CLSA's Russell Napier - "QE 2 Fails - Sell US Equities - Await The Fed's Plan C On The Sidelines"

Tyler Durden's picture

In his latest Market Outlook, CLSA's Russell Napier, who has long been one of the better big picture strategists, comes to the same conclusion as we did when we penned from last Friday "$440 Billion Drop In Shadow And Conventional Banking System Liabilities In Q4 Gives Bernanke Carte Blanche For QE3" namely that the contraction in broad money aggregates (shadow banking in Zero Hedge's case, M3 in the case of Napier), opens the door wide for Bernanke to usher QE3. "recent data imply that the US reflation is in trouble. QEII has boosted reserves but banks continue to reduce credit, while broad money has contracted. There is material downside risk to equity valuations." In other words - "Sell equities as the market wonders whether there will be a QE3 and in what shape it will come. Napier's conclusion - "Whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." This should not come as a surprise to Zero Hedge readers: we have been claiming since January that the market is due for a major correction in the end of March, early April in time to set the stage for the political wrangling that will inevitably accompany more monetary injections. That recent geopolitical events have forced some to coin the term "Glow in the Dark Swan" only makes the Fed's job that much easier...

Napier's key points:

  • Fed needs to get bank credit growing to get money growing
    • Broad money has contracted since the launch of QEII in November 2010 and this
      suggests that rising growth and inflation are not likely.
    • QEII is boosting unused bank reserves, but banks continue to shrink credit and it is having no direct positive economic impact beyond depressing Treasury yields.
    • Equity-market valuations are close to bubble levels and need the prospect of higher inflation and negative real rates to continue higher: but M3 is contracting.
  • Supply and demand challenges to reflating the USA
    • The largest US banks plan no credit growth, yet the Fed relies on this expansion; otherwise its boost to bank reserves will fail to increase the money stock.
    • Regulatory change, while necessary, threatens long-term stagnation in bank credit and money.
    • Corporate-loan demand is back, but the credit markets get most of that business.
    • The pace of household-sector degearing is surprisingly moderate, but there is no sign of a rebound in consumer demand for loans.
  • Private-sector credit demand weak outside corporate sector
    • Corporations are borrowing, but not through the banks.
    • Banks will accelerate security purchases, but this is unlikely to produce credit growth given the contraction in loans and leases.
    • Velocity has returned to its cyclical peak, but could surprise on the upside.
  • A risk to reflation would send equities sharply lower
    • The failure of QEII will undermine investor faith in a monetary solution.
    • With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside.
      The Fed will try again with a new package, but investors would do best by waiting to see how it plays out.

Full Napier report:

Napier QE2 Failure

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The Alarmist's picture

All the black swans we've had lately, and the selloff has been less than a hundred points on the S&P ... stop wasting our time & BTFD!

Samsonov's picture

Quite right.  "Watching from the sidelines" means being in cash and losing wealth at a 10% rate.  No thanks.  I know the S&P chart looks very run-up and frightening, so it's occasionally useful to compare it with GLD, which is a rough indicator of inflation.  This comparison shows that for the majority recent periods the market is not up at all.  Since it would be foolish to have everything in GLD, what are the choices?

6 String's picture

Since it would be foolish to have everything in GLD, what are the choices?

If you're concerned with, say, the next 3 months to a would be insane not to have something on the short side. For a conservative investor, and no I'm not fucking kidding, a lazy portfolio could look this this:

Long Gold/Silver--Short Russell 2000--Long Swiss Franc/Canadian

This should be implemented equally or adjusted according to your view.You can literally sleep well with this portfolio until you know what size and scope QEIII will be....

For a more aggressive, lazy man's portfolio in the next 3 -6 months just leave out the fiat, go longer silver than gold. Short 2000 with an equal weight.


Think about this for a second, if everything keeps going up, it will only be because a mother of all QE's comes next. In which case Silver outperforms the 2000 while you adjust.

If everything goes down, the 2000 will lead the major indexes lower. Offsetting the possibility of GLD going down--though it went up last time we went off QE---and silver. In this scenario, the fiat is sitting their outside the dollar--ready for opportunity.

66Sexy's picture

The FED does QE to create deflation, not inflation.

Why would you think a private institution consisting of international banking interests would do anything that benefits the United States? Shouldnt we consider the FED as a wolf in sheeps clothes? Is the the FED a charitable organization, put into existence to bailout US institutions at a loss and fund endless wars without profit?

Inflation benefits debtors, like the US government. Deflation benefits creditors, like... the Federal Reserve. If these interests wanted to replace the US dollar with a global currency, it would be through a means not indoctrinated by the investment public; which has accepted that inflation is the real force at work.

... and we see the run up in equities as a psychological force of anxiety over losing purchasing power; an entirely created effect. you feel the urge to trade out of dollars and into assets. this being a created effect; why would you trust it? especially, if the source is the Federal Reserve.

Remember the swelling of anxiety when housing was running up? isnt that feeling familiar by now? it is created and ultimately will be replaced by the desolution of collapse... it always has been, always will be.

Oracle of Kypseli's picture

Your principle is correct. Deflation does benefit creditors. However, the FED must firstly save the banks and create what it calls "stability and faith" in the system.

Call it what you may, deflation, inflation, asset bubble, Stagflation, wealth effect, etc.

The attempt here is that after the TBTF banks, being the owners of the FED, become stable the FED will eventually unload the losses to the taxpayers.

The attempt of the individual should be to understand the game and devise a plan to, at least preserve some wealth and perhaps profit from it. The working class will always be working class and is somewhat subsdized to stay silent. 

dogismyth's picture

Well I would agree with the deflation hypothesis.  I would disagree that the FED is or wants to save the banks.  I use to believe in that mantra but I see a fatal flaw.  Why preserve a company who is insolvent?  Why would the FED or even the company execs really care about the "shell" of the company as long as $$s can be skimmed one way or another (bonuses, loans).  The fed is pretending to "save" the banks or recapitalize them.  But its just a money laundering operation of sorts.  There is nothing to salvage in a company or its name.  And the banks certainly realize that things are unlikely to experience another credit expansion such as in the recent past.

We are heading down a new road.  Global asset forfeiture and the power behind controlling title of assets by the powers that be.  The "saving the banks' is just a distraction.  Money is being siphoning off and used to purchase the remaining hard assets.  The inflation and deflation arguments are just a distraction as well since a fiat currency will be worth zero at some point in time.  Hopefully, when you are not holding it.  And hopefully when you have completed your transaction for hard assets.

You are all playing a game among yourselves while the treasury in damn near every country is being looted, converted and reinvested into hard assets.  They want you to believe there is a sane and organized ending to this financial magic, and all will be well in the future.  Nothing is further from the truth.  And its the largest ponzi scheme ever, yet you will continue to fools that you are...demonstrated by these articles, comments and meticulous study on the art of trading.

You must stop playing the game to preserve what remaining good is part of the system.  That includes the goods that you have sequester to this point.  Don't think for a moment that you are better off or safer because you have a few million or tens of millions.  You're not in the Big Club and you'll never ever have a "chip" to play in their plush club. 

Their plan has been engineered for years if not decades.  It is meticulously orchestrated to the moment.  Each world event is controlled.  Its all an illusion folks.  Tomorrow will start the week off with all good news.  Imagine that...Japan is better (all of sudden) and the Libya problem will be presented as "fixed".  And your heart will be racing tomorrow as the market gaps up as you throw your money as the cashier for the next roller coaster ride.


rosiescenario's picture

In our new era scamenomics, the big banks actually want inflation as it bails out their bad loans, improves their balance sheets, gets rid of increasing REO, etc....but most of all, permits the management to pay themselves large bonuses.


Under 'Newtonian economics' you are correct, the creditor would be hurt by inflation and the debtor aided...but we have had a paradigm shift where inflation becomes a 'win / win' situation for both the debtor and the management of the creditor.

Samsonov's picture

I'm not insane, I just think that the environment is unfavorable for shorting anything.  The Alarmist is correct that QE3 (and beyond) is a certainty; therefore, it's unlikely that any hard asset will experience a significant decline in dollar-denominated price.  In other words, the Bernanke put is still there.

JimS's picture

Short at any S&P above 1300, then buy the dips to 1250. You can use the SDS ETF. You can buy calls or sell puts, as it is an inverse ETF to the S&P 500. You can short individual stocks if you have access to a technical service such as MarketEdge, and there are several out there that do the same thing. This market is in range-bound situation, as long as The Bernank is doing POMO and QE whatever.

The Alarmist's picture

I know the S&P chart looks very run-up and frightening, so it's occasionally useful to compare it with GLD, which is a rough indicator of inflation.

Try looking at it in EUR terms ... not nearly as remarkable. But if your functional currency is USD, you may as well be all in, 'cos you know QE3 is a done deal.

FunkyMonkeyBoy's picture

The Bernank is more of a threat to your way of life than Gadaffi, yet i see no will, either publicly or politically, to remove the Bernank from this world.

The USA is a nasty disease and it could have a terminal affect on the world.

Yen Cross's picture

I worked that chart section. I'ts just the way I'm built. I feel the need to understand.

Cindy_Dies_In_The_End's picture

Hi Everyone--


Last week was a record breaking week for the team at ZH as they kept posting article after article to keep us current. Have you considered that the ZH team needs to eat?


I'll spare the Sally Struthers routine, but PLEASE donate to ZH. Whether its just enough to buy the Tylers a beer, or something larger, please do your part.


Parting with $20 won't kill you and you will certainly be rewarded for your efforts by getting all the news that the MSM doesnt have the balls to print.


So don't think--Just Do IT. Support your Fight Club. Right now!

Kina's picture

Yes, too true. ZH most awesome site on the net. will attend to it.

Abitdodgie's picture

I too will attend to it , consider it attended

Whats that smell's picture

You may do the Sally Struthers routine as she performed in Five Easy Pieces !


sourgrapesson's picture

First rule of Fight Club:  You do not talk about Fight Club

RockyRacoon's picture

I feel the need to understand.

The need to understand is just a form of control.   Sometimes one has to just let go and deal with the world the way it is.   No amount of charting will replace the peace of mind of knowing that things are just as they are.   Wear the world as a loose garment.

lynnybee's picture

yea, it's a nasty disease, alright !    it's called ZIRP ! CHEAP MONEY !  NO INTEREST PAID ON SAVINGS & BERNANKE has infected this countries precious elderly population !   ......... god help them make it with ZIRP. 

Horatio Beanblower's picture

“Well, Doctor, what have we got—a Republic or a Monarchy?”

“A Republic, if you can keep it.”


Unfortunately later generations could not keep it.  The only generation that can take back the Republic is the current generation.  The world needs it just as much as Americans need it.  The world is waiting.

overmedicatedundersexed's picture

HB, any idea what asset classes do best when investing under a dictatorship aka monarchy??

seems we need an analysis of same here on ZH.

Horatio Beanblower's picture

Central banks and arms manufacurers.  One cannot really go wrong.  Tally ho!

NidStyles's picture

Pain, brutality, and starvation. I think they will fall under commodities.

Thomas's picture

The nasty decisions going forward really relate to inflation hedges: Do you pull them out and leave yourself exposed to inflation (and runaway hedge costs) to avoid a plunge? Do you sell gold and energy equities? You can get left behind VERY easily in such a strategy.

At one point, a reader asked Bill Fleckenstein to explain why not buy inflation hedges until you can see the inflation in plain site. The answer is that they will cost too much when that time comes.

A whoosh down will hurt but exposing myself to inflation is haunting.

Yen Cross's picture

Doesn't anyone ask anymore? Equity reduction BITCHES.

Robert Neville's picture

Why would anyone loan money for a fixed rates in an environment that is sure to morph into hyperinflation if the economy actually starts to grow? If the fed wants banks to loan they need to let the market set interest rates, but then the insolvency of the government would be obvious.

rosiescenario's picture

...when you are loaning OPM, you don't really just want to make sure that the assets backing the loan are sufficient so that no bad debt loss happens under your watch which might affect your bonus.

Captain Benny's picture

buy silver, short the indexes!

PenchantForHoarding's picture

Running out of holes in the back yard to bury the stuff.  Portability is becoming an issue.

rosiescenario's picture

...I'll rent you some of my backyard if that would help?

Yen Cross's picture

Ok Now I'm pissed. What is VIX? What is XLF?  What Is Baltic DRY? It bottomed Bioatches. This is for the ladies.

tallen's picture

Vix is the volitility index, it's based around how many people are buying puts/insurance incase the market goes down. A fear indicator.

XLF is the biggest financial ETF (Electronic Trading Fund) holding all US banks, financial institutions, BOFa, Jpmorgan etc.

Baltic dry index the index tracking demand for shipping capacity versus the supply of dry bulk carriers. I.e. if it goes down, global trade is reducing. 

TexDenim's picture

Napier is correct, but he is more of an economic seer than a political prophet. Watch the new GOP congressmen and senators use the prospect of QE3 to push for dismantling of spending initiatives and create tax cuts. There may well be a QE3, but it will very much be the outcome of compromises with Bernanke behind the scenes. The Fed is supposed to be independent of politicans, but that isn't true when it ceases to govern monetary policy and jumps over to run the entire economy, which is precisely what Bernanke has been doing since 2008.

glenlloyd's picture

The cuts aren't meaningful in any way. They're a minute fraction of what needs to be cut. We will never see serious cuts nor will we see the dismantling of wasteful bureaucracies at the federal level.

That is until the house of cards comes down.

Hannibal's picture


apberusdisvet's picture

I strongly suggest that everyone grab some silver at the bottom of the next raid; things are starting to get really hairy for Blythe; we could have a $10 pop soon.

Long-John-Silver's picture

Should be a huge pop in Oil, Gold, Silver, and the Military industrial complex on electronic trading @ 6:00 PM EST. War profits Bitchessssss!

overmedicatedundersexed's picture

'Should be a huge pop in Oil, Gold, Silver, and the Military industrial complex on electronic trading @ 6:00 PM EST. War profits Bitchessssss!"

body bags , that's a start up business worth looking into..tip o the day fwiw.

Alcoholic Native American's picture

This is bullshit QE never stopped. The anonymous billionaire boys, the FED, have been the buyer of last resort for the private and the public sector.  Without them buying out all the MBS who would be propping up the markets today, wouldn't be any large financial institutions cause they all would have gone bankrupt.  Who would be buying all these government treasuries?  What's the difference between an anonymous billionaire and the FED saying Oh gee we are purchasing more treasuries we will call it QE2!  NOTHING it's the same god damn thing.  QE 2,3,4,5, whatever the fuck they wanna call it is just the right hand movement, WHEN IN REALITY THEIR LEFT HAND IS STILL BUYING AND QE NEVER FUCKEN STOPPED.


lesterbegood's picture

The Fed's Plan C.

Head for the bunkers.

Leave the suckers holding the empty bag.

Brokenarrow's picture

mutual fund managers are behind and hedge funds.........

pleanty pomo coming...........

i left 90% on my cash behind reading these kind of pieces

FunkyMonkeyBoy's picture

But the FED is not federal and it has no reserves...

... and they are the only hope of a return to 'normality'!? The people of the USA has it's hopes for the future pinned on this criminal entity!?

The USA, and in turn, the world is very very screwed if this is the case. As has been seen in Japan recently, equities can lose 25% of their value in a few days.

I wouldn't touch anything associated with the U.S. given the choice... well, maybe silver eagles, but that would only be if canadian maples became un-sourcable.

silvertrain's picture

 There will infact be a qe3 and 4 and 19 and on and on..The only thing about it is that it will not be announced, In fact , the fed will announce the end of there program..

 See Jim Rickards article on King World News website titled  "QE IS DEAD, LONG LIVE QE"  for the full explanation as the fed can print into the wild blue yonder because there balance sheet has gotten so big..

equity_momo's picture

Indeed.  Yet to maintain a positive effect on asset prices (or inflation) the printing needs to be of an order of magnitude larger than the prior round of printing. I doubt that is possible and therefore you will see QE20 , as in Japan , but it will be during a deflationary environment for stocks and housing , because the Fed CANNOT PRINT FAST ENOUGH to have a meaningful impact.

This paradox will pass many investors and fund managers by.

blazen's picture

of course there will be QE-n! The point which ANA makes applies here - with everyone's dumping treasurys, their prices go down and interest rates have to rise. If they rise, you have to print more and more to prevent the government from going bankrupt -> death spiral, possibly hyperinflationary

which of course doesn't prevent them from playing small 'correction' here and there - they want markets to ask for next QE, or at least make it appear so...

So the only question is if QE-n is announced or just implemented


I am a Man I am Forty's picture

ZH should discuss the no QE3 necessary due to the fed balance sheet being so large and so many treasuries maturing that this can continue to infinity without a QE3