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3 Things Worth Thinking About

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

QE Is Dead, But Likely Not Gone

As I wrote on Monday, the end of quantitative easing (QE) has come. While it was announced during Janet Yellen's post FOMC meeting press conference on Wednesday, the last official permanent open market operation (POMO) was this past Monday.

The question that remains to be answered is whether the economy and the financial markets are strong enough to stand on their own this time? The last two times that QE has ended the economy slid towards negative growth and the markets suffered rather severe corrections as shown in the chart below.

 QE-GDP-SP500-103014-2

Asset prices have a coincident effect with the starting and ending of QE programs. As liquidity is extracted from the markets, the propulsion of asset prices has faded. The economy, not surprisingly, lags changes in monetary interventions as the decline in asset prices eroded consumer confidence that weighed on growth.

As I discussed recently, the Fed's ongoing QE programs have had little effect on the real economy. While the liquidity push drove asset prices higher, only the small percentage of the economy with assets to invest received a benefit.

"While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.

 

With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service. The issue, of course, is not just a central theme to the U.S. but to the global economy as well. After five years of excessive monetary interventions, global debt levels have yet to be resolved."

Alan Greenspan recently reiterated this point in a WSJ Report:

“'Effective demand is dead in the water' and the effort to boost it via bond buying 'has not worked. Boosting asset prices, however, has been 'a terrific success.'”

 

“I don’t think it’s possible for the Fed to end its easy-money policies in a trouble-free manner....Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets, so there is no reason to suspect that the actual process of boosting rates would be any different."

Greenspan has this correct; there is an underlying belief that the Fed can raise interest rates without "pricking" elevated asset prices. The removal of liquidity from the markets by the ending of the latest QE program is indeed a "tightening" of monetary policy. The raising of interest rates in a 2% economic growth environment is a stranglehold. (Read: Will Rising Fed Rates Cause A Problem for a complete explanation)

 However, as Dr. Lacy Hunt states in a recent CNBC interview:

""The Fed has spawned this 'buy now, pay later' scheme of the American consumer... but there comes a point when the 'pay later' overwhelms the 'buy now'... and when that happens monetary policy is basically ineffective"

Dr. Hunt hits on the right points in suggesting that we are unprepared for what the future holds. The structural shift in employment, a growing demographic issue, and ballooning entitlement programs have only been masked by the Fed's monetary interventions. As Dallas Fed President, Dr. Richard Fisher, previously pointed out:

"1) QE was wasted over the last 5 years with the Government failing to use "easy money" to restructure debt, reform entitlements and regulations.

2) QE has driven investors to take risks that could destabilize financial markets.

3) Soaring margin debt is a problem.

4) Narrow spreads between corporate and Treasury debt are a concern.

5) Price-To-Projected Earnings, Price-To-Sales and Market Cap-To-GDP are all at 'eye popping levels not seen since the dot-com boom.'"

So, as the latest round of QE fades into history, I would suggest that we have not seen the last of it.

 

Oil Prices Due For A Bounce - But Lower Lows Likely

Oil prices have fallen sharply in recent months due to the slowdown in global economic growth and rising deflationary pressures. However, there is also a growing supply/demand imbalance that is being driven by the "shale boom" as I discussed recently.

"First, the development of the “shale oil” production over the last five years has caused oil inventories to surge at a time when demand for petroleum products is on the decline as shown below."

Oil-Consumption-Supply-101614

"The obvious ramification of this is a “supply glut” which leads to a collapse in oil prices."

In the short-term the collapse in oil prices has reached a technical extreme. As shown in the weekly data chart below, oil prices (as represented by West Texas Intermediate Crude) have fallen by more than 3-standard deviations from the 50-week moving average. I have highlighted past historical periods where such declines from extreme overbought to oversold conditions have existed.

Oil-Prices-103014

While the current extreme oversold condition suggests that a bounce in oil prices is likely, historically bounces from such early extremes have led to either a period of consolidation with retests of recent lows, or further declines.

Many investors have gotten trapped in energy related issues by chasing either yield or returns in a "hot sector" over the last year. Therefore, it is advisable that bounces in oil prices, which should lead to a relative bounce in energy stocks, be used to reduce exposure to the sector until the current storm passes.

 

US Dollar Rally Likely Over

The US dollar has had an extremely strong rally in recent months as the global slowdown driven by deflationary pressures has driven money into the safety of the USD. However, utilizing the same technical setup as above for oil prices, the USD is now more than 3-standard deviations above its 50-week moving average.

USD-Prices-103014

Historically, such extremes have marked the end of counter trend rallies in the US Dollar. This time will likely be no different as not much in the world has changed over the course of the last several years (i.e. accelerating economic growth, wage growth, etc.) What is beneficial to the U.S. dollar currently is that it just is not as bad as everywhere else. Since oil is priced in US dollars in terms of trade, a strong dollar also has a negative impact on global growth, this is not something that our foreign trading partners are likely to tolerate for long.

However, IF, and this is a fairly big "if," the ECB can indeed launch some type of quasi-quantitative easing program in the months ahead, it will likely reverse flows from the USD back into the Euro. If that analysis is correct, this could provide a lift to depressed European asset prices relative to US related investments in the short term.

Just some things to think about.

 

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Thu, 10/30/2014 - 15:56 | 5395279 ZH Snob
ZH Snob's picture

The question that remains to be answered is whether the economy and the financial markets are strong enough to stand on their own this time?

 

in a word: NO.

Thu, 10/30/2014 - 16:01 | 5395293 Duffminster
Duffminster's picture

There are multiple indicators showing that the answer is no:

 

 

Thu, 10/30/2014 - 16:06 | 5395309 jcaz
jcaz's picture

A 2% GDP- which itself is a fluffed up number- won't cut it,  no.

Thu, 10/30/2014 - 16:13 | 5395333 kaiserhoff
kaiserhoff's picture

This is the last, best hope for the Fed to let rates rise and get the hell out of the way.  Will they do it?  I don't know.

Tyler was right about the taper, when sentiment on this board was running 10 to 1 against.  Doo doo happens.

Thu, 10/30/2014 - 18:18 | 5395716 max2205
max2205's picture

TLT is too high to allow stawks to crash this time.

Tractor beam up I guess.... All that money is still churning around

Thu, 10/30/2014 - 16:02 | 5395295 Bloppy
Bloppy's picture

They WANT weakness so they can justify more QE.

Thu, 10/30/2014 - 16:12 | 5395327 ebworthen
ebworthen's picture

Steve Jobs would have told Cook it had nothing to do with Apple or their products and to keep it to himself.

Thu, 10/30/2014 - 16:05 | 5395304 knukles
knukles's picture

One last time. 

There is no recovery.  The only appearance of a recovery is in the sophistry and manufactured news.
There will be another number, another event and QE whateveritsgonnafuckingbecalled will be there for YOU, dear peasant.

Never in modern history has there been so much fiscal stimulus and monetary ease applied at the same time around the world, in concert, and ni appreciable economic response generated.
Never
Ever
Anywhere
Anytime
Period.

It still sucks even after it did suck, before it sucked.
It is a disaster out there for the 99% of us.
Dis-fucking-aster.

And lemme tell y'all 'sumptin.
The R's get the Senate and keep the House.
Obie then blames the R's for everything and has the PERFECT EXCUSE TO RULE 100% BY EXECUTIVE ORDER
Which needs a 66 2/3 majority to overturn

Y'all ain't seen nuffin' yet, mo

Thu, 10/30/2014 - 15:56 | 5395280 FieldingMellish
FieldingMellish's picture

So they will just add more stimulous. Printing it appears to be free of any consequnces.

Thu, 10/30/2014 - 15:57 | 5395283 ebworthen
ebworthen's picture

"The question that remains to be answered is whether the economy and the financial markets are strong enough to stand on their own this time?"

No, they aren't, because .gov bailed out the bad actors and juiced Wall Street with Trillions of monetary heroin at the expense of savers, taxpayers, and future generations.

Thu, 10/30/2014 - 16:00 | 5395288 starman
starman's picture

Even Viagra looses its effects! 

Thu, 10/30/2014 - 16:00 | 5395292 EmmittFitzhume
EmmittFitzhume's picture

"Dollar Rally Likely Over"  - I just bought 1 fucking 9volt battery for $7.01.  The dollar is almost toilet paper now!

Thu, 10/30/2014 - 17:00 | 5395458 10mm
10mm's picture

Dude, youz got robbed and not by the dollar.

Thu, 10/30/2014 - 17:46 | 5395604 scam_MERS
scam_MERS's picture

Coulda, Woulda, Shoulda gone to Rob-yu Shack, they still give away free batteries IIRC. Was doing that since I was a kid in the late 60s, gettting multiple "punch cards" (for extra free batteries) and putting them in my Lloyd's 6-Transistor radio. That is, before the sales dweeb noticed I was coming in more than once a month for my free (non-alkaline) fix and put a stop to it. Hell, I guess I was a member of the FBA (Free Battery Army) before the FSA even existed. God, I miss those days.

Thu, 10/30/2014 - 16:04 | 5395299 Squid Viscous
Squid Viscous's picture

thanks for all the cool charts and stuff...

but Mr. Market says go fuck yourselves bears...

again...

Thu, 10/30/2014 - 16:06 | 5395312 Philo Beddoe
Philo Beddoe's picture

I stopped shorting a few hundred points ago. I am stupid but not retarded. Ok...mildly retarded. 

Thu, 10/30/2014 - 16:10 | 5395323 Dungholio
Dungholio's picture

I think I must be retarded

Thu, 10/30/2014 - 16:27 | 5395377 gatorengineer
gatorengineer's picture

im beyond retarded............

Thu, 10/30/2014 - 16:09 | 5395325 Bell's 2 hearted
Bell's 2 hearted's picture

"The last two times that QE has ended the economy slid towards negative growth and the markets suffered rather severe corrections"

 

hogwash on QE having that effect on economy

 

1) yes, summer of 2010 we were headed for likely double dip ... but congress passed 3 stimulus bills totaling $100 billion, foreclosure moratorium (not only kept distressed prop off the market ... allowed squatters to stay in home rent free), expiration of house tax  credit

 

2) summer of 2011 all about debt ceiling an default

Thu, 10/30/2014 - 16:28 | 5395380 gatorengineer
gatorengineer's picture

And let me ask what do you think the market does if the Repubs take the senate next Tuesday?

Thu, 10/30/2014 - 16:47 | 5395420 Bell's 2 hearted
Bell's 2 hearted's picture

not a clue

 

could go down ... or not

 

I DO think we're close to another recession ... and markets will suffer then ... my guestimate is no later than Q1 2015 ... but might be months later before markets fall/recession acknowledged by all

Thu, 10/30/2014 - 16:12 | 5395329 gatorengineer
gatorengineer's picture

Cant understand why the dollar rally being over until Paper Gold is $900 an ounce, and the Euro is at par, and we start QE4.....  We are ending a printing cycle and the rest of the world is just about to pick up the slack...

Thu, 10/30/2014 - 16:16 | 5395344 Bell's 2 hearted
Bell's 2 hearted's picture

no need to understand anything

 

you're right

 

Lance is wrong

Thu, 10/30/2014 - 16:14 | 5395336 Bell's 2 hearted
Bell's 2 hearted's picture

Lance AGAIN has not a word on where 10yr yield going ... how long till he throw in towel on 10yr @ 4% in 2015.

 

Dead wrong on USD ... it might slide a bit in near term ... but DXY will see 90 before breaking below 80

Thu, 10/30/2014 - 16:26 | 5395374 gatorengineer
gatorengineer's picture

My guess is that the fed will unwind its paper to keep it at around 2.20-2.50, selling into all of th rallies.  I think the next thing to be realized is that we have no exports to be hurt by a strong dollar.

Thu, 10/30/2014 - 16:50 | 5395428 Bell's 2 hearted
Bell's 2 hearted's picture

i'm a charter member of 10yr yield @ 1% club

might take a year or two to play out, though

Thu, 10/30/2014 - 22:53 | 5396692 Harry Dong
Harry Dong's picture

"What is beneficial to the U.S. dollar currently is that it just is not as bad as everywhere else."

II think you agree actually. It's the ecb's turn to print for the next x months. Dxy to 100!!?

Thu, 10/30/2014 - 16:22 | 5395363 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Quasi-quantitative easing = QE Infinity = Rinse = Repeat cycle

 

[PRESS START], Ms. Yellen.

Thu, 10/30/2014 - 18:48 | 5395819 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Mr. & Ms. Yellen seem to be collectively on their way to being the most productive one per centers of the entire bunch. Mr. Yellen's Lemon Theory

was pointed out to me by my father many years ago. The theory is limited

to an underclass of car buyers that know nothing about the cars they purchase. Most reasoned investors conduct research before making purchases. Today, that theory is less apllicable in so far as everyone conducts research online before buying a car IMHO. I could be wrong, but most would look online to see if there are bugs or buyer cautioning. Mr.

Yellen does appear to be one bright dude when all is said and done. I'll bet they have nice art on their walls. thanks for the Yellen family primer. ;)

Thu, 10/30/2014 - 21:45 | 5396464 AdvancingTime
AdvancingTime's picture

The jump In GDP was because of a 10% jump in federal spending, mostly on Pentagon hardware, also bolstered growth. It was the biggest increase in federal spending since 2009, when the Obama administration put in place a huge economic stimulus package. The economic recovery that the media and talking heads have been bantering around is a manipulated myth.

A manipulated stock market distorted by recent economic policy hides and mask the real truth, in many ways it is ground zero in the war to convince us all is well. The American people and Main Street will tell you they are far from convinced that it is smooth sailing ahead. Huge weakness in the economy has been shown by numbers that barely get by even after record amounts of stimulus.  

Fact is if QE or the massive government deficit spending that props up our economy is removed it will fold like a cheap umbrella. Recent changes in how the GDP is figured , which boosted growth thus reducing the debt to growth ratio, and attempts to spin poor numbers regarding employment have been met with skepticism. More on this subject in the article below.

http://brucewilds.blogspot.com/2013/10/myth-of-economic-recovery.html

 

Thu, 10/30/2014 - 22:38 | 5396633 jstrack
jstrack's picture

I am way too picky, but the verbage in the article is just too politically correct for me to read with the feeling of a vomit coming up...  In example, the author writes the term "negative growth"...  REALLY?  Has everyone in the USA, even the skeptics and people who think they are not the sheeple, drank from the punch bowl?  Is there no hope for reality and candidness any more in the country?  

Thu, 10/30/2014 - 22:38 | 5396634 jstrack
jstrack's picture

I am way too picky, but the verbage in the article is just too politically correct for me to read with the feeling of a vomit coming up...  In example, the author writes the term "negative growth"...  REALLY?  Has everyone in the USA, even the skeptics and people who think they are not the sheeple, drank from the punch bowl?  Is there no hope for reality and candidness any more in the country?  

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