Citi On QE3 - Less Flavor, More Calories

Tyler Durden's picture

There is an ongoing debate among market participants over the reasons for asset elevation - global growth expectations? liquidity hose-pipes? European tail-risk reductions? or some combination of the three. Citi's Steven Englander attempts to uncover the changing face of the Fed's QE impact - with some very specific findings this time around.

 

Citi, QE3: Less Flavor, More Calories

Ever since QE3 expectations solidified in mid-August gold has far outperformed the S&P and risk-correlated, in contrast to when QE1 and QE2 were announced. We see this is indicating that the expected impact of QE on activity is less for this round than for previous rounds and that the attractiveness of the rest of the world is also less than when the prior QE rounds were announced. 

 

We look at the gold reaction as a an indication of how much asset prices are driven by pure liquidity addition, the S&P to see how much is expectation of top line growth (recognizing that liquidity also has some impact) and risk correlated G10 currencies (a basket of CAD, AUD,NZD, NOK, SEK) as a measure is how much the impact is pure substitution out of USD.

 

When QE was announced in March 2009, the gold price reaction was relatively muted throughout the period, S&P exploded from the get go and small risk sensitive G10 currencies traded in between (Figure 1).

 

Figure 1. Gold (light blue), S&P (navy) and small G10 currencies (green) indexed to 100 when QE1 announced

We date the second QE from late August 2010 when Fed Chairman Bernanke gave his 2010 Jackson Hole speech. Again the S&P reacted sharply, although the runup in the first six months of QE2 was less than in the first six months of QE1 (Figure 2), Currencies and gold held their own but the dominance of the equity market impact is clear.

 

Figure 2. Gold (light blue), S&P (navy) and small G10 currencies (green) indexed to 100 when QE2 announced

This episode shows very different behavior so far. Recognizing that it is early days, what is clear is that the gold response is far outpacing the S&P and currency move (Figure 3). Gold is by far the winning asset relative to the S&P and even currencies. This is consistent with a view that there will be a lot of liquidity in the system but that neither US nor global prospects are as attractive as they were in the past. Hence the appeal of gold as an asset that reflects high liquidity and is a near money substitute.

 

Figure 3. Gold (light blue), S&P (navy) and small G10 currencies (green) indexed to 100 in most recent QE episode

 

Source: Citi

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DormRoom's picture

Stagflation cometh.

mammoth mo's picture

Until it all falls down.

They had two options - keep going with the ponzi or tell the truth.

 

This was no surprise.

The only question is how long will stagflation work?

Ruffcut's picture

I do meat shopping and am getting concerned.

Hyper inflation will be deadly.

It' s not far out of probability, but for sure is getting uppity.

I'm looking for a side of beef, home grown tasty meat. Fuck gold and silver. I got silver, but can't eat it either.

DosZap's picture

Fuck gold and silver. I got silver, but can't eat it either.

No, but you sure can buy a side of beef.

Silver Bug's picture

Here come the banksters putting their "Spin" on it. QE to infinity is now here to stay!

 

Banzai7 Visual Combat Art

mjorden's picture

to infinity ... AND BEYOND!

 

(I always wanted to say that with just my cape and underwear!)

CPL's picture

Follow your bliss baby.  Follow your bliss...

 

 

MachuPicchu's picture

BEn has made a  GOoooOOOOLLLLLdddDDD..!

Dr Benway's picture

"neither US nor global prospects are as attractive as they were in the past"

 

I would say we are at the point where no prospects are attractive, it's just a matter of choosing the least unattractive.

 

Terminal patient dilemma, bitchez

CPL's picture

The best looking horse at the glue factory.

LULZBank's picture

OT but you've got to see this! Total LULZ!!

http://www.youtube.com/watch?v=rdIWKytq_q4

iDealMeat's picture

+1,  Almost as good as Leno asking people, "Who lives on 1600 Pennsylvania Ave"..  Then asking them who lives in a pineapple under the sea...

 

There really is no hope for the silly sheeple..

roadsnbridges's picture

Citi just figured out currency debasement?

ziggy59's picture

In respect to Uncle Ben, Ben and Jerrys should make a new flavor..
Gold and Silver..creamy and loaded with flakes!

mrktwtch2's picture

wrong!..!what turned the market in march of 09 was the suspension of mark to market accounting..and mark to make belive was brought back..this is why history is important..

unununium's picture

Well buying $40B more worthless crap from banks every months helps too.

Papasmurf's picture

Just in time for year-end bonuses.

LongSoupLine's picture

Fuck you Citi Bank...crooked thieving fucks.

LongSoupLine's picture

Fuck you Citi Bank...crooked thieving fucks.

LongSoupLine's picture

sorry for the DP...but it does look good twice however.

LULZBank's picture

First one got 2 negatives for some reason.

LongSoupLine's picture

yeah, trolls are too fucking stupid to notice the one right under it. lol.

LULZBank's picture

Well... You've offended one of them now!!! lol

Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

Where's Graham Summers from Phoenix Capital when you need him?

kito's picture

CITI ON QE3: THANK YOU BEN, THANK YOU BEN THANK YOU BEN!!!!

CPL's picture

Until someone asks for delivery.

fonzannoon's picture

Gold should be up $100 bucks and climbing today and silver should be up $5. Margin compression will continue to hit equities but metals suffer no such thing.

unununium's picture

Yes, the move is impressive given that metals prices are controlled (fed's words) on days like this.

DosZap's picture

Yes, the move is impressive given that metals prices are controlled (fed's words) on days like this

They tried that yesterday, didn;t work out all that well this time, did it.

kito's picture

fonz, have you been studying your markets and staying away from cnbc? 

Yen Cross's picture

 Lower corporate guidance, from Multi Nationals, and (expensive milk) will leak into 2013 in a bad way!

 SNAP up BITCHEZ!

roadsnbridges's picture

If I were a hedge fund manager, I would liquidate into this ripfest, close down, and take my 20% to elsewhere.

CrashisOptimistic's picture

For an entire world with devastating fiscal problems, how can they possibly withstand the temptation to tax gold transactions?  There is literally no downside.  It has no value to society.  It has no impact on GDP.

A steep tax on it would seem inevitable.

roadsnbridges's picture

If the Goobermints don't obey the law, why should I?

LawsofPhysics's picture

Why tax when they can already rehypothicate?  You clearly haven't been paying attention, in a law-less world where fraud is the status quo, possession is 100% of the law.

unununium's picture

I wonder what the tax for losing it in a boating accident will be.

Clayton_Bigsby's picture

You can't tax what you don't have a monopoly over. 

Plus they would need a goon squad out with shovels and pickaxes to try and collect. You ever seen the typical IRS employee? Good luck with the physical activity.

CrashisOptimistic's picture

The tax would be on transactions, not possession.

Far worse, when it starts and is steep, transactions will stop.  That will end published prices.

You'll never know if your counter party is an agent or not.

Srsly, there is no downside to govts taxing gold transactions.  It would be a zero economic impact source of revenue.

DosZap's picture

 how can they possibly withstand the temptation to tax gold transactions?

 

Two words: Black Market

kieran1968's picture

Looks like Ben ditched the helicopter for an SUV. Just getting in practice for todays announcement.

 

http://www.youtube.com/watch?v=CjKuBkMNQZU

oldman's picture

Still nothing-to-do

All done just waiting for the next shoe to fall

How many legs does this son-of-a-bitch have?

om

Yen Cross's picture

Old Man? Me too!  There is plenty you can do. Buy a new safe,(pm's), and hollow out a place in your walls for "fast cash"!

  Or you can(partially) expatriate like I did 4 years ago?

oldman's picture

@YC

Yen, why did you wait so long

All of the above done

Before '98     

Didn't want to be late

How many legs left

How many shoes?

Maybe we never will get any news                      

om

 

unununium's picture

Gold must skyrocket BEFORE inflation does.

Why?

Because it must be too late for the sheeple to protect themselves.