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Correlation Of S&P 500 Performance With Fed Monetization Activities Since Start Of QE

Tyler Durden's picture





 

The chart below requires no substantial commentary suffice it to say that since the launch of the Fed's Quantitative Easing, aka Monetization, program, the value of the Total Securities Held Outright on the Fed's Balance Sheet has increased by $917 billion- from $584 billion to $1.5 trillion. This has been accompanied by an almost linear increase in the S&P 500 Index, from 721 at QE announcement on March 18 to 1033 yesterday. This $917 billion in extra liquidity, instead of igniting an inflationary spark, as the QE program was designed to do, is now (metaphorically) sloshing around bank basements. As a reminder: the most recent reading of Total Deposit Reserves was... $886 billion dollars: An almost dollar for dollar match with the increase in Securities Held Outright of $917 billion. And instead of this excess money hitting broader aggregates such as M2 or MZM, it is held by the banks, who proceed to buy securities outright on their own, either Treasuries or Equities. Apply the proper "money multiplier" to get the monetary impact on the S&P 500, as a result of the banks not lending these excess reserves, and instead simply speculating with it, and you will likely get the increase in the market cap of the S&P since the launch of QE.

QED.

Source: H.4.1

 


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Fri, 09/11/2009 - 02:11 | Link to Comment the fox
the fox's picture

Have you tried correlating the timing (intraday) of the MoMo's vs intraday spikes in the SPX? I have been unable to pull it with the Bloomie, but have the feeling the correlation will be almost as direct...
What is you data source, btw?

Fri, 06/03/2011 - 07:41 | Link to Comment loans
loans's picture

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Fri, 09/11/2009 - 02:15 | Link to Comment Anonymous
Fri, 09/11/2009 - 02:16 | Link to Comment Anonymous
Fri, 09/11/2009 - 05:19 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Are you really sure it began when they "announced" it?

Fri, 09/11/2009 - 08:11 | Link to Comment Anonymous
Tue, 09/22/2009 - 07:54 | Link to Comment Anonymous
Fri, 09/11/2009 - 08:29 | Link to Comment glenlloyd
glenlloyd's picture

bingo!

Sat, 09/12/2009 - 06:27 | Link to Comment Anonymous
Fri, 09/11/2009 - 09:16 | Link to Comment Sardonicus
Sardonicus's picture

Read about Moore and Schley in 1907.

The exit door will be too narrow whne they want out.  God only knows how this borrowed cash was leveraged.

March 2009 gave us the bounce everyone was looking for and it was much bigger than almost anyone could have dreamed.  However, everyone is looking for a correction and it too may surprise.  All we need is a reason for those banks to need that cash back.  So long as they can make 3-10% a month in equities they have no reason to lend it.

 

 

Fri, 09/11/2009 - 09:57 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:00 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:01 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:09 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Only the Treasury purchases, the MBS purchases will continue unabated.  I have said here before that I thought the S&P could easily reach 1200 by year's end, solely on the back of excess liquidity.  If the MBS purchases continued through 2011 like I think they will, the S&P could reach 2000.

However, this would come at great cost to the dollar.  So far there hasn't been any political backlash to Bernanke destroying the dollar, but ultimately it might come.  If that happens, and he is forced to stop his MBS purchases, look out below.

At 1050 on the S&P we are at the equivalent of October 1999 on the NASDAQ - just starting the really big liquidity ramp.

The sad thing is this sort of BS really leads to dislocations in the real economy, as bad business models are perpetuated and crowd out new, better ideas, but I am beyond caring about that.  At some point I will be turning my bets against the dollar into bets against the stock market, and will be able to retire early.

Watch the MBS purchases for your clues.  When those end, the time to go all-in short will be near.

Fri, 09/11/2009 - 13:02 | Link to Comment Anonymous
Fri, 09/11/2009 - 14:11 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

I think you are spot on with this one ghostface (IMHO, you usually are). The New York Fed's site has this helpful factoid in it's MBS Purchase Program "FAQ":

http://www.newyorkfed.org/markets/mbs_FAQ.HTML

"Purchases began in early January, 2009and will continue until the end of 2009."

Also:

"How are holdings under the agency MBS program reported?"

"Balance sheet items related to the agency MBS purchase program are reported after settlement occurs on the H.4.1. statistical release titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks." Securities acquired in dollar roll transactions are also included with other holdings of agency MBS.  Trade settlements may occur well after trade execution due to agency MBS settlement conventions.  This report also includes information on total outstanding commitments to buy and sell MBS in a supplemental table.  

In addition, the New York Fed publishes the most recent weekly SOMA agency MBS transaction activity in more detail on its external website on a weekly basis."

Is this the best way to follow this idiocy? Is it possible they do stealth monetization of MBS's like Treasuries (ala "indirect" and other nonsense)?

Fri, 09/11/2009 - 02:16 | Link to Comment Anonymous
Fri, 09/11/2009 - 04:13 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

"...people without chairs to sit in..."

Golden chairs, my friend, Golden.

Fri, 09/11/2009 - 06:52 | Link to Comment Anonymous
Fri, 09/11/2009 - 02:24 | Link to Comment Atlas_mugged
Atlas_mugged's picture

Good stuff as always TD. Too bad that reality doesn't matter.....yet.

Fri, 09/11/2009 - 02:26 | Link to Comment Anonymous
Fri, 09/11/2009 - 05:22 | Link to Comment Anonymous
Fri, 09/11/2009 - 06:30 | Link to Comment Anonymous
Fri, 09/11/2009 - 02:27 | Link to Comment chumbawamba
chumbawamba's picture

That graph looks like a representation of a cum shot, right into the eye of the American people.  Thanks, Banksters.  May I have another?

I am Chumbawamba.

Fri, 09/11/2009 - 02:39 | Link to Comment Anonymous
Fri, 09/11/2009 - 07:37 | Link to Comment SWRichmond
SWRichmond's picture

Chumbawumba is a twenty-something, I take it?

Fri, 09/11/2009 - 07:48 | Link to Comment Anonymous
Fri, 09/11/2009 - 08:16 | Link to Comment MinnesotaNice
MinnesotaNice's picture

Imho Chumbawama is a highly racist 'perhaps 20-something' individual... and personally my least favorite commentator on this site... we are lucky we didn't get the highly offensive word 'n.gg.r' thrown in with his comment... it is one of his favorites.

Fri, 09/11/2009 - 08:34 | Link to Comment deadhead
deadhead's picture

chumbawamba adds virtually nothing to zh.

his/her comment on al qaeda last nite was absolutely shameful and moronic.  

Fri, 09/11/2009 - 08:59 | Link to Comment Spartacus
Spartacus's picture

WHICH POST? MAY i KNOW?

Fri, 09/11/2009 - 09:45 | Link to Comment MinnesotaNice
MinnesotaNice's picture
I'll let DH post what he was referring to if he wants, but here is one of Chumbawamba's contributions (referring to Obama) and my response last week: by chumbawamba
on Sat, 09/05/2009 - 22:12
#60482 

He's a nigger, not a nigga.

I am Chumbawamba.

  

by MinnesotaNice
on Sun, 09/06/2009 - 09:45
#60802

You know what Chumbawamba... I think I might have to ask Heli-Ben on his next fly-over of South Central LA to drop you off in the northwest corner neighborhood near the 110 and 105 interchange wearing a blue bandanna... with that comment pinned proudly to your chest... and I would suggest immediately upon your arrival you begin discussing all of these types of thoughts with as many people as you can find... you are one of the most offensive people on this site... imho... you really ought to do a little historical reading and develop a more refined sense of empathy...

Fri, 09/11/2009 - 11:53 | Link to Comment chumbawamba
chumbawamba's picture

I add nothing to the site, except (apparently) for a chain of comments from a bunch of thin-skinned hippies with apparently little or no social life, other than what they find in online comments they share with the same.

Americans have many great qualities, but criticial thinking skills are not among the set.

I am Chumbawamba.

Fri, 09/11/2009 - 12:57 | Link to Comment Anonymous
Wed, 09/16/2009 - 18:43 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:32 | Link to Comment Anonymous
Fri, 09/11/2009 - 12:38 | Link to Comment TumblingDice
TumblingDice's picture

At first I was going to steer wide of this passionate conversation but some chemical imbalance in my brain has forced me to start pounding the keyboard.

Let's not make this personal. I am all for attacking chumbawamba for his racism. That has no place on this site. But his personal style, while hard to seperate from his racist viewpoint, should not be in question. And neither does it help to constantly bring up the previous racism.

And to the anonymous poster above, let me assure you that lewdness and crass is not as typical of twenty-somethings as you may think. So let us not make this about age either.

Ideas are the things that count and I hope we center our discussion around them. Intelligence is abundant in this forum and with it comes the ego. If we divert the conversation from ideas then all we are left with is the ego and that does nobody any good.

Fri, 09/11/2009 - 13:00 | Link to Comment MinnesotaNice
MinnesotaNice's picture

Those darn chemicals will get you every time.  I agree with your post... and I also agree Chumbawamba actually has good thoughts from time to time... however they are miniaturized by his racist rant that seems to come out of nowhere.  Now you and I have had some fun conversations in the past so I think I can go here with you (I hope I'm not wrong because I wouldn't want to offend you)... let's intellectualize this conversation to a different level... let's say every time you read a post from Chumbawamba he puts in the phrase "People Like Tumbling Dice are Asswipes" rather than 'n.gg.r'... what would you think... would you want the entire ZH community to remain silent and say nothing... I know you would likely personally sweep the floor up with him... but if the ZH community does not say that this is inappropriate then it can only be assumed that they are in tacit agreement... and then that becomes reflective of the ZH community.  There are black people on this website (however I am white) who love reading the material here... and how do you think they feel when they read Chumbawamba and his "n.gg.r rant".  I will tolerate just about any freedom of expression or idea... listen to any new thoughts that someone has... and step into someone's shoes that I haven't worn before... but I will always speak up against offensive, hurtful racist remarks.  You are right that ZH is a place of new, interesting, and different ideas... so we should try to stick with that as much as possible imho.

Fri, 09/11/2009 - 13:29 | Link to Comment TumblingDice
TumblingDice's picture

Minnesota, talking to you brings a smile to my face; so let me just say that I think you would have a hard hard time offending anyone, especially a thick skinned simpleton such as myself, even if you tried. This is a trait that is very undervalued nowadays and I appreciate it a lot.

We are on the same page: we will both speak against racist (and other egregiously wrong) remarks vehemently, no question about it, and hopefully the mettle of this forum will be determined by how we react to different remarks. But I think speaking against chumbawamba and bringing up his previous racist remarks is the wrong move here. It is sort of like forcing someone into a corner and eliminating all escape routes. Prejudice is infectious and hopefully we can keep it out of this forum.

Fri, 09/11/2009 - 13:32 | Link to Comment MinnesotaNice
MinnesotaNice's picture

I agree with you entirely... and I perhaps should not have thrown his remarks in his face... leaving him little ability to save face if he wanted.  And I love talking with you also :-)

Fri, 09/11/2009 - 11:27 | Link to Comment Rusty Shorts
Rusty Shorts's picture

 - actually he is 12 years old, and lives in a detention center located in Mississippi.

Fri, 09/11/2009 - 09:59 | Link to Comment Careless Whisper
Careless Whisper's picture

Chumbawamba is chill. Lighten up.

Fri, 09/11/2009 - 02:38 | Link to Comment Anonymous
Fri, 09/11/2009 - 03:37 | Link to Comment George the baby...
George the baby crusher's picture

Well blow me over with a feather.

Fri, 09/11/2009 - 03:42 | Link to Comment Anonymous
Fri, 09/11/2009 - 04:10 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Is there any doubt in ANYONE'S mind at this point that the Fed is doing stealth monetization of the Treasuries way above and beyond what they have announced? If so, please go see a psychiatrist. In fact, I will not be surprised if the majority of "indirect" is the Fed itself. This is Benny boy's gift to the Dollar-Deflationists of the world. Also, I'm not sure if the Fed adheres to elliot wave "principles" while gunning the market...wait...did I just see Fed do 1-2-3 of an impulse a-b-c up? WTF? LOL.

Fri, 09/11/2009 - 04:52 | Link to Comment tontoe
tontoe's picture

I don't know why Leroy Smith was the first thing I thought of when I saw this graph.

And it compelled me to make this : http://i32.tinypic.com/143noyh.jpg

 

Fri, 09/11/2009 - 05:17 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Hahaha...good job!

Fri, 09/11/2009 - 13:53 | Link to Comment Cheddar Bob
Cheddar Bob's picture

Nice.

Fri, 09/11/2009 - 14:55 | Link to Comment Hephasteus
Hephasteus's picture

Thank you for the laugh!!

Fri, 09/11/2009 - 05:00 | Link to Comment Anonymous
Fri, 09/11/2009 - 06:24 | Link to Comment George the baby...
George the baby crusher's picture

Dear Tim

I have a cunning plan.  We pump up the market by the power of 2, all the while increasing our debt burden.  Now I know what you're thinking Tim, but hear me out.

Then we deflate the dollar also by the power of 2.  We half our debt, and all the market players, well they've been well compensated by the artificial rally, so everyone's happy.

Think about it and get back to me.

Your's Ben

Fri, 09/11/2009 - 07:03 | Link to Comment Bob
Bob's picture

So you've been right all along, Tyler? 

And all us internet crazies are right as well?

Whuddya know. 

A picture is worth a trillion words. 

 

Fri, 09/11/2009 - 09:53 | Link to Comment Anonymous
Fri, 09/11/2009 - 06:59 | Link to Comment Anonymous
Fri, 09/11/2009 - 21:01 | Link to Comment Anonymous
Fri, 09/11/2009 - 07:18 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:23 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

It's news to a lot of the bears here.  I will admit I did not know how the stock market would react, but as soon as Bernanke stepped up QE on March 18th I went short the dollar by going long oil and CAD and AUD.  (I have since closed the CAD and AUD positions after nice gains and went long other commodities.)

Forget the Treasuries, they are nothing.  He is printing $25B of new dollars a week to buy MBS. (this past week a bit light because of the roll - basically there wasn't as much Sept supply as his buyers initially thought so that had to roll purchases forward to Oct  http://www.ny.frb.org/markets/mbs/index.html).  I find it funny all this agnst about $3B for Cash for Clunkes when Bernanke prints that much in half a day.  Think about that.

Shorting in the face of this liquidity flood is suicide.  Fundamentals don't matter.  Think about 1999.  Greenspan was flooding the system with cash in fears of Y2K, and the stock market went crazy.  We are basically in the same situation today.  AIG is the Pets.com of 1999 - there is zero justification for the stock price, but liquidity needs to find a home.

Fri, 09/11/2009 - 11:32 | Link to Comment Miles Kendig
Miles Kendig's picture

Excellent

Fri, 09/11/2009 - 15:38 | Link to Comment Anonymous
Fri, 09/11/2009 - 07:30 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

My assumption was that the S&P 500 was being dragged up by the pricing activity occurring within a fairly narrow bandwidth of volume, such that the vast majority of S&P 500 stocks are neither bought nor sold, but merely held.  Their "values" rise because the latest price for each of the stocks, due to HF or HAL 9000s or what have you, has been bid up, but the "support" for this value increase has not been broad.  As if there are 50,000 Chevy Cavaliers in a room, and we value all of them by the occasional bid and sale for one. I assumed that meant that the pricing support was thin, and could break at any moment, as all of the Cavalier owners watch the price and eventually decide they must cash in due to the fact that the price is, frankly, excessive.  But in the meantime, take the ride.  This explains why the car dealers in the room (the insiders) have been hitting a crescendo of insider selling (95:1 sell to buy). 

 

To the extent QE money is used to play within this thin bandwidth, I agree with you.  But if you are saying stockowners holding dollars produced by QE (and you know who THEY are) have steadily replaced other owners of those equities (who paid with "real," not freshly printed money), then the QE-owned shares are priced for good, and have no particular reason to cash out.  This would undermine the theory that at some point this market must return to "normal." It does not have to, if it is not built on a foundation of real money. and your analysis of the reserves sure looks like this is the case.  In that event, I think the notion that this must all end soon is completely without merit, as QE dollars are not real, and will not behave like real  money.  Makes me rethink this "go short soon" idea.  Better to buy into the rally and stay there.

There is probably a more precise way to say this.

Fri, 09/11/2009 - 07:40 | Link to Comment SWRichmond
SWRichmond's picture

Earnings?  You are suggesting another version of "new normal" a la tech bubble.

Fri, 09/11/2009 - 07:53 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:31 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Did the tech bubble last?  Obviously not.

As I posted above, watch the MBS purchases for clues.  As long as new money is created this market will go higher.  Once the new money creation stops, a re-pricing to fundamental values will start to occur.  Not before.

Fri, 09/11/2009 - 07:50 | Link to Comment William Wallace
William Wallace's picture

It doesn't matter how much funny money is pumped in or how much stock is owned by the recipients of the funny money.  At some point, if there are no earnings, the owners of the Beanie Babies, being human beings, will try to sell them.  Then the price of Beanie Babies will come down--and stay down.

 

There is no historical example of worthless crap inflated by a bubble staying valuable forever.  If the QE stops, that will start letting the air out.  If it continues, then the values will drop after what Mises called the "crack-up boom."

 

 

Fri, 09/11/2009 - 11:29 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Exactly, no need to overthink it.  Ultimately stocks do have a fundamental value, and will find that value.  Take the "big four": AIG, FNM, FRE, and C.  Of those, three of them surely have no value.  C is questionable.

To suggest AIG is going to maintain its value is foolish.  That situation will resolve itself at some point.

Those are extreme examples, but there are other examples.

In the short run, however, liquidity finds a home.  But that liquidity "burns off" eventually.

The best analogy we have to today's market is the 1999 NASDAQ bubble, another liquidity-driven event.

Fri, 09/11/2009 - 13:09 | Link to Comment Anonymous
Fri, 09/11/2009 - 13:32 | Link to Comment SWRichmond
SWRichmond's picture

The scenario you describe, where no one shouts "The Emperor Has No Clothes!" is possible, ONLY under the following conditions:

  1. ALL central banks agree to debase somewhat equally.
  2. The global man on the street never loses faith in paper currencies.

It's vital to understand that this is precisely what is aimed at and hoped for by central bankers, intellectually supported by mainstream economists and monetarist think-tankers, and incessantly regirgitated by B schoolers everywhere.

I am determined to not let them get away with it.

Fri, 09/11/2009 - 11:02 | Link to Comment Anonymous
Fri, 09/11/2009 - 07:42 | Link to Comment SWRichmond
SWRichmond's picture

Tyler,

A picture is worth a thousand words.  At least the Japanese pretend to discuss the merits of central-bank purchases of stocks.

Fri, 09/11/2009 - 07:48 | Link to Comment Gestalt
Gestalt's picture

I guess this explains why Treasuries and stocks and gold and oil and coppper have all been rallying at the same time (at least since June 4th, when Treasury rates peaked). A classic liquidity shock. Certainly there is no economic explanation for a coordinated rally in gold, stocks AND long bonds...

Fri, 09/11/2009 - 12:04 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Exactly.

The way to look at is the initial liquidity helped the banks with their liquidity problems, so the financial stocks rallied.

By now, it is all pouring into everything.  AIG at $55?  C'mon.

Fri, 09/11/2009 - 17:57 | Link to Comment Anonymous
Fri, 09/11/2009 - 08:11 | Link to Comment Anonymous
Fri, 09/11/2009 - 08:17 | Link to Comment MinnesotaNice
MinnesotaNice's picture

Great graph... that is really telling in helping to 'follow the money'...

Fri, 09/11/2009 - 08:22 | Link to Comment blackebitda
blackebitda's picture

well now that the cat is out of the bag, is what everyone else

knows worth knowing? insider selling is now headline news. 

Fri, 09/11/2009 - 08:28 | Link to Comment JohnKing
JohnKing's picture

So the question is..when does Kamikaze Ben pop the thing?

 

Fri, 09/11/2009 - 08:44 | Link to Comment George the baby...
George the baby crusher's picture

 

It's such a simplistic and harsh word "POP".  Could you rephrase it with, ummm, let's say, "Monetary quantative restraint".  For gods sake man,  make something up already, everybody else is.

 

Fri, 09/11/2009 - 08:53 | Link to Comment JohnKing
JohnKing's picture

I'm not good at word games :)

 

Fri, 09/11/2009 - 12:04 | Link to Comment TumblingDice
TumblingDice's picture

When the Fed is audited.

Fri, 09/11/2009 - 08:56 | Link to Comment Anonymous
Fri, 09/11/2009 - 09:32 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:13 | Link to Comment zeropointfield (not verified)
Fri, 09/11/2009 - 10:19 | Link to Comment Anonymous
Fri, 09/11/2009 - 12:33 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:20 | Link to Comment Anonymous
Fri, 09/11/2009 - 13:45 | Link to Comment Anonymous
Fri, 09/11/2009 - 17:55 | Link to Comment Anonymous
Fri, 09/11/2009 - 21:06 | Link to Comment long-shorty
long-shorty's picture

You have a good point, but please don't go there, because if they calculate the r-squared value, they might see that it isn't really that high, and worse yet they might stick a p-value on it that suggests some indeterminate, almost statistically significant finding, and then all the ZH staff would have to rally behind the notion that it means a lot even though the number is just a touch above 0.05.

Fri, 09/11/2009 - 21:15 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:33 | Link to Comment Anonymous
Fri, 09/11/2009 - 09:38 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:06 | Link to Comment Anonymous
Fri, 09/11/2009 - 16:37 | Link to Comment Anonymous
Fri, 09/11/2009 - 18:07 | Link to Comment Anonymous
Fri, 09/11/2009 - 21:12 | Link to Comment Anonymous
Sat, 09/12/2009 - 03:28 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:09 | Link to Comment Bearish Spirits
Bearish Spirits's picture

So anyone else see this ridiculous ramping and shanking of the dollar to drive the markets?  DXY was too low this morning to provide real upside for the market, so it's driven up .3 in 5 minutes to a new intraday high right after making a new low. 

Just more fuel to pump the market as the day goes on.  Virtually identical to what happened before the open yesterday.

Fri, 09/11/2009 - 10:32 | Link to Comment reading
reading's picture

Where/when does the dollar/market correlation end?  When will the dollars weakness become an uncomfortable level for those invested in US equities?  Does it ever?  If not, I guess I should just go invest in some place like Zimbabwe -- I mean if strength of the currency doesn't translate into anything actionable then I guess I shouldn't care.  I personally have a hard time feeling very good about anything if the value of what I use to buy things is going down the you know what on a the fast track.

Fri, 09/11/2009 - 10:45 | Link to Comment Bearish Spirits
Bearish Spirits's picture

It probably won't matter to equity buyers until DXY breaks below 71.  Until then, buy everything.  After that, buy commodities.  You can't lose!

Not to mention the "mystery" of much more extreme upward reactions to a slide in the dollar as opposed to the moderate downward reactions in response to a spike.

Fri, 09/11/2009 - 11:13 | Link to Comment JohnKing
JohnKing's picture

The green shoot theory is that inflation is good for stock prices, as the dollar goes lower it takes more of them to buy into equities. We are sooo screwed.

Fri, 09/11/2009 - 11:34 | Link to Comment Assetman
Assetman's picture

It ends when QE comes to a total halt and funny money isn't used to by questionably valued assets anymore.  Or it comes to a halt when inflation arrives with a Grim Reaper suit on.

The Fed now is playing a game of chicken with the USD.  If the decline is as slow and controlled as we're seeing now-- then the manipulation is working and there is no need to reverse the QE effects.  As the other commenter astutely pointed out, the DXY breaking 71 is going to be an interesting test, because instability in the currency markets may well be "re-introduced" after such an event.  That 71 level represents some very long term support on the DXY, and braking it may cause some panic.

Stepping back, my hope here is that the Fed/Treasury knows that the monetization strategy can't work long term.  My hope is that, perhaps, they have had the training wheels on this economy since last November-- and are slowly pulling back the training wheels as GDP pops above zero-- to see if the induced recovery can be self sustaining.  I see some evidence of that, but certainly not enough.

What's most disturbing, though, is that while the Fed is monetizing and the dollar is weak, Treasury yields are rallying strongly independent of Fed action.  It's almost as if the monetization strategy has worked so well, market participants are now almost urging it to continue.  That is a pretty scary thought.

Fri, 09/11/2009 - 20:20 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:25 | Link to Comment Anonymous
Fri, 09/11/2009 - 10:59 | Link to Comment Obnoxio
Obnoxio's picture

David Goldman wrote a good piece about this on his blog:

http://blog.atimes.net/?p=1136

Fri, 09/11/2009 - 13:42 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

I love his comments.  He was right on about the dollar/equity correlation long before others were.  check out his comments from yesterday.  someone's post above about Zimbabwe was right on.

 

"

I just spent two weeks in the Far East talking to a variety of financial types (although the main purpose of my trip was unrelated to finance). Everyone is sick of the dollar as a reserve currency; everyone foresees a diminution of American power under the Obama administration; and no-one has a clue what alternative might present itself to the dollar.

As I indicated in my last post before leaving, the desirability of American assets depends on their price in a basket of other currencies. A cheaper dollar reprices domestic tradeable assets, e.g., equities, to a world level which no longer is measured in dollars. There is a nearly one-for-one relationship between the value of the dollar index and the price of the US equities index. That, as I observed earlier, is how a banana republic equity market trades."

Fri, 09/11/2009 - 18:19 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:38 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:45 | Link to Comment Anonymous
Fri, 09/11/2009 - 11:51 | Link to Comment Miles Kendig
Miles Kendig's picture

Too bad John D. MacDonald is not around to spin another great Travis McGee pulp.  Perhaps the Green Cotton Helicopter..

Fri, 09/11/2009 - 12:00 | Link to Comment Anonymous
Fri, 09/11/2009 - 19:24 | Link to Comment Anonymous
Fri, 09/11/2009 - 12:07 | Link to Comment Anonymous
Fri, 09/11/2009 - 12:23 | Link to Comment Anonymous
Mon, 05/23/2011 - 06:30 | Link to Comment jackiboa
jackiboa's picture

I will forward this article to him. Pretty sure he will have a good read. Thanks for sharing!
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Fri, 09/11/2009 - 12:53 | Link to Comment SWRichmond
SWRichmond's picture

Will they ever be able to pull the QE funds back out, or does it not matter if they stay in indefinitely?

I'm no great enlightener, but I have a beer with him every few weeks so I'll give it a shot.  Your observation above IMO is key to the future.  The simple answer is: No, they will never be able to pull the QE funds out.  Here's why: in this case, the QE funds were used to buy a small portion of two asset classes that have both a dim future and a significant political importance, namely: Treasuries and MBS.  The only reason these securities have value is because of Fed support.  Unless the Fed owns all of these, any move by them to sell them will, absent a significant economic recovery providing real price support, crash the value of the remaining pool of non Fed-owned securites.  In other words, the Fed's balance sheet is too highly leveraged, both economically and politically.  I believe this combination wil prove fatal.

Fri, 09/11/2009 - 13:34 | Link to Comment Anonymous
Fri, 09/11/2009 - 14:48 | Link to Comment SWRichmond
SWRichmond's picture

Because it is a lie, and an economic system cannot survive long term on lies.  Questions are already arising; evidence is building that our ability to fund our deficits by borrowing and printing is coming to an end.

If you read about Argentina, their system devolved into similar lies accompanied by incredible systemic corruption.  Americans already are providing indications they're not going to stand for it.  Authorities are ramping up their goon squads in response; the stage is set.

Unlike Argentina, however, the USD is the world's reserve currency.  Our lenders are no longer willing to support our habit. 

Are you the same anonymous ( http://www.zerohedge.com/article/correlation-sp-500-performance-fed-mone... ) I replied to above with this?:

"The scenario you describe, where no one shouts "The Emperor Has No Clothes!" is possible, ONLY under the following conditions:

  1. ALL central banks agree to debase somewhat equally.
  2. The global man on the street never loses faith in paper currencies.

It's vital to understand that this is precisely what is aimed at and hoped for by central bankers, intellectually supported by mainstream economists and monetarist think-tankers, and incessantly regirgitated by B schoolers everywhere.

I am determined to not let them get away with it."

Printing currency is theft, and everyone knows it.  Americans are indicating their willingnesss to do something about it.

Fri, 09/11/2009 - 15:47 | Link to Comment Anonymous
Fri, 09/11/2009 - 23:11 | Link to Comment SWRichmond
SWRichmond's picture

Re: timescales.  I wish I knew.  The thing is this: I believe this government will stop at nothing to stay on top.  I believe they will change laws more aggressively than they already have.  IMO we are already living de facto economic martial law.  A long time ago on another blog (Mish) I speculated that "they will do everything we can think of and lots of things we can't".  They will do them until we MAKE them stop.

If you've read any of my other comments you know I see this as a political crisis much moreso than an economic crisis.  Honest money is a political issue.  The Fed and its actions are a political issue.  Borrowing trillions of dollars and signing citizens' names on the loan forms is a political issue.  Borrowing $787 Billion and giving it to Wall Sreet over 100:1 popular objection is a political issue.  Dems and repubs both voting for the bailout(s) reveals the magnitude of the political issue we face.

How long can they keep it up?  I still expect a long (18-24 month) period of deep and painful deflation that will seem never-ending.  I expect a currency crisis to follow that, triggered either by a default due to deflation-induced tax revenue collapse or one too many helicopter drops onto the banks.  It would be the worst possible scenario: deep deflation to rob you of your livelihood, savings and hope, then a hyperinflationary explosion of ~40% devaluation of USD in a short period, perhaps hours, followed by an extended, steady additional devaluation as the USD loses once and forever its place as reserve currency.  The net effect is to make everything you need cost more than you have.  This period will be defined by loss of lifestyle.

Why am I so gloomy?  We have been living in a credit bubble for the past 25 years.  Credit bubbles make everything easier than it should have been.  Now we're going to make up for it through everything being harder than they should be.  It's a very simplistic view, I'll admit.  Someone convince me I'm wrong, without idiotic monetarist theory.

Sat, 09/12/2009 - 03:58 | Link to Comment Anonymous
Fri, 09/11/2009 - 14:15 | Link to Comment Mazarin
Mazarin's picture

Current Total Market Value of the S&P 500 is ~10 trilion.

So figure $1 trillion per 100 pts.

QE of nearly a Trillion + other Fed lending programs X leverage is plenty to float Naz/S&P/Dow rally from March.

Fri, 09/11/2009 - 14:20 | Link to Comment mannfm11
mannfm11's picture

The SPX is worth roughly $8 billion a point. 

Fri, 09/11/2009 - 14:19 | Link to Comment mannfm11
mannfm11's picture

This is bunk. According to Fed Statistics coming into this week, Federal reserve credit had declined $183 billion year to date. The Fed started monetizing in 2007, but really in 1913 when it was started.  You might note the Dow was down 3500 points from its close on 9/8/07 and well over 4000 points from its peak and nearly 2000 points year over year.  There was TARP, TALC, TALF, XYZ, ABC and every other imaginable program along with the Fed floating the entire bear portfolio and the GSE's. 

Fri, 09/11/2009 - 14:39 | Link to Comment Ducky
Ducky's picture

They threw the book at this one. Relaxation of mark to market when Barney Frank publicly threatened FASB was also a big cause in my book.

Fri, 09/11/2009 - 15:48 | Link to Comment Anonymous
Fri, 09/11/2009 - 22:09 | Link to Comment Anonymous
Fri, 09/11/2009 - 23:53 | Link to Comment Anonymous
Fri, 09/11/2009 - 23:56 | Link to Comment Anonymous
Sat, 09/12/2009 - 06:20 | Link to Comment Anonymous
Sat, 09/12/2009 - 06:57 | Link to Comment irongate
irongate's picture

so if QE lifted the ess-n-pee 50%...........   what happens when they exit QE??

Sat, 09/12/2009 - 09:50 | Link to Comment Anonymous
Sat, 09/12/2009 - 10:15 | Link to Comment rapier
rapier's picture

One minor quibble. The money is inflating financial assets. The greatest cognitive blind spot in our 22 year adventure in monetary and credit ease is that asset price increases are not inflation.  Rather always refered to as increasing value.

Financial asset price increases about GDP increases are inflation. One little considered fact is that financial asset price increases and the mechanisms supporting that increase have become embedded in the GDP number itself. Creating a beautiful virtuous circle,for the beneficiaries. Meanwhile the parasites are driven into poverty.

 

Sat, 09/12/2009 - 11:51 | Link to Comment Translational Lift
Translational Lift's picture

There ain'r no there there........

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