Are We Seeing Stealth Quantitative Easing With A European Twist? (UUP, UDN, FXE, VGK, EUO, IEV)

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January 22, 2012 9:36pm NYSE:EUO NYSE:FXE

Mike Larson: Low volume stock rallies driven by nothing fundamental … A steady upward move in bond prices, and decline in interest rates … Levitation in hard assets, and a relentless decline in

select currencies.

I’m no Sherlock Holmes. But I’d say these market clues point in one direction — that we’re getting stealth Quantitative Easing, this time with a European twist!

Is the ECB Following in the Fed’s Footsteps? It Sure Looks Like It!

“QE” is Wall Street jargon for money printing. We’ve seen two rounds of it here in the U.S., one that ran from November 25, 2008 to March 31, 2010, and one that ran from November 3, 2010 to June 30, 2011.

QE1 caused every asset on the planet to levitate for months on end. The exception was the U.S. dollar (NYSEArca:UUP); it fell in a virtual straight line. QE2 had a similar, but more muted impact.

Over in Europe (NYSEArca:IEV), central bankers and other policy makers griped about the impact the Fed’s money printing had on commodities and the threat a falling dollar posed to their export industry. And more recently, several policymakers publicly disavowed money-printing as a strategy to combat the sovereign debt crisis.

ECB's  massive LTRO gave risk assets wings.
ECB’s massive LTRO gave risk assets wings.

Yet late in 2011, the European Central Bank (ECB) conducted the first of two planned long-term refinancing operations, or “LTROs.” The scheme flooded banks with 489 billion euros of cheap money, which they were “strongly encouraged” to use to buy sovereign bonds. The second LTRO is scheduled for next month, and there’s talk we could see 1 trillion euros (NYSEArca:FXE) — or more — in demand.

As a result of the LTRO and other ECB moves to combat the crisis, its balance sheet has exploded in size — to 2.67 trillion euros ($3.42 trillion) from 1.95 trillion euros ($2.5 trillion) just 6 months ago. The Fed’s balance sheet, by comparison sake, has ballooned to $2.9 trillion. That compares to $924 billion before the Lehman Brothers crisis.

Long story short: All signs point to the ECB pursuing — in a roundabout way — the same strategy the Fed did before it!

QE-E Sure to Fail Just Like Ours Did!

Albert Einstein supposedly said the definition of insanity is doing the same thing over and over again, and expecting a different result. But it looks like central bankers the world over haven’t gotten the memo.

Despite the failure of two rounds of U.S. QE to stimulate the economy in a lasting meaningful way … and the failure of two rounds of QE in the U.K. to accomplish anything either … we now appear to be getting “QE-E” — QE in Europe (NYSEArca:VGK).

It’s guaranteed to fail miserably if history is any guide. But it could also continue to inflate the asset markets short term, and drive the value of the euro currency (NYSEArca:EUO) even lower — just as U.S. QE drove the dollar down (NYSEArca:UDN). So keep those trends in mind when you’re picking your investing spots!

Until next time,

Written By Mike Larson From Money And Markets

Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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