This page has been archived and commenting is disabled.
The End Of Fed QE Didn’t Start Market Madness, It Ended It
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
Jeff Cox at CNCB wrote a reasonable piece yesterday, but chose a 180º wrong headline for it. And that matters for understanding the topic he addresses: what is happening in the financial markets. Cox claims that “Market Madness Started With End Of Fed’s QE”, but it’s the other way around. We’ve had six years+ of madness precisely because of QE, and during that whole time people had ever less idea what anything was really worth, and price discovery, an essential element of any functioning economy, disappeared entirely.
What we see now is the recovery of price discovery, and therefore the functioning economy, and it shouldn’t be a big surprise that it doesn’t come in a smooth transition. Six years is a long time. Moreover, it was never just QE that distorted the markets, there was – and is – the ultra-low interest rate policy developed nations’ central banks adhere to like it was the gospel, and there’s always been the narrative of economic recovery just around the corner that the politico/media system incessantly drowned the world in.
That the QE madness ended with the decapitation of the price of oil seems only fitting. Our economies need oil the way people – and animals – need water. If its price falls the way it has, that’s a sure sign something is profoundly amiss. At this point, we don’t yet know the half of it. It’ll take time for price discovery to work its way through, and for people to recognize what things are really worth. For now there’s really only one that’s certain: everything is overvalued, including you.
As the zombie money injected by QE is drained from the system, deflation is the magic word. And that doesn’t mean falling prices, they will never be anything other than a lagging indicator. For a system as bloated as the one we have at present, deflation depends on two factor: the size of the money/credit supply and the velocity at which the money is spent.
The end of Fed QE shrank the former – and no, other central banks won’t make up for the difference -, while the huge decrease in personal wealth – and wages- across the west (the average American family lost 40% of their wealth since 2008) slowed down the velocity of money. Sure, US car sales are looking good on the surface, but they’re fake, since as David Stockman writes today: “consumers borrowed every dime they spent on auto purchases (and took home a few billion extra in spare change).”
Economic growth in developed nations is just a narrative, kept – zombie – alive by media and things like those subprime car loans. We can all imagine why European countries would be at risk, in various forms and stages, but the US seems to be doing good (5% ‘official’ GDP growth last quarter), right? Well, not according to Jim Clifton, Chairman and CEO of Gallup, who writes this week that “.. for the first time in 35 years, American business deaths now outnumber business births”, and: “This economy is never truly coming back unless we reverse the birth and death trends of American businesses.”
The rich world is not doing as well as the narrative – mostly successfully so far – tries to convince you it is. Not nearly as well. The price of oil should be a flashing red flag with loud sirens for everyone. And it’s not just oil. Everything gets repriced. A 12-year low in commodities, dating back to late 2002, is not a laughing matter.
Commodities Tumble to 12-Year Low as US Futures Slide
Commodities (BCOM) tumbled to a 12-year low, led by copper’s biggest decline in almost six years, as slowing global growth curbs demand. [..] Commodity prices are tumbling as a supply glut collides with waning demand, reducing earnings prospects for producers and increasing the appeal of government bonds as inflation slows. The World Bank cut its global growth outlook, citing weak expansions in Europe and China, the world’s biggest consumer of raw materials. Data today is projected to show a gain in U.S. oil inventories.
“Oversupply and falling demand are dragging down commodities beyond oil,” said Ayako Sera at Sumitomo Mitsui. “There are a lot of uncertainties and it’s hard to see a reversal in sentiment for the time being. As an investor it’s hard to proactively take on risk at the moment.” [..] “The news everywhere is doom and gloom,” said David Lennox at Fat Prophets in Sydney. “Prices are going to keep sinking.”
Note that the leading word is demand, not supply. And that in one fell swoop takes us beyond developed nations and into emerging markets. But first, let’s let Jeff Cox have his say:
Market Madness Started With End Of Fed’s QE
For nearly six years running, the U.S. stock market has withstood a myriad of body blows [..]Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding. So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring. “Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group.
[..] the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October. That month marked a momentary collapse in bond yields on Oct. 15, a day that also saw the Dow Jones industrial average plunge some 460 points at one juncture before slicing its losses.
In second place for monthly volatility was December, as investors pondered the meaning of “patient” in a Fed statement on when it planned to raise rates and waited for a Santa Claus rally that failed to materialize. January has proven to be an even bumpier month as investors evaluate an oil plunge that has raised questions about longer-term effects on corporate bottom lines and business investment.
Then came Wednesday’s disappointing retail sales numbers, all of which raised concerns about whether Wall Street is capable of negotiating its way through rough times with only zero-bound short-term interest rates as a backstop. “The assumption that low energy prices were unambiguously good was called into question with December retail sales,” said Art Hogan at Wunderlich Securities. “I think it’s all connected, but I’d be hard-pressed to tie it just to monetary policy.”
Should the Fed try to reinstitute QE in the face of more volatility, “their credibility would be shot.” Michael Pento predicted in an October analysis that the end of the Fed’s QE would see “inflated asset prices deflate back to normalized levels,” and believes now that the process is well under way and is likely to continue.
QE works “much better for equity prices than it does for economic growth,” Pento said. “You had a huge separation where markets went based on the Fed’s $1.7 trillion QE(3) program and where GDP growth was on a global basis. Now you’re seeing those two reconcile.” “Copper’s down over 20%. You’re looking at global yields in the toilet and oil prices down over 50%,” he added. “If you add all those things together, it adds up to global slow growth and the bursting of the commodity bubble that we saw courtesy of central banks.”
“The fuel for the fire over the last several years has been stock repurchases, and that has been fueled for the most part by the zero interest rate environment. As long as that continues, there’s still some room for the stock market to continue higher,” said Brian LaRose, a strategist at United-ICAP. “The path of least resistance is still to the upside.”
There are some good points in that article, but, as I said, the headline is upside down, and also, emerging markets are missing. I talked about their importance to the global economy a month ago in The Biggest Economic Story Going Into 2015 Is Not Oil and again last week in Price Discovery and Emerging Markets, but I think they warrant a lot more attention than they presently get. People simply don’t seem to have enough insight into either the importance of emerging markets – they’re half the global economy -, nor the state they’re in. Bill Pesek at Bloomberg has this:
For China, Even Good Numbers Don’t Add Up
.. China will have to loosen monetary policy soon in order to ensure that GDP growth stays above last year’s target of 7.5% (it’s currently around 7.3%). That’s worrisome because of a different number entirely: 251. That, in percentage terms, is Standard Chartered’s working estimate for China’s debt-to-GDP ratio. Already worryingly high compared to where Japan was 25 years ago when its own bubble burst, the number will only rise further with additional stimulus. The more China gins up growth in 2015, the more irresponsible lending it will have to service in the decade ahead.
The math simply doesn’t work out. Even if China could somehow return to the heady days of 10%-plus GDP growth, its debt mountain would by then be nearly unmanageable. “We’ve got the biggest debt bubble that the world has ever seen and credit is continuing to grow twice as fast” as output, Charlene Chu, a former Fitch Ratings analyst, said. Those who believe China can somehow grow its way out of this problem are fooling themselves.
“Mathematically, that’s impossible when something is twice as big as something else and growing twice as fast,” as Chu noted. It took Japan more than a decade after its bubble burst in 1990 to create the Resolution and Collection Corporation, modeled after America’s Resolution Trust Corporation, to dispose of bad loans. China can’t afford to wait that long to head off a full-blown crisis.[..] Yet for all the official talk about curbing borrowing and adjusting to a “new normal” of lower growth, Xi’s government still hasn’t shown the stomach necessary to bring China’s debt problems out into the open and deal with them.
Even one of the first defaults on an offshore bond by a Chinese developer last week ended happily. Kaisa missed a $23 million interest payment, but quickly received a waiver from HSBC. Since all property companies won’t get last-minute reprieves, these kind of maneuvers just delay a reckoning. Chu, now with Autonomous Research in Hong Kong, put Chinese bank assets at around $28 trillion the end of 2014, a huge increase from $9 trillion in 2008. As any 12-step program participant can attest, sobriety requires first admitting the magnitude of one’s problem – and publicly.
Whereas nations elsewhere in Asia would seem to have even larger immediate issues. It’s about the rise of the US dollar. Well, on connecting with the fact that they borrowed themselves silly in dollar denominated terms as Fed QE was happening. But that’s the thing: they’re now coming back to normalcy, albeit with a severe hangover. It’s not as of normalcy just ended.
Plunging Oil Prices, Rising Debt Leaves Asia Staring at Deflation
Asia’s rapid accumulation of debt in recent years is holding back central banks from easing monetary policy to fight the risk of deflation, endangering private investment needed to boost faltering growth, according to Morgan Stanley. Debt to GDP ratio in the region excluding Japan rose to 203% in 2013 from 147% in 2007, with most of the increase coming from companies, [..] The ratio is close to or has exceeded 200% in seven of 10 nations including China and South Korea. Deflation risk is spreading from Europe to Asia as oil prices plunge..
“When real rates are high, only the public sector or government-linked companies will take on leverage,” the Morgan Stanley economists wrote. The key concern with an approach of keeping real rates at elevated levels is that the private sector will remain hesitant to take up new investment..
India, South Korea, Indonesia, Thailand and the Philippines all held their benchmark rates last month. The Asian Development Bank in December cut the region’s economic growth forecasts for 2014 and 2015. Oil’s decline to the lowest in more than 5 1/2 years has hurt crude-exporting Asian nations like Malaysia while benefiting others like the Philippines and Indonesia.
China could tighten rules to allow faster recognition of non-performing debt in the corporate sector, Morgan Stanley said. While this could lead to a period of sharper slowdown in credit and GDP growth, it will reduce risks and open up the door for aggressive monetary as well as fiscal easing [..]
Troubled times ahead indeed. But it still simply the world reverting to normal. To functioning economies – though that doesn’t mean they’ll be doing well – and to price discovery. To get there, though, we need for trillions of dollars in zombie money to go up in thin air. It’ll be musical chairs with not nearly as many chairs as contestants.
And then the Fed can add to the damage. Which I keep thinking they will. It’ll be murder on emerging markets, and on most Americans, but Wall Street banks should be faring just fine, thank you. The Fed has been ‘leading’ its own narrative for months now, with various figures coming out of the woodwork with pro or con rate hike messages. It’s all staged, and here’s Yellen (a contradictory story will again come in a few days from some regional Fed head):
She’s No Greenspan: Yellen Signals She Won’t Babysit Markets in Turmoil
Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility. The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations.
To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad – just as a put option protects against a drop in stock prices. “The succession of Fed puts over the years has led to a wide range of distortions in financial markets,” said Lawrence Goodman at the Center for Financial Stability. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.”
So much for the stock market. But should we really be worrying about that when we know it’s all been a six-year headfake anyway? Isn’t it better to have price discovery back than to have so-called ‘investors’ trip on Bernanke blue pills? Oh well, never mind, oil made that decision for us.
- 13141 reads
- Printer-friendly version
- Send to friend
- advertisements -


Here's Johnny!!!
https://www.youtube.com/watch?v=m8r6OAaIsG8
I had to stop reading that this "the ultra-low interest rate policy developed nations’ central banks adhere to like it was the gospel "
I disagree. when the FED puts interest rates that low, there is no way the other developed nations can keep theirs at any sensible level
specifically, the ECB tried, and it caused havoc. now I can resume reading...
Why did you reply to the idiotic "here's Johnny" post obviously posted to be first?
To be second?
why not? I was too lazy to go further down, and I ignored the Johnny. so?
Open markets operations are not over (not should they be), and they existed befor QE. And guess what, the world goes on. Death-wishers.
Derivative contracts have existed for years and were (still are) used to responsibly manage risk.
You are misinformed if you think the open market operations of the 70's 80's and 90's were of the magnitude of QE.
The answer I expected in so many ways.
Have a great weekend!
Stop the madness
Isn't ZIRP still madness?
Madness is eating a breakfast burrito in the morning and washing it down with coffee after a night of overindulgence of beer and Irish whiskey. My stomach feels and sounds like the markets are going to be today.
Wait for the explosion.
Do like the FED. The best cure for a hangover is a shot of whiskey. Until it's not.
It's articles like this that are going to derail the recovery. <sarc>
Zirp I can come to terms with, Nirp, on the other hand is mind numbing . If it goes even negative 1 basis point why would you leave your money there
Why indeed. Ask the Swiss.
Why leave money in the bank at negative interest rates? Where would you put it? I have to get along with the wife and she hates the gold buying that I occasionaly do. If I take it out of the bank and keep it in cash it can be confiscated by the cops and if not confiscated the only thing I could buy would be real estate which is about to drop in value. Federal laws govern the use of cash so I can only keep it in the bank or put it in very risky investments. NIRP is better than nothing.
Yea, What a horrible thing to do, paying cash for something. Like Guns, they have made Cash out to be something immoral and only crooks (them) use. As a kid I watched my mother pay for everything using cash. And as we all know, banks would never ever steal your money and never ever money launder. Ha!
The government steals your earnings via taxes and fees and now a co-conspirator in insurance scams at the point of the 'gun', government agencies run black op operations (cute little regime changes) from illegal drug sales (Afghanistan, Kosovo), the justus system steals by imposing fines, and now the badged thugs are taking their cut from the confiscation schemes enacted by previously mentioned elected parasites.
What we have are a bunch of immoral, decrepit, scourge, thieving scoundrel scalawag constitution killing warmonger skeletons telling us what is and is not moral,,, what is and is not money,,, what is and is not food,,, where you can and cannot go and what you can and cannot do.
I use cash every chance I get and see many others doing the same. Keep your bank accounts, but only enough to do your business because one of these days these scumbags will be confiscating it too.
It is the lingering result of madness, a leftover from QE that restricts the traditional options of central bank stimulus "policy".
The fed can't lower rates meaningfully in order to attempt stimulation of consumer spending, they can only continue to print. The Fed will never successfully raise rates in an environment of low to no growth such as we have now, 4Q's "5%" notwithstanding.
We appear to have entered that most interesting place, where the Keynesian end point of the diminishing return and the Fed's powerlessness to interfere, except in a way that is known to be inflationary, and, given the macro environment, potentially hyperinflationary.
I rarely read Ilargi because of his anti-capitalism, anti-US slant but I have to agree completely with his assessment of QE was the madness, not this - true, unfettered price discovery.
IF true price discovery would be allowed to continue, through thick and thin, we would all be better off in the long run. Politicians cannot resist the pressure to "do something" though, which is where capitalism gets a bad rap. It ain't capitalism if TPTB are always screwing with the system.
I too agree that the madness was in the QE and the Greenspan puts. Also not mentioned but things like the PPT and outlawing shorts were fucking pure craziness too. That pol who said something to the effect that he was going to burn the shorts back to their elbows should have his fucking neck stretched about 8 inches.
But as far as your love of capitalism goes, don't you realize that its an economic method highly dependent upon gov't muscle? If the major capitalists hadn't received gov't support in one way or another they would have fallen flat on their goddamned faces. And that can't ever be any different.
Free market capitalism IS NOT dependent on "gov't support in one way or another". Crony capitalism is. "Falling on their ... faces" is exactly what should have happened and the economy would be much healthier now.
Given mankind's predilection toward material as well as bodily self preservation, it is likely that the perfectly free market system will never exist.
What would you rather see in capitalism's place?
'It has been said capitalism is the worst form of economic organization except for all the others that have been tried', to paraphrase Winston Churchill.
Why even give CNBS and the MSM one minute of your time?
Because you get great tips like this morning I learned that I should buy Apple because it is undervalued. I also learned that an expresso from Starbucks in Geneva skyrocketed to $5. My brain is saying that Apple is overvalued and that anything from Starbucks cost $5 in every major city in the world but what do I know.
Sounds like you have reached a special place in the world, all because of CNBC.
Sorry, QE didn''t "end", it moved to Japan.
The banksters issued sufficient threats to force the Japanese government to use their $1.2 trillion pension fund to buy US Treasuries.
Happy days are here again!
And don't forget Belgium
You have to remember that Gartman's daughter is a producer in CNBC so you should expect anything they say to be what Gartman wants you to do. Is he dumping Apple?
Govt running a massive deficit........debt will keep growing....rates..
Ever larger debt and bubbles that always pop.
Who might "Raoul Ilargi Meijer" be and why should we pay any attention to these verbose posts?
He is another writer who seems to think that what we used to call 'honest money' is a bad thing.
All those PhDs at the Federal Reserve wanted to blow ever larger bubbles. The very last and largest will take them down as well.
As they say, when you only have a hammer, all the world's a nail.
The only answer the Fed can offer is liquidity.
And they have, by the trillions.
But we do not have a liquidity problem. The world is awash in liquidity.
What we lack is the intelligence to reduce the real reasons as to why busineeses cannot grow their bottom line-profits.
For decades, many of us have said they were killing businesses, killing moticvation to start a business, and killing our potential.
That day has arrived. More busiessses are dying than forming.
And we know why.
Lack of price discovery brought on by unsound monetary policy is and always has been a greater threat to business than taxes and regulations. Business is about offering services and products that people want/need for a profit. How can you do this when people's purchasing power and discretionary income are constantly in flux? How can you do this while monetary speculation enabled by fiat forces some commodity to take an artificially oversized portion of consumer's budgets? In what world does it make sense to go into business if you know that with a keystroke the FED can destroy the ability of your customer to afford your services?
I'm confident the fed will be quick to fix all this optimistic utopian bullshit talk. Unfort.
If Raoul thinks these markets are not on lockdown he is sadly mistaken. Price discoverey? pffffftt.
Take oil for instance, pops every morning knowing it will fall throughout the trading day
Stocks look to be in some sort of engineered controlled soft landing- Should be getting 500-1000 point drop days
AU-Ag- should be rocketing 100 dollars a day with the swiss unpeg. On lockdown as usual
So, tell me more about your free market forces. lol
Inflation -> buy gold. Deflation -> buy gold... Sigh. I gotta believe, after the Greek vote, gold is going to plummet again, just like it did all those times before... Or should I buy it now, before it rockets into the stratusphere?
Are there still people who believe that Fed QE is really over?
US CB hasn't even gone Japanese, yet.
They may call it something else, or they may run it through other institutions to disguise the act, but they are not done until the global, unified currency is in place cause theyMuppets were screaming for it.
Now, bend over for your protein, er, I mean, liquidity injection.
Bernanke's blue pills...
Really liked the article until I got to that gem. Projectiled 2 belgian waffles and a side of sausage.
But the QE isn't over (ECB just warming up the press), and the NIRP is ramping up around the globe. No, nothing is fixed. Price discovery remains damn near impossible (we all know everything is overvalued relative to fiat, and undervalued relative to phizz PM). The level of distortion in the marketplace is only matched by the level of propaganda in the media. In the past, these levels of propaganda and repression have presaged world war. At the one end of the asymptote stands the 1-world government vision of the NWO, complete with its lack of personal freedom and privacy. At the other end of the asymptote stands the prospect for smaller government and more individual freedom, but this can only occur when the NWO is exhausted. In other words, after a global war.
Sad to agree but I must.
The nature of certain humans to dominate and rule (or to be first sometimes even second) has been with us a long, long time.
The people that see and know a better way avoid violence as a matter of their nature.
Looks like it gets bloody again before it changes.
I mentioned that it is sad.
"Should the Fed try to reinstitute QE in the face of more volatility, “their credibility would be shot.” Michael Pento predicted in an October analysis that the end of the Fed’s QE would see “inflated asset prices deflate back to normalized levels,” and believes now that the process is well under way and is likely to continue"...
Oh yeah?...
Never underestimate a heroin addict and his dream of "staying in a dream"! How can anyone in their right minds look at the last 6 years and tell themselves the owners of this mess won't do more of the same?...
Yellen with Fischer script in hand will do anything she's told. And of course once again "just like the bailouts" -those that understand just enough but don't want to will be disgusted for a moment -but only for a moment!
Capt's Son - the difference from 6 years ago is very important. 6 years ago the Dimons and Blankfeins were effectively bankrupt... not just their respective companies but the individuals as well. That is why Hank Paulsen loked like a berserk stork as he ran around Wash DC trying to get all Congress to sign TARP. This time around .. the Dimons and Blankfeins are prepared for the return to reality. They are no longer 100% long in their own stock, today they own gold and pm's and weapons and have private protection armies at their beck and call.
Well they not only saved themselves from erwona bankruptcy, they have made another $25MM per year for the last 6 years. They would probvably support interest rate huikes right now and an end to QE. Shake it up. Obama is a lame duck. Start working on the next sucker that becomes President.
It is so very clear ... now is the time for "price discovery" for these guys. 2 years to clear it all up, plus next President will be selling more hope than change.
Exactly, its the old 'got mine fuck you' thing again. Whatever benefits those in the club is what's going to be.
Price discovery?
Something to do with risk measurement?
Can't quite recall?
World war -
Price discovery on the value the political elite place on human life.
+1 for your picture alone.
+100 for stating exactly what war is for those who don't fight it.
You cannot really have price discovery without functioning Accounting.
When is that coming back?
The Fed only exists to prove articles like this wrong. Well, that, and to exert absolute totalitarian control over economies every chance it gets.