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Todd Harrison: Will the ECB Flip Financial Markets Upside Down?
The specter of negative deposit rates and unintended consequences.
Todd Harrison    

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

We've spent a lot of time mapping and navigating the technical landscape, and for good reason. The S&P (INDEXSP:.INX) has persistently held the positive side of 1850 seven separate times since it broke out at the beginning of March, which has kept the bulls on the field and scattered the bears among other, tertiary sectors and situations.

You know the drill by now; S's over N's (S&P outperformance of NDX (INDEXNASDAQ:NDX)), biotech as a leading indicator (once IBB (NASDAQ:IBB) 255-260 broke, IBB 215 (the 200-day) emerged as a target), carnage in the highfliers (that has thus far been contained to that space), relative strength in the financials (Turnaround Tuesday tested that trend but BKX (INDEXSP:BKX) 71.50 remains support), transports that are trying to get over TRAN (INDEXDJX:DJT) 7600, and of course, the overseas rip cords below Shanghai 1985, Nikkei 14K, and German DAX 9K.

It's akin to a high-stakes obstacle course with massive rewards for those who navigate it successfully.

The most important news that crossed my eyes yesterday wasn't nestled within the price action, however; it was a column in the Wall Street Journal hinting that the ECB is considering negative interest rates to combat deflation worries. In such a scenario, commercial banks would actually pay the ECB to park their extra cash overnight. The next policy meeting is April 3, which is a lifetime in financial markets but close enough to table for discussion.

Why is deflation the enemy of the state? We first touched on this topic in 2006 and revisited the theme in 2010. Deflation in a fractional reserve banking system means that central bankers have, for all intents and purposes, lost control of the economy. It is an admission of defeat, albeit one that may be unavoidable.

We were speaking about the United States prior to the Grand Experiment; it would appear that we've now exported the Phantom of Deflation abroad.

We could (and likely will) see large-scale asset purchases (quantitative easing), but it is the specter of a negative deposit rate that should raise a collective eyebrow.

Sure, it might work like a charm -- the intention is to spur banks to lend to small businesses -- but there are a cacophony of unintended consequences that might light the fuse on our interconnected global machination.

I, for one, don't believe the next financial crisis will look like the last financial crisis; we, the people, have presumably learned from our mistakes. The crazy dot-com valuations that led to the tech crash might echo in the future (our present), but we'll likely never see that script play through again.

Ditto the credit crunch; everyone was so freaked out by the financial crisis that they've done anything and everything to get their balance sheets in order. It's the classic example of Gambler's Fallacy in that we extrapolate what happened in our past with hopes of protecting our future.

There are several other "release valves," however -- currencies and interest rates among them. While the grand plan is to squeeze money into global stock markets to perpetuate the wealth effect, bifurcated as it is, there will come a point when a gasket will blow off one of the many moving parts within the machination. When that happens, the underbelly of our financial universe -- the quadrillions of dollars of derivatives holding the world together -- will be exposed and vulnerable.

I don't profess to know if a move to negative interest rates will provide that catalyst, but that's the point -- nobody does, because we've never done it before, save an experiment in Denmark.

At the very least, we can take solace in Erkki Liikanen, the Bank of Finland governor who is on the ECB's 24-member governing council. He yesterday said, "The question of negative interest deposit rates, in my mind, isn't any longer a controversial issue."

I hope you're right E, because the entire world is banking on it.

R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Todd Harrison: Will the ECB Flip Financial Markets Upside Down?
The specter of negative deposit rates and unintended consequences.
Todd Harrison    

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

We've spent a lot of time mapping and navigating the technical landscape, and for good reason. The S&P (INDEXSP:.INX) has persistently held the positive side of 1850 seven separate times since it broke out at the beginning of March, which has kept the bulls on the field and scattered the bears among other, tertiary sectors and situations.

You know the drill by now; S's over N's (S&P outperformance of NDX (INDEXNASDAQ:NDX)), biotech as a leading indicator (once IBB (NASDAQ:IBB) 255-260 broke, IBB 215 (the 200-day) emerged as a target), carnage in the highfliers (that has thus far been contained to that space), relative strength in the financials (Turnaround Tuesday tested that trend but BKX (INDEXSP:BKX) 71.50 remains support), transports that are trying to get over TRAN (INDEXDJX:DJT) 7600, and of course, the overseas rip cords below Shanghai 1985, Nikkei 14K, and German DAX 9K.

It's akin to a high-stakes obstacle course with massive rewards for those who navigate it successfully.

The most important news that crossed my eyes yesterday wasn't nestled within the price action, however; it was a column in the Wall Street Journal hinting that the ECB is considering negative interest rates to combat deflation worries. In such a scenario, commercial banks would actually pay the ECB to park their extra cash overnight. The next policy meeting is April 3, which is a lifetime in financial markets but close enough to table for discussion.

Why is deflation the enemy of the state? We first touched on this topic in 2006 and revisited the theme in 2010. Deflation in a fractional reserve banking system means that central bankers have, for all intents and purposes, lost control of the economy. It is an admission of defeat, albeit one that may be unavoidable.

We were speaking about the United States prior to the Grand Experiment; it would appear that we've now exported the Phantom of Deflation abroad.

We could (and likely will) see large-scale asset purchases (quantitative easing), but it is the specter of a negative deposit rate that should raise a collective eyebrow.

Sure, it might work like a charm -- the intention is to spur banks to lend to small businesses -- but there are a cacophony of unintended consequences that might light the fuse on our interconnected global machination.

I, for one, don't believe the next financial crisis will look like the last financial crisis; we, the people, have presumably learned from our mistakes. The crazy dot-com valuations that led to the tech crash might echo in the future (our present), but we'll likely never see that script play through again.

Ditto the credit crunch; everyone was so freaked out by the financial crisis that they've done anything and everything to get their balance sheets in order. It's the classic example of Gambler's Fallacy in that we extrapolate what happened in our past with hopes of protecting our future.

There are several other "release valves," however -- currencies and interest rates among them. While the grand plan is to squeeze money into global stock markets to perpetuate the wealth effect, bifurcated as it is, there will come a point when a gasket will blow off one of the many moving parts within the machination. When that happens, the underbelly of our financial universe -- the quadrillions of dollars of derivatives holding the world together -- will be exposed and vulnerable.

I don't profess to know if a move to negative interest rates will provide that catalyst, but that's the point -- nobody does, because we've never done it before, save an experiment in Denmark.

At the very least, we can take solace in Erkki Liikanen, the Bank of Finland governor who is on the ECB's 24-member governing council. He yesterday said, "The question of negative interest deposit rates, in my mind, isn't any longer a controversial issue."

I hope you're right E, because the entire world is banking on it.

R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Daily Recap
Todd Harrison: Will the ECB Flip Financial Markets Upside Down?
The specter of negative deposit rates and unintended consequences.
Todd Harrison    

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

We've spent a lot of time mapping and navigating the technical landscape, and for good reason. The S&P (INDEXSP:.INX) has persistently held the positive side of 1850 seven separate times since it broke out at the beginning of March, which has kept the bulls on the field and scattered the bears among other, tertiary sectors and situations.

You know the drill by now; S's over N's (S&P outperformance of NDX (INDEXNASDAQ:NDX)), biotech as a leading indicator (once IBB (NASDAQ:IBB) 255-260 broke, IBB 215 (the 200-day) emerged as a target), carnage in the highfliers (that has thus far been contained to that space), relative strength in the financials (Turnaround Tuesday tested that trend but BKX (INDEXSP:BKX) 71.50 remains support), transports that are trying to get over TRAN (INDEXDJX:DJT) 7600, and of course, the overseas rip cords below Shanghai 1985, Nikkei 14K, and German DAX 9K.

It's akin to a high-stakes obstacle course with massive rewards for those who navigate it successfully.

The most important news that crossed my eyes yesterday wasn't nestled within the price action, however; it was a column in the Wall Street Journal hinting that the ECB is considering negative interest rates to combat deflation worries. In such a scenario, commercial banks would actually pay the ECB to park their extra cash overnight. The next policy meeting is April 3, which is a lifetime in financial markets but close enough to table for discussion.

Why is deflation the enemy of the state? We first touched on this topic in 2006 and revisited the theme in 2010. Deflation in a fractional reserve banking system means that central bankers have, for all intents and purposes, lost control of the economy. It is an admission of defeat, albeit one that may be unavoidable.

We were speaking about the United States prior to the Grand Experiment; it would appear that we've now exported the Phantom of Deflation abroad.

We could (and likely will) see large-scale asset purchases (quantitative easing), but it is the specter of a negative deposit rate that should raise a collective eyebrow.

Sure, it might work like a charm -- the intention is to spur banks to lend to small businesses -- but there are a cacophony of unintended consequences that might light the fuse on our interconnected global machination.

I, for one, don't believe the next financial crisis will look like the last financial crisis; we, the people, have presumably learned from our mistakes. The crazy dot-com valuations that led to the tech crash might echo in the future (our present), but we'll likely never see that script play through again.

Ditto the credit crunch; everyone was so freaked out by the financial crisis that they've done anything and everything to get their balance sheets in order. It's the classic example of Gambler's Fallacy in that we extrapolate what happened in our past with hopes of protecting our future.

There are several other "release valves," however -- currencies and interest rates among them. While the grand plan is to squeeze money into global stock markets to perpetuate the wealth effect, bifurcated as it is, there will come a point when a gasket will blow off one of the many moving parts within the machination. When that happens, the underbelly of our financial universe -- the quadrillions of dollars of derivatives holding the world together -- will be exposed and vulnerable.

I don't profess to know if a move to negative interest rates will provide that catalyst, but that's the point -- nobody does, because we've never done it before, save an experiment in Denmark.

At the very least, we can take solace in Erkki Liikanen, the Bank of Finland governor who is on the ECB's 24-member governing council. He yesterday said, "The question of negative interest deposit rates, in my mind, isn't any longer a controversial issue."

I hope you're right E, because the entire world is banking on it.

R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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