The Bernanke Put 'Strike' Is Now At 1200 For The S&P 500

We have discussed at length the need for the equity market to be significantly lower in order for Bernanke to step in with his munificence. Critically, this is less about the absolute level of the S&P 500 (though anyone expecting the Fed chairman to step in with the S&P 500 within a few percent of multi-year highs is dreaming) but, as Barry Knapp from Barclays notes - based on Bernanke's writings - additional monetary stimulus is a function of a significant drop in inflation expectations (as opposed to a shallow drop in the S&P 500). It is the risk of deflation that will trigger a policy reaction. Current conditions are not even close to levels that have warranted additional stimulus in the past - which we estimate to be a 2% 5Y5Y forward inflation breakeven rate. In order for that level to be triggered - based on the post-crisis relationship between equities and inflation expectations - the S&P 500 trailing earnings yield would need to rise over 8.2% implying an S&P 500 level near 1200. Tracking inflation expectations is critical to any NEW QE hope - and for now, there is none on the horizon, no matter how much everyone clamors for it.

The trigger for previous extreme monetary easing has been around the 2% level (red dotted line) for 5Y5Y inflation breakevens...

The small red and green arrows above (as we noted in a previous post) show the risk flare around Europe's initial re-emergence into crisis which was quickly grabbed as managers bought the dip on the Bernanke Put hope.

This implies around an 8.2% trailing earnings yield or an S&P 500 level around 1200...


Simply put - without break-evens dropping, the Bernanke Put will not arrive (as the printer-in-chief would implicitly believe it to be too inflationary) and so asset values will need to fall (on the back of real earnings disappointment or fundamental macro deterioration) in order to bring the FOMC in - if the status quo of BTFD reflexive front-running continues, NEW QE will remain absent.

Data/Charts: Bloomberg