The One Chart To Explain The Real Effect Of QE3

Tyler Durden's picture

Much has been written over the course of the last few days/weeks about what Bernanke could do, has done, and the efficacy of said actions. Inflation, unintended 'energy' consequences, debasement, financial repression, scarcity transmission mechanisms all come to mind but realistically they are all just symptoms of what is really going on. As the following chart from Barclays shows, the real effect of LSAPs is to suppress the signaling effect of macro data from the real economy. During periods of extreme monetary policy, the stock market's beta to macro-economic data surprises is dampened massively - and hence the forced mal-investment and mis-allocation of funds occurs. However, given the now open-ended nature of QE3, this may change with the 'good news/bad news' logic leading to a stronger market (higher beta) response (since all bad news is automatically attenuated by QEternity and thus all the good news is out there).


Via Barclays:

An important driver of this attenuated market response to economic news was the sense that important elements of the monetary policy framework were ‘in play’, and that policy was likely to respond if the economy weakened sufficiently, but not otherwise. In this context, bad economic news may not seem so horrible, if it is perceived to raise the probability of a market-friendly monetary policy response. In the run-up to June 2011, the question facing investors was whether the Fed would allow QE2 to end in June, in accord with the Fed’s stated intention. More recently, the question has been whether the Fed would put a more aggressive policy in place. But the ‘good news/bad news’ logic was much the same.


It seems to us that this logic will not, however, remain operative in the months to come, since the policy frameworks recently announced by both the Fed and the ECB have no stated end date on which markets can focus (as did QE2), and are not likely to be materially adjusted in response to economic data for some months to come. Economic news may have been a ‘good news/bad news’ story in the recent past. But now that the monetary policy responses to economic weakness are in place, markets have had the good news.

In the future, bad economic data will be, well, just bad, and good news will be unambiguously positive. This should lead to a stronger market response to economic data in the weeks and months to come.

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malikai's picture

They have made themselves impotent.

Rejoice, slaves!

Cursive's picture


Like Wotan, waiting in Valhalla, sullen and carrying his broken spear around, waiting for the cleansing fire that will consume all of the gods.

Hedgetard55's picture

Ragnarok, bitchez!  :~)


Yes, Ben has essentially cut the pricing transmission lines, it is like cutting off the nerves in your hands, now you can put them in a fire and not feel it. Insane and criminal.

SWRichmond's picture

Mises explained all of this in 1920 (that is, what happens when price mechanisms are thwarted).

Economic Calculation In The Socialist Commonwealth


trebuchet's picture

bollox that beta curve is not real effect that is BArcap trying to sell hedging products and ETFs; the beta correlated with a lot of stuff


"oh look  QE3 relates to BETA  (very badly deifined beta) roll up and hedge now."

Fink and Blackrock- BCG trying to dump ishares on the public before banks flog a new round of mortgages....

DUNTHAT's picture

ASSET Manager LONGS is where the manipulators are classified bt the CFTC.  Interesting.  Too Bad we couldn't get daily/hourly quantities on these Bastards.

The Shootist's picture

New all time highs for gold?

Think for yourself's picture

Well, I don't know about that, but in due time, definitely.

However I feel bad about the USD. And as I live in Panama without a bank account, I get paid in USD cash. I hate holding it,  but I haven't been able to find a PM dealer lately, so I'm over 70% cash (USD)... not even 30% PM. Tomorrow I'm making a border run to convert at least 50% of my USD in Costa Rica Colones, diversify a bit.

Now, I'll probably do it either way (can't be worse than being 100% USD, and as it is my neighbour country it is the best option aside from PM), but since my understanding of economics is still very cursory compared to any trader, I'd like to do something I don't do often, that is, to ask this board for reference. How you feel about the CRC as a currency - I've heard talk of it being considered as undervalued - and how do you feel about Costa Rica as an economy in the current environment?

Thanks in advance!

Think for yourself's picture

I'd definitely do it with Colombia, but it is over 10 hours on the road plus a day in a speedboat away, each way (or 2 flights whose cost will eat most of the money I want to convert anyway). On the other hand I can get to Costa Rica in 2 hours and for a less than 4$.

Considering my time, money and work constraints, the choice is to either sit on a wad of USD or convert part of it in Colones.

Are you implying that it is a bad idea to convert USD in CRC? Why? Or just stating that it would be a better idea to convert into colombian pesos? 

flacon's picture

Could you buy PM jewelery?



Think for yourself's picture

Yes but no... Premiums are just too high, at least at the scales I'm working with (converting about 1 grand). It's quite hard to buy PM jewelry for less than 3x price of materials, and 2x price of materials is a really good deal. It needs to be from a trustable source and/or quality needs to be verified, yet it when pressed to sell it it will be hard to get 1x materials price. ..

Given more time, I'd just keep looking for another bullion dealer, but shit is destabilizing quickly and October is right around the corner. That's why I felt the need to get out of USD, fast. I don't want a process that takes weeks or more and just wake up with my dick in my hand - my ressources are very limited, which is why I must ensure to allocate them wisely.

dwayne elizando's picture

Buy necessities. Beans, rice, salt, sugar, toothpaste, shampoo, etc etc.

kito's picture

No need to stock up on anything, ray dalio says we are deleveraging beautifully and koo says no biggie...we are just japan....we are all overreacting...its just a little debt, it will all get worked out...gosh what was I thinking......

Think for yourself's picture

Already done. I'm a migrant backpacker, though, so although I will sometime sit still for a few months to a few quarters, I need to be able to get on the move and so these are not proper investments. A safety net, sure; whenever I arrive in a new location and know that I will be staying for more than a few weeks, I'll buy supplies for a month right away if not more.

Also, being in rural, food producing regions of central america severely lessens the imperative of these supplies compared to western urban centers depending on just-in-time logistics.

But I've got a move planned in a month, so more supplies is not an answer for me. Otherwise, considering the current conditions I'd make sure to have supplies for 6 months or more! Hence the original question: does you believe the CRC is well or badly positioned to deal with the upcoming USD upheaval?

Captain Benny's picture

I'd recommend skipping Costa Rica and going to Nicaragua.  Its a little less economically tied to the united states.... they certainly have less interest in long term dollar ties.

Think for yourself's picture

Thanks for that honest feedback. I've been thinking the same thing. I currently have an apprenticeship lined up on an experimental permaculture project in Costa Rica, so I think I might stay there for a while (moving from Panama in a month). But I'm essentially a backpacker so am very flexible and could head to Nicaragua if it does not work out, but when shit gets real I'll probably be heading for Ecuador/Bolivia, not Central America.

The question right now was more one of whether the currency is perceived as a secure investment (return of capital, not return on capital) and if the economy itself is resilient. You seem to say that Costa Rica is too dependent on the US? 

Treeplanter's picture

Costa Rica has long been less corrupt and less oppressive than the rest of CA  That gets reflected in the economy. ships PMs overseas and are reliable.

TrustWho's picture

If inflation becomes the story, real or perceived, private business margin management becomes more problematic. Labor inflation is highly unlikely; therefore disposable income will fall and demand for all good and services will drop. In the next 6 - 9 months, corporations will see their top and bottom line, IN REAL TERMS, will fall.

Inflation adjusted bonds and physical commodities will soar. Idiots may buy equities, and may win in the short term, but Daddy Bernanke has forced a very narrow focused mindset. 

jerry_theking_lawler's picture

its already happening. we are cutting costs, postponing hiring, regulating inventory/cash conversion, etc. it is coming, and coming quickly.

q99x2's picture

That makes things easy. Now the hard part - where to get the money to BTFD.

wandstrasse's picture

Freedom is slavery.

War is peace.

Ignorance is strength.

TrustWho's picture

As long as you have Happy Thoughts, NEW WORLD ORDER baby!

tarpuranus's picture

Hey WallStreet...

Those words don't even rhyme

Try to make a point

go at it one more time

else fly this joint

Conman's picture

Someone needs to tell the algos that bad news is bad. They are still stuck on frontrunning QE mode.

TheSilverJournal's picture

Won't bad news just mean print more? After all, they're committed to print until unemployment improves...which will be never...and it will continue to get worse and worse. That's a lot of printing.

Dr Benway's picture

I think the article is trying to say that this manipulation is now priced in due to the fed tying itself to the wheel, so the bad news will no longer bump the stock market, as it previously did due to the perverse indirect effect on fed policy.


But yeah you are right, even though QE is unlimited in duration, they can still increase the rate of printing to achieve one last hit off the pipe, and the final endgame of parabolically increasing money supply

Sheeple Shepard's picture

Tying itself to the wheel with its face glued to the rear-view mirror and a brick on the accelerator, what can possibly go wrong?

LMAOLORI's picture



Yes it will bad news is good news now for the elite's how's that for chair satan propaganda.

"The greatest trick the devil ever pulled was convincing the world he doesn't exist"   

Baudelaire, Charles

Tenshin Headache's picture


I love it. Let's hope that gets picked up and firmly embedded in the finance vocabulary. Captures the situation nicely in one word.


Cursive's picture

@Tenshin Headache

I've got to give credit to David Rosenberg for "BernanQE."

timbo_em's picture

They (Barclays) use the word market way to often.

Yen Cross's picture

We don't need no stinking charts. The effects were felt "immediately" via inflation!

Djirk's picture

sorry kids, but it is not about unemployment or even the Burnyankee put. There is no way the US gov can meet the liabilities of Social Security and Medicaid or cover the liabilities of the shadow banking system. The only way to save political face is to inflate away these liabilites and destroy the QEinfitiny and beyond!

divedivedive's picture

Please help me understand. How does the Fed's purchasing of MBS's on the secondary market directly affect the US equity prices. Let's say WFC offers up a few billion of its inventory. There is no commitment on the part of WFC to do anything with the proceeds of that sale right ? Is there an implied assumption or requirement that they will do something humanitarin with those funds ? Aren't they just going to turn around and open more branches on more street corners ?



Dr Benway's picture

In your example, giving cash to WFC in return for shitty assets raises the share price of WFC, at least temporarily until the cash is vaporized. QE is a huge gift to financial institutions, nothing remotely 'humanitarian' about it.

divedivedive's picture

Exactly - so there is a very small group of beneficiaries of QE3 and they are sll holders of MBS's. If you put aside BAC and JPM why should QE3 cause any of the other 28 DOW stocks to rise ? 

Dr Benway's picture

It frees up funds so the the financial insitutions can buy other stocks and commodities and blow up some more bubbles.

divedivedive's picture

Ok that makes some sense. I guess we should see an appreciable increase in volumn then if the money gets put to that use.

Switching topics - Given these MBS purchases - should we see the "St Louis Adjusted Monetary Base" start rising ? Is that a good way to track the Fed's spending on these securities ?


Dr Benway's picture

Hey an even simpler way to look at it: Increase the number of dollars, and the price in dollars of everything rises.


Not sure about the appropriate metric to track Fed spending on this. Do you mean track spending between disclosures, as I am assuming they will have some regular disclosure how much they bought?

divedivedive's picture

Sorry - I'm just full of questions tonight. Since these MBS's are to be purchased on the secondary market can it be assumed that the sellers will receive (no more than) a fair market value for these securities ? How will the value of these securities be determined ? What I'm asking is - what are the chances they will take even a tiny haircut ?

And I'm sure this is a particularly silly question to ask on ZH - is there any chance that the Fed will have a source of funds for these securities other than printing ? Can Operation Twist be unscrewed let's say ?



Papasmurf's picture

There is no viable price discovery on MBS, so they will be paid more than fair market value.

itstippy's picture

The FED will only buy Agency MBS: Fannie, Freddie, Ginnie, and FHA.  Those MBS already have the explicit backing of the US Treasury, so they're not "toxic".  They're liquid.

The toxic MBS out there (non-agency; old Wamu & Countrywide crap) will remain on the banks', insurance companies', and pension funds' books, marked to model.  To unload the bad mortgages within them the banks and mortgage servicers have to restructure the loans to conform to GSE standards and unload them on the GSEs.  If that were easy to do they'd have done it already.

QE3 is all about the FED creating money and feeding it into the financial system via one of its very limited transfer vehicles.  They can't lower interest rates any further.  All they can do is print money and use it to buy Treasuries or Agency MBS.  They can't fling it out of helicopters (much to Bernanke's chagrin).  They're fucked, basically.

We shall see the longterm effect on equities in time.  If corporate profits suck going forward, and I suspect they will, who will buy equities?

Bernanke's "reducing unemployment" bullshit is a canard.  He knows he's fucked.  He made Time Magazine's Man Of The Year for "saving the financial system".  It's finally becoming clear to all that the financial system is deeply flawed, it's based on illusion and fraud, and it needs fixing not saving.

Dabble in equities if you will; enjoy in Great Moderation.