Things That Make You Go Hmmm - Such As QE3 Marking An S&P500... Top?

Tyler Durden's picture

From Grant Williams, author of Things That Make You Go Hmmm,

Over the last five years, there have been so many ‘projections’ from the economic and political glitterati that have failed spectacularly as to be almost unbelievable - from Bernanke's 'subprime is contained' to Rajoy's November promise that 'Spain will stop being a problem and instead form part of the solution'.

Projection was historically the moment when, despite all the work that went into getting to that last point in the program, hope and faith took over as the alchemist found himself having to rely on just a little bit of magic in order to get the outcome he so desperately wished for.

Grant Williams 'projects' that, when QE3 finally arrives (and arrive it will), it will mark the top of the S&P500 for a VERY long time and its positive effects will be far shorter-lived than many - including the Fed - are projecting. Far from an overwhelming rising tide that will float all boats, QE3 will be a dismal failure and the last bullet in the Federal Reserve’s gun will turn out not to be the hollowpoint that many are projecting, but instead simply a ‘bang flag’.

In the course of the conversations I have whilst performing my day-job, I am constantly searching for anybody who is buying and holding stocks as an asset class because they offer tremendous long-term value, but I have yet to find them. Yes, there absolutely are some wonderful companies out there that offer tremendous long-term value. Corporate balance sheets have, by-and-large, never been healthier, companies are sitting on a heap of cash and, at ground level, businesses are doing extremely well. The problem comes with the fact that 99% of the people I speak to and 99% of the commentaries I read are either holding ‘stocks’ per se or recommending doing so for one reason and one reason only; they are terrified of missing out on the projected strong rally that will undoubtedly come once QE3 is unleashed by Ben Bernanke’s Merry Band of Brothers.

That is a terrible, terrible reason to hold stocks and, when the correction comes, those good companies with strong, healthy balance sheets will be sold right alongside all the overpriced, overvalued stocks that take turns as the darlings of the analyst crowd (you know who you are, stocks). The only difference will be that the better companies’ share prices will recover far faster once appetite for value and risk returns.

2008 is still too fresh in the collective minds of investors for there to be any other reaction to another major market swoon and, as the world nears the closest thing we have ever seen to a truly global recession, it’s incredibly hard to see where the growth is coming from to justify buying stocks on 2% yields on multiples in the teens.

The 1982 bull market began with the S&P500 trading on 7x earnings and yielding 6.3% (green dotted line, left). It ended in the tech blow-off at 30x earnings and a 1% yield (red dotted line, left).

As we stand today, the S&P is yielding 2.5% and is trading at roughly 11x earning (blue dotted line, left). Expensive? Maybe not, but hardly the stuff dreams are made of.


As for the full note by Grant Williams, which has much more in it, it can be found below:

Hmmm Jul 15 2012

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schoolsout's picture

Nah, I think stocks will go up further as long as the money/liquidity keeps flowing from the Fed/gov

schoolsout's picture

Not that that's a good thing, either

barliman's picture


It may be time for Bernanke to "break the mold"

A pure fantasy thought experiment:

Bernanke's ultimate goal is dollar devaluation to "reset" the US government debt into terms that making paying it down slightly remotely feasible. To this end, he has pursued his "beggar thy neighbor" policy.   Unfortunately for him, other nations have taken exception and joined him in a "race to the bottom". All of this has been discussed on ZH ad infinitum over the last 3+ years.

We have also watched Bernanke's growing frustration with the political class. Even inch of accomodation he has given them has been used as a means of putting off ANY attempts to solve the long term fiscal picture.

Despite not having engaged in QE3 for over a year, the financial and political elites now count on its eventual deployment as a safety net that will save THEM from all real risk. If Bernanke wants to be something other than the first person in line for the gallows ... figuratively speaking ... he needs to "break the mold" that has formed regarding QE.

The solution is simple and Machiavellianly elegant.  His opening statement during tomorrow's testimony:

The Pavlovian behavior exhibited by the fniancial markets, Congress and the Executive branch with regard to further quantative easing now runs directly counter to the interests the Federal Reserve is trying to serve. In the past week, the issue of addressing the "fiscal cliff" has now been turned into a game of "chicken" massively increasing the likelihood of additional downgrades of the credit rating of the United States government issued debt. In conference with the rest of the Federal Reserve board this morning, it was agreed we need to take action to force the pursuit of a reasonable compromise on the legislative and executive branches of government.

Accordingly, the Federal Reserve Board is now announcing there will be NO MORE QUANTATIVE EASING provided until a long term solution to reigning in the goverment debt has been passed by the Congress and signed into law by the President. We do not take this step lightly, nor are we unaware of the near term effects it will have on global financial markets. Regardless, we can no longer allow the presumption a third round of quantitative easing is imminent to be used as a means of escaping the government's responsibility to address the long term problems. Experience over the last three years has proven there is a lack of political will to address this critical problem. A recent study done by the Federal Reserve has indicated the entirety of the "recovery" of the economic markets is driven by the quantative easing we have engaged in and the expectation more is imminent. We are now removing this artificial prop from the equation.

In the long term, this announcement would insure Bernanke's ability to devalue the dollar at a rate that leaves all other countries behind.

There is a greater chance snow will fall in the Midwest tomorrow than there is Bernanke will make this statement - but it does make for an interesting thought experiment.


ArkansasAngie's picture

I'd fall over in a swoon if he did that.

I'd take every dirty rotten thing I've said about him back.

I'd go to Washington to make sure that My CONgress critters knew exactly where I stood on this matter.

Snow ... you say.  Heck ... we can even catch a breeze off a scattered shower

malek's picture

 this announcement would insure Bernanke's ability to devalue the dollar at a rate that leaves all other countries behind

Such an announcement would signal the advent of real deflation on a grand scale, provided the Bernank would stick with pursuing that announced course.

Which is just another reason it's never going to happen.

barliman's picture


Right now the 10year yield is 1.476 and the DXY is 83.12

The USD and UST are the safe havens of the world ... which is counter to the dollar devaluation agenda.

If Bernanke made the announcement I prepared above ... the markets are down 30% by the end of this week and the rest of the world wakes up to the idea that NO ONE can stop Bernanke from doing what he has just announced.

With the American markets dropping, the other central banks have two choices ...

... play 'chicken' and remove all stimulus from their markets to continue the "race to the bottom" OR shit themselves and then start buying EVERY asset class in their local markets to prevent them from dropping by 50% initially ...

Meanwhile, every politician in the U.S. comes unglued as they begin to realize Bernanke didn't just point a gun at their heads ...

... he is "walking fire" towards them and 470 of them are going to be answering to the voters in less than 4 months.

The Swiss are going to be royally fucked in this process (which ought to make Bruce Krasting happy) because it would vaporize their peg to the euro.

The DXY would drop to 75.00 by July 23rd and the 10 year yield will be at 2.50% and climbing.

Ever had a real live bullet zip by your ear?  There is no better motivator to MOVE YOUR ASS I have ever come across and the folks with ice water in their veins don't tend to run for political office.

The BTFD crowd has another opportunity of a lifetime ... if they have ice water in their veins ... and ALL THE REASONS they will ever need to motivate THEIR SERVANTS IN WASHINGTON, DC TO COME TO A COMPROMISE NOW !!!!

Bernanke will have broken the confidence in the dollar as a safe haven. Make no mistake - I am prescribing the NUCLEAR OPTION ... not just a threat ... really dropping the figurative nuke on ALL the other players.

BUT ... by August 15th, the American politicians could deliver a long term compromise to the SCOAMF for signature.

Bernanke just has to stay surrounded by his SWAT team and stay in a safe hiding place till then.


malek's picture

When the markets (stocks, commodities) go down 30%, that means that the Dollar went up by the same factor.

A stronger Dollar means it is much harder to pay back debts by earning Dollars, and even less possible to take on new unlimited debts, so US politicians would need to balance their budgets no matter under how much screaming.
Even if they succeed in doing so, the US Bond market would likely implode anyway at our debt/GDP ratio.

Because of the massively strengthening Dollar, other central banks would need to hit the brakes on printing/easing or otherwise their currencies would implode into a black hole.
The Swiss could de-peg, as the CHF would weaken by itself after the mad rush into Dollars (but, at least at first, not Dollar-nominated assets!)

The politicians would -on second thought- not be too unhappy, as they would have gotten served the perfect strawman to blame all of their long line of wrong decisions on.

barliman's picture


I think you are missing the "breaking the mold" concept.

Dollar up, stocks down is the new normal - which includes the "all bad news is good news" concept of pushing us closer to QE3.

Bernanke announcing "We are not doing ANY QE until there is law in place to resolve long term debt." breaks the new normal and the associated "Through the Looking Glass" logic.

The Fed's dual mandate is to maximize employment (FAIL) and control inflation (FAIL).

All QE has provided is artificially low interest rates that ENCOURAGE the Washington politicians to keep SPENDING.

Since only the bankers can control the politicians ... it is time to give the bankers incentive to HEEL THEIR DOGS.

I guarantee you, if Bernanke made that kind of announcement - the markets will tank first and the dollar will not be far behind.

Did you miss the article about the Fed study showing the markets would be 50% lower without all the stimulus the Fed has been throwing at the markets?


malek's picture

Dollar up is the new normal? But you said yourself we are in a devaluation race to the bottom, with other countries. So what is it?

If Bernanke stops QE, it means that the malinvestments will become realized as they cannot be papered over with more fiat, anymore.
When all the malinvestments are liquidated, then free, available, non-invested cash will shoot up in value, and after the dust settles the surviving few good investments will too.
Identifying and removing malinvestments strengthens the currency overall.

What the deflationists believe is that one day people will do the right thing (or markets will force them), to let malinvestments fail.
I don't believe in that outcome, as it almost always easier to do the wrong thing, and so that will get done: QE until for the currency fails (unless they find an enemy at the right time -after most of the debts have been inflated away-, which they then can blame for the disaster while in silence switching back to a stable currency again by ending QE).


barliman's picture


malek  ... either you are pulling my chain ... or you can't read.

Since you've been around here for a while, I'm going to go with the chain pulling ... either way - you're behaving like a putz. There are thousands who come here to learn because they have read or been told that ZH cuts through the horseshit. You playing jackoff games is something they can find at HuffPo if they want it.

For the readers who have followed the complete phrase "Dollar up, stocks down is the new normal" - what is happening this time around is just another bubble.

It is NOT a credit bubble. We already had the credit bubble courtesy of banks using MBS's to line their pockets and morons who used their houses as ATM's to take vacation cruises.

We are currently in a QE bubble. Bernanke created it to reflate the stock markets in the infinitely stupid belief that boosting the stock markets back up to where they were before the crash would automatically create a "wealth effect" which would reflate the entire economy.

Having taken the global economy on a steep ride up to the top of the roller coaster with the various forms of QE he has deployed since March 2009, Bernanke KNOWS additional QE will no longer buy any significant period of economic stability.

My thought experiment was intended to show one way Mr. Bernanke could use his QE stick to solve at least ONE problem.

Maybe I am not giving malek enough credit. Maybe he IS as stupid as he is pretending to be. Making a statement regarding malinvestment realization in a situation where the primary goal is to shake GLOBAL confidence in the Fed, QE, US Treasuries and the U.S. dollar is a fairly strong indicator he does not have a clue.


malek's picture

You are stretching terms and not even responding to my main points.

We currently don't have another credit bubble going on? QE is not credit??

So what exactly do you call it when the Fed allows banks and other entites to cover up their large losses, and Gov't to continue spending like drunken sailors even though we were broke long time ago?
And nominally boosting stock and house prices is not done by addtional credit?

The Bernank can solve nothing. He can force others to stop avoiding the real issues, yes, if he behaves as described in your thought experiment.

There is a fine line between "to shake GLOBAL confidence in the Fed, QE, US Treasuries and the U.S. dollar" (which is what the Bernank is doing, and not what you're talking about in your thought experiment) and to collapse said confidence. The latter would be a disaster.


barliman's picture


"We currently don't have another credit bubble going on? QE is not credit??" - No, QE is NOT credit.

From investopedia - Credit - A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.

The Federal Reserve has not been loaning out money to the banks under QE. They have been purchasing assets (i.e. MBS, UST's) of varying natures and maturities. Purchasing LSAP's (MBS's) at par value beginning in March 2009 is not a credit transaction. It was an intentionally "blind eye" investment process intended to remove risk from the balance sheets of the TBTF banks and put them on the Federal Reserve "We don't give a FUCK what they are worth" balance sheet.

The stated intent was to provide the banks with cash they would then loan out as credit into the economy - which they did not do! 

Instead, the foul smelling goat fuckers at the TBTF decided,

"Hey! If we take ALL of this cash and turn it over to our proprietary trading desks using the High Frequency Trading systems ... we can literally NEVER LOSE on a trade!"  (All of which ZH has doceumented over the last 3+ years)

Side note: my wife tells me NPR had a good item on this afternoon explaining in lay person's terms EXACTLY how the HFT's are used to swamp the trade queues illegally and prevent anybody else from making any money.

"So what exactly do you call it when the Fed allows banks and other entites to cover up their large losses, and Gov't to continue spending like drunken sailors even though we were broke long time ago?"  - EASY answer - debasement of the currency which is defined in the Constituion as an act of treason.

You are mistaking the Treasury yield curve as being something the Federal Reserve directly controls. They have ENORMOUS influence because the USD is the world reserve currency and therefore every OTHER Central Banks debt issuance is dog shit by comparison but ...

... but the reason China is going all over the world negotiating direct exchange agreements with other countries is towards their goal of weening the world off the USD as the reserve currency - which would make America's government debt just as attractive as Greece's.

"And nominally boosting stock and house prices is not done by addtional credit?" - NO, see above - stock prices were boosted by TBTF banks being freed of their risk obligations and being allowed to turn the markets into rigged casinos. Housing prices HAVE NEVER recovered - the banks are holding millions of foreclosed or waiting to be foreclosed houses OFF THE MARKET because if they didn't they would be BANKRUPTED by all the at risk debt they still hold. Click on this link:

The bulk of metropolitan areas in America have 25% or more of ALL mortgages currently underwater. In many areas, it is over 50%.  There is no bottom to the housing market in sight for the next 5 years ... at the earliest.

"The latter would be a disaster."    Bad news, malek - the disaster has already HAPPENED. The SCOAMF and the MSM are colluding to convince you it has not happened --- because letting people realize the truth would lead to them losing power.


malek's picture

Well, we're mostly just twisting terminologies here.

If an entity with almost unlimited deep pockets (the FED) buys nearly worthless assets at par (from the banks), it effectively is giving them a slightly concealed additional huge credit line.
That the banks didn't loan out much of it to the economy doesn't matter - even with all accounting tricks the banks would have been bankrupt is they hadn't received additional credit from the FED, and some TARP from the Gov't.

Yes, and giving out large amounts of additional credit, especially on very loose to non-existing repayment terms, is inflationary to the currency and therefore the same as debasement.

I don't give a  **** about the treasury yield curve as a "market indicator".
But I don't think the LTRO was dog shit in comparison; that has been the only exception so far.

Housing has "recovered" insofar as house prices would be waaay lower without the interventions. But I also tend to believe it will go lower still, in some way or another.

The latter [in said confidence in the Fed, QE, US Treasuries and the U.S. dollar] would be a disaster.

Basically nothing has happened yet in those areas regarding confidence. The real fireworks are still to come.


Muppet of the Universe's picture

well said sir.  well said.


people often austricize the bernank.  but he did not start this shit show.  he is simply trying to stop the inevitable collapse, and if he can prolong the collapse through bubbles, then perhaps there is chance.  but honestly, the flouride and lead has made any chance of a recovery impossible.  the dolts are now dipshits and they simply don't get it, even when its laid out in front of them.

SheepRevolution's picture

If one reads his history, it is likely that the international Wall Street Banksters will crash the stock-market by contracting the amount of outstanding credit (and thereby creating an artificial crash). Afterwards, the U.S. will engage in an another great war, creating an even bigger deficit in the federal budget. The deficit is then financed by credit from the Federal Reserve, credit that will be held at various Wall Street banks. The banksters will then use  the credit as reserve, in order to pyramid even more credit through fractional-reserve-lending.


This was the case in 1915 (RMS Lusitania), 1941 (Pearl Harbor) and 2001 (9/11 attacks). I believe we will witness a stock-market crash in 2012 or 2013, and afterwards the U.S. will start a war against Iran. What are your thoughts?

SMG's picture

Yea it's possible.   One of the things floating around the rumor mill lately is some sort of major event, like a  major "terrorist" nuclear or chemical attack at the London Olympics. Here's a video of possible evidence of that, if you're interested.

If it is true (and much of this stuff turns out not to be) that would ceratinly be a good time for our Oligarchs to trigger a crash, and push the blame off on something else besides them.  An Iran attack would be a good time to crash it  for sure, but something like what is mentioned in the video would be way better for the oligarchs to clamp down and control the pesants even more.  And remember what the Oligarchs value the most is CONTROL.

If you knew about this before hand, you could make alot of money betting on a disaster.  I don't know their plan, so we just have to take our best guess.


GernB's picture

My bet is that it is a game of tug of war. Stocks will go up if the rate of Fed monitary expansion can outpace the rate of contraction in the real economy. The problem is each time the Fed expands the money supply they also make the magnitude of a potential future contraction larger. Eventually, they won't be able to print fast enough to keep up with the rate of contraction.

Everyone is so convinced that QE3 will save the economy. What happens when it's in full swing and corporate earnings continue to drop, forward earnings projections continue to fall, and we see the first quarter of genuine contraction in GDP?

QE succeeds in part because people believe it will, leading to people being more willing to borrow and spend. What happens if people start to questions whether QE will work? Then will hit the suddent realization that there's no fixing this, no muddling through, and no avoiding austerity. Then watch out because the markets will fall with no seeming bottom.

world_debt_slave's picture

I'm getting giddy for the coming crash!

Mr Lennon Hendrix's picture

Or QE "3" kills the dollar.  Either way, lol.

buzzsaw99's picture

2.5% is huge. 2.5% will be higher than the 30y treasury yield VERY soon.

Alcoholic Native American's picture

I wasn't paying attention when they did the first 2.  Is another one bad?

world_debt_slave's picture

ha, ha, as an alcoholic myself, this is self evident.

CunnyFunt's picture

You forgot to wish Barack a happy birthday.

Now, sign the card, or else!

Everybodys All American's picture

lol ... that guy sure has alot of birthdays.

HelluvaEngineer's picture

...and Birth Certificates to go with them!

brewing's picture

will they #$%^& out my cuss words...

CunnyFunt's picture

No chance. Instead of the #$%^&s, inspiring words such as "hope", "forward", "righteous", "shared sacrifice" and "obey" will be inserted in place of "less informed" language. Sunstein perhaps helped design the algo.

Village Smithy's picture

I can see this happening. The rush into equities when QE3 was announced would provide the perfect cover for the dumping and shorting that the TBTF would be doing. Turn over billions in equities and commodities but never even move the needle? That's what they exist for.

FieldingMellish's picture

Kind of like a premature ejaculation with a sperm count of zero. hmmmm.....

Deep79's picture

Have been saying same thing for last 6 months, QE3 will be final nail in coffin. We might rally 5-10%, but then it over.

TeMpTeK's picture

Its not about raising asset prices.. its about devaluing the dollar. They will succeed.

TomGa's picture

"...and the last bullet in the Federal Reserve’s gun will turn out not to be the hollowpoint that many are projecting, but instead simply a ‘bang flag’."


More likely to be a misfire, not even a flag.  "Click" 


FEDsup ammo doesn't store well. Need Hornady Zombie rounds in this dead "economy."

TheSilverJournal's picture

You won't find me betting that anything will be going down faster than the dollar.

Jason T's picture


our debt has been being bought by foreigners

ouchtouch's picture

Jim Rickards claims the Fed can just buy stocks -- seems illegal to me but what do I know?

sitenine's picture

illegal?! ROFL! That would imply that rule of law still exists. You know better than that, don't you?

falak pema's picture many of you buy this :

RUSH LIMBAUGH: Barack Obama 'Hates This Country' - Business Insider

Barack O'bammy a fifth columnist of leftist dismemberment of what made America great or...Crony capitalisit of current Oligarchy? 

Two opposing themes...which one is it?

sitenine's picture

Careful. You loose at least 5 IQ points every time you read BI. Propaganda comes in many forms, and Weisenthal has mastered them all.

falak pema's picture

well its main stream USA, and its supposed to be smart. A lot of those who post here at ZH post on BI!

So I don't disdain it like it were Fox news. Its worth a cursory look and its worth debating the issues raised, even if Russ Limbaugh is not my cup of tea; but then neither is O'bammy. And if he gets elected he will  have to choose between armageddon in Iran, Print to infinity or Reset and depression trauma. Awesome times, and all that chimes is worth listening to, as lightning falls from any direction and has no rational reason to do so! 

sitenine's picture

"well its main stream USA, and its supposed to be smart." Really? Umm, OK...

BTW, lightning is striking exactly where we expected! Those that consumed more than they produced are finding their source of credit drying up. Not even the rating agencies are willing to collude anymore. The jig is up, and idiots like Weisenthal and Krugman are clearly being exposed as the frauds that they are (that's right, I put both of these douchebags in the same category). Check out this video for a clearer picture of the separation from reality that grips our friend Joe:

Dr. Engali's picture

This is why Ben needs to print big when he does. He needs to do at least two trillion to get anything from it.

ArkansasAngie's picture

He's got one chance at this.

Yes ... it will be a big one.  Then he'll be a hopin that it lasts long enough for him to get out of Dodge

RobotTrader's picture

There is not going to be any QE3, the stock market is already too strong.


And that fact is already priced in, people are buying stocks anyway.

Deep79's picture

Really people are buying stocks anyway. 

Have you seen the volume

brewing's picture

robo, thanks for the ink.  i needed a good laugh this afternoon since mdb is mia...

TWSceptic's picture

There is going to be QE, just not at this point in time. People are expecting it, yes it's priced in. So Ben will play hard to get and when the shit hits the fan he will play and announce QE.