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SocGen: End Of QE3 Will Lead To 15% Market Drop, Surge In VIX, Followed By "The Big Sleep"
Curious why recently the US stock market has dislocated from its most trusty correlation counterparty: the size of the Fed's balance sheet (which increased another $13.4 billion last week and up $939 billion Y/Y to a record $3.75 trillion)? Simple: the market is now starting to factor in the end of QE, because while tapering may have been delayed it has not been cancelled. And while the Fed has done everything in its power to destroy the market's discounting function, when it comes to frontrunning the Fed the market can still think ahead. Especially when frontrunning is no longer on the table.
Which is precisely the basis for the just released forecast by SocGen's Alain Bokozba, which extrapolates what will happen when the Fed's balance sheet stops rising, and applies the same drop to stocks as was seen at the end of QE1 (-16%) and QE2 (-17%) and concludes that the "end of QE3 would cost the S&P500 15%" and that following that, absent even more QE of course, "the US equity index should remain relatively flat, burdened by higher yields (rate hikes in mid-2015), a higher US dollar and limited earnings growth (Return on Equity is already high), but supported by better economic prospects and a new shareholder value cycle, staving off a bear market." Or, as SocGen calls it, "the Big Sleep."
Charting SocGen's latest expectations:
SocGen's commentary:
Between now and the end of the year, any decline in the S&P 500 is likely to be limited given that the Fed is still injecting liquidity. We expect the S&P to be at 1600 by year-end, in line with our technical analyst’s forecast (1560+/-10pts).
SG economists expect the January FOMC meeting to be the most likely timeframe for tapering. They look for the first move to be $20bn (instead of the $5-10bn previously expected by the market).
We expect the drop to accelerate at the start of 2014 as the market starts pricing in the end of asset purchases (i.e. well before the market’s Fed tapering expectation). The S&P 500 should dip to 1450 on our estimates, down c.15% from the peak.
Keep in mind the S&P500 fell by -16% after QE1 stopped and by -17% after the end of QE2. From Q2 2014, the S&P 500 should start to recover slowly after a technical rebound (c.+7%), as "Growth" returns to the forefront. We see the S&P 500 at 1600 by the end of the year, so 2014 should be rather flat.
In the two to three years that follow, the US equity index should remain relatively flat, burdened by higher yields (rate hikes in mid-2015), a higher US dollar and limited earnings growth (Return on Equity is already high), but supported by better economic prospects and a new shareholder value cycle, staving off a bear market.
Or visually:
But perhaps the best way to prepare for the Fed's withdrawal is not through risk assets, but their volatility derivative: the VIX, which SocGen expects to soar once the transition from QE3 to nothing begins.
History shows that the implied equity volatility (VIX) regime is highly sensitive to the Fed Funds rate. When the Fed tightens its monetary policy, the VIX tends to rise. QE has pushed the theoretical Fed Funds rate in negative territory. Now the start of the exit strategy process (including tapering, follow by the debate on the first rate increase) should cause the VIX to rise.
Of course, the reflexive corner the Fed has found itself in means that a large enough VIX surge and a big enough drop in the S&P, would simply usher in QE4 (and 5, and 6, etc.) as the stock market is the only thing the legacy status quo regime has left to preserve confidence in a failed monetary and economic regime.
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15%? Sure. More like 40%, minimum. Back to 1000.
75%.
In a world where the Fed would not print money, you'd be right. The Fed will turn the printers back on turbo when we near 1000.
Probably won't do much good this time.
The free opinion of these worthless fucks is exactly that.
"good" and "artificially rising stock market" are two different things, so yeah, more printing won't be good, but it would probably keep stocks on the up.
bs paper: QE will not end, ever. it may be tapered for a short while, but in the end Yellen will at very least double current levels of QE. the only way QE ends is when The Fed loses control and that could happen at any time.
Since the March 2009 low, the stock market has risen about 40% slower than the rate of increase in the fed balance sheet, so, yeah, 40% crash has actually already happened in real terms. Which is also why I'm completely not buying the tapering argument, the Yellen signal confirmed this (I actually see an increase in QE after a "disappointing holiday shopping season", since us plebs are completely out of debt atop debt fiat to utilize for random shit). I don't see the band-aid being ripped off until there is a politically opportune time to do so (specifically, 2016), and even then, it's only to apply a bigger band-aid.
A medical analogy: Don't count on anything productive coming out of the coma patient. The patient is 100 years old, addicted to everything in the medicine cabinet, has zero lividity and cannot function in any way.
All the SocGen is attempting to do is stave off the DNR order and keep the corpse alive for another day at the cost of the resources being needed else where in the hospital.
Grief follows many paths, but when it's cost is the pain and suffering of people that could actually USE those resources...eventually the Doctor makes a professional judgment on the situation for the good of all in the hospital and not a single comatose crack head patient and the families that have put their lives on hold because of it. Closure is needed for all things that end.
It sucks, but Mercy is a double edged blade.
the only thing that prevented larger correction previously was the NEXT QE - if there is none then gold , silver, guns and ammo are nthe highest alpha you'll find
The Big Sleep is also known as a coma.
In my coma, I can see higher economic growth too.
Tapering, what the hell is that?
Per the premiere episode of Ren & Stimpy, you don't wake up from the big sleep.
the fed will double qe to 170 billion a month before they taper, because they will never taper. mark this post.
Keep dreaming dude. It's all over.
Incredibly Bankrupt Italy turns positive, obviously a 40.1% youth unemployment rate is bullish
Long unemployed youth!
Quiet! You'll excite the Catholics!
What? http://www.pictureshowman.com/images/Big_Sleep.jpg The http://www.youtube.com/watch?v=Uoni_tnPq0M ? How original.
Bernanke's solution:" No problem, we'll get faster printing machines! There, problem solved!"
Okay repeat after me....the fed is not going to end QE. They are only going to print moar.
Monday humor.
People will freak out when they see moar printing has moar negative effect now.
The Fed will become a useless impotent relic when its major bank members go bust and have no means of buying moar worthless paper from the US Treasury.
Watch for the US Gubment start selling off assets such as national parks and the Strategic Petroleum Reserve and various federal buildings along with finally closing USPS and NASA. And add to that no more big oil or farm subsidies along with cutting foreign aide.
-51%
The markets won't freaking drop, why don't you guys understand that.
This debt ceiling debate and Government shutdown was planned as everything else.
I agree, this is all a sideshow
LA LA LA LA LA...
"This debt ceiling debate and Government shutdown was planned as everything else."
erm...dont buy the "Boehner, Reid, Pelosi, McConnell=evil geniuses" meme
So dump equities in early 2014, buy the VIX, sell the VIX mid 2015 and settle into divy stocks during the sleep? or BTFD?
End of QE? Yeah sure...Clearly they haven't been paying attention.
I couldn't agree more. Ben Hunt wrote a great observational piece this week on the Fed and the future of the markets. QE isn't going to end. It can't. And so long as the velocity of money continues to drop and so long as they keep buying long-term UST then this game is going to go on for years. I know everybody here is waiting with baited breath for the big crash but I don't see it coming. Just ... sputtering.
More lies and propaganda. Based on what I am seeing, the plan is to have another set of crises in 2015. There are no market forces. Prices are determined by the banks. The banks have put "wage and price controls" on all of the US markets. If a price goes up then it is because the banks have decided they go up. If a price goes down then it is because the bank has decided that that prices go down. THEY DO NOT CARE ABOUT MARKET PARTICIPATION. They have intentionally killed participation and taken control.
THINK! Specialists and Market Makers set price, now by computer. They can program in their set of prices and just let it go. They do not care if anyone else participates. The connected win and the disconnected lose.
So, the question is not "what will the markets do?", but "what will the banks do?" in deciding what will happens with prices. Why would Soc Gen, a connected bank tell the public what it planned to do in the future? (Answer: They wouldn't)
DYODD
Right when they've got everyone completely convinced of 1 thing, they'll do the opposite...what they want is a sudden panic to seize everyones 401K's and pension funds next. That's about a cool $5 trillion.
"History shows that the implied equity volatility (VIX) regime is highly sensitive to the Fed Funds rate"
History shows that the Fed shorts the VIX to keep the casino volatility index low, to lull the muppets to sleep. VIX is just another rigged game in the casino.
Keep fishing for those suckers, Soc Gen. You are part of the club, after all.
How soon before the FED uses a new kind of QE to buy stocks and bonds off stockholders such as insurance companies and other large stock owners?
Good read
Forget the Shutdown! US Economy About to Hit the Vortex of a Structural Trap
Read more: http://www.minyanville.com/business-news/markets/articles/structural-trap-liquidity-trap-tarp-the/10/7/2013/id/52103#ixzz2h2m0YR8t
"Boom! Forget the shutdown. With the debt ceiling we are about to hit the vortex of the structural trap. It’s like we are approaching the place where the structural trap, politics, and monetary policy all converge at zero. The economy, the government, and the central bank are all at maximum ineffectiveness. What is the endgame?"
Wake me when the 10yr is over 3%. Until then I'm not seeing the markets account for tapering
To taper or not to taper? When the direction of markets are based upon the action of a few bankers we need to reset.
We have a real economy. Look at the companies in the DOW, S&P, Russell, private businesses, people working (not enough), trains, planes, trucks, ships, autos, mines and we are stuck waiting on a few bankers and politicians. Granted we are moving very slow but we are moving. We just need to stop those trying bury us in debt. We are sick.
Hard physical limits - zero sum game - no more "free" growth.
Sorry.
Agree but we have a good base to work with and hopefully we will settle into some steady as she goes course and not let a few pull us to the bottom. I never expect us to lead the world or have unrealistic growth again, too many new qualified competitors. But hopefully we can find stability and stand tall with it. I think we look to much at the Fed/Washington for our solutions/reality. I'm dreaming here, be nice.
Haha a real economy. I have six pack abs buried deep in my stomach fat.
If you have six pack abs, we have a real economy (buried under the FED/Washington). no matter, that was funny. up 1
They couldn't taper 10 Billion. Now comes the same retoric we heard all summer. Complete ass clown show.
I thought we were already in QE4 anyway? This shit isn't going to stop. They'll be pumping it to 100Billion/month eventually. They don't have the balls to pull the heroin needle out of the arm of the junkie markets and they never will.
Or maybe they'll use more smoke and mirrors to fake like they've cut the junk back to like 60 Billion/month and then secretly pump 40 Billion more to the markets to make it look like "tapering" isn't having a negative effect?
It's not like they haven't lied or "broken the rules" before, right? lol What do they care about lying to us more when the state run propaganda media will always cover for them.
Technicals suggest maybe 20%.
But possible difference is at end of QE1 and QE2 market could still price in chance of another round of QE. If QE3 ends then does that mean end of QE? If so then a lot more than 15-20%.
Unless Fed goes BoJ and buys anything that isn't nailed down.
Which is all they know how to do. So...15% and get ready for QE4.0
I expect the announcement of in increase in QE in just a month or two. I also expect the 'world' (not mine) according to the media to naturally be "shocked" when it happens. The timeline of this also appears to be dovetailing nicely (inevitably?) with the exhaustion of COMEX and LBMA gold supplies, though the price may even drop once again, just before the very last ounce is shipped to Asia.
Big changes coming. Melt down gramma's silverware and buy whatever else you can find. Unlike conditions at the high end, still easy to do at the retail level --if you're willing to wait a few weeks for delivery. But boy, is that going to change in a hurry on some hapless Monday morning soon. 'Christmas presents' under the tree by next year are most likely to simply be food.
Let's all skip past the cutesie games and get right to the endgame. I'm thinking this is how "they" resolve this since no chance in hell all of these debts globally can be repaid so it is a scramble to see who survives:
- all physical gold is ultimately confiscated at some "market" price
- "global reserve" currency recalibrated shall we say backed by said gold
- debts are written off in a controlled fashion over a number of years
- 401Ks, IRAs, and pensions are mandated by law to hold a certain % in UST (i.e. "guaranteed" funding of US Debt)
- immigration laws open the floodgates to essentially anyone that has money and is willing to help soak up the ridiculous unoccupied inventory of empty homes
timing TBD. I have no idea. Impossible to accurately handicap politics, etc.
Yes, there has to be debt writedown. And the damn shame of it, is that the best solution would have been to let the TBTF firms fail in 2008-2009. That would have cleansed trillions from the system and we'd be rocketing ahead economically by now. The problem with that, is that the losses would have been borne by the Wall STreet speculators and power elite, aka, the top 1%. Since they had the levers of power, why not use them to save themselves from those trillions of losses and instead transfer them to the middle class end everyone else.
No print and rising rates = Dow = 0 and dollar = 0
This month, Hollywood gave us "Gravity" a superb blockbuster. But it is nothing compared to the movie currently being prepared by the FED. The release date is not clear yet. They were also planning to call it Gravity but since the name was already taken and 2.0 wouldn't sell, they went for "Anti-gravity"! It is also an action movie with rates in orbit and bankers lost in space. Amazingly, they plan to offer a front seat to almost everyone they can think of. The scoop is that the the sequel is already in preparation: A horror movie apparently. Their talents are versatile!
'Gravity' was crap.
Try this movie instead. Send the link to everyone you know:
"The Biggest Game InTown" about the Government CAFR wealth shell gamehttps://www.youtube.com/watch?v=jkwjtbTjTsE
pomo will bring markets fucking green, this ''sell off'' is a joke
porno will off this fucking bring
'Better economic prospects'?
'Value' in stocks after only a 15% correction?
What punchbowl is this guy drinking from? If you really see a taper, and you get the Obamacare tax, and you get higher interest rates, and if real inflation continues at 10% a year -- you expect 'better' economic prospects?
Otherwise known as the Goldilocks Bear Market.
Try -45% and flatlined.
I can't help but notice that no one in the country is talking about or advocating some kind of 'American Re-industrialization Bill.' Everyone --and I mean everyone, even the non-zombie population-- seems to have completely bought into the meme that there is nothing to be done but to see this whole thing through to the bitter end before taking any steps.
Why is it that no one is aware [he asked rhetorically] that the most destructive mass of all this "debt" being measured and discussed is fundamentally illusory, being primarily "owed" to the banking system itself for so generously giving us something that literally cost less than nothing to generate in the first place--
Incidentally, I recently heard an estimate that the Rothchild family banking cartel owns or controls approximately $100 Trillion is assets. These of course, are the guys we are all ultimately in "debt" to.
And this concludes my crazy rant for the day...
Better economic prospects? What fucking planet does that guy live on?
Whatch they god a Bernanke wave reader.
What's wrong with 19.5% instead of 15%.
Does somebody get paid for writing this crap?
When another bump in QE is met with a market crash, then and only then, will QE decrease. Until then, it's moar, moar, moar. Why is this so hard to understand?
The end of QE3, with no more quantitative easing to come, will bring the stock market down 48% (QE1 16% + QE2 17% + QE3 15%). What matters is the flow of Fed purchases, not the stock. The market will discount this correctly, when tapering finishes. The Fed, under Bernanke, has painted itself into a disastrous corner.