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Convergence on Ben
I was looking at old charts from June. Remember when the stock market
was correlated with movements in the 10-year Treasury bond? Compare the
results in the following graph. The 5/3 – 6/10 numbers versus the 6/11 –
9/24 results is day to night.
The level was 96% back then. That’s a hell of a number. More or less it
means that things were lining up nearly perfectly. As of late the
correlation has fallen to 3%. Some random thoughts:
-My conclusion is there is a lot of risk involved with correlation
trading. What is here today is gone tomorrow. Reliable predictors do not
have much shelf life any longer.
-What is the source of the disconnect? Strong stocks and strong bonds in
this time period coincide with the emergence of QE-2 talk from Ben
Bernanke. Back in May the thinking was that the next move by the Fed
would be a gradual withdrawal of monetary stimulus. Today the betting is
that Ben is going to throw another $2 trillion on the fire. This turn
around in thinking by the Fed and the market disconnect is not a
coincidence. It is cause and effect.
-Is there an inverse relationship between the movement in the stock
market and the probability of QE-2? I am willing to bet big that IF
stocks were to fall by 10% between now and the next Fed meeting QE-2
would be a done deal. But what if stocks rise by another 10%? Can
Bernanke throw gas on the fire if that were to be the case? I have to
think not. So the question is, “Is Ben wishing for higher stocks today or not?’ I think he wants a downdraft so he can justify another QE early in November.
-Clearly the 96% was not sustainable. The inverse (3%) is probably not
either. Should the old relationship start to re-appear it would imply
that rates have to go much higher or stocks much lower. Place your bets.
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I think the worry about China and the Trillion + in treasuries and their possible dumping them is not the problem, we've been making it out to be. After all Ben&Co. have been throwing Trillions around for some time. QE Next might be a deal to buy back China's position or at least a big portion of it.
In view of what they've been doing, do you really think printing up another $2 Trillion is going to bother them? And if China wants to preserve the value of their position they will remain quiet.
If China wants out, they need a buyer. Far easier to purchase commodities and foreign companies as quietly as possible with the USD, while they still can.
I would agree the Bond mkt is just another asset to inflate.. no longer reliable as an indicator in the mkts. Its ben taken over.
Ben knows what coming.. these prices are just to cushion the fall. The table is set for slow growth and rising bond rates
for Investors fleeing of USD based assets.
The Stock Mkt is the Economy? Has Ben noticed lately their is a Currency crisis unfolding before his very eyes ? Earth to Ben come in Ben..
Qe2=Deth of the Dolr.
Screw those silly games...trying to figure out what Ben is going to do next? Looking at moving averages when they have little relation to the situation on the ground?
Buy physical PMs and sit on them. The trend is your friend and what else has returned over 15% for the last 10 years...except 30 year treasuries bought circa 1980.
The markets can remain ludicrous longer than most can remain solvent...especially when the active intervention is so blatant and unpredictable.
That is one serious divergence. I didn't know it was that bad. Couldn't we just do a convergence trade? Short $SPX and sell the 10 year t-bill?
I believe you may be right, he wants the market to go down so that he and the Whitehouse will have a reason to put into effect QE 2 or 3.
If that's what he wants, he seems peculiarly determined to cause the opposite.
What we are watching is QE 2.0, the prequel, that's why the equtiies are going ga-ga. Everyone has the March 2009 et seq. playbook out and page 1 says don't miss the boat. The Fed only has to whisper "QE" and the markets do a carpe diem.
Ben has a big problem and China has a bigger one. All this talk in Washington about China's currency manipulation is causing heartburn in Beijing: the Chinese authorities--out of fear of potential chaos in the country from a crashing economy--must of necessity keep the CNY low to maintain its export (and thus jobs) machine. Perhaps the buying today of USD by Peru and Brazil will be followed soon by other Latin American and ASEAN allies. So Ben has the printing press but China has a trillion in Treasuries: I don't think Ben would dare allow the US government bond market to collapse. At the end of the day, he won't care about equities. ES futures, like the USD futures printing a double bottom, appear to be in a double top; we'll see next week whether Ben has brass balls.
http://99ercharts.blogspot.com/2010/09/es_8416.html
Timely post 99er.........I think your chart makes my point into an illustration about technicals having probably lost relevant meaning in the context of this FED campaign.
In other words intervention has become a primary fundamental of price discovery and it really has no metric to measure against, and as the author of the article pointed out by tom puts it so aptly, "QE is still a very poorly understood topic."
Therefore advantage; FED
Deuce.
http://www.youtube.com/watch?v=YiwA3C2qeRo
Tien len
I think Ben is not as in the dark as he pretends to be about how the second leg down in housing is developing. That's why he wanted that "accomodation" verbiage inserted into the FOMC statement. Which I think was a very aggressively dovish thing to do (don't blame me for the ugly language, "doves" are misnamed).
http://keynesianfailure.wordpress.com/2010/09/24/why-this-time-qe-really-will-spur-inflation/
Thanks for sharing. It's a very lucid, well-written article.
It mentioned "About 90% of QE1 met heightened demand for cash, and only about 10% fueled credit expansion. It’s difficult to predict exactly how markets will accommodate QE2, but I think it’s safe to guess that the portion that fuels credit expansion will be at least 25%."
Do you have any insights into where the author came up with the 10% of QE1 fueled credit exapnsion estimate or source, as well as the 25% number?
Nice article tom, and agree with the sentiment as expressed below. QE is relative........the FED has had its way with the initial phases of this QE so far and expect that to continue.........trading technicals have probably lost relevant meaning in the context of this FED campaign, at least for a while.
1175 looks to be the next SP target within reason.......and more POMOS coming.
Quote; "Everybody knows that “accommodation” means quantitative easing. But my readings of professional analysis, media articles and online forums have made clear to me that QE is still a very poorly understood topic."
Advantage_____FED
Good discussion, thanks Bruce and everyone.
RoRo
Exactly right: QE is fuzzy, so few grasp the insidious nature of it. It's a sleepy,non-threatening thing- like performing Euthanasia, instead of Killing.
If Benny and the Inkjets called it PRINTING MONEY, it would have a different effect.
Thx Kayman...........you make the point about the insidious side of it better than my try at it.
There's still a half million of those ratty ass option ARMs sitting around.....half of them in Kalifornia. You're damn right BB knows about the second leg down ! And he knows a yield getaway sinks all the boats.
www.doctorhousingbubble.com
out with the old and in with the new always hurts. grwoing pains are part of the nature of progress. there is definately covert market influences behide this divergence. keep carefully investigating. the truth is often stranger than fiction. the forbidden truth is usually the most dangerous and most profitable.
http://covert2.wordpress.com
I have a penchant for the forbidden.
POMO seems easy enough and under the radar, so to speak, due to the modest day to day $'s suggested. However, I keep reading/hearing that BB and fed are just going to do QE-2 "if necessary". So can someone spell out for me...
1. How much $ a QE-2 means?
2. In the previous round, this meant MBS type junk ($ for $ of fantasy valuation) and US debt (correct?). Since the Fed just can't hand us all FRN's (or 1111's...ie. can't just drop money from helicopters no matter how much he'd like) what would the Fed buy and put on it's balance sheet (must be limited to being backed by the "full faith and credit")?
QE 1.0: $2 trillion and a limited program. MBSs and Treasuries.
QE 1.5: arguably limited amount (reinvestment of Fed balance sheet MBSs - $1.25 trillion?), unknown duration. Drip feed into markets and permanent until patient leaves ICU.
QE 2.0: A Time to Kill. Minimum of $2.0 trillion. All treasuries, but perhaps other assets.
QE 2.5: same as QE 1.5
Agree...QE2 same as QE1...and, it will be in the Wall St banks next to the QE1 funds. Recycled to treasuries.
This is the stealth approach, unlike TARP. Most people don't know what is going on between the Fed and Wall St bankers...and will never know what happened. The pols don't want to see another TARP type action that they can be blamed for.
The rub comes if the dollar continues to drop against other currencies and if oil pops back to $100+. All commodities priced in dollars go up. People notice prices at the gas pumps and grocery stores. Few Americans know diddildy about PMs...
Anybody here consider that Ben sees the flow of money into gold a better option than a flow of money into oil and soft commodities...which Americans would notice? As long as most Americans remain ignorant of the dollar falling in relation to gold all is well. Hell, talk of a bubble in gold is now rampant...but there is no bubble in gold...only a dollar sinking against gold...deception and misdirection and control of MSM.
June ... correlation trades ... wow! So long ago!
The Fed supports stocks/bonds with one hand while the Main Street economy cannot afford oil @ $80. Something has got to give.
If oil breaks (again) then stocks will retrace, giving BB room to do the QE cha cha.
This is how the 'Key Man' strategy is self- defeating. In 2007-8 there were plenty of rotting key finance players. Letting Lehman destroy itself played into the schemes of Bernanke and the NYFed. Who will (be allowed to) fail, now?
If oil breaks, some sort of crisis will appear as it has since 2008 and the Giant Spike. Last time it was Greek bonds, next time ... Ireland?
Steve - As I think you have said many times before, oil is central. I think if oil prices ever move up significantly, that will be the final confirmation that all hell is going to break loose. With oil still in the $70-$80 range, the lid is still on the steam kettle. Oil is the king of commodities. Until the king sings, the commodities upswing is not in full swing.
One other thing - none of this liquidity works if the market doesn't have a decent sized short position. No short position, no squeezes - when does the speculative market get exhausted?
Have been wondering the same thing. Many of the stocks that hit one of my screens today that were ripping had high short-interest ratios. Once enough bears are carted out, there will be a lot less support under this market. However, Ben, Tim and Co. have been pretty good at recycling bears and coming up with squeeze money after suitable dips. The financial MSM mostly does it's part by running strongly procyclical market news. And as long as there are some economic growth prospects, whether real or illusory, stocks will likely continue to benefit from the slaughter of the USD.
There will soon be a matter/anti-matter collision. If it cannot exist, it won't
Seriously Bruce , I can't believe the market is taking this as good news , it really should be going in crisis mode when thought out to it's logical conclusion . QE1 didn't work for very long therefore what makes QE2 any different from QE1? QE2 is the final nail in the coffin of the American economy. That in turn will crash American markets - My bet would be on both higher rates and a lower market as a brand new correlation .
"Logical" Ha! Therein lies the ill-fitting puzzle piece. They will whittle on it until it fits.
If one can believe that the metal markets are manipulated, and that prices are made to fit in order to facilitate the harvesting of longs at predictable intervals, how can one not believe the same thing of the stock market as well?
You had to enjoy the MSM news outlet spin dilemma today - all the news was bad, from durable goods to new homes, and yet they gave up and said "stocks ralled CRAZY on durable goods reports. . . " yeah I know a couple of segments were up a but, hardly news to rally with. No mention of the USD in a tailspin, which brought us the March 2009 and ensuing rally - if you recall it was all about the dollar spinning down, as the stocks rose. Not of gold, execpt quickly in passing. Nope the message was" time to get into stocks Mr. and Mrs. America, you're missing the boat. Too bad Mr. and Mrs American don't have any money for stocks, and are leaving their half cashed out 401k in debt where the feeling is at least it can't be stolen by wall Street machinations.
I don't agree that Ben wants to hit QE2.0 and I certainly don't believe he wants the stock market to fall 10%. My read is a bit different as I believe the current QE1.5 is aimed at taking market up as the POMO money seems like nothing more than the ammo to make a short squeeze possible despite the falling market liquidity.
Like you, I firmly believe that a sell-off in the market will make QE2.0 an inevitability.
The thinking on the street seems to be if the economy improves stocks go up, if not QE2 plays and stocks go up. BB has to realize this. What if he pulls liquidity to tank equities, which allows him to move ahead with QE2? Just a thought...
First off I respect the fact that you use your real name. I want this sucker to pop but even though I'm "there" I really think I'm wrong. I wanna believe, it was a great day but even if we nail it I get killed by gold. I hate to say it. I've been "informed." What else can I say?
Should the old relationship start to re-appear it would imply that rates have to go much higher or stocks much lower. Place your bets.
What if both go lower with the real economy?
THE PLAYER
http://williambanzai7.blogspot.com/2010/09/player.html
Subtle and brilliant re-make of BK's photo.......presuming it is not yours in the first place.......is it intended as the inference I think.........the contemporary werewolf or shape-shifter? Nice, having not assigned a name other than The Player, I mean.
I had to look more than once to see the difference.
So, it is plain you are some kind of talent, wb7.
Looks like "The most interesting man in the World!"
"Stay thirsty, my friends."
Ben's big problem is all about what you said. Stocks rise, problems in economy remain. This equities movement benefits very few.
It's the law of unintended consequences, aka there is no free lunch, aka you can't have it all, Ben. And Ben will throw gasoline on the fire, all day long.
"problems in the economy remain." Nailed it Ned.
Nothing has been resolved. No problems have been fixed by .gov and banksters. Many problems not even recognized by DC, Fed and Wall Street.
This is all going to end very badly.
- Like commodity prices. You think consumer spending is bad now...
- Like what happens as risk assets continue to run and massive money rolls out of treasuries. WTF is that going to do to PD's who have been arbing rates? As if they need another massive hole in their balance sheets.
- We continue to move up, extremely over bought and on pathetic volume, into long term overhead resistance in the averages. (from 2008 pre-crash highs) Mind you, WITHOUT fundamental strength in the economy. (as Ned pointed out)
Let them play their games. I will continue to add exposure betting short knowing that while this could probably continue for longer than I think, it most certainly cannot continue indefinitely.
Bruce,
We were all thinking QE2 was in the making in May around here. The PIIGS problem (which hasn't been solved by any means) was at the forefront of many posts. It's not like the market really thought that Benny boy wouldn't go all in on that one either (and he did with SWAP lines and IMF funds)--thus the market has always believed that Bernanke will throw money at any and all situations to save it. Problem is, he will run out of ammo when a black swan arrives that he cannot print his way out of. There are so many possibilities of what that event will be so I won't even speculate.
HB
HB/Bruce, you don;t have to go back far at all.
Look at the trends in 2/5/10yr treasuries in Jun2007, you can see a move into these preceeding GFC1.1 by about 6 months, which for arguments sake started from a peak in Dec07. You can see it because the treasury trend clearly changed in price/yield indicating to me money moved into these early while prices where respectably below $110 and yields where 4-5%. These people made a killing in not just preserving capital! The reasoning is simple - when capital+yield growth in equities falls below treasury, and what was clearly a massive bubble, safety is in treasuries.
So this period commenced the high correlation from a previous low correlation. Doing so in 2007 wasn't just smart, it was genius.
What you are seeing now is 3-6 months in advance of something. What I can't figure, is why the f**k anyone would tie up funds now on overpriced bonds with such low yields. This is like turning up to the party way too late.
It is either rampant stupidity or further genius insight into the cataclysm of GFC1.2. The new normal means that to see inflation, you only have to look at copper, gold and most base metal prices.
You know a trainsmash is coming, but you don't know where to look. Small caps are going to shine through this period and come out the other side sprinting. That is why growth through M&A is seen as market share protection as much as it is from lack of organic groweth elsewhere.
Did the same correlation with Dollar and Wilshire , funny, same thing there . No patterns to follow . But .......in individual stocks there still is . Avoid the darlings .
That could have something to do with China, China is buying Japanese bonds..I wonder if they are going to use the appreciation of the yen to buy resources such as the metals you just mentioned from Australia. 1.8 billion people need a lot of resources...and those central bank interventions didn't do diddly. Also with bernanke printing they are probably trying to grab all the resources out of the global economy that they can, because if they were ever forced to sell treasuries probably out of panic guess who would get to buy them...or they could just be stupid....or we could be seeing the panic play out right now! I wonder when china's going to strike the swiss frank those canadian resources might be looking mighty fine..to bad we whored off our position as the world biggest creditor and manufacturer. If the world truely is a chess board looking at china's position a couple years ago they turn out to be good loan sharks to our politicians... Of course the boys at the fed and the politicians made us beg for those loan shark communist pieces of paper over the last 20-30 years. But what sucks is if the U.S. goes belly up the politicians will spin it to where freedom is bad, competition in industries is bad government run monopolies are the only choice because when your a debt slave what other choice do you have? well I'll leave that thought up to you guys...this isn't going to end pretty
good to see you HB - you and CB on the same friday. cheers.
so, HB, Bruce, has anybody got the tools to run a correlation on the lack of correlation? (seriously)
when was the last time virtually all of the traditional correlations got so ... un-correlated?
and what did the markets do?
it's a lot of data, but it would be fascinating to look at a few of the past bumps from this perspective.
theory being, regardless of an administration's techniques, bending markets will obviously bend market-relationships as a side-effect, resulting in second-order bending, cascading "bent-ness" etc.
Couldn't agree more, this why I am short and stay short, rather sooner then later, that one ne particular event we all don't know about will blow Benjie and his printing press to hell!
Short stocks and bonds convergence trade.
Amen. I'm waiting for Nazz 2400 before I start to put on my next strategy. I've said it for a while.. they can't have their cake and eat it too. Of course, they have made me look like a fool for a while too. Eventually, vapor and fumes have to give way to solid fundamentals. $300 looms large for AAPL.