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The Unwind Of QE Means The "S&P Should Be Trading At Half Of Its Value", Deutsche Bank Warns
In his latest weekly note, DB's derivatives analyst Alekandar Kocic focuses on the interplay between US inflation expectations and US equities, and points out something curious, and very much spot on:
Policy response to the crisis post-2008 consisted of unprecedented injection of liquidity, transfer of risk from private to public balance sheet, and reduction of volatility from its toxic levels. The net result was near-zero rate levels and collapse of volatility across the board, while different market sectors developed high degrees of coordination. The last effect has been an indirect result of the central banks’ flows and the distortions they introduced in the bond market. In this environment other markets acted as a complement to rates (through which monetary policy was transmitted) and crowding out there pushed investors to articulate their views elsewhere. Their participation was a function of amount of liquidity injection. As a consequence everything was trading off of US inflation expectations as the main expression of the QE effects.
That was the case for the first 5 years of "unconventional policy" until some time in 2013. Then something snapped. Kocic continues:
With deflation as the main risk tackled by monetary policy, its success or failure was gauged by the ability to reflate the economy. Inflation expectations and breakevens were therefore signals for risk-on or risk-off trade. In fact, most market sectors, from FX to EM equities, were trading in high coordination with breakevens. Taper tantrum was the end of these correlations and a beginning of dispersion across different assets. In effect, it was the unwind of the “QE” trade, its first phase. While most other assets, like credit spreads, EM equities or different currencies, do not have a logical connection with US breakevens, US equities do. The dispersion between these assets and breakevens was an expected consequence of policy unwind. However, for US equities this unwind distorted their “natural” correlation with inflation. Persistence of these dislocations is just a manifestation of to what extent QE has been an important driver of post-2008 markets.
Which brings us to the punchline:
Since 2013, stocks rallied while disinflationary pressures were reinforced by a strong USD, low commodity prices and a decline in global demand. If pre-2013 coordination between the two is taken as a reference, then based on current stock prices breakevens should trade about 1.5% wider. This means the Fed should be hiking because inflation is above target. Alternatively, given the current level of inflation, S&P should be trading at half of its value.
Wait, the S&P should be trading at 900... or even less? Yes, according to the following Deutsche Bank chart:
Only one question remains: which breaks first - do inflation expectations surge higher, soaring by some 150 bps to justify equity valuations, or do equities crash?
Is reconciliation likely – and, if so, in which direction? Are we returning to the pre-crisis world, or we are in a completely new regime?
The answer will come from none other than the Fed and by now, even Janet Yellen knows that one word out of place, one signal to the market that the QE-inflation trade will converge with stocks crashing instead of inflation rising (which, unless the Fed launched QE4, NIRP of even helicopter money now appears inevitable), and some $10 trillion in market cap could evaporate overnight.
Is it any wonder that Yellen is exhibiting "health issues" during her speeches: the realization that the fate of the biggest stock market bubble lies on your shoulders would make anyone "dehydrated."
In retrospect, Ben Bernanke knew exactly what he was doing when he got out of Dodge just as the endgame was set to begin.
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I would really like to know DB exposure to the VW debacle.
Well, the German banks and their industry are interwoven kinda like the Japanese zaibatsus and DB is after all (read somewhere whether true or not who knows) the largest single holder of derivatives (don't worry it'll all net out, LOL) let alone VW.
Whatever the details, it ain't good. Period.
Charts, shmarts - it's all bullish !! Buy ! Buy ! Buy ! With both fists and feet, too ! ..... thankyouverymuchI'llbehereallweektrytheveal !
And DB should be chapter 7
Should, could, would but doesn't.
I'd rather know how big their trades on the downside are and how it will affect them if we get a sideways or V movement.
In 10 days a new debt limit will be created and also give a indication where QE4 will be and that always sparks a spike, maybe not a long lasting one but if you're short short term that can hurt.
And we've run through the bad news for the next 14 days so that won't help them either.
What Deutsche Bank seems to be saying is that all of Wall Street could wind up underwater, the stocks and derivatives held by the banksters halved in value. Such an economic crash would wreck the Manhattan property market, cut the income of the drug cartels (and their DEA running dogs) and generally raise economic havoc everywhere. Amid catcalls and laughs, CNBC would have to shut down, its star, Jim Cramer, checking into a rehab facility after a nervous breakdown when he couldn't make margin calls on his trading account. Barry would probably try to declare martial law as he flew Air Force One to a secure location (Offutt Air Base in Omaha again?). Boy, would things be great then! Until, of course, I found out that all the ATMs nationwide were shut down on orders of Homeland Security.
If you wind down almost 20 trillion $usd of funny money from '08.
Here lies, the conundrum of money printing.
Short mortgage backed securities.
I'm raking in cash on the corporate debt side. MBS is where the real money is. ha
PS, I got into a heated argument with my local coin dealer last night.
NO Joke. I almost ripped the Mother Fuckers head off.
Homey don't play the spread.
How are you shorting them exactly ?
Because I have a little info you might be interested in.
The whole industry's future rests on the difference between void and voidable right now.
Now the statute of limitations on criminal prosecution for the baksters has tolled it
looks like the Justus system may be about to dismatle the industry as it is now.,
Corporate, or MBS?
I'm inverse trading corporate.
I'm all ears Winston. I deeply respect your input.
RMBS for sure.Been a while since I looked at CMBS pooling and servicing agreements.
I have one somewhere on my drive , let me have a look.Can't imagine its not the same boilerplate as
the RMBS one..
Probably tomorrow though, with a link to a writ of centoirari that will prolly be granted by
SCOTUS.I have other higher priority tasks this minute.I was just keeping on eye on any news
between those other things..
Winston, one of the things I most admire about you, is your uncanny ability to overthink situations.
Relax, take a breath, and give the Mrs. a hug for me.
It's NO hurry my friend. I'll send you some information as well.
A plan is made, long before it's executed. ;-)
Winston, you might pick up a couple of euros shorting the $usd in early London.
Hey with Pro-Bowler NFL Irving Fryer sentenced to 5 years for mortgage fraud( along with his 72 year old mother) the industry ought to be clean and solid.
Honest.
You can trust Fedgov Justice and our never rest regulatory agencies. Amerka 'taint no banna republic.
"We never sleep" that's their motto.
Any idea how the Fed is making out on the $1.25T of MBS it bought?
Inflation above target? Really? Where did they come up with such nonsense?
They stopped the limo and tried to buy a newspaper for 5 cents.
treasury rates are indicative of nothing. cpi is moar manipulated than libor. when the 5Y/5Y goes 0%/0% then S&P goes ballistic. charts are worthless. there is no market there is only the yellenator.
i will say this though, they may throw a scare into equities if the PDs end up with a bunch too much of USTs. that has nothing to do with any alleged market action, just pure fuckery.
I have bought a new Popcorn machine just for this occasion. I am now ready to see flying bodies. Please start jumping.
It wouldn't be the first time a man sacrificed a woman to save his ass, but there will be clawback on this.
To me this begs the question, did QE really ever end? Is there a way to tell?
My ultimate SP target is 450. That, of course, is if we haven't exchanged nukes by then, in which case there will be no S&P.
The other option SP to the moon, but main street results of SP 450. Either way, 450 is coming.
SHOULD TEST 666
I have been buying on the dips..Are you telling me that the S&P (Standard & Poor's) 500 is going to live up its'last name?
Jim Willie says the Fed is funding $1T/month (yes trillion) of QE right now, by allowing the Banksters to sell (but never deliver) US Treasuries. In other words, the Fed is "buying" treasuries from the big banks to save them from their massive losses. Just like the MBS fraud, the paper is never marked to market. More fraud with complicity, to kick the can down the road.
Listen here https://www.trunews.com/tuesday-september-29-2015-jim-willie-pt-1/
This narrative seems like quite a stretch, but ya gotta love Mr. Willie's speaking style. And, if this is true that is sure a lot of dry powder to blast the markets higher.
Remember when the markets made sense? Those days are long gone!
Fuck yeah! Spot on!
If they are publicly saying this to everyone then its going higher - no chance they are trying to do the right thing and this is the product of actual research.
Eventually its gonna go there - but I have come to the realization its not gonna happen until massive disaster strikes that completely decimates the fed Put. There is such a widespread belief that no matter what the Fed has their back that its next to impossible to get significant selling.
Heck - a 5-7% correction and you have people freaking out - now a 10% correction is a crash, a 15% drop is jump off the building time. All you have to do is watch the market reaction to bad news.
Repeated bad news is still pump time. Think about it - economy slowing = bad for earnings - yet they have destroyed risk reward to the point that bad = good. More bad = more good because that means the fed will buy futures even more.
20 years from now these idiots will be villified and 50 years from now people will not understand how we let this crap happen.
That's technically horse shit. The value of the S&P is based on earnings. Yes, the P/Es are elevated, but not twice what the would normally be. And yes earnings are likely overstated but even if they are only $90 that's a ten P/E. I don't see how they get to that.
"That's technically horse shit. The value of the S&P is based on earnings. Yes, the P/Es are elevated, but not twice what the would normally be."
There is no normally, any more. The "value" of the market is based on massive financial fraud.
The Banksters wont like this.
http://www.cdbaby.com/AlbumDetails.aspx?AlbumID=thatguybloke&_ga=1.204737360.132707828.1438206264
Translation: the unwinding of financial fraud means...