akin to a Black Hole and the possibility of capital being destroyed thanks to ZIRP (as it is mis-allocated towards speculative endeavors) hence the risk of pushing to far the "Perpetual Motion" experience":
"Obviously, you need a theory to explain what is happening other than the QTM. I have offered such a theory. I have called it the Black Hole of Zero Interest. When the Federal Reserve (the Fed) is pushing the rate of interest down to zero (insofar as it needs pushing), wholesale destruction of capital is taking place unobtrusively but none the less effectively. Deflation is the measure of wealth in the process of self-destruction -- wealth gone for good. The Fed is pouring oil on the fire as it is trying to push long-term rates down after it has succeeded in pushing short term rates to zero. It merely makes more wealth self-destruct, and it makes the pull of the Black Hole irresistible.But why is it that the inordinate money creation by the Fed is having no lasting effect on prices? It is because the Fed can create all the money it wants, but it cannot command it to flow uphill. The new money flows downhill where the fun is: to the bond market. Bond speculators are having a field day. Their bets are on the house: if they lose, the losses will be picked up by the public purse. But why does the Fed under-write the losses of the bond speculators? What we see is a gigantic Ponzi scheme. The Treasury issues the bonds by the trillions, and promises huge risk-free profits to the bond speculators in order to induce them to buy. Most speculators believe that the Treasury is not bluffing and they buy. Some may believe that the Fed is falsecarding doubts and they sell. But every time they do they only see foregone profits. What we have here is a rare symbiotic relation between the government and the speculators." - Antal Fekete


  •  European QE, the Devil is the detail and the future of the Euro lies in Germany's liability exposure
In relation to the European QE and the details of the "plan", we would like to quote our good friend and former colleague Anthony Peters, strategist at SwissInvest and regularly featured in IFR from his last post entitled  "On the ECB and mutualisation of risk":

"Yes, I did take time off the desk yesterday afternoon to listen to St Mario's press conference. I heard everything he said and but I didn't understand quite a lot of it. Going into it, I had had a long talk with Ian McBride of Mirexa Capital, a fledgling agency brokerage in the rates space and one of the most experienced people I know in London when it comes to the whys, the  hows and the wherefores of the government bond market.
He made a very strong point that, as far as he was concerned, size didn't matter. To him there was only one critical issue of concern and that was the subject of mutualisation of risk. With it, so he reckons, the Eurozone is headed for stability. Without it, it is doomed in as much as it effectively ceases to be a harmonious, homogenous area. The dream of making a United States of Europe in the image of the United States of America is dead in the water and any claim the euro might have had to be like the dollar has just gone up in a puff of smoke.
As recently as Wednesday night, the Dutch parliament had voted against mutualisation and thus, with the Germans, the Finns and the Austrians also averse, unanimity was never going to be achieved. A split vote was not an option and so there had to be a fudge. The question was, how heavily was the fudge going to be tainted with the flavour of sauerkraut? When I heard Draghi begin to explain the split in loss-sharing, I knew all was not right. Ian titled his analysis of the outcome with "Mario Swings a Big Bat, But Misses the Mutual Ball?" Please permit me to share some of his thoughts:
"Call me a cynic, but you're trying to hide the fact that you failed to force through the most important component of the QE program... namely loss sharing, liability sharing, mutualisation, or whatever you want to call it and you end up with at best 20% loss sharing only, of which only 8% is on government bonds. You hide this shortcoming in the fetching headlines that you will be buying up to €60bil/month combined Public & Private securities. And on top of that you make the program longer than some expected taking it up to at least Sept/2016, having started in Mar/2015. That is in theory €1.14trn of securities you will accumulate. Sounds big right? Then the cherry on the Smoke and Mirror Cake is that you tell everyone you will make the program conditional on achievement of your mandate for price stability. Saying that the program will go on as long as needed. Or open ended if you like."
He continues "To illustrate how big the party is in Berlin tonight... Based on what is clearly a big win on the compromise (I'd say outright victory) that Germany and its allies wrung out of Draghi. Look at some rough numbers for new German joint loss sharing exposure by the end of the Program when and if the ECB and National CBs manage to buy the total of €1.14trn by Sept/2016. Based on the Capital Key, Germany is responsible for 18% of that total or €205.2bn and of that only 8% is held by the ECB with loss sharing. So that means that the total non-Bund exposure for the BUBA is only an additional €16.4bn out of the grand total of €1.14trn bought. It'll be lots of beer and sausages all around!!"
"That tiny 8% is symbolic, but not in any way significant enough to prevent, over time, the segregation/tiering/fragmentation of the credits within the Eurozone borrowers. The Haves vs. the Have Nots. I will expect, when the dust settles and purchases begin, that the credit spreads between the strong and the weak will widen. This is not a program that is designed to float all boats equally."
"It is a divisive piece of policy that Draghi, in my mind, has lost a lot of credibility over. He and other members clearly caved in to the demands of the big bully(s) on the block. And for me, despite the big size headlines and open ended-ness of the program, it comes up short of what is needed to maintain the structural integrity of European Monetary Policy and Fiscal Unity."
So, while they were dancing on the floors of the stock exchanges and while all the high fiving was going on that St Mario and his merry men had finally come to the rescue, wrapped in open-ended QE, it could quite well be that the seeds of the final destruction of that strangest and most incongruous of constructs, the European Single Currency, were yesterday sown.
It might, of course, be that the euro softens a little bit, that inflation is imported to the tune of roughly 2%, that exports pick up enough in order to push Eurozone unemployment down from the current 11½% to 5½-6%, that construction and consumption accelerate, that fiscal revenues rise to the level at which deficits are wiped out and surpluses are achieved without legislative intervention or trimming of benefits and that pigs learn to fly. Or it might be that the whole system falters when driving down the road by hitting a whole pile of cans which had been kicked there over time." - source Anthony Peters - "On the ECB and mutualisation of risk":
This is exactly what has happened with the QE plan put forward by our"Generous Gambler" aka Mario Draghi. Back in July 2012 in our conversation "Europe - The Game of the Century" we argued the following:
"The only possible Nash equilibrium for Germany will be to defect"

While only appearing to be making material sacrifices, German Chancellor Angela Merkel has managed to keep Germany's liabilities unchanged, this is again the case with the present QE, as it was the case with the capped ESM and EFSF.
As we indicated in our conversation "Eastern promises" on the 9th of June 2012, we still believe that eventually Germany will defect in the end:
"We think the breakup of the European Union could be triggered by Germany, in similar fashion to the demise of the 15 State-Ruble zone in 1994 which was triggered by Russia, its most powerful member which could lead to a smaller European zone. It has been our thoughts which we previously expressed."

We would like to point out there is no such thing as a credit-less recovery in Europe as discussed in our conversation "In the doldrums":

"If credit growth does not return, economic recovery may prove to be difficult in the absence of sizeable real exchange rate depreciation." - Zsolt Darvas - Bruegel Policy Contribution.
"So for us, unless our  "Generous Gambler" aka Mario Draghi goes for the nuclear option, Quantitative Easing that is, and enters fully currency war to depreciate the value of the Euro, there won't be any such thing as a "credit-less" recovery in Europe and we remind ourselves from last week conversation that in the end Germany could defect and refuse QE, the only option left on the table for our poker player at the ECB:"The crux lies in the movement needed from "implicit" to "explicit" guarantees which would entail a significant increase in Germany's contingent liabilities. The delaying tactics so far played by Germany seems to validate our stance towards the potential defection of Germany at some point validating in effect the Nash equilibrium concept. We do not see it happening. The German Constitution is more than an "explicit guarantee" it is the "hardest explicit guarantee" between Germany and its citizens. It is hard coded. We have a hard time envisaging that this sacred principle could be broken for the sake of Europe."


What do we do sir? 
When the facts haven't changed, we do not change our mind.  In the European QE, there has indeed been no move towards "explicit guarantees" as it would have indeed entailed a significant increase in Germany' s contingent liabilities hence our continued negative stance on the future of the European Union.
On a final note we leave you with Bank of America Merrill Lynch's graph displaying Labor force growth vs US CPI from their Thundering Word note from the 18th of January 2015:

"Technology and demographics (Chart 3) continue to act as secular deflationary forces across the developed world. The end of QE in the US means the Fed is no longer inflating asset values. And investors are increasingly concluding that QE has ended up creating excess supply rather than excess demand. The relentless “lust for yield” continues. In Q1 it is the turn of REITs to be the asset class attracting large speculative inflows in search of Yield & Growth." - source Bank of America Merrill Lynch
"We need to ask whether, in the long term, some individuals with a history of psychosis may do better off medication." - Thomas R. Insel, American scientist
Stay tuned!