It has been three years and nine months since the Fed announced 'real' QE1. Presented for your convenience below is the market's reactions then and for comparison we have included today's reaction. It seems the markets - whether Gold, FX, or Treasuries - have become numb (or engorged) on the Fed's actions. This leaves us with the sad conclusion, which the Fed will be last to acknowledge: the ammo, it's gone. It's all gone.
It will take the market some time to figure it out, but there were two main parts to the Fed's announcement: the actual breakdown of the $85 billion/month QE4EVA which were priced in as far back as the day QE3 was announced and were not a surprise at all; and the employment and inflation hard-targeting part, the so-called Evans Rule, which is, or at least should be, a shock to the market, only it hasn't quite realized it yet. Why shock? Because starting today, every incremental economic data point that is materially better, brings us closer to an explicit end of Fed intervention. Because at least before the Fed's calendar target was as soft as it gets; now the Fed will have no choice but to terminate its monetization once the unemployment rate plunges (be it entirely due to part-time jobs or 68 year old workers, as has been the case lately). It also means that as the economy continues along an "improving" glideslope, whether real, manufactured or doctored, the market will start pricing in its own "flow"-based demise. Because once the Fed's $85 billion/month in new Flows ends, it's game over.
Having released the somewhat less exuberant economic projections (see below), the great one is about to explain the fact that his regime shift in 'rules-based'-doctrine is in fact not, as tin-foil-hat-wearing fringe blogs would suggest, a 'true' counter-cyclical policy by which investors will antithetically hope for worse economics to improve their nominal-priced 401(k)s. Over to you Ben...
*FED: 2012 GROWTH OF 1.7%-1.8% VS 1.7%-2.0% IN SEPTEMBER
*FED: 2013 GROWTH OF 2.3%-3.0% VS 2.5%-3.0% IN SEPTEMBER
S&P 500 futures were initially undecided but eventually auctioned up to the highs and pushed on past (though somewhat un-confidently). High-yield credit is bid and leading the ETFs higher. Precious metals and Oil are the winners at the moment though (beta-adjusted) with Treasury yields snapping higher and holding those yield gains. The USD is weakening led by EUR strength (as pressure reverts back to Draghi) but JPY weakness is tempering the overall USD weakness. Energy by far the outperformer post-FOMC as the rest are moving almost entirely systemically with the synthetics (though Tech is lagging). As we post, the initial exuberance is fading across most risk assets.
Just as consensus demanded expected, the FOMC transformed sterilized 'Twist' into unsterilized QE4 in addition to QE3's MBS buying and lowered economic forecasts - dropping calendar-based rate guidance unchanged with a shift to "Evans-Rule"-like threshold-based guidance. High inflation, forget it; 'lower' unemployment, naah; market wants 'moar' so market gets 'moar'. $4 Trillion balance sheet here we come (check to Draghi's OMT and Spain or EUR 'richness' crushes hopes of recovery).
- *FED BOOSTS QE WITH $45 BILLION IN MONTHLY TREASURY PURCHASES
- *FED TO KEEP BUYING MORTGAGE BONDS AT PACE OF $40 BLN PER MONTH
- *FED SAYS MONTHLY PURCHASES TO TOTAL $85 BLN
- *FED ADOPTS ECONOMIC THRESHOLDS FOR POLICY TIGHTENING
- *FED: RATES TO STAY EXCEPTIONALLY LOW WITH JOBLESS ABOVE 6.5%
- *FED: RATES TO STAY LOW WITH INFLATION SEEN AT 2.5% OR LESS
Disappointingly for AAPL investors, there was no explicit decision to monetize mini-iPads (or their own subsidized student loan debt in the ultimate reacharound).
Assuming that Ben Bernanke unveils the transition from 'sterilized' Twist to 'unsterilized' QE4 today (which if he doesn't will upset more than a few long-only managers looking to make their year), then the chart below shows the incredible and insatiable demand for money printing (and the central banks' acquiescence). Looking at just outright incremental injections of excess reserves (money-printing), since the whole 'experiment' began, the Fed and ECB have embarked on more and more frequent attempts to prop up this 'fundamentally' sinking ship. Perhaps this is what the Hong Kong Monetary Authority warned of? At the current average decay period of around 40% per action, we should see the ECB or Fed enact something new by around February 4th (just as the debt-ceiling comes to a head).
The last time we saw a 10 Year auction with comparable confusing internals, it was in July, when in a bond issue that smashed virtually all record, the sold 10 year paper in what we then dubbed a "WTF auction." Today's 10 Year $21 billion reopening, while maybe not quite as stunning in all categories, and coming at a yield of only the third highest in history or 1.65%, certainly had enough drama in the internals to qualify for the designation of WTF 2.0. It wasn't the Bid to Cover either that made it remarkable, which at 2.95 was higher than November, but well below the TTM. What truly set aside this reopening was that the Directs, continuing on yesterday's surge, took down a massive 42.7% of the auction: only the second highest since the July 45.4%. The flipside of course is that Indirects were left holding 24.2%, or the lowest Indirect take down since April 2009. Why did this dramatic inversion happen? Why the collapse in Indirect bidder interest (only $6.6 billion in bids tendered for an allocation of $5.1 billion)? It is unclear, for now.
There was a time when the only media ambush Columbia business school dean Glenn Hubbard had to watch out for was humiliating exposes from the likes of Inside Job's Chris Ferguson. However, when even the stage props are off to get you (as they clearly are at 1:56 in the clip below), perhaps someone is sending you a signal it is time to take a sabbatical from the media circuit (especially since any hope of making Fed head of even SecTres is now gone for good.)
At the top of the agenda for today’s FOMC meeting is deciding what to do about the Maturity Extension Program (MEP). SocGen agrees with consensus (as we noted the day QE3 was announced means a ~$4tn Fed balance sheet is on its way) that the MEP (Twist) will be converted into outright QE. The size is more uncertain, but we see several reasons why the current pace of $45bn/month should be maintained (which combining with the $40bn MBS means the Fed’s balance sheet is expected to increase by $85bn/month from January onwards). There has been no “significant” improvement in the outlook for employment (recent data is likely to be played down by Bernanke). Scaling back monetary accommodation also seems at odds with the looming fiscal contraction which could dampen growth in early 2013, which SocGen suggests will lead to the FOMC’s economic forecasts being updated (and downgraded we suspect) as the 2013 GDP forecast of 2.5%-3.0% looks too high in the context of contractionary fiscal policy and is at risk of being revised down. As for the “Evans Rule,” we believe that it will be adopted eventually, but don’t expect an announcement for now.
When two weeks ago Mark Carney was appointed head of the Bank of England (despite his firm denials of any interest in the position) many were surprised. Not us: we were certain the former Goldmanite, and incidentally current head of the Bank of Canada, would lead the world's oldest central bank. We were even more convinced Carney would become BOE head after on November 8 the Bank of England halted QE as its "potency was questioned." Needless to say to the banker sponsors of the MIT monetary genius diaspora (as profiled previously), there is nothing more terrifying than the prospect of an end of electronic money conceived literally out of thin air, and debiting it into perfectly willing excess reserve accounts at any/all banks. So what is a statist financial system caught in the final days of its existence and desperate to extend its life as long as possible to do? Why, appoint the one person who would turn this "disastrous" conclusion on its head, and promptly proceed with doing exactly the opposite: printing like a drunken Hewlett Packard laserjet.
With the Fed nervous to even let a little MEP 'Twist' expire (tightening), we can't help but be a little nervous of their unbridled and passionate belief that if inflation should rear its ugly (or virtuous, perhaps, in their satanic eyes) head, they will be able to manage and tighten to control it. To wit, we note that one of the Fed's most-watched indicators of inflation - the 5Y5Y forward inflation breakeven - has just reached its highest level in 17 months and is near its peak since the financial crisis lows in 2009 at over 3.08%. We have six little words for Bernanke, Yellen, et al. "Be Careful What You Wish For." And by the way, the last few times, the 5Y5Y reached these levels marked a short-term top in the S&P 500.
In our fair-and-balanced way, it was Harry Reid that slayed the bullish beast yesterday and today it is the words coming out of Boehner's mouth that have cracked the pre-FOMC euphoria. Admittedly, we had started to slide from the open, but the Republicans bluster helped stocks take another leg down (to the overnight session lows) as the rhetoric picks up once again... but but but a deal is just around the corner so buy buy buy...
The much-heralded $1.05 billion patent lawsuit win on August 24th appears to have marked "Peak AAPL-ness" as investors look through the first-round win for Apple to Samsung's potential second- and third-round wins on margins and revenues as a supplier to their rival. As Bloomberg's Chart of the Day notes, since that analyst-exuberance-inspiring date, Samsung is +16.8% (or 23% in USD terms) and Apple is -18.4%.
Define irony: when the most vocal supporter of a dramatic change to the existing tax policy takes advantage of the last few days of the old one...
- BERKSHIRE HAS PURCHASED 9,200 OF CLASS A SHRS AT $131,000-SHR
- BERKSHIRE RAISED PRICE LIMIT FOR BUYBACKS TO 120% BOOK VALUE
- BERKSHIRE MAY BUY ADDED SHRS AT NO MORE THAN 120% BOOK VALUE
- BERKSHIRE BOOSTS BUYBACK PRICE LIMIT TO 120% BOOK VALUE VS 110%
A total $1.2 billion spent to avoid a few hundred million in new taxes. And now back to the hypocrticy of the "Buffett tax", and "Patriotic Millionaires for America." In other news, total donations to pay down the debt in Fiscal 2013 (starting October 1): $290,195.03.