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Explaining The Stock Market Rebound In 1 Simple Chart
Many were stunned at the pace of the v-shaped recovery in US equity markets this week after Monday and Tuesday's carnage. However, as the following chart makes very clear, there was good reason for it... Having overshot to the downside of "Fed-Balance-Sheet-Implied" levels but around 100 S&P points, the broad index ripped back higher to almost perfectly settle at "Fed Fair Value" - between 1980 and 2000. But, there is a rather ominous event occuring in 2016 that is out of The Fed's control that implies S&P 1,800 unless QE4 is unleashed.
Fed balance sheet implies an S&P level around 1990...
What happens next? Well, Scotiabank's Guy Haselmann has some thoughts...
The Fed's balance sheet has $400 billion of maturities to deal with in early 2016 which the market place is not paying enough attention to.
I believe the Fed will want to allow as much of this as possible to roll off (i.e. the balance sheet will shrink). The decline in the Feds balance sheet is a defacto tightening.
The Fed may be reluctant to do both, i.e. hike, while also allowing the balance sheet to shrink too quickly. They could hike and do some re-investment, but it may be strange re-invest a large portion at the same time that they are hiking.
I believe market turmoil and balance sheet maturities will cause a period of (hike) pauses in 2016. If this is true, Treasury market yields may not rise as high as some pundits are warning.
A $400 billion reduction - which is inevitable unless The Fed unleashes a new QE - means S&P drops to 1800... and further...
Charts: Bloomberg
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the bouncing ball has not stopped bouncing and is obeying the laws of gravity.
If it weren't for gravititty, and bounciness, your avatar wouldn't mekka any sense.
So, S&P is cheap due to Fed BS.
also must consider a random starting point in 2012. move the beginning to the left or to the right could show s&p should be 1500 or it should be 2500.
As my BFF, good buddy and accomplice, Budgie Twitters, once told me b 4 he joined unindicted fraudster, Joe Cassano, in Britain, and then on to the continent for the festivities in Monaco, "It's ALL in the CON text."
These prognosticators, reflectors, and others selling something have taken the position that everyone is as stupid as George Bush, and Barney Frank after smoking too much Afghani.
I get a daily dose of a guy who tracks New Highs, and posts his "Analysis", of the massive move up ---sometimes 15X---AFTER THE FACT, in less than a year of Pharma and Biotech stocks. Not once has he posted anything about the early part of the move up so that I can get very very rich.
Arbitrary starting points are like lubricious foreplay, and then when it COMES time for the main event, all of a sudden she's got to answer the Tweet from her husband.
..or not.
... or they could drive someone(s) else's balance sheet into US equities.
You forgot the upcoming mark-to-market adjustment on that balance sheet.
Not to mention a few hundred billion in liquidations by the Chinese.
#41
When the Fed bought Treasuries in QE1, QE2, and QE3 the bond market sold off.
When the Fed STOPPED buying Treasuries the bond market rallied.
FWIW.
So...
Fed buys Treasuries > Treasuries sell off
Fed stops buying Treasuries > Treasuries rally
Fed sells Treasuries (or maturities reduce B/S) > Big Rally in Treasuries?
Future expectations determine a market (when and if said market is actually functioning).
Europe in free fall
http://thesaker.is/europe-in-free-fall/
We won't get that far.
At the first notice of any withdrawal symptoms, the FED is there with a nice big syringe full of herion to ease the pain....
We're DOOMED!
great post, thanks a lot!
Not sure how the Fed balance sheet is going to decline, even letting bonds roll off, if China and emerging market central banks are dumping UST's that the Fed has to buy. Or maybe this was the plan all along, a kind of roundabout QE4.
Either way, it seems like the Fed is sneezing into a handkerchief that it's allergic to.
Buying via BLICS.
http://www.treasury.gov/ticdata/Publish/mfh.txt
+ the one trillion China and other nations QT and interest hikes and print print print.
This will never end without a nuclear war.
Oh, we only need a short sharp armed confrontation with China to divert everyone's attention and you'll have everyone running for the safety of Treasurys and we'll see the S&P go up another 50%.
Shogun Abe is already gunning for it, it may divert the Japanese voters attention from the lethagy of the Japanese economy and enable increased spending on the Japanese MIC.
Let us hope this won't happen and that our families and friends won't become cannon fodder.
Here's a question: if the Fed funds rate is virtually 0%, doesn't the Fed constantly have to buy bonds to keep that rate? In other words, QE never really ends. The rate isn't zero just because the Fed says so.
The Fed Funds rate is the rate at which the Fed will lend money to its member banks. So yes, the rate is exactly whatever the Fed says it is.
So-called market rates, like mortgages, are set using Treasuries. The FED rigs these rates by buying Treasuries either overtly, using QE, or covertly, using foreign proxies(banks or CB's). A deflationary collapse in China does some of the work for them by herding scared investors into Treasuries for safety. So, while China may be dumping US debt, others are buying.
"The decline in the Feds balance sheet is a defacto tightening."
The FED is not worred about deFactos...
Treasury market yields may not rise as high as some pundits are warning.
lulz @ the "pundits"
obviously just FUN-DER-MENTALS!!!!!!!!!!!!!!!!
Dow straight up 100 points in the last 15 minutes of trade?? Meh...
Nothing to see here in the Matrix!
Instead of WW III, let's play Space Invaders!
I loved playing that game.
And the S&P finishes up by 1 point today!!
What a TOTAL, Fucking, Bullshit, Rigged motherfucking joke!!
I feeel like throwing my fucking computer across the room!!!
The only winning move is not to play. [/WOPR]
With the 50 MA cross down through the 200 MA on the S&P daily chart, it is not that unusual for the market to bounce up from oversold to test downtrending 10/20s (and possibly 50 MA). That is what happened back in August 2011 and then it took until February 2012 before 50 MA crossed back above the 200MA. Fund managers pay attention to these MAs (or propertietary MAs) and not the noise coming from the permabears and permabulls permeating on various media outlets and social networks.
The FED may have $400 Billion maturing, but if one looks closely at their language when they atopped QE, they said they were re-investing interest and maturing debt. So it maybe maturing, but that does no mean the balance sheet is shrinking.
Same in the UK. The BoE QE program explicitly says that interest is refunded to the govt and bonds are rolled-over at maturity to keep the balance sheet fixed.
A monetization by any other name would smell as sweet.
According to Guggenheim Partners:
http://www.guggenheimpartners.com/perspectives/media/rates-must-rise-to-...
Rates Must Rise to Avert Next Crisis
July 17, 2015
In 1898, Swedish economist Knut Wicksell argued that there existed a “natural” rate of interest that balanced the supply and demand of credit, assuring the appropriate allocation of saving and investment.
Should market interest rates remain below the natural rate for an extended period, investors will borrow excessively, allocating capital into less productive investments, and ultimately into purely speculative ones.
This is what the US economy faces today after years of meagre borrowing costs. Policymakers have created a Wicksellian dilemma where investment spurred by low interest rates is driving economic growth, but these inefficient investments support growth at the expense of lower productivity in the economy.
In recent years, this investment has flowed into housing, commercial real estate, and equities, driving asset prices higher, exactly the goal of the Federal Reserve in the wake of the financial crisis. But as the recovery in real estate and equities matures, a darker side of this imbalance between natural and market rates is beginning to emerge. Many investments today using artificially cheap capital are not increasing productivity – they are being made, because money is cheap and the profit motive is strong.
Consider the evidence. This year likely will witness record US stock buybacks; the second biggest year for mergers and acquisitions; the highest percentage of non-investment grade borrowers among new issuers of corporate debt; and a record for covenant-light loan issuance. In the midst of all this, stock prices are appreciating at the slowest pace since the financial crisis. Why? Because top-line growth is low and productive investments in core businesses are wanton.
Over time, the natural rate of interest should roughly equate to the average return on new capital investment. Distortions in economic activity begin to occur when the natural rate varies materially from the market rate.
The aftermath of the current period of corporate borrowing and splurging will be nasty. Consider that the majority of defaults of US high-yield bonds during 2008 and 2009 were loans originated between 2005 and 2007 – the final three years of the last credit cycle when M&A and leveraged buyouts peaked. Similar to today, credit remained cheap and the Fed was slow to raise interest rates.
We are not back in the frothy days of 2007, but we are leaving the realm of smart investment decisions and moving into the “silly season” when investors become convinced that recession is nowhere on the horizon and market downside is limited.
It is a world where asset prices continue to appreciate and confidence remains strong, while capital chases a shrinking pool of productive investment opportunities. Similar to the run-up to 2007, rising asset prices and malinvestments today may be sowing the seeds of the next financial crisis.
The harsh reality is extended periods of malinvestment result in declining productivity growth, lower potential output, and slower increases in living standards. A failure to normalize market interest rates soon will result in more capital plowed into investments that are less productive and more speculative.
As productivity declines, long-term growth will be stunted. Eventually, inflationary pressures will build, forcing market interest rates to rise. The longer market rates remain below the natural rate the greater the purge will be once higher rates induce a recession, causing a sharp rise in defaults among malinvestments made during the period of cheap credit.
Today looks a lot like 2004 or 2005, when investors were blissfully ignorant of what awaited. It is still early, but I get increasingly concerned the longer I see undisciplined investors clamoring for bonds with suspect credit worthiness at ludicrously low yields. Higher rates, higher prices, or both are on the horizon. Before long, some of those bonds may become toxic waste.
The good news is there remains time to take action. Policymakers can still make adjustments to avoid the worst phase of the credit cycle. To reduce the continued accommodation of these marginal investments, the US central bank should normalize rates soon. For investors, the time has come to consider opportunities to book gains in assets that in the reasonable light of day a prudent investor would never buy.
Guggenheim makes a very plausible case. I would suggest only that two additional items be considered:
Their argument, IMO, demonstrates a weakness that the Fed also suffers from: it looks only at effects on the US economy. With international trade and capital flows exerting strong influence on current conditions, we also need to analyze the effects of Chinese and emerging market capital flows. This analysis may temper decisions based solely on US conditions.
There is also the larger question of whether continuous growth is a viable goal long term. There may come a time when the impact on resources, together with shrinking demographics, will require us to find a way to stable economic conditions with less "growth." There will be a clear need to accept lower "standards of living" at the same time as we attempt to prevent social disruption. Neo-liberal capitalism has no answers to this question. Maybe Bernie has the answer.
then they have probably been buying belgium bonds. sometime in the near future the money supply figures are going to come in and they will be off the chart. velocity still near zero. no panic yet, there would be more panic if it was obvious what they were doing. what are they doing? theyre staring into the deflationary abyss, and Yellen has decided they can keep throwing money into the hole and listen to see if it hits bottom. there is no hyperinflation as long as you cant hear the money that you throw into that hole hit bottom. keep printing that has been the plan all along. things dont fuck up because of the black swan, or the horse throws you or an asteroid hits you, they fuck up because you have the wrong policy and you never change.the fed is never going to tighten credit, the only way the fed will do anything different is when the people who have been in there all along are fired and some new people come in for the express purpose of cleaning house. so be very careful who president Trump would make his fed chief. this is what the stock market is saying
The next Fed chief has already been selected by those who are most interested in long term policy. This is Stanley Fischer, ex chairman of the central bank of Israel. It does not matter who the president is. The dye is cast. Any attempt at putting someone else in the job will be met, not only with massive pressure from the existing establishment, but also by accusations of anti-semitism.
Two things not visible in FED's balance sheet, reinvestments of maturing securities and repo's. So defacto QE didn't end at all. https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWM...
China's doing the same: China's Central Bank Intensifies Assault on Financing Costs With Cash Injections http://www.bloomberg.com/news/articles/2015-08-27/pboc-injects-23-4-bill...
This is nonsense. They are still reinvesting all maturities of both mortgages and treasuries.