The ECB balance sheet is set to swell. China, Asia to reduce global liquidity

* The G7 finance ministers set to expand emergencyfund by 60 Bln Euro.

Perhaps this will consolidate markets somewhat nearterm, but I have a feeling more drastic measures will be needed to stop marketconcerns re the rest of the PIIGS countries.



- Perhaps a "massive" (pick a huge number) swap line from the FED to secure liquidity via the ECB to the PIIGS countries.

- Direct bond buying by the ECB.

Neither will sound good to the ECB, but the second will sound worst.



In either case, I feel fairly confident the ECB balance sheet will swell substantailly before long.

Diluting its portfolio with junk bond paper.

Both factors will sink the Eur substantially.



At the same time, Asian centralbanks are reducing the size of their currencyreserves as they are switching from exportoriented policies to domestically demand led ones. Tightening liquidity in the process ( China leading the way here, and yes, are they overleveraged or what? Same old, same old.)

I expect this liquidity factor to push up riskpremiums on assets globally regardless of what happens in Europe. Lets just hope the G7 finance ministers can get this situation under control to start with. I somehow doubt it. Although I can definitely see short term consolidation measures having shortterm effects.



* So far, the 2008 crisis has not really been RISKmanaged at all, just managed.

Liquidity has been poured over the leverage problems in the private sector and debt has then been transferred to the public one. Hoping it would be forgotten there. In essence, the stakes have been RAISED substantially, instead of lowered. The financialbubble in 2008 may have burst, but it has NOT been deleveraged,. Just transformed and increased, keeping fingers crossed for positive growth (the leverage would then generate superior growth). With negative growth,,,,, well lets not go there.



So far things have been looking quite good; rallying assetclasses, and market values slowly but surely approaching book values on various balance sheets, sinking implied volatilities int pre crisis territory. This, would in turn unclog the liquidity plug. Getting credit flowing and then - yes - growth going. Well, no more. Now it seems we might have a problem getting there,,,,, I expect money velocity to slow down further.



The Banks thought they were on safe ground, but they might soon get wet feet again,,,,

Just as some of them shouted out loud they didnt need any government support any longer,,,,, Oh well,,





* CEE to suffer hard if G7 liquidity measures fail to work

Usd liquidity and CHF liquidity dried up last week and this situation will just get worse if the G7 "liquidity rescue operation" fails to work.



*Whats the scope from here then?



- Well, I took profit on most of my equity puts on Friday, buying calls, anticipating urgent liquidity measures taken over the weekend.



- I have taken profit on most of my short Eur positions. Bought Eur calls.



- I have taken profit on my long
SOIL ETF.



Ive kept some limited exposure for continued weakness, just in case markets reject the measures taken alltogether and we'd spin into some kind of "black monday" scenario.







As usual, good luck















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