November 22nd 2021

THE BUFFALO

ECB & FED BALANCE SHEETS + US & EZ GDP + GLOBAL DEBT + S&P 500 CONCENTRATION

Charts 1 + 2 + 3 + 4: If the Fed is a bull in the “US china shop”, the ECB is a buffalo in the “European
china shop”, as the ECB balance sheet now amounts to 70% of EZ GDP versus 37% of the US GDP for
the Fed! Worse, since the start of QE and in constant dollar terms, both cenbanks have injected around
$7.5tn, whereas US GDP is currently 70% higher than EZ GDP + while both GDPs were almost equivalent
in 2007.
Over the period indeed, EZ GDP has increased by +25% versus +58% in the US (in local currencies)!
Hence Wall Street’s outperformance (besides the extreme & insane concentration of US indices
which is back to its low of 2000, thanks to the tech giants and the self-reinforcing effect of passive
strategies – chart 6), while the much weaker impact of QE/ZIRP in Europe is raising eyebrows. Given
a lower wealth effect in the old continent, it seems that the risk of liquidity trap is higher (like in
Japan). However, Lagarde, who again reiterated her intention not to lift her foot off the throttle (just
when Weidmann declared that he does not believe in the transitory story!), prefers to hit the wall.

As to the general solution/idea of letting inflation rip in order to erode debts, chart 5 shows that there
would still be a very long way to go. Meanwhile, the headlines that markets are currently facing are 1)
the resurgence of Covid with the return of restrictive measures in Europe + 2) the possibility of a
quicker taper at the December FOMC (as we expect, and as mentioned by the Fed Vice-Chair), even if
Brainard would be considered as uber-dovish (assuming Powell is not confirmed in his functions) + 3)
the tax loss harvesting period in the US that may temporarily lead to some seesawing moves/dispersion
+ 4) the expectations of a Santa Claus rally.

All in all, we would stick to the views developed last week however: in any case, and as a result, a
larger top may now be in place in Europe while, in theory, a last rally would still be missing on US
small & mid cap indices.
Ps: as an example of whether inflation expectations may not be anchored anymore in the US, 10k union
workers at Deere just signed a contract that will be adjusted for inflation each quarter. While this is
still an isolated case, linking salary and inflation is a very bad reminder of the 70’s, which started with
food inflation and the Vietnam war followed by the oil shocks while, at that time, Fed Chair Burns was
in the same denial than cenbankers today.

EUROSTOXX INDEX – DAILY

We consider the rally since last October is over, which opens the door to a much larger setback. Valid
as long as the key resistance is intact.

EU BANKS SX7E INDEX – DAILY

Following last Friday’s sharp reversal, the EU Banking sector is once again at a key juncture, as it is
testing the top of wave 1 or a. We must again adopt a wait and see stance as result.
 10-YEAR TNOTE FUT – DAILY

The trend remains down, we only adjust the levels.

RUSSELL 2000 FUT – DAILY

A reversal must absolutely occur on the upside now. Any pullback into the past months’ triangle
pattern would indeed invalidate the recent breakout on the upside of the US small cap index (and this
would bear very negative implications).
 DISCLAIMER:
This report or any portion hereof may not be reprinted, copied, sold, forwarded or redistributed without prior and written
permission from Tactical Watcher.
All analyses, advice, virtual portfolio positions and trades, opinions and forecasts provided by Tactical Watcher through its
website, e-mailings, Whatsapp messages, or by any other medium of communication, are exclusively intended for Institutional
Investors and Market Professionals. They should not be regarded as exhaustive financial advice, or as any recommendation
to enter positions on the financial markets.
Even if we do our very best, forecasts are not always accurate, and we cannot guarantee the completeness, the relevance, or
the accuracy of the data and information our research and virtual portfolio positions/trades are based upon. You should
independently make you own research and also assess whether all analyses, advice, forecasts and opinions that we provide
can be relied upon for investment decisions.
By using our services, you agree that Tactical Watcher cannot be held responsible or liable for any claim for damages arising
directly or indirectly from any investment decision you make or refrain from making, partly or entirely based on our analyses,
advice, virtual portfolio trades and positions, opinions and forecasts.
The views reflected in all our reports are subject to change at any time without notice.