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Surprise... Everyone Was Wrong About The End Of QE
Submitted by Lance Roberts of STA Wealth Management,
Since the beginning of this year, Wall Street economists and analysts have been consistently prognosticating that following the Federal Reserve's latest bond buying campaign, economic growth would gather steam and interest rates would begin to rise. This has consistently been the wrong call as I discussed in April of this year in "Interest Rate Predictions Meet Bob Farrell's Rule #9:"
"An interesting article hit my inbox this morning from WSJ MarketWatch which was titled '100% Of Economists Think Yields Will Rise Within 6 Months' From the article:
'Economists are unwavering in their assessment of where yields are headed in the next half year.
Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury yield to rise in the next six-months.'
This is very striking from the standpoint that a separate poll of economists showed that there were none, zero, nada expecting an economic contraction either.
With literally 100% of all surveyed economists bullish on the economy, it suggests that there is nothing but clear sailing ahead for investors. Of course, it is also important to remember that it was this same group of "economists" that have been predicting the return of economic growth and higher interest rates for the last three years, as well. As we enter into the sixth year of the current economic expansion the unanimous 'bullish bias' is indeed fascinating."
Almost 18-months ago, after interest rates initially spiked from historic lows, I began writing then that the bond "bull" market was not yet over despite the litany of articles and punditry claiming otherwise. Furthermore, I stated that interest rates would be lower in the future as the three primary ingredients needed for higher rates were missing: rising inflation, increased wage growth and economic acceleration.
So, as we pass the 6-month mark for those predictions, let's take a look at where things stand now that the Federal Reserve's latest QE campaign has come to an end.
Interest Rates
As I discussed earlier this week on Fox Business News, the call for lower interest rates has continued to confound and frustrate the majority of mainstream analysts.
Will long-term interest rates eventually rise? Yes. However, as stated above, the ingredients necessary for a sustained rise in borrowing costs are not currently embedded within the economy. Furthermore, as I wrote previously, the current level of interest rates, given global economic conditions, is not unusual. To wit:
"Since then rates have continued to be in a steady decline as real economic strength has remained close to 2% annually, deflationary pressures have risen and monetary velocity has fallen. The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period."
"Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates.
Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance."
Importantly, since 2009, interest rates have only risen during the Federal Reserve's QE campaigns as money was forced out of "safe haven" investments like bonds into "risk" assets in the equity markets. This, of course, was what was intended by the Federal Reserve under the assumption that inflating asset prices would lead to increased consumer confidence levels and higher rates of consumption.
(Note: As shown above, interest rates peaked during the latest QE program just as the Federal Reserve announced their first step in reducing bond purchases. Equities, at least for the moment, have appeared to peak as the last of the liquidity support was extracted from the financial markets.)
IF the Federal Reserve remains flat on monetary interventions, the current trend of interest rates suggests a retest of 2012 lows as economic growth slows domestically due to global deflationary pressures.
The Dollar & Oil
Like interest rates, the dollar has also been driven by the Fed's monetary injections. Just as with interest rates, the dollar is a "safe haven" investment during times of global weakness and deflationary pressures. As shown below, the dollar has rallied strongly when the Federal Reserve has extracted support from the financial markets which has made "risk" based investments much less attractive.
Since oil is traded in US dollars globally, it is also not surprising to see the effect of the Fed's interventions applied to oil prices.
As shown, oil prices rose sharply during QE programs as the push for "risk" drove money out of "safe haven" investments of the dollar and bonds and into oil contracts. As monetary interventions were extracted, or as during Operation Twist where the Federal Reserve was not actively monetizing debt, oil prices trended lower. The latest plunge in oil prices coincided with the end of the Fed's latest QE program which, as expected, sent oil prices and interest rates lower and the dollar higher.
Another Year Of Bond Bear Disappointment
The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered; wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically at strong enough rates to sustain higher interest rates.
This is a point that seems to be lost on most economists who forget that the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption. With the Fed now extracting that support, it is very likely that economic weakness will resurface since the "engine of growth" was never repaired.
As I stated at the start of this post, while interest rates are indeed low currently, it is not the first time that we have witnessed such levels. Furthermore, interest rates can remain low for a very long time when there is a lack of sufficient economic catalysts to sustain the drag imposed by higher borrowing costs.
For now, as a contrarian investor, literally "everyone" remains piled onto the same side of the interest rate argument even after 18-months of being wrong. That alone is enough to keep me bullish on bonds and other interest-sensitive sectors of the economy for now.
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Just print 100 trillion and get it over with already for fuck sakes.
https://www.youtube.com/watch?v=RCtzQRkrj0U
The Pope and her deacons will do what's best for humanity. Humanity being the 500 people on the entire planet that will actually benefit from QE.
The Fed can change the language in its statements all it wants ["considerable" "Appreciable" WHO GIVES A RAT'S A**???!!!], but that won't change the fact that,
THEY CAN'T AND WON'T RAISE RATES!!!!
What part about the Fed being trapped in a roach motel of monetary policy don't people understand.
Geesh... time to send some GS and JPM banksters down to Cuba to help them out with "God's work" of the asset stripping of their economy.
P.S: TOLD YA SO!!!
Its "all good"........nuttin ta worry about.......come back in the waters nice and warm
The FED is too stupid to figure out they let the Saudi's kill the ONLY half functioning transmission mechanism they had...
Oil never really went up, only due to QE, that in itself created oil patch jobs. Now that QE has ended, oil reverts back to where it was when QE was originally undertaken.
Around $35 bucks a barrell. There is still no demand even with falling gas prices. There is only lost jobs to show for all the effort the FED has wasted in this criminally negligent so called administration we have here.
Fed intervention trumps organic demand every time.
talk about no shit research. here's what you need to know: printing money = risk on = higher rates. not printing money = risk off = lower rates. now, where do i go to get my Economics PhD from?
Austria?
ZH makes it to the NI FED headlines on Bloomberg with this story.
One day I hope to live in a world where pulling forward future consumption is not seen as a mature viewpoint, but rather, an immature one where it's obvious to all that there are consequences to these actions.
Not holding my breath though.
That, sir, would require modesty, and we duly refuse to exercise it.
and anyone suggesting such would be drug by their lips to the center of town and flogged with live rabid raccoons
Thank god we aren't in a depression or anything like that.....
Who names his kid "Lance?"
I mean, my name's Barnaby and even I think Lance is a stupid name.
Also his central premise is biased.
No, Barnaby is way more stupider than Lance.
I look forward to the day when the Fed can pull constipation forward.
Pulling constipation forward might not be so good. Put feces up past the pyloric cecum and you might be in septic danger.
Come to think of it that might not be so bad for the US.
Has Peter Schiff called and told you he was screaming that QE will never end? Pick up your phone.
I'm just glad I didn't invest with Peter Schiff. That clown has lost his clients a ton of money with his bogus predictions.
100% of economists have been wrong before.
The only requirement to be an economist is to call yourself one.
"the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption."
Cash for Clunkers is the only economic program modern day economists understand.
It is time for an economic education reset.
Yesterday, when I saw that Russia was in a financial and banking corner (getting locked out of international banking liquidity and the Ruble in the ER), I thought that anything could happen. Including some thermo-kinetic action.
But then I saw two Russian clogs fall: First that Russia was doing jack squat about America's arms buildup in E. Ukraine*, and then this morning's announcement** from their CBR. Given the combo of these two pivotal events, I fear that Russia just raised the White Flag, and it's clear sailing for Wall St for 2015. That's my take.
* http://rt.com/news/215047-pentagon-confrims-nato-buildup/
** http://www.zerohedge.com/news/2014-12-17/russian-central-bank-releases-7...
Maybe an arms build up is exactly what the west wanted from Putin so they can continue their propoganda against him and Russia. Maybe Putin sees it that way and is not falling for their crap. Or maybe as you say he is surrendering. (I doubt that)
I have seen a lot of comments saying that Putin didn't immediately respond so he must be weak or stupid or defeated or whatever. Knee-jerk reactions are what we in the west are used to because that is what our government does.
I am not a Putin fan anymore than I am an Obama or US oligarchy fan. I imagine that when your house is on fire, you work to put out the flames before you start figure out what to do next. But that's just me I guess...
The NeoCon 'Pivot to Asia' goal is to isolate, surround, fracture and crush Russia into complete submission first and then to focus on assuming control over China after.
According to Reuters, OPEC secretary general tried to moderate the infighting within the oil exporters, saying “OPEC can ride out a slump in oil prices and keep output unchanged, arguing market weakness did not reflect supply and demand fundamentals and could have been driven by speculators.” (Speculators = GS, JPM and probably Belgium)
So unless the bottom has suddenly dropped out of the global economy what we are witnessing may be part of carefully co-ordnated scheme to attack Russia. At least that is what Putin believes...
Neocons are not in control. Those guys are not obsessed with Russia the way the Brzezinski/Soros group controlling Obama is. "Neocon" is an overused term at this point. Certainly the competing control groups have certain overlapping interests but they also have differing world views on others. Neocons like to invade and occupy countries while "building democracy". Brzezinski's crowd prefers mercenaries (i.e. freedom fighters), usually with an anti-Russian component. Looking back one can somewhat see a pattern between Carter/Clinton/Obama and the "Bush".
The eCONomists have turned into nothing more than glorified weathermen. Their predictions are based on models that are based on ideal scenarios without opening the hood on the economic car and checking the spark plugs first.
They're also paid shills like the ratings agencies for the banksters and politicians.
In terms of a side by side comparison, I think the weathermen have had greater success in terms of prognostication. Maybe modeling an observable phenomenon is easier than a multitude of variables as in an economic model. Any model based on too many assumptions produces something basically worthless except for engaging self absorbed intellectuals at chic cocktail parties.
Miffed
Great comment Miffed.
I attribute a large percentage of economists ineptness to (2) factors.
1) • Laziness ( paid shills)
2) • It's hard to tell the truth when you get paid to lie.
Ad hominem aside, buy a gallon of milk that you'd actually drink and see the real impact of this shit.
No WIC labels on organics, 3X the price of a gallon of gas.
Middle Class was obliterated, now the Dependent Class will be controlled and eviscerated. Forced to consume hemorrhoid-inducing poison, sell them the sharkskin ointment (Prep H), tax them for the preservation of the shark, then sell them a $7,900 procedure to remove their assgrapes in a local hospital, all on CarePayment which cannot be discharged in a BK.
It's like a neverending free beer bong with the occasional Milk Dud of a turd: does it really hurt to swallow it?
Legalize the marijuana to provide alternate realities, placate the masses. Nothing changes
I agree with you only on one front: if you accept there is a distinction between mj and cannabis.
Marijuana is a white man's thing. Cannabis is a true plant with no self concept,
The problem with your proposition is that cannabis WILL expose you to alternate realities.
Only they won't be the ones manufactured for you by the media working for the elite.
When those CB-1 receptors kick in, you begin to see the absurd and mendacious programming you're expected to absorb and obey without question. It provides a passageway through the Matrix if you choose to keep walking.
It's a mere adjunct that amplifies a person's core personality. It makes the intelligent want to think in new and creative ways but, unfortunately, tends to dull the already dull-witted, which is no great loss.
Beats having them driving around drunk out of their skulls.
Maybe these business schools should be including some courses on human psychology. All the math skills in the world won't help you if you have zero understanding of human nature.
The fact that they all seem to be scratching their little wooden heads over the lack of consumer spending proves that they are clueless.
And the fact that they apparently believe they have the ability to plug whatever numbers they choose to into the equation while expecting it to work shows they don't understand the math either.
Even with the SNAP stealth cloak, people are aware at some level of the 45 million people in the virtual soup lines. Despite the bogus unemployment numbers, people are aware of the unemployed, underemployed and the poor prospects faced by the young. Even if they can't quite figure why, given the propaganda, people sense that things aren't right.
The parents whose formerly independent kids move back home get it.
Another disturbing trend that my daughter made me aware of is that parents are moving in with their children as they find SS and no savings can't keep up with their debt.
Three people in her section have had their parents move in while they tried to sell their house in the last six months.
I don't know if the fact that these kids are making very good money skews the numbers some, but she hears about it more and more lately just in her large company and among other friends.
I'm sure there's an ongoing tax-funded study about this somewhere in academia.
Two questions: who's buying the Treasuries? and where are they getting the money?
They aren't actually printing them anymore. Trucks loaded with notes leave the building, drive round the block a few times, stop somewhere secluded so the driver can change the license plates, and then continue to unload the notes at the printers 'goods in' entrance.
Lets call it a variant of the 'Sachs aluminum shuffle'.
"Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor."
No kidding.
These asshats might think they're going to raise rates.
They might even raise them.
The S & P only matters for political cover.
But whatever they think, the finance industry - including the Fed's owner-banks, as well as their biggest debtors - are HOPELESSLY overleveraged and will rapidly be threatened by defaulting loans.
The Fed's policy path is rapidly narrowing, where more QE threatens a loss of faith in the currency, and more interest rates threaten a collapse of currencies and financial institutions world-wide.
The Fed, you see, is walking the plank.
Where's Johnny Depp and his compass?
Let's see what happens as the effects of these recent devastating moves in currencies and oil shake out.
Interesting article. I would like to point out however, that rising productivity generally raises wages, it doesn't lower them. The reason wages are facing downward pressure in the US is due to the fact that Obama care incentivises businesses to only hire part time, as well as to hire illegal aliens, to avoid the worst parts of it.
Regulations are pummeling startups as well as established small businesses. (the driver of employment). Lowering demad for workers and thus wages. The demand for illegal aliens to fill jobs fro pennies on the dollar, is being met with Obama's policy of not enforcing the laws, drawing in millions of third world people, to fill those positions Americans have been frozen out of.
People resort to voodoo when they don't think there is any other alternative. (Or when the alternative is unpalatable). Instead of cutting regulations, enforcing the law and letting the markets work... our leaders are dancing around, and waving the chicken leg of QE infinity, over our sick economy.
I have not held my breath since QE1. I don't foresee holding my breath.
"This is a point that seems to be lost on most economists who forget that the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption."
The forward consumption of stock options, maybe. For most people, income has gone down. What is the percentage of Millenials living with their parents, again?
During the brief hiatus between QE1 and QE2, I asked myself the question: does the Fed have to make a public announcement every time it prints money?
I looked online for the answer. Couldn't find it. So I assumed that the Fed doesn't have to tell the public when it prints.
When it prints to loan money via repurchase agreements, that activity will show up in M3 and those who are interested can find out.
But, as you know, late in 2005, just before Bernanke took the reins, the Fed announced it would cease publishing M3 in 2006 to save money.
If the Fed distributes QE through repurchase agreements, where can you find that out now?
Also, why did they made announcements about the progress of QE 1, 2, and 3?
Was it just to give the banksters and other crooks on Wall Street courage? To keep the global financial thieves from defenestrating in despair?
Naaah!
"I said years ago..."
"I stated..."
"I warned..."
"...I began writing..."
"I", "I", "I-I-I-I-I-I-I"...!!!!! Damn it - someone PLEASE pay attention to ME and my 'expert' prognostications - P-L-E-A-S-E...? 'I' can't take the non-affirmation of my venerable existence anymore...!!!
Consuelo
I"m here because Nurse Ratchet said I had my choice of commenting at ZH or basket weaving.
What's your excuse?
(also, do you have any thorizine to trade for?)
http://38.media.tumblr.com/tumblr_m3eo09HojA1qbbjkio11_r2_250.gif
I'll trade you for thorazine.
What do you want?
Hey. You can edit AFTER someone replies to you.
That's quite a perk for someone who only joined 28 weeks and six days ago.
But then, you're not just any old someone. You're