We have long claimed that 2011 is playing out in a manner virtually identical to 2010, almost to the tic. And as we approach the end of QE2 in 6 weeks, a quick glance at what happened with stocks following the end of QE1 in March of 2010, will be illustrative of what to expect this time around, because contrary to what Comcast's business channel would want its ever declining viewers to believe, it never really is "different this time." To help with that comparison, here is a David Rosenberg summarizing what happened between the end of QE1 and Bernanke's August 27 announcement of QE2. If this is all it takes, then as we (and Scott Minerd earlier) have predicted, get ready for not only QE3, but 4, 5 and so forth. And not only that, but Rosie joins the likes of Zero Hedge, Minerd, Koo, Janjuah and all other pragmatics who realize that the Fed will never, never, allow deflation to run its course even if that means collateralizing the dollar with sewer bonds and physical housing, which incidentally is what Rosenberg predicts: "the day the QE programs run their full course, the Fed will have
likely added physical housing units to its balance sheet as opposed to
just mortgage paper. Ben Bernanke will be the biggest landlord in the
country at that time."
Rosie reminds what happened laste year between the end of QE1 and the surprise start of QE2
- S&P 500 sagged from 1,217 to 1,064
- S&P 600 small caps dell 394 to 330
- The best performing equity sectors were telecom services, utilities, consumer staples and healthcar, in other words - the defensives The worst performers were financial, tech, energy, and consumer discretionary [sound familiar?]
- Baa corporate spreads widened +59 bps from 237 bps to 296 bps
- CRB futures index dropped from 279 to 267
- Oil went from $84.30 a barrel to $75.20
- The trade-weighted US dollar index (against major currencies) firmed to 76.5 from 75.5
- The yield on the 10-year US Treasury note plunged to 2.66% from 3.84%
- Gold was the commodity that bucked the trend as it acted as a refuge at a time of intensifying and financial uncertainty - to $1,235 an ounce from $1,140 and even with a more stable-to-strong U.S. dollar too.
In other words, for those who have forgotte, gold was the only commodity that outperformed and in fact rose, as at least someone had an inkling that QE 2 was coming...
And Rosie's prediction:
The Fed is seriously contemplating an end to QE2 but make no mistake, QE3 will come down the pike, but at completely different levels on everything. It is certainly not going to happen at 1,330 on the S&P 500 but we do know that the strike price last fall was 1,040 and lots of chatter of a 'double dip' recession.
Bernanke, Yellen and Dudley, in contrast to the Fed Bank Presidents, would love nothing more than to quickly embark on QE3 and keep economic growth above 2% but they do not have enough support on the FOMC or on Capitol Hill. But that day will come when we see QE3 and it will be the day when all the folks who are complaining and lamenting QE are lining up begging for it. (And, the day the QE programs run their full course, the Fed will have likely added physical housing units to its balance sheet as opposed to just mortgage paper. Ben Bernanke will be the biggest landlord in the country at that time.)
Which means that by then, the dollar will be collateralized by multi-family apartments, warehouses and, appropriately, sewer bonds. Which also means that the dollar will be approaching an inverse asymptotic valuation. Which, lastly, means that the Fed will be monetizing every last piece of paper to come out of the Treasury, as America changes its name to the United States of Weimar.
And for those who missed Minerd's thought on the issue earlier, here it is again from the horse's mouth.