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The Unwind Process Has Far To Go (And Don't Hold Your Breath For QE4)
Via Scotiabank's Guy Haselmann,
Several times today, I was asked if or when I thought the Fed would begin QE4. The answer is ‘never’ (pending a disaster); although I guess the more prudent answer is to say the chances are ‘infinitesimal’. It is counterfactual to know with any certainty what would have happened if the Fed had not done QE3; however, it is easy to make a few observations that suggest QE is a failed policy, or at least a policy that has reached its saturation point. Let’s review a few of them.
As I mentioned in my note yesterday, QE was intended to spur aggregate demand to deal with over-indebtedness. This implies that, under this metric, successful QE should have decreased debt-to-GDP levels. In fact, sovereign and corporate debt-to-GDP levels have risen substantially. (To be fair, household debt has fallen quite a bit, but that is likely due to demographics. Yet, household debt-to-GDP remains well above the average of the 20th century.) Large increases in debt will borrow from future growth and act as an economic headwind.
QE intentionally encouraged asset price inflation with the intent of having ‘the wealth effect’ spill into the broader economy. The plan was to eventually hand off the support for QE-fueled lofty asset prices (and sinking risk premiums) to strong fundamentals backed by robust economic activity. The trouble with markets today is that the latter never materialized and QE is now ending at the same time that perceptions for growth and inflation are ratcheting lower.
- Therefore, prices for risk assets need to adjust downward to meet those new economic expectations. This recalibration is occurring quickly in an environment of crowded trades and poor market liquidity. Therefore, an overshoot to the downside is highly likely and this process has just begun.
QE policy has also amplified inequality which is a factor that should not be dismissed too quickly. Inequality is an economic headwind. Historically, when it becomes too extreme, very bad things can result. A QE policy that makes the rich richer could not happen at a worse time, given popular dialogue; and combined with the effects of globalization and technological advancements.
- Unfortunately, education and training is currently losing out to technology.
- The difference between QE as a driver of inequality and that of globalization and technological advancements is that the former is a deliberate policy choice. Furthermore, the latter have wonderful qualities that have resulted in lifting tens of millions of people out of poverty. The benefits have arguably done more to collectively improve the human condition than any other development in history.
The Fed’s policy of financial repression sends the wrong signal. It punishes savers, such as pensions and retirees, while rewarding speculators and debtors. It is like giving my son ice cream after he yells at his mother and punches his brother.
- Counter-intuitively, higher rates might actually increase the velocity of money and increase lending, as it would allow the lender to charge more for their loans.
- In addition, lower rates, coupled with lower equities, significantly damages the funding status of pensions. This could be one of many reasons why the ECB never adopts sovereign QE.
Forward guidance has reached its ‘sell by’ date. It was initially used as tool to encourage risk-taking by collapsing the risk premium, and in turn, to provide a ‘put’ to risk seekers. However, after a prolonged period of time, investors have become callused. Prices have diverged too far from economic fundamentals. Investor and corporate confidence has become negatively impacted.
After all, if the Fed is so worried about the economy that they have to keep rates low for a very long time, then how can a corporation have enough confidence to want to begin a capital investment project? Shouldn’t a potential borrower (or consumer) wait to borrow until there is more visibility, knowing that rates will remain low for an ‘extended period’?
Conclusion: Many Fed policies have been, or have become, counter-productive. Events may certainly force the Fed to be ‘lower for longer’, but expecting some type of new stimulus measure is an exceptionally long way off. Should the Fed resort to ‘new’ measures, based on the comments above, the Fed might wish to veer in an entirely new and creative direction. (see ‘Macro-Prudential’ note from yesterday mentioning direct targeting of subsidized loans to select areas of the economy)
Market Comment
Fed policies and financial asset prices have recently reached their practical limits.
Until recently, many risky assets were perceived to be ‘safe’; because volatilities were low, prices seemingly ascended each day, and markets were overly-confident that the Fed would always do whatever was necessary.
Today, the end of QE, occurring simultaneously with a deteriorating view of the geo-political and economic landscapes, has conspired to call this perspective into question. Valuation and expectation recalibrations must occur accordingly.
- The explosion of market volatility has shaken the foundation of investor psyche.
- The unwind process has far to go.
- Blindly “buying the dip” will be more difficult for equity investors. (Low volatilities have led to greater leverage and position sizes, due to how most risk models are designed.)
- Treasury bonds should maintain an underlying bid. Investors will earn carry, ‘roll-down’, and the optionality of lower yields.
- Liquidity, safety, and high quality bonds will command a premium during the market shakeout.
- Low yields and low inflation means that holding cash has a low opportunity cost and a high optionality value.
- Credit spreads will widen as risk is pared and risk premia rises.
- Fed hikes for 2015 are too far off in the future. With quickly building levels of uncertainty, the market may completely price them out for 2015. Should things change, the market can always quickly price them back in.
“Insanity: doing the same thing over and over again and expecting a different result” – Albert Einstein
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no but they'll jaw bone like crazy
They can't afford to allow oil to move higher so they won't print. Jawbone is all they got. They need oil down to squeeze Putin. That takes precedence over everything else right now.
I ain't bonin' grandma's jaw. Hellz no.
The FED will wait until even ZH'ers are begging for more QE printing.
It is how they maximize their profit during each inflation/deflation cycle.
Whelp, my stopping by ZeroHedge to get cheered-up after a long day wasn't a good idea on my part............
Well, you're not dead from ebola yet, so you've got that going for you!
You come here to get cheered-up?
Bernanke screwed up the balance sheet, and left them with few options. They still own a load of toxic waste from the MBS days, and negative cash flow is a real possibility. The ones who not idiot mouth pieces like Yellen, have to be worried.
Bernanke wasn't so stupid as to stay around for the fireworks, that's for sure. Janet the bag holder.
Without doubt. managing perceptions is our new national industry.
https://www.youtube.com/watch?v=ObWODJ-HULE&list=TLL3hZ3IXX4TTGQiPBUadPH... Here is a .357 barrel I chambered for this guy on my lathe. it's 19-1/2" long. which helps the muzzle vel. .357's are nice destructive little beasts even at pistol velocities. the whole gun is made out of water pipe from hardware store. Except the barrel; which an American Union Product made out of 4140. it's very accurate.
Kind of off the subject; but I thought someone might be interested in it for entertainment value.
Very interesting, kind of a Liberator from hell but I think I prefer my Ruger GP-101.... ;-)
it's specific for this guy's needs. it fits in a backpack and doesn't have moving parts; springs; pins, screws, etc. when its time for it to go bang it's going to go bang.
I don't get it. Why can't they immediately increase their assets by another $Trillion? How is that different than raising it from $800 billion to $4 trillion. Hell why not double it to $8 Trillion? Not enough Treasuries?..govt can just deficit spend a few $Trillion...bingo you have treasuries to buy. It's not sustainable but that's for the next generation to figure out...right?
At the moment, they can't because of the rational expectations of failure.
Thing is, another moment is just around the corner. By then expectations will have been managed to the tune of... wait for it... WE HAVE TO DO SOMETHING!!!!!!111!1!
Absent creative accounting, there's no way the Fed's balance sheet won't continue to grow. However that happens, it won't be known as QE, as it is now a known snake-oil.
don't hold your breath for more QE
are you kidding me? it's QE fa eva! and there will never be a rate hike either. the fed got us strung out, and now they gotta deal with it.
reposting:
So my girl is a real estate agent...
She doesn't know shit when it comes to finance like this gun slinger does but she comes home and says "the weirdest thing happened today" then she says "I was working with this guy who was working on a VA loan...between yesterday and today his IR went down almost down 1%"
And that's what the FED has done. They have fucked the economy up so bad that stupid retarted shit like this happeneing. And that's all I really have to say about that.
I hope she then took the client to look at more expensive homes.
You know the breed;)
You evil bastard, you!
QE 4 Eva! It be comin' bitchez!
I would agree wiht the premise of the article; for what it's worth; which is nothing. Faith and trust are easy to lose but hard to get back; I really don't think we need to worry about any S&P2000's until sometime next year. but remember, althouigh they are out of bullets; the fed may show up with bows and arrows; or slings and stones, or abacus, or God knows What.
The talk of the FED doing QE4 to save the Ponzi cotton candy markets has begun already.
Funny if it weren't such a misguided perverse thought devoid of reason and sanity.
Welcome to Biff's World.
“Insanity: doing the same thing over and over again and expecting a different result” – Albert Einstein
Profanity: saying the same 4-letter words over and over again while trading equities, and expecting different results.
Here's your first 4letter word: MOAR
Here's your second: FOUR
Putting together: MOAR by FOUR as in, by 4pm the PPT will hockey stick this bitch to keep margin calls from crushing this top heavy, funny money, crony infested, liquid infused steaming pile of confidence laden unreformed crap called "the market."
Hah as I read that, I heard it as Clark Griswald in Christmas vacation when he was yelling about his boss and the crummy bonus.
Up Vote for the 7 (Seven) adjective phrases accurately describing this utterly insane shit show.
SELL?
:) Or, perhaps "VWAP": Vomiting When Algos Profit
Politicians and governments are run by cluess puppets. The have hands up their asses moving their lips. Whatever a government insists is true, you can safely assume the exact opposite. Remember Clinton with the "I never had sex wth that woman (Lewinsky)" statement on TV? Just a minor example.
But who are the ones whoes hands are up the asses of the guys in government you ask....?
That is for you to find out, if you are clever enough.
That's easy. Start with the list of billionaires and work your way to the top. In this environment, there's simply no room for any honest billionaire to exist, as they will be squeezed by The Club until they succumb or are taken down. Cuban and Gates are two examples who come to mind.
Oh, and here's all anyone needs to know about "The most powerful man in the world."
http://toprightnews.com/wp-content/uploads/2014/01/SOROS-OBAMA.jpg
There's only one person in that room who didn't stand for Obummer.
QE4 won't make a difference even if it's attempted. It would take twice as much this time to support the pyramid at these levels. And the Fed knows it.
They will inform the key players to take cover, just before they pull the rug out.
All those that still believed in the Fed but get crushed will not have enough left afterwards to even find an ear that will listen to them.
The gig is nearly up.
“Insanity: doing the same thing over and over again and expecting a different result” – Albert Einstein
Insanity is the essence of ideologues. Therefore QE4 is just around the corner!!
Are the SIFIs sitting on piles of cash waiting to pick up cheap assets again at the bottom? What's GS, the immortal, doing?
Indeed they are. There are even more SIFIS now
Do the math and it's clear there will be no "un-wind"...the Dow is now below where it was when the "taper" was announced last December, Russell 2000 down 10%...S&P, Naz bout to go negative. And that was still with about $500 B in QE over 2014...imagine what 2015 would look like with not only no QE but a modest rolloff of say 5-10%...or about $200-$400 B...Or a net swing of $700 to $900 B...All while taxes have risen 9% but spending 1% over the past year...all this together is close to a 10% reduction in "money" circulating in the economy for '15...don't think that's a likely scenario.
the math is done for you in this article...
http://srsroccoreport.com/the-heart-of-the-ponzi/the-heart-of-the-ponzi/
....what's that stuff "for every action there will be an equal and opposite reaction"?
yea.....QE to the moon baby.
bbut.. the public pension funds apocalypse can't be allowed. Think of the little children... and their small helpless canines....and smartphone bills.
Rubbish article - talk of technology ??????
Savers better people then spenders etc etc etc.
The production distribution consumption chain (i.e the Industrial system) has broken down because the bankers refuse to give people back their purchasing power.
Instead people must become conduits for useless corporate technology which waste most of the high quality capital before it can be usd at a local level
Capitalism is rule by the banks.
People need a redistribution of wealth
The wealth concentration vortice of the western world (Tudor corporate capitalism) has reached the end game.
We can clearly see this breakdown in the euro entrepot.
The brownian motion airport / car economy of that hinterland is imploding.
Banksterism is NOT capitalism. As you noted, they've stolen the purchasing power of the money used to transfer wealth.
Capitalism is nothing but saving more of your income than you consume, using the savings to fund further wealth creation. That is hardly rule by the banks.
You come so close to coherence at times, yet always fuck it up with your collectivist bent, insisting that evil methods can be harnessed to create good.
In other words, you are but a water boy for those very banksters that rule us all with your misguided beliefs.
Sorry mate - the feudal system for all its rights and wrongs was not capitalism as we understand it today
The east India company brought in the freely transferable share which meant the new Lords had no skin in the local anymore.
The local began to be destroyed in detail so as to get a yield.
You can see this transition during the Tudor corporate period very clearly.
Read some Belloc or CH Douglas to open your mind a bit.
"The rebellion was in equal part a protest by feudal lords against the intrusion of central government into their domains, a conservative Irish reaction to English policies that were altering traditional Gaelic society; and a religious conflict, in which the rebels claimed that they were upholding Catholicism against a Protestant queen who had been pronounced a heretic in 1570 by the papal bull Regnans in Excelsis."
http://en.wikipedia.org/wiki/Second_Desmond_Rebellion
My ass that's the end of QE. They have NO other options. QE doesn't work, except to keep the stock market propped up. QE NEEDS to stop and the system needs to crash/reset. That's NOT going to happen... yet.
Another bankster who papers over the notion that what the Fed does is all by intention in order to concentrate capital in the hands of the Fed member and cohorts. Continuing that tacit impiication that a Fed is even needed. A stinking red herring.
This years deficit at about $480B will likely be the lowest for some time as it is projected to go up above $1T after Ofraud leaves office. Do you think the Treasury is going to push all that financing to the public market?
correct. it is only about wealth transfer - and IT IS WORKING beyond belief.
during most of history - they had to show up at your door with armed men behind them and take your assets.
it took modern computing and a bit of thought, but they perfected stealing. all your hard earned assets become theirs,
in keystrokes.
and warren buffett will be particularly annoyed, because he even went on the media monday and said 'I'm buying'!!
until the wall streeters feel some real pain, it will continue.
The idea that QE was ever meant to do anything other than enrich the 1% and prop up the banksters is pure unsupported nonsense. If you acknowledge what QE was intended to do the only conclusion you could possibly draw is that it was a success beyond their wildest dreams. Therefore, QE4 is all but guaranteed. Especially after all the calls Yellen probably got today from the 1%ers whining about losing money.
The Fed will ultimately destroy the economy if they continue to feed the 1%. They know this and also know that they have gone a long way to destroying the fundamental economy already. They hope their opium QE moves would ignite the fundamental economy which is hasn't and never will. Completely flawed logic from a group that knows nothing about how the real economy really works (other than subprime was contained). They may try something, but if it is anything like what they have been doing over the past 6 years, it will put the final nail in what's left of our tattered economy.
Way, way too many big words...
Way, way too many big words...
What? Cramer just told me that I was overserved, umm, excuse me, "oversold"....I can't recall all of the details. Besides a slight hangover, I wonder what tomorrow will bring? SELL!
"household debt has fallen quite a bit"
Just wait until they have to pay the FED back for all those bonds...you DO realize the taxpayer pays for any loses the FED incurs?
The markets have ebola.
Dowbola.
I have full faith and confidence that the government will do absolutely anything and everything to keep the stawk market propped up. They'll nationalize it and declare values out of a Supreme Soviet if they have to. I still think the collapse we're looking for is going to come in the form of real things like extravagently expensive energy or Ebola, and not in things they can still manipulate.
Is it almost time for the IMF with it's SDR's Mr Rickards?
I still don't understand why people believe that QE is over simply because the Fed says it's over. Why would anyone believe that they wouldn't just continue doing it covertly? They lie about everything else. I mean seriously, you honestly believve the markets could continue functioning for 1 day without stimulus?? LOLOLOL.
QE is here to stay, it just won't be called such.
<< Therefore, prices for risk assets need to adjust downward to meet those new economic expectations. This recalibration is occurring quickly in an environment of crowded trades and poor market liquidity. Therefore, an overshoot to the downside is highly likely and this process has just begun. >>
Wait until this downward spiral gains momentum in house prices and sales.
oi vey!
Can't think of a better time to short bonds and the correlation between bonds and volatility might not hold true once the unwinding starts.
Perhaps their next trick will be passing out cash to consumers.
I'm sure Guy is what passes for a "maverick" on "Wall St." but just how does he define "disaster." And what about this chesnut:
....the Fed might wish to veer in an entirely new and creative direction. (see ‘Macro-Prudential’ note from yesterday mentioning direct targeting of subsidized loans to select areas of the economy)
I mean, excuse me, but aren't these the types of policies and meddling in the economy that have brought us to our present deplorable state?
I'm surprised to see so many people around here thinking there won't be more QE. If the Fed goes the deflation path won't the state be unable to support the petrodollar?
Might need to read the article again. QE does not work. Been there done that. More will only make it worse.
Buying American increases demand that forces the hiring of American citizens. Rebuild the manufacturing sector.
Good article...except for underlying assumption that the Fed gives a rat's patootie about the real economy.
will they allow deflation to take hold?
Consequences?
will they allow rates to rise?
Consequences?
globalization is not a policy choice??? and i suppose tech advancements are defined as mass govt spying??? if your policy is globalization. with tech advancements, to spy massively. for globalization. policy choices???
time to go curl your hair. better yet, go dry ur curly hair in the oven. grandma did
Darn, it was all so f***ing perfect. No need to work, just buy stocks, any stocks, and the Fed would push them up for you through limitless money creation. Sit at home, collect the unemployment check, watch ‘Dancing with the Stars’ on big TV bought for nothing with your stock profits. No job, get an EBT card and free groceries for life. Drive a big truck with payments for nine years. The repo man takes it, get another one. Skip a few house payments, no big deal, it takes years to foreclose so live in it for free.
America is bankrupt and $18 T in debt which can NEVER be repaid. Only Ron Paul told people the truth and the lemmings didn’t want to hear the truth. They couldn’t handle the truth. Instead, the greedy masses all wanted more Fed happy talk, “We will keep rates low, go out and buy lots of stuff!” The rich sat back and laughed as they could not ever have dreamed of such good fortune. The bankers handed them billions and more billions. The fund managers were all bragging on themselves.
There is no way out of this box. We can never have austerity or rate hikes. No matter how they try, all they do is delay the final collapse for a little while longer. Growth is dead. Sure the morons can squeeze another I-Phone onto the MasterCard and make the min payment each month, but you can see the rot is spreading everywhere.
The Silicon Valley fairy tale is now camera on a stick, Facebook, Twitter and Yahoo. Tech is most all made in China and manufacturing here is generally gone forever. Nobody cares; they eat $9 burritos at Chipotle and return from lunch to layoff notices. They have not yet realized their $125k job will now be a $25k job flipping burgers, if they can even find one of those. The party is over and the downside has barely begun. QE4, 5 and 6 will not change what is coming. Fear will take over. But there will be a few powerful market rallies on Fed jawboning just to torture the bears.
The unwind process has further to go, since according to the Dow Theory, stocks are in a primary bear market since October 10th, as explained here:
http://www.dowtheoryinvestment.com/2014/10/dow-theory-update-for-october...
Primary bear markets, as spotted by the Dow Theory, tend to have long legs. While nobody knows the future, and it could be a failed signal (a ca. 30% probability), technically something ominous has happened.
I agree, QE is counter-productive, contributes to inequality and is very unpopular. However, the Fed will once again start it up as they don't know any different. They will, however, wait a little longer this time in an attempt to get credibility.