Charting The Diminishing Multiple Expansion Benefits Of Fed Action

Tyler Durden's picture

The expanding-multiple-dependent US equity market that we have discussed numerous times (most recently here) appears to have hit a snag. While we noted the almost perfect correlation between forward-looking P/Es and the market during the last three years - and the clear hope-iness nature of said multiple expansion (and reality contraction) - what we failed to note until now is the significantly diminishing multiple-expansion impact from each of the Fed's actions. QE1 created a plus-4x multiple expansion (from ~10 to ~14), QE2 created a plus 1.5x pop in multiples, and Operation Twist around the same. Critically though, as soon as the Fed-sponsored money-supply 'flow' expansion ended, so the P/E multiple-expansion ended (and indeed reversed very quickly). It really is about the flow; and the threat of a crack-addicted market's requirement for perpetual QE.


So critically, unless we see/hear believe that the Fed will embark on perpetual and exponentially growing QE since its impact is lesser and lesser, then its game over for the equity market - and if they 'hint' at open-ended easing than Gold goes sky-bound...


Chart: Morgan Stanley

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Mutatto's picture

"Gold goes sky-bound..."


Taking oil (and everything else) with it.


Snakeeyes's picture


I  have an op-ed in US News and World Report and I wish I had that chart, But here is my version for the upcoming FOMC meetings.

Dr. Engali's picture

The fed may be willing to let the equity market go since they have succesfully herded retail (for the next slaughter) into the bond market . This will keep uncle Sam's borrowing coast down (for now) until the bond market blows up.

Hype Alert's picture

"It really is about the flow; and the threat of a crack-addicted market's requirement for perpetual QE."


At what point do we have the Weimer effect (perpetual QE, rising Stock market & prices, no growth, falling employment).  Where is the Event Horizon of that black hole?  Are we there?

FieldingMellish's picture

Open-ended QE is ALL that is left. Never ending with no preset spending limit. The bill will be, yet again, passed on to future generations.

LawsofPhysics's picture

Correct.  The QE will be in imaginary paper wealth, while the "bill" will be paid in real wealth, in other words, the bill will be paid in blood.  Know your history, same as it ever was.  That which cannot be sustained, won't be, as the laws of Nature and physics really don't give a shit about any of this.  hedge accordingly, that's all you can do anyway.

Jlmadyson's picture

Diminishing returns baby!

Man oh man what are they thinking.

Meesohaawnee's picture

they are thinking huge bonuses and huge stock option based compensation from all their "contributors" .. thats all they care about. Nothing about the good of the coutnry. You all need to stop thinking in that mode.

neutrinoman's picture

Thanks for presenting charts using valuation (not price) metrics -- it's what smart people do, especially in a secular bear market like ours.

larz's picture

whats the solution to this stupidity?!!!!! do we just sit and wait for lock down or complete meltdown or is there something to do before?

Banjo's picture

Let me understand this. Welfare and free money for the banks while throwing people into unemployment and reducing their wages is bad for the economy?

No one could have forseen that outcome. We should give banks more money so they can attract more talented people. And remove the minimum wage so the invisible hand can "cure" unemployment.

miker's picture

All QE's NOT the same. 

First QE was 1.25 T in MBS.  That money went to banks.  Banks were told to buy the market up which they did in return for unloading shitty assets.

Second QE was Treasuries.  Treasuries go straight into economy via federal spending.  Prices got some inflation boost as a result.

QE 3 will be MBS or other private debt.  Equity markets petering out and will need a "shot in the arm".


FRBNYrCROOKS's picture

You are being fooled. The only achievement is lowering bank reserves and leveraging banks back up. The FRBNY simply says  "give me those Treasuries you are supposed to keep as collateral, we will buy them and you can borrow more money at the discount window at 0.25% to throw at the stock market." Oh  

Conman's picture

Really define petering out?  Looks pretty frothy to me. Fed will not buy private debt, except through Harry potter at their markets group.they are well aware of the impact that would have politically.


Lot of states are starting to allow casino gambling at racetracks. This is under the guise that it will draw economic benefit, much like QE. All it does it steal money from the middle class and poor. Look at the surrounding neigborhood around Atlantic city and Vegas.

mademesmile's picture

"All QE's NOT the same" I like that. Remember the stimulas checks under Geroge W? Nice little check of $600 to a majority of Americans. Only a matter of time and scale,  IMO.

miker's picture


Bush's "stimulus" wasn't QE per say.  That is to say it was not money printing.  Financed by debt, I believe; therefore no increase in money supply.  The big worry with QE (justified) is devaluing the currency and inflation of prices.  My point is that inflation of consumer prices may or may not happen depending on where the QE money goes.

FRBNYrCROOKS's picture

I missed everyone of those "W" checks because I was in college and didn't file. They need to make it up to me. If the cultist, man with many wives, gets in the WH we might just get it.

Haddock's picture

Printing money doesn't work????

Who'da thunk it?

1eyedman's picture

it appears, this week, we will finally see a negative half-life on the effectiveness of easing/stimulus announcements....its already occurred and nothing has been initiated or announced....sell the news perhaps??

MSM seems to confuse the concepts of 'stimulus' and Fed actions....Fed cheapening is not stimulus, spending is stimulus.....but words and ideas are hard to understand for MSM.....


how few people see who survives election cycle, or rather, those who are not elected yet have very very substantial control...big ben appointed by Bush, re-upped by Barry; greenspan survived gop to dem to gop....want to start a fight w/ both sides? tell them they both dont matter as the real power is the Fed and corportocracy.....but as the riots and "revolutions" in the middle east show us, humans have great capacity to bend over and take it for a long time until they rise up.....dont expct any change soon...

IMA5U's picture

in the short run all that really matters is draghi


the bernak is a sideshow right now

OutLookingIn's picture

The diminishing marginal productivity of debt.

For each new $2.63 of debt you get just $1.00 of GDP.