This European Scam Will Make Our "Super Crash" Much Worse

Lee Adler

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Ultimately, all financial roads lead to Wall Street. The big investment banks and trading firms known as primary dealers all play in one worldwide money pool. When the ECB prints money, it's not just available to Europe, it is also instantly available to Wall Street. This isn't Vegas. What happens in Europe doesn't stay in Europe. That's why it's important to keep track of the performance of the European banking system.

Any decline in European liquidity will have a negative impact on Wall Street, the U.S. Treasury market, and U.S. stocks.

And any European skullduggery is likely to make 2018's bear market much worse.

Unfortunately, that's precisely what's going on now.

But don't worry – as always, we're set up for protection and even a bit of upside…

A Trick Program That Utterly Failed to Stimulate Growth

There's every indication that liquidity in the European system has not grown as a result of NIRP (negative-interest-rate policy) and QE (quantitative easing) and that it will only get worse now that the ECB has drastically cut its asset purchases.

In December the ECB announced that it would cut those purchases in half from 60 billion euros a month to 30 billion, beginning in January. Meanwhile the ECB continues to penalize bank deposits by imposing negative interest rates on banks that hold reserve deposits at the ECB.

ECB asset purchases along with NIRP has caused many bonds, particularly sovereign bonds, to have negative yields. Instead of earning interest, investors and banks holding those bonds get clipped every quarter. So they have an incentive to unload them especially once the stop appreciating. But cash deposits also get penalized, so big banks and institutional investors largely get rid of deposits by using them to pay off any debt that they hold.

The result is that bank assets and deposits don't grow, leaving the ECB flummoxed as to why their insane policy isn't working. So they just pretend that it's working, but begin to gradually dismantle it.

The ECB's trillions in asset purchases have done nothing to stimulate lending or growth. Most of the money the ECB printed to buy those assets has been vaporized as banks and investment institutions deleveraged their balance sheets by selling assets and using the proceeds to pay off debts that were other banks' loans.

Meanwhile, the ECB established a trick program called the targeted long-term lending operations (TLTRO) that gave the appearance that bank assets did grow now and then. But it's a sham. The idea was that the ECB would lend money to the banks and pay them a bonus if they increased their lending to customers.

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But there was no intrinsic loan demand in Europe. So what did the banks do? They lent the money to each other in a shell game, so that they could collect the interest bonus. Now it appears that they are beginning to unwind that scam.

European bank assets and deposits plunged in December just as the ECB announced that it would cut its asset buying program (QE) in half to 30 billion euros a month. The liquidation of assets was probably a preemptive move by investors and depositors. They wanted to reduce deposits to stop the bleeding from NIRP.

The drop in European bank assets is a likely sign of more to come as the ECB maintains the punitive NIRP policy but cuts QE, reducing the amount of new money it injects into the system. That in turn will cut the flow of European capital into the United States. The name of the game in Europe now is deleveraging.

Total European bank assets plunged in December back to the level of the 2014 lows, indicating that NIRP and QE have done nothing to stimulate borrowing or investment.

Household loans have been growing, but that has all been in mortgages. It's evidence of yet another housing bubble as central bankers the world over continue to address systemic rot by papering it over. They do it by promoting housing bubbles. Then they act surprised when their precious bubbles deflate.

All of the ECB's money printing and negative-interest-rate trickery have failed to stimulate growth. The evidence suggests that rather than borrowing more as a result of NIRP, as the ECB had hoped, many economic actors are pawning their assets off on the ECB and deleveraging in the process.

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Lee Adler

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Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.

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