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Guest Post: QE3, What’s Not To Like?
Submitted by Peter Tchir of TF Market Advisors
QE3, what’s not to like?
Even the most die-hard bear or those who simply believe QE2 did more harm than good, have to resign themselves to the fact that this Fed will enact QE3 at its earliest possible convenience. While I remain convinced that some current 5th grader will eventually be awarded a PhD in economics (not from Princeton) for their work on the folly of the QE programs, it is time to prepare for QE3. Those of us who had hoped the dissent from the August FOMC meeting was a sign that the Fed was wavering on its “print and print some more” philosophy, have seen those hopes dashed against the rocks. The doves have come out in full force. The minutes show that some members think we should have already started QE3 and now one of the dissenters has backtracked.
I think that playing this from the perspective of being long stocks is a potential mistake this time around. “Daily Needs” commodities should do well and even the stocks of companies that produce them. PM’s should do well, since whether they will work long term or not, they have rewarded those who have treated them as de facto money for the past couple of years. High Yield bonds had seemed oversold, but that trade already appears to have reversed too far, too quickly as investors have piled back into risky assets.
Will QE3 Support Stocks?
It is virtually impossible to find anyone who doesn’t think QE is bullish for stocks. It is easier to find someone who still believes Obama deserves a Nobel Peace prize than it is to find someone who thinks stocks won’t do well because of QE3. That is scary. Whenever the market becomes universally convinced of something, it gets set up for disappointment. Not the disappointment that QE3 won’t come (it is coming), but that everyone has fully priced it in. It is hard to remember anything from a year ago, but even when QE2 was announced, there was some question of how much good it would do for stocks. There was actual debate. There was the famous Tepper moment on CNBC where he dispelled the debate and stocks started a relentless march higher. Until that point, and even to some extent, after that, investors debated whether or not QE2 was really good for stocks or not. By the end, the only investors who were arguing that QE2 had little impact on stock prices, were the bulls and they were only saying that as a justification why stocks would remain strong after QE2 finished.
What did stocks really do during QE2?
What actually happened to stocks under QE2? It was first hinted at in Jackson Hole in late August with the S&P 500 at 1050. By the time it became official policy on November 3rd, the S&P was already up to nearly 1200. Stocks actually closed the month of November lower than where they were on the day QE2 was made official. From that point, there was a relentless march higher, peaking at 1340 in February. Then market bounced around in a fairly wide trading range. Peaking just north of 1350 a couple of times, but trading back down to 1265 a few times as well. Stocks finished June 30th, the end of QE2 at 1320. Since the end of QE2, it has been as low as 1100, almost back to where stocks were when the whole program was first hinted at. The half life of QE seems to be shorter than that of a teenager’s viral video fame.
So, if nothing else had gone on in the world, and all of the moves in stocks were attributable to QE2, how should it be viewed? It seems as though the bulk of the benefit came prior to its official announcement. Stocks were up 150 points since Jackson Hole. SPX only gained 120 points from then until it concluded on June 30th, and except for a 2 month period where it was a daily grind higher, the market was volatile and had several -5% moves. The hype surrounding the potential for QE3 seems to be greater than the actual performance.
What else happened in that time frame? Well, at the end of August, the EFSF was officially unveiled. It was almost comical in its construction, but the market liked it. The ECB added Irish and Portuguese debt to its bloated balance sheet already loaded down with Greek debt. Ireland received IMF support. We had an election that was viewed positively by the market. Remember all the “hope” surrounding those November mid-term elections? Then Obama allowed the Bush tax cuts to remain in place and added some payroll tax cuts just to keep everyone happy.
So maybe, just possibly, some of those events also played a role in the performance of the stock market?
What is different this time?
So before going “all-in” long based on QE3, it is worth spending some time to figure out what is different this time around.
Now everyone believes QE3 will ensure stocks go up, there was doubt about that in the past.
Stocks jumped 150 points from the first hints in 2010, until it was actually implemented (we are up 125 from the lows already).
Stocks were at 1050, rather than 1225.
The ECB was worried about inflation and was willing to raise rates and not fight the dollar devaluation with their own debasement program. With the slew of weak data coming out of Europe, it might be prudent to assume that they are working on their own devaluation plans – which may not help US stocks. Although the S&P is up almost 13% in the past 12 months, it is only up 1% in Euro terms. Making the assumption that Europe will play nice again is a risky proposition.
Investors, politicians, and maybe even some real people actually believed in the wealth effect. It should be clear now that the wealth effect is enjoyed by a limited number of households. Their purchases can drive the earnings of Tiffany’s and Saks, but the move in stock prices didn’t really help the average family. How dumb does the Fed think the average American is? The Fed and Wall Street say your pathetically small 401k (average of 75k according to Fidelity) is up, so spend, spend, spend! Yes, spend, and please ignore all the talk about taking away those pesky little “entitlements” that you feel entitled to. The wealth effect is too small, especially when everyone realizes pensions and benefits that they had planned on are being stripped away, and that housing isn’t coming back any time soon, and that earning interest on balances is a thing of the past. Their 401k isn’t even “waking up and getting out of bed” money to most of the people advising them to spend. That is bizarre and seems unstable.
Transitory used to be a word that meant something that came and went. It was a temporary thing. Now it only means something that the Fed wants to pretend they aren’t responsible for. The CRB index was 268 last September 1. Today it is 342. Yes, it was above 360 at one point, but that doesn’t meet any normal definition of “transitory”. The Fed has unleashed inflation pressures, and even if we don’t admit it, the rest of the world understands it, and will take policy measures to protect themselves. We do not make policy in a vacuum. Other countries see what we are doing and do react. The reactions may not be instantaneous but they are real and will have long term impacts that are difficult to change. Pretending the pursuit of QE doesn’t cause other nations to take steps, potentially to our detriment, is short sighted and wrong.
Contagion in Europe was whether Ireland and Portugal could be contained. It is now about Italy and Spain and the banks in all countries.
That Europe was in a “liquidity” crisis rather than a “solvency” crisis was believed by many.
The US was AAA at all rating agencies and had not made a fiasco of its debt ceiling and spending.
BAC didn’t “need” money and was trying to increase its dividend when its stock price was $13.50. Now they still don’t “need” the money, but are happy to dilute shares with sweetheart deals at $7.
I can write an entire article about QE and not mention the effect on the treasury market, and not feel like I’m missing the key market impacted by QE.
Entrepreneurs are nervous about the uncertainty. Not the uncertainty the establishment constantly points out about taxes and debt ceilings, but the uncertainty that comes from policy after policy that benefits the incumbents at the expense of those looking to profit from being prepared for times like this.
Maybe all the Fed members can read Winnie the Pooh and the Money Pot prior to the September meeting. It is a simple story of how greed, and gluttony, and doing what feels good now, can have some very negative long term consequences. That story ends well, but maybe the path of printing money won’t. Another round of QE3 may not do much to help the stock market this time since so many of the factors are different, so much has been priced in, and there were many other positives that helped stocks last year that may not reappear.
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And I always thought it was Smart vs Dumb
mkanterm, @ 10:41,
Watch the left hand while the right is doing all the gestures.
The SHEEPLE, have paid little to no attention to the Fed, or it's insane policies.
What is KILLING any hope of any recovery, is WHO is in the seat at 1600,and the legislation that has been passed since it got elected.
Until the policies and programs instituted under the current regime are KILLED, the people with the power to hire, and get the econ rolling again, are not going to spend ONE dime.
All they smell and see is fear,uncertainties and why not?.All they see is more costs, and the unknown.
They have only BAD things to look forward to, if they even think of cranking up their business sectors.
People with money, are simply NOT going to spend / invest it, when the penalties for doing it are so gruesome, and /or unknown.
There is a Bogey man behind every piece of legislation passed by this admin, and their clowns.
Before it was elected, I was prepared to spend around $50k, a new car, home upgrades etc.( I am not a bus owner) just a consumer.When I saw the direction we were being SHOVED into, I said screw you.
I refuse to spend a dime to boost anything until we get leadership that has a CLUE how to treat companies(small ones), and get these onerous regulations, and new costs off their backs.
And get the American people back to work.
Bring it on...we're burning down the house as fast as possible, so lets just pour some jet fuel on this bitch and get it over with so that we can re-start. Hopefully the re-start will start with putting all these douche bag criminal scumbags on trial for treason and have them put to death Mussolini/Hussein style.
I'm not totally ready for the collapse, but I'm getting more comfortable w/ my preparations every day. I feel horrible for those who have been blinded by the fools who are burning this country to the ground, but we can't save everyone. The longer we put off the inevitable collapse and don't face up to the mess we're in the harder and more devastating the fall is going to be. So I'd rather just get it over with as soon as possible so that we'll still have some pieces of our Constitution to pick up and salvage this vessel with.
Keep stacking the phyzz folks...and keep stacking lead and lead delivery systems along w/ food, etc. It's gonna be a bumpy ride to the other side!
And don't forget to read the Turd daily or you're missing out on a lot of great stuff. http://tfmetalsreport.com
Last nights post by Turd on the Pan-Asian Gold Exchange is EPIC NEWS!!! Plus interviews by James Turke on "P.A.G.E." and what it will mean for real price discovery of the phyzz!!!
http://www.tfmetalsreport.com/blog/2256/page-turning
What QE 3 will most likely lead: QE 2 for my industry, oil and gas. I say this as I would expect whatever stimulus the government sets out on to push commodity inflation. This should push oil ever further and keep natural gas more or less in the same range it has been in awhile. Oil being the global energy commodity, and a defacto currency. Natural gas on the other hand in north America will most likely remain stagnate as gas producers are able to access capital markets again, and as such raise money and drill their brains out. It should be noted that at current gas prices there is probably only one basin that is economic to produce, Marcellus shale. An interesting way to play this type of rally would be to latch on to small Canadian oil sands producers. Main reason being that as oil price expands, bitumen prices will expand. You may not know this but bitumen prices are somewhere around the 50$ bbl mark, with a COS of around $40. A push to 60 dollar bitumen doubles bitumen cash flows. If you're really ballsie find some leverage company or leverage yourself. The key here is to not try and over play QE3, if you want a reason to make and take your money quickly just look at the any energy index for august.
How's your physics? Does the term "pushing on a string" mean anything?
There are contractionary forces at play. The demand isn't there. OK, sure, if the USD continues to be devalued, yes, the PRICE of oil goes up, but this doesn't mean that it's a good investment play. Good investment plays are (as originally intended) to support increasing demands. In today's investment world money is just sloshing around (and shaking out small investors), looking to "show" good numbers; in inflation-adjusted terms there really isn't much that's giving any meaningful returns. So, only two choices*: back the over-the-cliff paradigm, or stow "wealth" in tangible assets (land, PMs etc.).
* There's kind of a third choice, that being to completely get out of the paradigm (the "stow 'wealth'" option tends to be one of riding it out, expecting to hook up on the next cycle- this, of course, ASSUMES there's a next cycle).
the banking system cartel is a private corportation... its not our business to question their human rights
.
QE3 too much for ya? all theyd have to do is run commercials durring prime time relabel it iQ3E and your neighbors would google its options on the internet
.
and vote for Obama 2012
if a catasptrophe happened to the life of krugman, that would be good for the economy
Krugman and Bernanke.
I can't think of two better kids to be on Leave it to Beaver.
Or Maybe Dennis the Menace.
Those clowns from small town 1950's America should have stayed on their Ivy League Campuses, instead of destroying the country.
I thought that they were BIG university folks...
Oh, and quit belittling small towns!
Looks like a setup for NFP numbers looking ssoooooooooooooooo much better than expected.
God has given us Obama, Bernanke and Krugman ! God has granted the Socialtards and New Dealers their every wish for 80 years ! Socialism is ubiquitous ! Even the hicks of Arkansas have discovered it with our boy Bill..... and Hill ! Hill-Bill-ies ! (Monedas digresses) What God has withheld......is any clue as to how to make it work ! What a delightfully wicked sense of humor has the great one ! Monedas 2011 Comedy Crusade World Tour
Socialism is like driving the Pennsylvania turnpike in a 1958 Desoto with the accelerator stuck at 120 mph when the steering wheel comes off in your hands ! All you've got left is your body English and QE3 ! Monedas 2011 Front row seat for the New Deal Derby !
If the prime rate is zero, ZIRPed for two years, isn't that 'QE3'?
Free money for the governor, endless cash to manipulate markets, it all good!
Buy body armor, gas masks, bullets and beans-
But for Cripe's sake don't sell the gold! You'll need it at the other end of this long, stinking sewer pipe we must now crawl through. Kinda like Andy Dufresne's soap.
you all hope for QE unlimited because you want Gold to go up more ?
time to sell your Gold !
Gold is static!
It's fiat currencies that are fluctuating.
I cannot speak for everyone holding PMs, but I suspect what they really are wanting is for a stable economy, and that means a non-manipulated currency! CONCEPT!
hello ?
all currency is manipulated, especially Gold !
Stop saying shit like that. USD is down, but not 6x in 10 years.
What did stocks really do during QE2? They did not collapse, as willingness to play make believe in credit markets briefly was sustained. Yet this does not make for a QE = rising stock prices correlation. Faking a "liquidity crisis" has had its moment. Any further QE will serve only to prove a "solvency crisis." The more liquidity added, the faster credit spreads again blow out. Equities are doomed.
Watch B of A.
Buffet's $5 Bill has already been burned through. Come Sept 6th, sometime in Sept when B of A starts to "retank", Buffet will take his ball, along with his short profits and go home, saying to B of A , "you're on your own schmuck".
QE will "set sail". The Bernank will "fire up the pump", Obama will "double down", the Treasury will go "all in", Wall St will " hyperventilate on the anticipation of liquidity", EU banks stocks will "circle the drain" & B of A will "go Lehman".
Oct 2011 become Oct 2008. It will be "Deja Vu all over again".
Gold & Guns & Groceries "will soar".
http://www.youtube.com/watch?v=Z-FPimCmbX8
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