It’s The Thought That Counts

Stocks moved almost 6% from their overnight lows.

The China reserve rate cut was real.

The globally co-ordinated swap plan mostly just took a plan that was globally approved in September and cut the rates by 50 bps. It is neither a benchmark rate and it is not clear the program is even being used much. So saving 1/8% on funding costs for the weakest borrowers can’t be worth 6% on stocks.

So it is the thought that counts. The market is viewing it as a clear sign of more to come. That central banks “get it” and will do as told. That is definitely more likely than the “Grand Plan” and Europe “gets it” rally as the Fed in particular is convinced stocks are the economy and QE is the way to go and their are virtually no limits to what he can do. (Fed buying EFSF bonds seems less unlikely now). The problem is once again we have rallied far more on the expectations than on anything that has actually been done. Ben loves managing expectations and certainly delivered a dose of confidence.

I’m not confidence this was the first of more aggressive policy or just putting in place things that may be needed. I do not think that senior unsecured bank creditors will be hurt except for one or two small ones, and this policy helps ensure that. I am far less convinced the banks will be allowed to escape without some sovereign debt forgiveness and possible large equity raises. If that happens I think public backlash will be large especially if inflation or some other less obvious problem arises.

I expect ECB rate cut and promises of treaty agreements. I am far less convinced that ECB will print in which case this rally has gotten far ahead of itself because this is not enough to stop banks from continuing to reduce their balance sheets.