ECB and EU LTRO and QE for Dummies

January 26th, 2015
in contributors

Special Report from Money Morning and Wall Street Insights & Indictments:
Make These Trades

by Shah Gilani, Money Morning

Pssst! Do you want to make some money trading some initials? Real easy money?

For real. I just made my subscribers 382% trading these initials. And we're not done. After closing out our 382% gain, we're in the same trade again, and we're up 180% in just a few weeks - and still going.

Follow up:

We're also in a conservative trade, trading the same initials mind you, and we're up 41% there.

The initials are EUO. EUO is an ETF (exchange-traded fund).

As soon as you read this "ECB and EU LTRO and QE for Dummies" explanation, which would take even a dummy about two minutes to read and understand, I'll share both of these trades.

Then, you'll be making some real money...

The World's Biggest Economic Experiment

The ECB is the European Central Bank. It's Europe's central bank, just like the U.S. Federal Reserve is the central bank of the United States.

The EU is the European Union. The EU is a confederation of 28 European countries, a sort of wannabe United States of Europe. Of the 28 countries in the EU, 19 of them exchanged their sovereign currencies for the euro, the EU's single currency. The other nine EU member countries, though they gladly accept euros, kept their old currencies.

After the credit crisis of 2008 and the Great Recession, which devastated Europe as much as the United States, the EU and the ECB followed the U.S. government and Fed's "stimulus" plan and worked to drive interest rates down.

The ECB embarked on an LTRO program, longer-term refinancing operations. But its "stimulus" program wasn't nearly as big as what the Fed did in the United States.

While the Fed spent about $4 trillion buying U.S. Treasuries and agency mortgage-backed securities ("agency" means that those mortgage-backed securities are guaranteed by some federal agency, like Fannie Mae or Freddie Mac), the ECB spent less than half that amount on asset-backed securities and covered bonds from European banks.

The Fed's stimulus programs, which happened in three stages - the first in November 2008, the second in 2010 and the third in 2012 - became known as QE1, QE2 and QE3. QE stands for quantitative easing.

When the Fed drove down interest rates to essentially zero in 2008, and growth in the economy wasn't stimulated, it began the experiment we now know as QE.

Quantitative easing simply means the central bank has driven interest rates as low as it can and the central bank is out of old-fashioned ammo. So, to try and get banks to lend more to stimulate consumption and production, the central bank buys assets from banks. By buying assets that banks are sitting on - meaning U.S Treasuries the banks stockpile and mortgage-backed securities the banks invested in (to earn interest) - the trillions of dollars the Fed pays banks to buy their inventoried bonds is supposed to make the banks flush with cash that they supposedly will lend out, stimulating consumption and growth.

At least that's the idea.

The jury is still out here in the United States as to whether QE was just a boon to the big banks who benefited by it, whether or not it artificially pumped up "risk assets" like stocks, or whether or not it exacerbated income inequality and wealth disparity by enriching those who benefited by owning stocks and real estate "risk assets" while middle-income incomes stagnated and the ranks of the poor grew.

Nonetheless, the U.S. economy is growing while Europe faces its third recession since 2008. U.S. banks are in better shape than their European counterparts. And in spite of everyone's deficits and government debts increasing, the United States is managing to slow the rate of its debt growth while European nations are piling on more and more debt.

Viewing all that, the ECB, in consultation with its oversight body, the European Commission, decided today to embark on its own version of quantitative easing.

Quantitative easing in Europe is vastly different from the ECB's former LTRO programs. QE means for the first time the ECB isn't just going to buy asset-backed securities and covered bonds (essentially those are packaged corporate loans and bank loans) - the ECB is going to buy government debt obligations from member nations in the EU.

That's historic.

Make These Trades

Okay, here's how to make money on Europe's new QE experiment.

To grow its way out of recession, Europe has to export more goods and services. To make its exports cheaper to buy, Europe has to devalue its currency. The ECB is printing money to buy member nations' government bonds, and asset-backed securities (ABS) create more money in the system. More money in the system is supposed to devalue the euro.

In other words, the ECB is doing QE to devalue the euro.

On the other side of it all, whether or not this experiment creates growth, remains the fact that if it doesn't work, if the ECB can't create inflation (which it won't be able to do) and growth, and faith in the European Union experiment itself comes into question, the euro could be doomed.

In my trading services, Capital Wave Forecast and Short-Side Fortunes (shameless plug, YES!), we've been betting, correctly, that the euro will fall against the U.S. dollar.

We've been doing that by betting on EUO. EUO is the ProShares UltraShort Euro (NYSE ARCA: EUO), a leveraged ETF that goes up in price if the euro falls in value relative to the U.S. dollar. And it has been falling.

We bought EUO some time ago at an average price of $17.165. It's now up to $24.25 (it might be higher or lower by the time you read this), so we're up 41.275% on that trade.

We also bought May $26 call options on EUO. We paid 25 cents for them. They're now trading at about 70 cents, so we're up about 180% and counting.

We previously bought January 2015 $21 calls on EUO last year for 28 cents and sold them before expiration for $1.35. So we made a tidy 382% there.

I'm betting that the ECB's QE will be a bust one way or another for the euro.

I hope you make these trades - and I hope you also make a HALOM... a helluva a lot of money.

Editor's Note: Shah's subscribers have a lot more gains like this coming their way. In fact, he's just uncovered one of the biggest capital waves in history - and it's hitting soon. Shah has put together a full breakdown for you on how to take advantage of it, and he'll be sending that report out next week. Watch for it.









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