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Guest Post: Why QE May Not Boost Stocks After All
Submitted by Charles Hugh Smith from Of Two Minds
Why QE May Not Boost Stocks After All
What if the Fed throws a QE equity-ramp party and the fireworks fizzle?
If there is one dominant consensus in the financial sphere, it is that the Federal Reserve's $85 billion/month bond-and-mortgage-buying "quantitative easing" will inevitably send stocks higher. The general idea is that the Fed buys the mortgage-backed securities (MBS) and Treasury bonds from the banks, which turn around and dump the cash into "risk on" assets like equities (stocks).
This consensus can be summarized in the time-worn phrase, "Don't fight the Fed."
This near-universal confidence in a QE-goosed stock market is reflected in the low level of volatility (the VIX) and other signs of complacency such as relatively few buyers of put options, which are viewed as "insurance" against a decline in stocks. The usual sentiment readings are bullish as well.
But what if QE fails to send stocks higher? Is such a thing even possible? Yes, it does seem "impossible" in a market as rigged and centrally managed as this one, but there are a handful of reasons why QE might not unleash a flood of cash into "risk on" assets every month from now until Doomsday (i.e. December2015--the Mayans made one teeny addition error in Column 13).
1. Bullish sentiment. Though Mr. Market has been chained and whipped by central planning, he still harbors a mighty resistance to rewarding the majority in any trade, and with most traders firmly on the bullish side of the boat, Mr. Market might break free of the Fed's chains long enough to capsize the boat.
As the saying goes, complacency leads to volatility, and stability leads to instability. Not all cycles can be voided by central planning, until Central Planners own 95% of every market (which seems to be the direction we're going here).
2. The technical case for QE yielding diminishing return. The Keystone Speculator (among several analysts pursuing the same line of inquiry) made a compelling case for a Fibonacci sequence playing out as each QE is launched:
Starting with the time, QE1 was a 13-month pump, so note the beauty in the Fibonacci sequence occurring; 13, 8, 5, 3. Thus, the current 3-month rally would already have achieved its target based on this metric. For the point moves and percentages, continuing along in the sequence would target about a 20% rally for the current QE3 pump, with about a 250-point move off the 1270-ish bottom which places price in the 1520's target area. "Don't fight the Fed" is the mantra, but the current rally appears far along already.
In other words, the length and rise of each QE-goosed rally diminishes with each QE. If this pans out, the QE3 rally is within a few weeks of topping out and reversing.
3. The Fed has trained traders to front-run its decisions. The Fed has played a masterful PR game of describing its next round of intervention for months, keeping markets aloft in anticipation of the "free money" flood.
In one of the unintended consequences that central planning excels in producing, the Fed has trained traders in Pavlovian fashion to front-run "risk on" assets, i.e. buy stocks before the Fed actually announces its latest market manipulation. As a result, stocks have already run up strongly so the "announcement" bounce is modest; everybody tempted to be bullish is already all-in, and disbelievers are wary of jumping in on the downside of "buy the rumor, sell the news."
4. The Fed has no surprises left. The market loves surprises, especially lavish gifts of free money from central banks, and now, 3.5 long years after the March 2009 lows in global equities, there are no more surprises left--unless the outright purchase of stocks by the Fed counts as a surprise. Interest rates are already near-zero, the Fed already owns a significant percentage of all long-term Treasury bonds (see The Fed Now Owns 27% Of All Duration, Rising At Over 10% Per Year, Zero Hedge), and it already bought $1.1 trillion in MBS and will keep buying more dodgy mortgages.
So what's left to wrap up and deliver to a market addicted to free-money surprises every few months? Nothing.
5. Correspondent David P. explained the real mechanism at work in QE3--the enabling of fiscal "nearly free money" spending. The Fed creates money electronically and uses the cash to buy $45 billion of Treasuries every month. Since the Treasury now holds a preponderance of short-term bonds to keep interest rates down (as explained by Zero Hedge), it must issue an insane amount of bonds every month to roll over existing short-duration bonds and fund the Federal government's $1.2 trillion deficit.
The only way the Treasury can get away with issuing trillions of dollars in bonds every year is if somebody buys and holds a big chunk of them, i.e the Fed. Here is David's explanation:
While Fed money printing doesn't make it to the marketplace, Federal government spending does, and Fed monetizing makes it so that Treasury borrowing doesn't negatively impact treasury markets and so Treasury rates don't increase.
Fed directly enables the Treasury to spend its 8% GDP of borrowed money each year. That money goes right into the economy, no ifs, ands, or buts. And we know Bernanke is forever talking about how effective "fiscal policy" is - and he's enabling it directly through his monetization.
The Federal government gets to borrow half a trillion effectively for free in perpetuity as the Fed effectively says, "Don't worry about $500 Billion of that 'fiscal cliff.'"
In other words, the pathway of the freshly printed money goes from the Fed to Treasuries and through deficit fiscal spending into the real economy. The amount of "new free money" flowing into equities may be a lot less than the consensus believes, as $500 billion of it has already been committed to enabling Federal deficit spending on a monumental and seemingly permanent level.
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It'll work: Bernie is going to use the new USPS bailout model - Forever Bonds
As long as QE sends Gold and Silver to the fucking Moon, I don't care.
Why do people do this?
State something is not possible, then provide the exact circumstances that negate it, all the while acting like they've said something worthwhile (and reasonable).
Why do analysts have to resort to such meaningless sophism?
Also, I'd say anything preventing a complete collapse to be a "boost," regardless of it failing to go higher.
Is language really this hard? Or is it so corrupted that this is the best one can do?
BUY the rumor
SELL the news
QE3 priced in.
next global boost will come from rumor of more EU bailouts.....or when China wants to re-inflate again. US actually wants China to re-inflate...so that high food prices cause social disorder while US figures out how to bring some manufacturing back to American shores.
Buy inflation....
That's all I need to know for now.
They are they don't give a crap about you that should be clear by the fact that they did QE-3.
HOT: Fed Prez Spills the Beans on the Excess Reserve Inflation Time Bomb
"The amount of "new free money" flowing into equities may be a lot less than the consensus believes, as $500 billion of it has already been committed to enabling Federal deficit spending on a monumental and seemingly permanent level"
It's a two fer Crony Investors buying foreclosed houses & MBS's will be enriched at your expense and obama gets to spend us right into the worse Depression ever!
Fed Virtually Funding the Entire US Deficit: Lindsey
Fed Mortgage Buying Helps Big Banks More Than Homeowners
The Wall Street gold rush in foreclosed homes
Short now on the esS&Pcontract from 1432.5. the eurphoria seems to be wearing thin.
No, Dionne Warwick Bonds: Forever and Ever.
Yeah...Sorry Tyler, Ben is creating the theatrical retraction that pretentiously resembles some sort of healthy pullback here. We will see a 14K plus Dow before election day - GUARANTEED!! If not - Nothing in the world makes sense! Besides, every pullback in the last 6 months doesn't look or behave anything like those prior to that timeframe. The gap downs are highly controlled, always and mysteriously as if being pushed against inertia back to the flatline. No...Ben's intervention is very much alive.
Oh c'mon Charles Hugh Smith....You heard Shumer tell Bennie "Now Get To WorK!!!!". The Asshole did and went all in. He can go "all in" many times yet. Until the printing presses stop, It's all Bullshit!
Hey I know where a pot hole needs the attention of 27 CA DOT workers. It is right at the end of my street and when it is dark it is very hard to see.
Fed President Richard Fisher Tells Joe Kernen On QE3: "Our Job Shouldn't Be To Provide Ritalin To Traders"
I included the transcript for non-video watchers.
Just hookers and blow??
why would high frequency trading machines need retalin?
sound like this central banker is behind the times....
Richard Fisher is a worthless pile of shit. I have more respect for the Fed doves, because at least they say what they really mean. Fisher is the designated "bad cop" on the Fed. His job is to come out and talk tough to preserve a semblance of balance from the Fed. In reality, he's completely part of the money printing, bank subsidizing scam.
Smith is just throwing it out there. BTFD
priced in. call me surprized.
Law of diminishing returns, with Hopium just as with Heroin.
Do as Japan do and you Dow will look like Nikkei
http://www.forecast-chart.com/historical-nikkei-225.html
Not sure what you can make of that. It's only been 23 years..., and counting.
I know this is off-topic but I thought others would enjoy . . .
http://jessescrossroadscafe.blogspot.com/2012/09/robert-johnson-economists-as-marketeers.html
the bernank is trying to squeeze everyone into the equities clown car
Reminds me of a joke.
Do you know what kind of car Bernanke drives?
He drives a Fiat.
'Good joke. Everybody laugh. Roll on snare drum. Curtains'
Evryone knows Fiat = "Fix It Again, Tony"
..Now its "Finance It Again Timmay".
Catherine Austin Fitts has said that in truth, QE3 is not primarily aimed at raising the stock market, but with its $40 billion/month MBS focused purchases is aimed at:
1. Making the enormous liabilities of mortgage associated fraud "disappear" (into the bowels of the Fed).
2. Once mortgage fraud - rather than being prosecuted and rectified - disappears, opening up now safe US property markets to (more) foreign investment.
Here's the full post with explanation: http://solari.com/articles/quantitative_easing/
What do you think?
" The Fed is where mortgage paper goes to die " ......I will promptly steal that phrase.
Being in the market for a house now I'm hoping he's doing QE to give some wiggle room to get rid of inventory. There's remarkably litle out there and it all goes for cash.
As I understand it, Catherine believes that investors (including foreign investors wanting a place to park assetts) have been holding back becuase of the fraud-soaked mortgage market and that once that once the fraud-laden mortgage paper is bought up and then "disappeared" at the Fed, a lot of investment money will rush into real estate, thus raising prices.
To sum it up the Fed is buying the election for obama and enriching the elites at our expense same thing many of us have said on site.
Correct.
So long as the Bernanke is paying the banks interest on excess reserves, eliminating the opportunity cost of holding these funds, especially with the Zirp environment, then the only new money going into the economy is the purchase of Timmays new Treasuries.
Ergo, fund (most of) the deficit and save the banks from their shit paper.
Bernanke and friends win, the productive class and savers lose.
It may or may not be a Depression, but it certainly is Depressing.
The State must survive at all costs. Including the cost of it's citizenry.
20 years from now when the economy turns up, the Dow will be at 75,000 and Ben will say , look we were right
And there will be no Fed bounce in housing either. The Fed recklessly pushed Fannie MBS 3.5 to NEGATIVE DURATION!
http://confoundedinterest.wordpress.com/2012/09/26/fannie-mae-mbs-spread-to-10-year-treasuries-goes-negative/
So we expect housing will bubble OR MBS investors will just get sickended and sell their MBS to Uncle Ben?
How is a negative duration even mathematically possible ?
Unlimited Congressional support for Fannie and Freddie expires on Jan 1 2013. Until then, F/F bonds are equivalent to Treasuries. After Jan 1, not so much. The Fed is providing a channel for investors to unload their F/F bonds before the deadline. And into next year and beyond, Fed support will be the only thing that allows F/F to keep operating and to continue to sell bonds.
Read this it might help answer your questions
snip
This new money will push up housing prices. As housing prices start to climb, bidders will start bidding up mortgage rates, as the rates go up, though, even more money will come out of excess reserves (Remember, there is approximately $1.5 trillion in excess reserves, that is a huge amount of money---never mind the money multiplier effect).
Which poses the question.
Why isn't this $500bn causing much more inflation ?
If this hypothesis is correct I would expect 20%+,or will it lag by 18/ 24 months ?
If so,the Fed's hands will be tied by interest on US debt,and hyperinflation will quickly
follow.
Welcome to Weimar, and have a nice day.
You'll never get inflation with 0 or negative velocity....
Or an economy either.
Velocity or no... the rest of the world will soon start to dump the Treasuries and the $ will shit all over itself. That brings it's own kind of volocity.
"Never" is a long time. try not to blunder so much.
Since the S&P's not under 700, I think QE3 *is* boosting stocks.
It was clearly a forward looking statement if you read the whole article.
Dead and not Stable
Who sets the price for all this stuff the fed is buying, or do they just say fuckit and pay par?
You mean all those REMIC trusts that have no promissory Notes in them ?
Not sure how you value nothing.
Sure the mortgage servicers are happy though, as they will I'm sure no longer have to
fund the income stream to even pretend the MBS have value.
They pay par; that's the whole point; to avoid disaster for the Banks.
QE3 was only meant to keep the markets afloat until after the election. After that, all bets are off.
"In other words, the pathway of the freshly printed money goes from the Fed to Treasuries and through deficit fiscal spending into the real economy." Hate to bring up the ugly truth Ben, but all government spending is overhead. Not all overhead is bad, in an office you need chairs, desks, the lights on and all that sort of necessary overhead. But we need a high speed rail in the middle of nowhere like we need to make Greece the 58th state.
A high speed rail to carry my sorry ass from Denver up to Vail in the wintertime would be nice. What's a little inflation in corn, oil, and whiskey going to hurt? C'mon, Benny! I'm in a swing state fer cryin' out loud. Where's my high speed cho cho?
Why doesn't the FED just buy stock?
Then it could go short to .
With the massive computing power at its' beck and call, it could be the king HFT.
I don't believe the Fed buying stock is allowed under the Federal Reserve Act. But the real question is, if the Fed did buy stocks, who would have standing to sue in Federal Court to stop them?
This system deserves to die an awful death so that humanity will never travel down this road again.
I wish,but this is not the first time we've been here.
The Fourth Turning laid it all out.
The 99% get completely fleeced every 80 years or so.
They just get a trim in betwee those Turns.
Then its wash,rinse and repeat.
How do you want your buz cut ?
The Roman Empire published public proclamations that they would pay all roman citizens every month; it was late, already; and they didn't actually have the money. I'm sure it's not that different this time.
Suppose that you are a the manager of a bank with a pile of houses whose mortgage payments are past-due, but that you haven't foreclosed on because that would force you to take a loss (and would also glut the market with foreclosed homes for sale). Are you going to make new home loans with your QE money? Or are going to just let the money sit as excess reserves earning a safe 0.25%?
No matter how much money Bernanke pumps into the system, the banks are not going to start making new home loans until the overhang of foreclosed homes is gone. The only thing that QE3 does is to allow the banks to sell their existing MBS to the Fed at a profit (because interest rates have dropped), pay their executives big bonuses, and accumulate even more excess reserves.
Yes, and to the bankers in charge that's all that matters. And they get to laugh and chuckle while they pull off this clever scheme for easy plunder because the rest of us let them get away with it.
and besides that - the truth is that even if you lend to a guy that puts down x% up front and has the job and credit to pay for it, you know he is underwater next year.. so unless you can find a sucker that has bought into your lie about the 'recovery' with 100% cash - no trade. the game is over.
REALLY? Only the ZH editorial board believes that. ("QE pushes stocks higher! QE pushes stocks higher!") As the sole resident of Bullish Rage....I beg to differ oye ye anointed up's got me down one. Leaving facts let alone reality behind (and indeed I should be the last one saying this...yet I AM the only one with the facts....and reality...on my side on this...go figure) how are we to respond to "when the Fed says we're buying every Treasury ever issued...forever going forward" along with....emphasis added...EVERY MBS....that suddenly those assets soar in value?...???. I SAY BECAUSE THE FED IS BUYING! Yes? No? God I want to kill you too? Hey, man...I'm hip. It's a mystery to me that the trillion dollar DEBT Market has convinced itself that IT must front run the Fed. Sorry but not only is that not Ben Bernanke's fault...some might consider it his job. Of course if the Chairsatan and I are wrong this...does it matter? I say ABSOLUTELY NOT.
Mixing recreational drugs is not advised.
Silly drivel. Ignore. Almost Graham Summer-esk.
A wide range of asset classes will rise in price, initially slowly but steadily, at a later point in time faster and furiously by this signalling a nearing end. Ben Benanke has the US$ at his disposal to let assets rise - and that he is going to do no matter what the consequences will be.
PM's away
If inflation can lift the price of a cheeseburger, but cannot lift share prices, tells you that the Bernanke is not sleeping at night.
The masters of our new command economy decree that even money losing corporations must have a rising stock price. It's all for the greater good, you see!
Marketwatch says QE 3.5 in December will be outright purchase of treasuries without the twist.
“I think Bernanke more or less told us...they would move to outright buying of Treasurys,” said Mike Moran, chief economist at Daiwa Securities USA."
http://www.marketwatch.com/story/feds-next-move-buy-more-treasurys-2012-09-26?dist=afterbell
This is from an article back in 2007:
"Bernanke himself revealed the various policy measures the Fed might take in response to a crisis: buying government bonds, providing overdrafts and other short-term credits to banks, currency swaps (to boost the dollar), and “securities lending,” that is, lending money to institutions to buy stocks."
http://www.investmentu.com/2007/January/20070111.html
In his QE3 announcement, he made it clear other step would be taken. I don't think a pull back in the market is necessarily a sign he's giving up. Basically it will be seen as a healthy pull back. Until inflation becomes more painful than unemployment, I don't see the fight ending and with Obama about to get re-elected, people (according to the polls) seem to be okay with what's happening. That's not to say I like it or support it, but when you step back and look, it just seems to be where we're at.
So? It is not like that will make any difference at all. The only thing that will is an increase in Federal Deficits, or the Fed buying gold. (I don't think the Fed can legally buy stocks.)
Just a little mousey Man that was worried about HIS Job. His voice quivrs like a scared little Boy who did someting wrong. While, he destroys the Middle Class, Seniors and all of the starving People around the World.
to some degree, he (ben shalom) is aware that he has a mother and father. he might even have an understanding that he isn't the only person on the planet. lloyd is doing god's work and god only knows what jamie is doing, and so that is none of our business because we aren't holy rollers and because we should learn to trust him. all these guys have our best interests in line before their own.
in the meantime - lets' check out at the end of the year. 35 million dollar bonus. montag at bac, blankfien at gs. dimon at jpm. maybe a bit less - vikkie at citi. etc. etc. nice job guys. bennie has your back.
Seems to me it's only a matter of tme before overwhelming core credit markets will be certain realization that, securities offering historically low yields in no way will maintain their purchasing poiwer. Central bank recklessness is creating an environment where physical shortages are resulting from expanding shutdown of businesses whose margins are being destroyed, which is causing supply-constrained price increases (much as we're seeing at the pump) whose effect is not likely temporary, and so in all probability will precipitate investor demand for higher rates of return. Being criminally insane, central bankers no doubt will only double down seeing the result of their policy prove not only ineffective, but in fact destructive. This, of course, will serve only to accelerate the negative feedback loop.
Thus, dynamics specific to hyperinflationary shutdown of the physical economy invariably will defy those whose expectations are for increasing asset prices. That's how I see it anyway.
Don't kid yourself. Ben will have Ken Griffin in there tomorrow buying the mino es with both hands. He made Bill Gross richer than ever. The idiot from gs.treas--Kashkari gave him that idea that he got from Timmy. This whole fucking game is so crooked it smells like a sewer. There will never be a free market again in your lifetime. There will be a serious war where the USA wont be attacking a small, weak, unarmed country like the past. Stay tuned.
Don't kid yourself. Ben will have Ken Griffin in there tomorrow buying the mino es with both hands. He made Bill Gross richer than ever. The idiot from gs.treas--Kashkari gave him that idea that he got from Timmy. This whole fucking game is so crooked it smells like a sewer. There will never be a free market again in your lifetime. There will be a serious war where the USA wont be attacking a small, weak, unarmed country like the past. Stay tuned.
With regard to #4, they can announce 100billion per month instead of 40 billion...etc.
It is funny when people doubt the limitless power of the Fed. The Fed prints as much money as it wants. And it has the guns to make sure it remains the world's reserve currency. QE will go on as long as nessesary.
they cant make people produce
dont forget about central planning incentives from Uncle Fed Fuckup, like no-one-sees-it-coming inflation.
"....and so Treasury rates don't increase..."
and why is this boys and girls? i knew you knew......it's because of interest rate swaps which will swallow ms and jpm.....after which comes the deluge....it will happen and is without remediation.
Should I now sell on the fact of QE3 or buy on the rumor of QE4? Is it now just a wash?
What would happen to equity values if corporate profits turned negative? It could happen - I've seen it happen.
Corporate profitability (or lack thereof) used to be a big factor in equity values. Really. Look it up if you don't believe me.
ZH says:
"market is within weeks of topping out and reversing"....
NO !! it HAS already TOPPED OUT @ spx 1475 1 day after QE3..and eur topped @ 1.315, same day !!
Correct.
You can polish a turd all you want....
Charles is absolutlely correct nearly 100% of the time.
The QE was priced-in, and they wanted more. Infinite QE is the road to infinite diminishing returns.
We, Charles included, predicted as far back as 2007 that we'd rapidly run out of bullets in our deep, deep quest to protect the Backsters, and their "TBTF" "Banks" from failing and falling into the Legal System, where no White Collar Criminal should ever be, as so say the other White Collar Criminals rotated from Wall Street into Government Relulation positions to protect their peers.
We'd run out of bullets specifically because the White Collar Criminal "Regulators" would refuse to take the proper Legal actions against their own. Their foot-dragging would result in an outrageously long Recession/Depression as a result.
EVERONE not connected to the crime(s) saw this and SCREAMED it.
No one liistened. We were all laughed off.
And here we are. Out of bullets. EXACTLY where we SAID we'd be, and the same FREE MARKET UBER ALES!!!!! people are casting excuses and aspersions to this day.
Their constant refrain is always: "WE didn't fail-- we were FAILED!!!"
Right. Wanna buy this Bridge I have for sale in New York City for super cheap??? Only three other parties claim ownership to it, but, I'll sell you this slice of a Premium Tranche on claim to ownership.
Sound familiar?
so where do you run?
NLY
CEF
physical assets
PM (Au, Ag, Nobles)
Base Metals
farm and agriculture futures
Energy
cash for the short term
farm land in South America
NasdaQ
pallets of nickles and ammo (ala Kyle Bass)?
???
I wouldn't put outright equity purchases out of bounds of this tyrannical govt for one second. Way past time for states to go their own way.
Point 4 and the conclusion sums it up perfectly. The Fed has no surprises left and the amount of 'new free money' flowing into equities may be 'a lot less than the consensus believes. QE is not a long-term solution. Printing money cannot cure deep rooted problems. Equities are increasingly at risk globally.
www.shareholderwatch.co.uk - 'Working to ensure all shareholders get a better deal'
Bullshit. One spark and the forest goes.
Arguing bout the size and source is a fools game -- just like equities.