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Nic Lenoir Has A Fever, And The Only Prescription Is More QE
From Nic Lenoir of ICAP
Today is absolutely key if the market is to turn anytime soon. Let me first summarize the global macro economic picture before we get into technical considerations. The economic cycle has turned as the effects of stimulus wane and the boost of inventory rebuilding abates. Regarding inventories in fact the expected contribution to GDP is expected to be negative in the next 2/3 quarters and Mr. Ore who runs ISM said that if recent inventory building was not fully voluntary we might have a very serious problem. ISM has rolled in the US, following Japan and Australia where it last printed 47. Sovereign credit spreads are hovering around the recent highs they made in peripheral Europe were default is pretty much a given at this point. Central banks are pretty much all with the notable exception of the ECB (which hiked in June 2008... no further questions your honor) intervening in the FX markets or launching additional/fresh quantitative easing programs in a devaluation race as demand is insufficient and exporters fight for a competitive advantage. Congress is voting laws to tax Chinese imports, and public relations between Japan and China are at rock bottom. Recently the entire mortgage foreclosure process in the US has come to a halt as it has come to light that most foreclosures were not backed by any documentation of ownership of the mortgage loans. There are talks about a potential moratorium on foreclosures. US states' CSD keep trading very wide and default is almost a given for a few states, including Illinois or California.
And all that is... great news because it all point towards more quantitative easing which should prop up asset prices. Well well, if this is not the dog chasing its tail. The argument has been made popular by David Tepper who voiced it the most clearly a couple weeks back on CNBC. I added the now familiar chart of global liquidity which shows how the prices of assets go up when global aggregate monetary base denominated in USD goes up. Here is my problem with this rationale: QE will not do anything for the underlying economy. First of all one can note that money flows more and more into gold, bonds, and sovereign markets, and out of US equities. Secondly because we have excess capacity and a dire need to repair consumers' balance sheets, there is no reason to expect massive capex from big business beyond the basic replacement cycle and the money that gets into the consumer's pocket via stimulus will either be a one-time boost to consumption in the case of the neediest, or a payment of credit balances otherwise. I could even say that in the best of cases it will go straight to savings if the recipient is lucky enough to be fat and debt free. Most of that cash will end up sitting on some financial institutions' balance sheet in no time, finding its way to Brazilian bonds or other higher yielding proposition. There is no demand for more money, and yields are not what is holding the real estate market from carrying our economy like it did from 2002 to 2007. Jobs will not come back because of excess capacity that can no longer be supplanted by credit. Instead, more QE will have the pervasive effect of debasing the USD, and bring about inflation which will no correspond to any improvement of the economy but more expensive commodities which will further hurt demand. Maybe this can be swept under the statistical rug with more CPI calculation modifications (an excellent job has been done by the governments to modify inflation reporting so that rates can be kept low, and the cost of education/healthcare/food/anything-else-you-need can grow between 6% and 10% a year), however I doubt it will be kept away from the pump long. Crude is threatening to break out higher and more USD debasement will only make things worse. This is because unlike Japan which has enjoyed a positive balance of payments thanks to her exporters and could therefore use quantitative easing for years without any major run on the Yen, the US has a negative balance of payments and the world will not tolerate QE if it is on its dime.
Here is what I think: everybody has priced in QE2 in November and in size (anything less than $500Bn here would be a major disappointment). USD has sold off aggressively irrespectively of the fact that other central banks like the bank of England and the bank of Japan have commited to more/new quantitative easing. Yet nothing has been delivered (little doubt is left since Ben Bernanke has sent his generals on the air to echo his desire to drop buckewts of liquidity from a helicopter) and questions whether purchasing US Treasuries is a good idea are popping up everywhere. The only buyers in the market base their reasoning on the fact that things are so bad (see macro assessment earlier) that liquidity will save us. I disagree.
If you are going to take a stab at this market, now is the time, and I will be very disciplined if price action proves me wrong. However, many signals show that we are at a key pivot. Early in September we had a Vix signal indicating a bottom in volatility for equities (see Vix chart). This low in volatility typically precedes a high in price for stock indices. So far this low/signal has not been invalidated. Then we set at the top of our agenda the task of trying to pick a top for US equities. Last week I finally pulled the triggered and committed to the 1,155/1,164 range for S&P futures. This is were I think bears are supposed to sell, and a close above 1,170 will be for me a signal that the melt up will carry on and 1,233/1,236 becomes the next sensible target. I have attached the 2-hour and daily chart that are pretty clear as to why this zone is a key pivot and should be a strong resistance. Another market I find of interest is crude, an its not so distant cousin USDCAD. Crude has been stuck in a range for a while as debasement has not eclipsed demand concerns. If we hold key resistance here it would be in my opinion a strong acknowledgement by the markets that QE is all fumes, and only gold or EM emerging markets will benefit from it as they unlike us can leverage the fresh liquidity. USDCAD similarly is testing a key support, and USDMXN looks very similar.

In summary, my base case scenario is that we are living a bad remake of 2008 when stocks could not re-take their highs in the summer but still rallied until late May despite obvious very troubling signs given by the economy (sounds familiar). At that stage bulls found a new holy grail: decoupling. Commodity and USD debasement hysteria ensued... but when reality set in all collapsed. I expect very much the same this time around. However periods of low volatility and delusion can last longer than one expects while realization is often sudden. I love the image of USSR which was the dangerous rival, a strong economic powerhouse, which when the wall fell instantaneously turned into a third world country in people's collective appreciation of the economic landscape (China... I see you). That is why if key resistances are breached on a market close, I will save some powder for the next time the technical picture aligns with my fundamental view of the economy which is not really getting any rosier.
Good luck trading,
Nic
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This is a stock market only a mother (f**ker) could love.
Don't know about the "mother (f***ker) part, but a "trend follower" would also love this market. Quit trying to call tops and bottoms and become a "turtle".
Sorry, forgot the <sarcasm> tag.
I've got the fever, and the medicine is more cowbell!
deez...you beat me too it!
The alternative option is C=A leg on the daily chart $SPX is part of a Triangle pattern/larger corrective mess.
I preferred your alternate weekly count with this pattern from the April High (2010) being part of a B wave before another leg higher for the C. (Zig-Zag X or 2 off the 09 low in EW speak.)
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/shir...
Repeat after me: stocks do not go down..how about a chart of combined market cap moves in US over past month plus vs. expected QE?
I guess my question on all of this (great read, btw) is that do we honeslty think Banana Ben is stupid? I mean, all jokes aside. Can he not see that QE2 does nothing for the greater economy, and actually poses greater risks in the long run? What is his agenda? Is it truly the destruction of the middle class and everyone except the elite? Will that goal really help the Fed, the US or the world in any regard?
It has been said that he does not understand the potential social impact of his textbook decisions. Combine that with unchartered waters and there is definitely margin for error.
@Ivanovich
You are correct, Bernanke is no idiot, but he is doing a little soft-shoe routine to try and prop the markets until the November elections are over. IMO, we are seeing a repeat of the Fall (pun intended) of 2008. The dollar will rally, and everything else will get trampled in the mad rush to Treasuries.
A lame duck Congress will add some comedic relief, and the new Congress in January will attempt to right the ship, with President Obama playing the role of Captain Queeg
Ummm, I thought there already was a mad rush to Treasuries. You do realize the 10 year is now below 2.4%, right? And the price of 10 year paper is going through the roof?
Not only that, but the 2-10 spread has dipped below 2%.
I absolutely refuse to believe this can continue for much longer.
I think this time the driving forces are different. Back in 2008 we had panic forced selling and the ensuing flight to safety. This time around bonds are rallying as a result of the drive for income. IMO equities will sell but only when there is realization that QE2 (and the ensuing ones) is not of much use for the real economy.... Most of the time the bond market is right and equities are wrong. Let's see if it holds this time as well.
Excellant!
http://www.youtube.com/watch?v=3zgeQmzV9kk
on the contrary, it is conceivable that the Fed and the "elite" does not want the destruction of the middle class. you don't understand that without middle class there is no elite because what usually happens is a revolution that overthrows the elite (communism rings a bell?).
so basically the fed is trying to restart the engine and pumping more money is the only bullet they have, the alternative is insolvency.
I would say it's pure evil. Everybody who knows history knows printing money is the deal with the devil. Germans gave that license to the Central bank in 1914 over there to fund the war.. by 1922, unemployment in Germany got to 1%. by Nov of 1923, game over. Was a jewish conspiracy that the currency got hyperinflated and we all know what happened to them. Ben is playing with fire here.
"Here is my problem with this rationale: QE will not do anything for the underlying economy."
Do you think Ben & crew were ever concerned about the 'real' economy?
"if recent inventory building was not fully voluntary we might have a very serious problem."
Like perhaps in, I don't know....CHINA.
btw: does anyone know what the bearded clam said this morning?
Ben might be more clever than you think. He has done no qe2 as of yet and the stock market is soaring. He is basically threatening qe2 and getting all that he needs from the threat. The big difference between now and 2008 with respect to commodities is that the stuff that is going up really does not matter. As long as opec plays along and oil behaves the consumer is not going to feel it directly. Who really cares if gold goes to 1500 and copper goes to $5.00. Also this is going to help the us balance of payments because we are big exporters of ag.
This market should have rolled over a week ago but has not done so. Hard to believe it is going to fail before ben is put to the test of having to actually print more dollars.
Do you not think all the POMO of the past month qualifies as QE?
This market is not going up.
The Dollar is going down, down, down
Bernake is clown clown, clown
The economy is goin down down down
It won't rebound, bound, bound, bound...
Chart: ES and ZB
How much can you eat?
http://99ercharts.blogspot.com/2010/10/es-and-zb_06.html
Interesting read, but why not 1175 as resistance and a turning point?
I have to agree with Nic, although the FEDs are the big wild card, we can stipulate all we want, at some point, they are going to come up with something we did not thought about! This market is beyond good and bad for a long time now, who knows when it will go down and for how long, for which reason. The only chance I see for myself is to have one position in LONG VXX and the rest safely placed in hard assets, then wait and see! Fact is, nothing can save anyone, anymore! WAR is a GIVEN, since nothing else can stop these bastards!
.
2x attempts at 1160 this morning..
3rd times a charm?
Every single massive bilge pump has been brought on line along with a dollar dump in a mad and desperate attempt to push higher.
Got........to........go.........higher.........or........die.........trying.
The Dow is 50 points from 11,000. For the bread and circus crew, 11,000 would be pure adrenaline.
Anyone consider the fact that QE isn't by choice...but needed so the PD's are able to take down all future auctions? Without QE, where will the US get the $100-120 billion EVERY MONTH to fund its spending? QE or default, BITCHEZ!
Of course it has been considered. Can you spell Ponzi? Once you're committed to all out warfare, there's no turning back and every step forward limits your choices for the next step forward.
Painted into a corner bitches.
I see "My golf instructor tells me to drop the right shoulder" has been conveniently scrubbed off the SPX chart. You're a real wit Nic.
Chart: The Long Bond
Yield? What's that?
http://99ercharts.blogspot.com/2010/10/zb.html
What does a country do that has borrowed to buy USD in order to lower their exhange rate and protect their exports? Do they invest in USD bonds, USD equities, or do they buy Yen or Francs?
What would they do with the Yen?
Think of this as an old WWII dogfight. In the rarified air, the prop-driven fighters lose lift and tend to stall out. The plane that can claw the most altitude wins as it sits above all others.
China is sandwiched between the US and Japan. Their horizon is filling with storm clouds. Computerized manufacturing with it's attendant low labor component (and attendant high labor skill requirement) along with transport cost increases can severly dent China's macro-business model.
http://www.ceps.eu/book/how-level-capital-playing-field
http://www.reuters.com/article/idUSTRE6951V820101006
We could well be in a "new" galaxy charting a new course. I think there is altitude left in the US stock markets. On the downside, we may see a "Scott Brown Election" adjustment right after the mid-terms.
Govern yourself accordingly...
We're gonna need more cow bell.
Based on the historical charts, this is a sure fire prediction of the future.
"I guess my question on all of this (great read, btw) is that do we honeslty think Banana Ben is stupid? "
He's less stupid than he is criminal. He's willing to break the entire apparatus in a desperate attempt to save the Fed's franchise banking system. His view is the good ship lollipop goes down if he doesn't engage in grand larceny at the public's expense, but the truth is the system's failure has already commenced, and all he is doing is altering, somewhat, the path that leads to its outright extinction. They, (The Fed) can run, -and make a lot of people think they are actually competing- but they can't hide.
The Fed is not stupid... far from it.
The only way out of this mess and the slippery slope we are on is hyperinflation. Don't think for a moment that the Fed has not already built scenarios around this, and that this is being studied in earnest.
The eventually inflation and subsequent hyperinflation that will set in will bring down the whole system... allowing the US to emerge with owing little to no debt... while retaining its economic hegemony.
If you doubt what I am saying, ask yourself how are we to get out of the current unfunded liability of $23,000,000,000,000,000.00? Funded liabilities are now approaching 90% of GDP... and most of the advanced economies are in the same soup.
Not even human enough to be deemed criminal . . . sociopathic. I am beginning to think the desire for political power is an illness and that our leaders are all, down to the dogcatchers, sick in various degrees.
Chart: EUR/USD
Top.
http://99ercharts.blogspot.com/2010/10/eurusd_6565.html
Nic,Mish and others just don't get it.Whether QE2,3,4,6...makes any sense or is completely suicidally insane doesn't matter.All that matters is that TPTB come out on top and in control of what is left of the western economy.They know the whole system is f****d,but rather than try and fix it by making the obvious changes like cut government spending,cut defense spending,reform the banking industry, etc etc,they would rather the "burn it all to the ground and start again" policy.
Jesse Ventura made exactly this point a few years back.Some people will only get it when it's too late.