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On the Odds of an Ease
A friend sends me the following chart to support his conclusion that another round of QE is coming from the Fed sometime in June. The chart tracks the ten-year bond and the performance of the S&P since 2009.
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Some thoughts on the info provided in this graph:
+ While both QE1 & 2 were ending, the S&P fell.
+ Operation Twist appears to have successfully restrained any increase in long-term interest rates.
+ The European Long Term Financing Operation (LTRO) liquidity operations had a significant positive impact on US equity prices.
+ As of today, the spread between LT interest rates and the S&P is the widest it has been in three and a half years.
+ The current level of the ten-year bond is the same as it was during the height of the recession/depression during the 1Q of 2009.
My observations:
- Tyler Durden at Zero Hedge (among others) has been pounding the table with the thesis that what drives markets today is not the size of the Central Bank balance sheets, it is the daily/weekly flow of additional monetary easing that matters. I think the chart confirms this.
- Twist and LTRO are finished for the time being. Bond yields are reacting to the economic slowdown that comes with the ending of these monetary jolts. Stock markets around the world have flattened out; there is good evidence that an equity market correction is underway.
- The huge gap in the current spread between bonds and stocks is scary. Notice that the orange and white lines have crossed numerous times in the past. If the lines were to cross again, it would imply that either interest rates have to shoot up, or the stock market is looking at a very sizable adjustment. I see little chance for interest rates to move higher in the current environment. This sets up the possibility for an out-sized down move in stocks.
- Everyone (most importantly Bernanke) is aware of the information that is contained in this chart. Bernanke is also aware of Durden’s point: you have to feed the beast every week, and you have to commit to weekly feedings far into the future, or markets will get grumpy.
- The expectation from all directions is that the Fed and the ECB will (once again) rise to the occasion (June is the popular time frame), and when they act, stocks will go “green” again.
- That the market is so convinced that the Fed will bail it out (or prevent any significant decline) allows for the very high spread between stock prices and interest rates that exists today. There is a high degree of complacency in the market. It believes the Fed is the backstop, and it will always be there when markets flutter.
The arguments and logic for additional Fed accommodation are compelling. The assumption is that the Fed will do the “logical” thing and repeat its past actions. I disagree.
The next opportunity for the Fed to act is June 21. That is 133 days before the election. Any new Fed program (sterilized QE) would take time to become operational. To be effective, it would have to have a time frame of at least six months. This leads to the conclusions that (1) the earliest the Fed could act is late August, and (2) if it were a six-month program, it would be in full gear for the first week of November.
The Fed can’t do that. It would (appropriately) be accused of supporting Obama and interfering with the political process in the US. An independent Fed can’t throw elections. If it tried, the result would be a loss of its independence.
The Fed's only support comes from the political right. I think this is because the Political Right = Money, and Money "believes" it is better off with an independent Fed. If the Fed takes action to support a liberal president in a key election, it will lose what support it has.
The folks at the Fed ain’t dumb. If they cared about their role in society and wanted to maintain their power, prestige and independence, the last thing they would do is start another round of QE in the 3rd quarter of 2012.
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The situation is quite the opposite in Europe. I think the outcome will be the same.
Europe has had its critical elections this weekend. Now we know that a Socialist will lead France. The message from this election is very clear. The French people do not want austerity. Neither do the Dutch, Italians or Spaniards. The only country left that is pushing for austerity is Germany.
I think that there is a near zero chance that the German people will permit their leaders to write a check that supports growth programs in the EU. If France says, “To hell with austerity”, the politics in Germany will turn away from those that support pan European bailouts. Merkel will be D.O.A. if she tries to have Germany foot the bill for a French expansion program.
I will add that if France does turn its back on austerity (almost certain that it will), the German Bundesbank will just say, “Nein, danke”. Without "Bubba", no deals will happen.
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The markets are going to hit a wall on Monday. There will be a cry from the pundits:
"Don't worry, QE is coming for sure! Buy the dip! The Fed is going to come to the rescue and bailout the global markets!"
I’m going to go against the consensus opinion.
The Fed is on hold until December.
We will not see another LTRO operation this year.
If I'm right, what does it mean for those lines on that chart? Nothing good.
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When it comes to survival, the gloves come off. You are probably right, election be damned as this world still needs to run.
However, all it will do is push the inevitable just a little further down the road and the economic strength which was the envy of the world may turn into one big dust bowl.
Could we get a nice Bernank speech about he is standing by warming up the Sikorsky? They make me feel so warm and safe!
Time for the half dozen USD bulls to get rich and to bet against gold, really, right?
I'll loading up on UUP calls over the next couple of months
Right. Temporarily.
Always enjoy hearing your thoughts Bruce. Tomorrow looks to be a bloodbath, correction here we come.
I agree with your thinking but the 'left' could make the same argument if the Fed does not QE. That it is playing politics to defeat Obama. We've seen the ECB bend to political demands with its bond purchases. Central bank independence seems to have its limits.
The Republicans want to audit the Fed and get rid of Bernanke. I doubt anyone would accuse them of catering to the Republicans to help defeat Obama.
ZIRP is the Keynesian endgame. Austerity for nothing and money for free. War is whats next...
Austerity is no alternative to stimulus. Austerity means social unrest on a massive scale and its not necessary. Stimulus over time means a slow increase in asset prices. So what is the big deal? People need to eat and work.
Austerity is meant to create unrest. When the government is called out for overspending the first things they threaten to cut are parks and schools and other things people actually want. They never offer to cut things like government salaries or weapons stockpiles. Don't be fooled. Ask for real cuts in the things which we don't want and don't need.
Parks and Schools,both way overated.
How pathetic that we're all reduced to reading the tea leaves of the Fed...like a bunch of old Kremlinologists. I remember when investing was about capital formation, for companies with products and earnings and market share.
Having said that, I'm not sure Bruce is right here. I think the Fed could have it both ways. Ease some more, AND keep their credentials with the Right. Remember, Obomba is part of the Right (with a thin veneer of Leftie slogans)
The Fed controls everything now - the bond market, the stock market, commodities, housing (through interest rates), credit cards - everything.
If you are well connected with the Fed, then you cannot lose.
"Alan Greenspan, the former Federal Reserve chairman, has helped Pacific Investment Management Co. make ``billions of dollars'' in his role as a consultant, said Bill Gross, the bond manager's co-chief investment officer."
We do not have free markets anyore - more like fascist, controlled markets rather like our government.
Any irony that Greenspan was part of the Ayn Rand free market champion inner circle? This is what it looks like in practice when these people get into power. Good thing Rand just wrote books, or we'd have been completely fubar'd a long time ago.
The irony comes from the fact that Greenspan gave up his principles when he was offered power by the government and that you exult the power of that government.
So hard to keep up, if ya don't take notes! Pay heed, LetThemEatRand!
"I remember when investing was about capital formation"
I remember when Wall Street was about capital formation, rather than financialization.
Cry 'Havoc,' and let slip the dogs of war
If you believe in the Matrix, your analysis is spot on. If you believe that there is no spoon -- and that this whole debate about austerity and debt and a "liberal" President is a bunch of nonsense designed to conceal a so far extremely successful attempt to shift much more of the wealth of the world to a very small group of people who already have more money than they could spend in 100 lifetimes, and who own and operate the Fed along with the ECB -- your analysis will be proved wrong.
That wealth transfer has already taken place. As the Greek and French election demonstrate - the consequences of that transfer are coming due. Nothing is free.
Although I don't subscribe to conspiracy theories such as a small goup of people steering/controlling everything,
I agree with your premise here.
Bruce is oversimplifying, not to say dumbing it down, a little bit too much here:
The Fed can’t do that. It would (appropriately) be accused of supporting Obama and interfering with the political process in the US.
Yeah, and that also means more covert operations are also to be completely ruled out? Please.
You (Bruce) might want to take a look on how many occasions before previous elections the Fed eased especially strong, though at that time they still had other tools than only QE left.
"attempt to shift much more of the wealth of the world to a very small group of people who already have more money than they could spend in 100 lifetimes, and who own and operate the Fed"
Compelling argument, except you seem to have been out of touch for a while now. Here, let me catch you up.
Retail is out of the equities casino.
Got that? So, if they ratchet up equities, then they are just stealing from each other. Kinda hard to take over the world that way, isn't it? The HFT's (and the Fed's Wall Street handlers) are running the show. They are not being very successful at luring in the casual "investor". They need a plan B.
Are pensions out of the casino?
But it's not about stock prices. They are selling their stocks to the taxpayer. Equity prices are going up because the taxpayer is borrowing money to buy equities.
Inflation isn't a problem for those who get the money first.
If you are a few grasshoppers against a legion of ants, you better be sure they are extremely weak before going in for the kill.
Ah...the proverbial Straw Man argument. You use that a lot. And we all know why Tuco:
http://www.youtube.com/watch?v=HswzT8YCg4U
You're no Clint, my friend. But so long as you see yourself that way (or as McDowell...).
From straw man thrashing to evasion.
Keep it up, only 35 more to go!
http://www.logicalfallacies.info/
I think I just shit in my pants