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By Frontrunning QE, Did The Market Make QE Impossible?
Ever since the beginning of the year we have been saying that in order for the Fed to unleash QE, stocks have to drop by 20-30% to give political cover to the Fed (and/or ECB) to engage in another round of wanton currency destruction. Because while on one hand the temptation to boost stocks is so very high in an election year, the threat to one's presidential re-election chances that soaring gas prices late into the summer does, is simply far too big to be ignored. Yet here we are: stocks are just 4% off their 2012 highs, even as bonds are near all time low yields, and mortgages are at their all time lows. As such, even with the latest batch of economic data coming in simply atrocious, the Fed finds itself in a Catch 22 - it wants to help the stock market hoping that in itself will boost the "economy", yet it knows what more QE here will do to the priced of gold and inflation expectations: something which as Hilsenrath himself said yesterday does not compute, as it runs against everything "Economic textbooks" teach. What is more important, is that the market, like a true addict, is oblivious to any of these considerations, and has priced in a massive bout of Quantitative Easing to be announced tomorrow at 2:15 pm. There is one problem though: has the market, by pricing in QE on every down day - the only buying catalyst in the past month have been hopes of more QE - made QE impossible? Observe the following chart from SocGen which shows 6 month forward equity vol. What is obvious is that due to precisely being priced in, QE is now virtually unfeasible, irrelevant of what Goldman and its "FLOW QE" model tell us. As SocGen simply states: "More stress is needed to trigger ample policy response."
Naturally, SocGen is not the first to get this. Recall that this is precisely the logical espoused by both Citi a month ago which warned of XO crossing above 1000 bps first, and then Deutsche Bank this weekend saying a crash may well be needed to jar Europe out of inactivity like last fall. Not to Goldman though. Goldman is confident that the 4% drop in the S&P from its highs is enough to unleash an epic episode of monetization. Well, the chart below begs to differ.
Of course, if Goldman is right, and the Fed does indeed go ahead and launch some version of a Flow-based easing program, with a $50-$75 billion monthly monetization total, then kiss it all goodbye, as going forward the market will consider even a one tick drop in the ES a sufficient reason to kill the USD, and buy every ounce of physical gold available. In the process, of course, the Weimar wheels will start turning.
Furthermore, while stocks are always in their little world, and always, absolutely always wrong in the long-run, recall that the fixed income markets are saying something totally different: no bombastic LSAP program, but a very timid Op Twist expansion, where the 3 year selling threshold is extended by one year to include 4 year bond sales. An outcome such as this will send stocks plunging as it is merely more sterilized easing - the kind of intervention that has had no real impact on risk at all as all risk gains in the past 9 months have came solely from Europe's $1.3 trillion LTRO-based balance sheet expansion.
So what will it be? More QE, whereby the Fed admits defeat and hands over the monetary apparatus to an increasingly more petulant market, or no QE, and a wholesale risk crash in one day.
Tune in tomorrow at 2:15 pm to find out.
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I see your point. I was thinking more along the lines of a real run in the US, not Europe. Something like money market funds breaking the buck en masse, bank runs, failed auction, etc. You know, money leaving the system/deleveraging type of stuff. That would seem to justify intervention to calm things down. Doing it now just raises oil prices again and slows things down which seems counterproductive. One would think it would make sense to intervene more when the downside of not intervening was greater than the unintended consequences. My point was how will they justify further intervention now when the old excuses aren't really good enough with rates low, stocks up, etc.
I know, it sounds counterintuitive but we are not talking about real money here, we are talking debt money.
Less stress is needed now that we have a Kenyan as President, the Department of Homeland Security and TSA pat-downs.
The Fed now has the greatest confidence and enthusiasm in the mission and wants to help us.
Stop Dave. Dave please stop. My mind is going. I can feel it.
Bennie, order up! One Stress to go!
Ben cant release again. It is. coordinated circle-jerk and Europe can't find its penis.
of course .... you're ASSUMING the announcement of more QE will have an upside effect in the DOW
something tells me it won't.
look out beloooooooowwww!!!
I love this speech by Reagan:
http://www.reagan.utexas.edu/archives/speeches/1981/32081b.htm
Letting the big boy banks compete nation wide might have turned out poorly, but Reaganomics (as it played out) didn't reflect his vision of trimming the budget and cutting income taxes by 2/3rds (also factoring the cost of inflation into them).
The liberals who blast "trinkle down" as pissing on the little guy probably have had their fill of today's "siphon up". The hawks who support such excessive defence spending should know he didn't want to and that it was a more functional economy that beat the USSR.
Heads up to the next country who gives the great American experiment a try: pay your politicians well and socialize their fund raising needs, or your Reagan will have his most important proposals shot down by all sides too.
Lots of good ideas from the Gipper on that site.
"Rest not life is sweeping by go and dare before you die. Something mighty and sublime, leave behind to conquer time."
- Johann Wolfgang Von Goethe
updated "Fed Watch" link collection
http://morelivers.blogspot.com/2012/06/19th-jun-fed-watch.html