Here Is How Much QEternity Has Already Been Priced In

Tyler Durden's picture

With global growth slowing, global trade tumbling, and earnings revisions falling rapidly, equity market outperformance has been (as we noted earlier) based on the Fed/ECB's largesse. The unanswered question is - how much is now priced in? Given recent 'stability' post-FOMC, it seems the follow-through is not there (especially if we look at sectoral performance) and based on David Rosenberg's estimate of Fed QE's impact on stocks, we think we know why. In the last three months, the S&P 500 has 'outperformed' the Fed balance sheet by around 220 points - which equates to a pricing-in of around 11 months of additional QEternity.


S&P 500 vs Fed balance-sheet...


Via David Rosenberg:

As I have said in the past, there are six different factors that drive the equity markets at any given point in time, and in some periods, one or a few factors dominate, and in other periods, these same drivers can be on the back burner.


These six items are liquidity, fund flows/positioning. technicals, valuation, sentiment, and the fundamentals. They continue in the aggregate to provide a very murky picture, but the fact that the market has hung in following last week's massive gains tells me that the first two factors are dominant at the present time.


The Fed has bolstered investor confidence with its massive monetary easing, even if it doesn't work for the real economy - our research from the past three years shows that every $40 billion of QE boost (QE3 at a pace of this amount per month) to the Fed's balance sheet, as a static stand-alone event, adds about 20 points to the S&P 500. Then there is the fact that the hedge funds, in aggregate, have lagged so far behind this year that they will be forced into the market to avoid embarrassment - and redemptions - at the end of the year. We are hearing some hints of some asset mix shifts taking place among institutional investors too. Technicals, as far as I can see, are neutral (though improving over the past week) as is valuation though forward WE ratios are at the high end of the range for the past 20 months at 14x (and the Shiller cyclically adjusted multiple is 25% above historical norms).


Sentiment and fundamentals remain the two primary sources of downside risks. On the latter, operating profits are now declining in tandem with reported (GAAP) EPS and guidance overall is to the negative side and by a larger than usual margin (four to one). Analyst downgrades are outpacing upgrades. I look at FedEx as a cyclical bellwether and shipments are contracting. As for the former, the bull camp is getting crowded — problematic from a contrary standpoint.


At the June lows in the S&P 500, the Investor's Intelligence Survey flashed just 34% bulls — that number as of this latest week is up to 54.2% (from 51.1%). The bear share fell to 24.5% from 25.5% and is actually lower now than it was when the market was carving out an interim bottom in early June. Take note that the bull/bear gap has widened out to 29.7 points from 25.6 points last week and 7.4 points in early June (when sentiment was very low and the VIX was at 26 versus 13-and-change today) — a spread of over 30 in the past typically characterized an over-extended market ripe for a pullback: and bullish readings of 55% or higher in the past was a warning flag for those investors playing from the long side.

Charts: Bloomberg

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TheSilverJournal's picture

BernanQE has a stated goal to lift equities and housing prices so people feel wealthier, and he has a printing press to make sure he meets his goal.

Translational Lift's picture

How fruckin stupid....Announce QE3 to infinity when S&P is at an all-time high.....that'll be effective alright.  Not too obvious he's trying to get the bummer boy and himself reelected!!  And these are the monkeys that are running things!!

flacon's picture

How much have silver and gold priced in QEternity?

zaphod's picture

Another way to look at this is the market has priced in the ONLY next 11 months of QE printing.

Just wait until the market realizes there will be another 10-20 YEARS of QE printing, it will definitely gap UP that day...

Ungaro's picture

Every $10B of QE gets you 5 S&P points. At $85B QE/month that should be 42 S&P points/month -- FOREVER! What's not to like? 

Translational Lift's picture

What's not to like?

What's not to like....Vol is at an all-time low now, once you hit a certain price all you will have is two HFT computers trading with one and another on whatever news is prevalent and nobody in the market...........

TheSilverJournal's picture

Pretty much by definition, if the printing goes on for an eternity, then prices will keep rising. It's a no brainer, precious metal prices will rise until interest rates are raised enough to get ahead of inflation...which will never happen. BernanQE has cooked up some nice hyperinflation soup that's just about ready to be served to all of humanity.

Bear's picture

No, no, no ... he 'said' he wants to do it to lower unemployment.

StychoKiller's picture

Silly Bear!  New QEternity is BOTH a price stabilizer AND an employment incentive!

eurusdog's picture

So SPX 2000 is possible this year!

Meesohaawnee's picture

so making it obvious someone knew and was frontrunning is a great way to get retail lathered up and ready to rumble again? Isnt that the true goal? yea that should get retail's trust back

Hubris hangover's picture

Fed has too much free rein

Maurice Newman

To most of us, central bankers are arcane figures. US Federal Reserve chairman Ben Bernanke and his predecessor, Alan Greenspan, are so influential that Washington, Wall Street and their global equivalents dwell on their every utterance.

Milton Friedman maintained that “any system which gives so much power and so much discretion to a few men, [so] that mistakes . . . excusable or not . . . can have such far-reaching effects, is a bad system”. He would undoubtedly have endorsed Republican presidential candidate Ron Paul’s Federal Reserve Transparency Bill, which was passed by the US House of Representatives last July. It has yet to go to the Senate. Its proponents maintained that the central bank had failed to satisfactorily account for trillions of dollars dispensed to some of America’s and Europe’s largest financial institutions and corporations.

The Government Accountability Office, when reviewing the Fed’s actions, formed the view that the US central bank had exceeded its legal authority when in certain cases it had extended credit. There are also questions about the Fed’s accounting practices and claims that its balance sheet is misleading.

Whatever the Fed’s legal standing or accounting practices, it has consistently applied conceit and easy money in equal measures in an attempt to deliver positive wealth effects. The Fed’s own report, released in June, shows its policies have instead resulted in significant wealth destruction. A typical American family’s net worth fell 39 per cent between 2007 and 2010, to levels not seen since the early ’90s. The US Census Bureau reached a similar conclusion and identified those aged 35 to 44 as having lost a whopping 59 per cent.

Quantitative easing 1 and QE2 have now vanished without trace. But, undaunted and like a gambler eager to return to the table, the Fed is back at it with what could be its last throw of the dice in the form of QE Infinity.

Leading American economist Dave Rosenberg wrote recently, “The market distortions from the Fed’s [latest] intervention in trying to influence relative asset prices, and the resource misallocation that will ensue will probably prove to be a massive headache for the economy and policy down the road. But this is clearly the price the Fed is willing to pay.” Is it a risk the American people and the rest of the world should be prepared to take?

Discouraging thrift and encouraging risk may resonate with speculators, but following a reckless institution further up the risk curve is certainly not recommended.

The Fed has also not explained how its objectives will reconcile with President Barack Obama’s proposals to increase risks by lifting income and capital gains taxes. Moral hazards abound. The truth is the Fed (and other central banks) has embarked on an unprecedented experiment to buy time and, based on recent experience, probably little else. The Fed is taking the world in a direction it has never been before, and I think the public is totally unprepared.

According to the Organisation for Economic Co-operation and Development’s chief economist, William White, not even during the Great Depression of the 1930s were policy rates and longer-term rates reduced to such low levels. In a paper, Ultra Easy Monetary Policy and the Law of Unintended Consequences, White says the Fed’s policies carry the danger of boom-bust processes which might threaten both price and financial stability. He cautions there are limits to what central banks can do and that eventually, the cumulative effects on overstretched, complex adaptive systems can be unpredictable, disproportionate and undesirable.

The situation the US and the world face is that governments burdened by debts and deficits are largely paralysed when it comes to more fiscal intervention.

The Fed and other central banks are filling the void and crossing the line which divides monetary from fiscal policy. But what seems to be overlooked is that we have a solvency, not a liquidity, crisis. Moreover, as White points out, the flow channels through which central banks are operating may be less effective in stimulating aggregate demand than previously.

Friedman was right that the Federal Reserve system confers too much unaccountable power on a few who have used it to tilt the economic system in favour of the banking cartel which owns it. On the eve of the Fed’s centenary year it is time to review its independence. While elected representatives may behave no better than central bankers, they are at least accountable to the people.

Maurice Newman is a director of Queensland Investment Corp Ltd and adviser to MMC Group of Companies

The Australian Financial Review

davidsmith's picture

There's just one flaw in your argument: your assumption that only $40 billion is going into the prop-up.  What would you say, gang, is it actually about $350 billion?

davidsmith's picture

And sure enough, right on cue!  Note that barring some expansion of the Fed's purchasing authority, some new financial instrument will be needed to get it into the purchase of other bad debt.  And that financial instrument will be invented.


So far, everything is going according to Dr. Schacht's playbook.  Does anyone know who HE was?




SAN FRANCISCO (MarketWatch) — The Federal Reserve could expand its stimulus package to include assets other than mortgage-backed securities if the U.S. economy fails to respond to its latest effort to jump-start the economy.


The Federal Reserve building in Washington.

“Unlike our past asset-purchase programs, this one doesn’t have a preset expiration date,” said San Francisco Fed President John Williams at a speech at the City Club on Monday. “Instead, it is explicitly linked to what happens with the economy.”

At its monetary-policy meeting on Sept. 13, the U.S. central bank said it would buy $40 billion worth of mortgage-backed securities per month as part of a stimulus plan colloquially known as QE3 — for Round 3 of quantitative easing.

“We might even expand our purchases to include other assets,” he said.

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While the Fed is limited to what it can hold on its books, it can increase purchases of U.S. Treasurys, mortgage-backed securities, and debt issued by agencies such as Freddie Mac and Fannie Mac, Williams said.

He also suggested that the Fed could extend Operation Twist beyond the end of the year, when it is due to expire, and continue buying longer-term Treasurys if the economic recovery does not make substantial progress.

There are measurable and significant impacts from Fed’s policies from QE1 and QE2 in the market, but economic growth is not strong enough and still has a long way to go, he said.

Meanwhile, unless Europe heads nearer a worst-case scenario — a wholesale breakup of the euro zone — Williams considers the domestic “fiscal cliff” scenario a bigger threat to the U.S. economy, he said. The fiscal cliff refers to the federal tax increases and spending cuts that set to go into effect under current legislation.

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“I don’t expect all these tax hikes and spending cuts to take place as scheduled,” Williams allowed. “Still, there’s little doubt that a number of austerity measures will hit. I expect that to slow our economy’s forward progress.”

Williams projected U.S. gross domestic product to expand by about 1.75% this year, followed by an acceleration in growth to 2.5% in 2013 and 3.25% in 2014. The unemployment rate, he said, is likely to ease to 7.25% by the end of 2014, while inflation remains below the Fed’s target of 2% “for the next several years.”  

Remington IV's picture

$40Billion  ... will become $60 Billion by year end

Translational Lift's picture

More like $80-85Billion.........per month.....

boiltherich's picture

It is now about 85 billion between the existing programs and the new QuEenofthedamned.

Yet that simply is not enough for the voracious greed of the Wall Street pigs, look at this story over at CNBS today:

Fed May Need to Boost QE 'Dramatically' This Year: Pros

From Morgan Stanley chief equity strategist Adam Parker's point of view, the Fed soon will find its new program inadequate.

"QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end," Parker said in a research note.


So our piggy little friends think the goal of all this printing is to make them richer via higher equity markets. And yet there are still people here planning to vote Romney. The oinking porcine species inhabiting lower Manhattan are already saying to the Fed this is a failure unless you give us multiples of that amount, and how does any decent human being react except with outrage so volatile that every last one of them swings from a hastily organized gallows? The Fed does not need to vomit up hundreds of billions per month in inflation, the IRS needs to claw back hundreds of billions per month from those that have looted you and me.

Bear's picture

Only 11 months ... is that all?  I think I'll change my name from Bear to Bull

Howdan's picture

Something stinks to high heaven here! As always with the financial terrorist Bernank he gets it wrong, wrong, wrong. Just checkout the Youtube vids of him in 2007/8 saying there will be no housing/mortgage crisis and that they expect moderate growth in the economy.

And another thing  - for months, nothing on QE, then all of a sudden 2 months before Barry O'B needs to get re-elected.....WHAM....QE3 big time out of nowhere.

It's sickening to think of them printing trillions of dollars which go to the TBTF banksters instead of ordinary people.

Markets have been so debased, abused, broken and rendered so utterly ridiculous (and totally disconnected from reality) that it just beggars belief.

Snakeeyes's picture

Seriously, wait for QEMBS to fail (no money velocity / tight mortgage standards) and MORE QE to offset the gigantic increase in taxes!

To paraphrase The Carpenters, "They've only just begun ... to print."

boiltherich's picture

Makes me scratch my head in wonder.  Between the fraudulent statistic keeping and bogus accounting they had managed to bring unemployment rates down to just 8.1% which is not yet good enough but is a damned sight better than it was, what happened?  Did they lose their nerve about making the birth/death model just work a little better?  Did they get busted over the participation rate?  Because we all know real employment rates and earnings mean zero to TPTB, and that QE anything is just the final nail in the coffin of American democracy and justice, that money is simply nothing more than the "well deserved reward of a sybaritic life" for our "job creators."  Maybe the job creators just said enough, no more new fake statistics till you give us several trillion more dollars.  My income is only growing at double digits lately and that is just not enough. 

Wow, am I glad I got a passport from a neutral island nation with plenty of rainfall and an advanced agricultural base.  Time to get out before the doors close.

Galactic Superwave's picture

I sure wish Tyler would quit posting these doom and gloom posts (sarc). We need people to be happy and confident the market is going up forever so that the sentiment indexes get in the ejaculatory range. Then, and only then, will the markets fall. (Unless there is a geopolitical black swan out there, of course.)

nickels's picture

Bernanke= Mickey Mouse in "Sorcerer's Apprentice"

davidsmith's picture

Study fascist "economics."  These will tell you exactly what is going on.  The most important economist of the 20th century was not Keynes, it was Mussolini.

White.Star.Line's picture

QE will stop when the last foreclosure notice is delivered to the last rebel left in the American colony.

White.Star.Line's picture

QE is just another way to destroy the human spirit by making his labor worth nothing.

All in the program of devaluing, degrading, demoting, desensitizing, despiriting, deculturing, destabilizing, etc. etc.....

Ungaro's picture

Every $10B of QE gets you 5 S&P points. At $85B QE/month that should be 42 S&P points/month -- FOREVER! What's not to like?

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achillez's picture

Don't you guys get tired of being bearish and being wrong? I have read this blog for the past year and all you guys have been preaching is how bad everything is, and all the while the market has been ripping for months. Here we are a year later, markets near all time highs and you are still at it. My performance the past year would have been much better had I not visited this site ever...

You are playing for a move that might happen in 3 months, 3 years, or 10 years... who knows. Why not go long till the party is really over, not anticipate it and be wrong day after day. Just some thoughts...