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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Thu, 09/13/2012 - 15:36 | 2791602 DormRoom
DormRoom's picture

Stagflation cometh.

Thu, 09/13/2012 - 15:40 | 2791624 mammoth mo
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?

Thu, 09/13/2012 - 15:51 | 2791690 Yen Cross
Yen Cross's picture

Hyper-Inflation cometh first! Chart provided.

Thu, 09/13/2012 - 16:23 | 2791891 Ruffcut
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.

Thu, 09/13/2012 - 16:48 | 2792005 DosZap
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.

Thu, 09/13/2012 - 15:36 | 2791603 Silver Bug
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

Thu, 09/13/2012 - 15:38 | 2791608 Snakeeyes
Thu, 09/13/2012 - 15:38 | 2791609 mjorden
mjorden's picture

to infinity ... AND BEYOND!


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

Thu, 09/13/2012 - 16:01 | 2791743 CPL
CPL's picture

Follow your bliss baby.  Follow your bliss...



Thu, 09/13/2012 - 15:40 | 2791618 MachuPicchu
MachuPicchu's picture

BEn has made a  GOoooOOOOLLLLLdddDDD..!

Thu, 09/13/2012 - 15:41 | 2791632 Dr Benway
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

Thu, 09/13/2012 - 16:02 | 2791746 CPL
CPL's picture

The best looking horse at the glue factory.

Thu, 09/13/2012 - 15:47 | 2791635 LULZBank
LULZBank's picture

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

Thu, 09/13/2012 - 16:01 | 2791742 iDealMeat
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..

Thu, 09/13/2012 - 15:42 | 2791640 roadsnbridges
roadsnbridges's picture

Citi just figured out currency debasement?

Thu, 09/13/2012 - 15:44 | 2791653 ziggy59
ziggy59's picture

Should be Shiti Bank

Thu, 09/13/2012 - 15:42 | 2791641 ziggy59
ziggy59's picture

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

Thu, 09/13/2012 - 15:43 | 2791643 mrktwtch2
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..

Thu, 09/13/2012 - 15:53 | 2791702 unununium
unununium's picture

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

Thu, 09/13/2012 - 16:04 | 2791760 Papasmurf
Papasmurf's picture

Just in time for year-end bonuses.

Thu, 09/13/2012 - 15:43 | 2791645 LongSoupLine
LongSoupLine's picture

Fuck you Citi Bank...crooked thieving fucks.

Thu, 09/13/2012 - 15:43 | 2791646 LongSoupLine
LongSoupLine's picture

Fuck you Citi Bank...crooked thieving fucks.

Thu, 09/13/2012 - 15:45 | 2791658 LongSoupLine
LongSoupLine's picture

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

Thu, 09/13/2012 - 15:48 | 2791678 LULZBank
LULZBank's picture

First one got 2 negatives for some reason.

Thu, 09/13/2012 - 15:55 | 2791711 LongSoupLine
LongSoupLine's picture

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

Thu, 09/13/2012 - 16:07 | 2791778 LULZBank
LULZBank's picture

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

Thu, 09/13/2012 - 15:58 | 2791732 Budd aka Sidewinder
Budd aka Sidewinder's picture

That's what she said

Thu, 09/13/2012 - 15:44 | 2791652 Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

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

Thu, 09/13/2012 - 15:44 | 2791656 kito
kito's picture


Thu, 09/13/2012 - 16:06 | 2791766 CPL
CPL's picture

Until someone asks for delivery.

Thu, 09/13/2012 - 15:45 | 2791661 fonzannoon
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.

Thu, 09/13/2012 - 15:55 | 2791712 unununium
unununium's picture

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

Thu, 09/13/2012 - 16:51 | 2792023 DosZap
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.

Thu, 09/13/2012 - 16:37 | 2791959 kito
kito's picture

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

Thu, 09/13/2012 - 15:45 | 2791662 Yen Cross
Yen Cross's picture

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


Thu, 09/13/2012 - 15:46 | 2791667 roadsnbridges
roadsnbridges's picture

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

Thu, 09/13/2012 - 15:46 | 2791669 CrashisOptimistic
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.

Thu, 09/13/2012 - 15:50 | 2791682 roadsnbridges
roadsnbridges's picture

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

Thu, 09/13/2012 - 15:54 | 2791707 CrashisOptimistic
CrashisOptimistic's picture

Because they have jails.  

Thu, 09/13/2012 - 15:53 | 2791706 LawsofPhysics
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.

Thu, 09/13/2012 - 15:56 | 2791719 unununium
unununium's picture

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

Thu, 09/13/2012 - 15:58 | 2791729 Clayton_Bigsby
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.

Thu, 09/13/2012 - 16:09 | 2791795 CrashisOptimistic
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.

Thu, 09/13/2012 - 16:32 | 2791932 Clayton_Bigsby
Clayton_Bigsby's picture

Sukhdeep is an agent?!

Thu, 09/13/2012 - 16:47 | 2792002 DosZap
DosZap's picture

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


Two words: Black Market

Thu, 09/13/2012 - 15:48 | 2791679 kieran1968
kieran1968's picture

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

Thu, 09/13/2012 - 15:49 | 2791681 oldman
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?


Thu, 09/13/2012 - 15:56 | 2791724 Yen Cross
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?

Thu, 09/13/2012 - 17:19 | 2792118 oldman
oldman's picture


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                      



Thu, 09/13/2012 - 15:51 | 2791688 unununium
unununium's picture

Gold must skyrocket BEFORE inflation does.


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

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