NO QE3 COMING, REPLAY OF 2011 TO CONTINUE
By Lance Roberts, CEO StreetTalk Advisors
As the days and weeks unfold the similarities to the summer of 2011 continue to unfold. In June 6th post “Forecasting The Rebound and Bottom” we stated then: “In each of the past two summers the market has experienced an initial very sharp decline which took the markets from extremely over bought to extremely over sold. This temporary washout allowed for a bounce back to previous resistance levels where investors, previously trapped into the decline, begin liquidating out of the market.
It was at this point that the markets retraced and set new lows as concerns over a weakening economy, the lack of liquidity and Eurozone crisis that continued to plague the markets. As stimulative programs were introduced in late summer and early fall the markets rallied and broke out of their respective downtrends.”
It is this continued replay of the last two summers that have us on edge at the current time. The Eurozone crisis continues to brew with yields rising to dangerous levels for Spain and Italy. While Greece may have avoided a temporary crisis with the recent election there has been nothing done to address their solvency issues or rapidly deteriorating economy. Recession is dragging on in most of Europe and now has begun to deteriorate the economic strength of emerging markets and the U.S.
Interestingly, the continued calls for further support from the Federal Reserve have grown louder in recent weeks post the May decline. While the decline in the economic numbers has grown recently - the market has rallied fiercely as Wall Street salivates in anticipation of another “hit” of liquidity driven nirvana post the F.O.M.C. meeting tomorrow. History, however, tells us that this is likely not to be the case.
The chart shows the S&P 500 over the last three years with the summer events detailed more clearly. The markets, driven by stimulative actions of the Fed have peaked each summer just before the expiration of the programs. The market then experiences its initial decline, Point 1, as liquidity driven rallies are unwound as the economy and employment began to falter.
It is at this point that the calls for more stimulative actions are made by the media and Wall Street. The market then rallies on rumor and innuendo as expectations rise on hopes that the need for liquidity will soon be met - Point 2.
This is where we are today. Headlines, postings and tweets are filled with that hope of further accommodative action from the Fed. It is highly likely that the market will be disappointed for the reasons that we laid out in our recent missive “Inflation, Interest Rates and Dollar Open Door for QE”. We said: “I do not think that we will see any action before the August-September period which we laid out in our recent PPI report. While there are many calls for Bernanke to announce QE at the June FOMC meeting, while possible, I think this is a fairly low probability event. Bernanke will likely wait to get a final read on first quarter GDP with some early diagnosis on 2nd quarter as well. With inflation taming, and the markets not absolutely collapsing at this point, my best guess is that he may hint at QE at the next meeting to gauge market response. As QE programs are highly inflationary he will likely wait until the end of summer, with a possibility of post election, to announce the next round of stimulative action. Make no mistake – there is no real organic growth occurring in the economy and no support coming from Washington. There will be further stimulative programs in the future — it is only a question of when.”
That analysis remains salient today. The market is not that far off its recent highs. The economy, while slowing, is not falling off a cliff and the dollar is rallying while interest rates remain very subdued. For the Fed there is no impetus for launching a QE program at the current time — the market has priced in the bulk of whatever effect it may have had. Furthermore, as stated by Bernanke himself, the diminishing returns of each program are a concern and he will only want to launch further accommodative action only if absolutely necessary. That is not the case at this moment.
It is likely that the markets will be very disappointed tomorrow as Bernanke restates his position that he is aware of the weakness in employment, economy and Europe. He will also refocus attention on the current Administration stating that it is the job of Congress to act to create economic growth as the Fed’s policy tools are not long term solutions. He will also reiterate his concern over the diminishing return of stimulative programs. However, he will leave the door open further stimulative action if necessary.
With the crisis in Europe brewing, yields rising, an upcoming election, weakening economics and a potential debt ceiling debate just around the corner it is very likely that we could see a slide in the markets into the August-September period. Each of the past two summers has played out very similarly and in both cases it was then that the Fed finally leapt into action. Will this summer play out exactly the same? It is all a guess. However, from an investment standpoint, the current level of downside risks grossly outweigh the odds of success.
19 Comments
That’s why they play the game.
Well know soon enough. When the clock hits 2:15 e.t wether your a lion or a gazelle you better be running. The bearded one is coming
12:30 EST my friend. Ben has his big press conference tomorrow so the meeting is early. 9:30 PST for us.
Ooooohhh …Should be a real humdinger of a party.
For the amount of time I spend on this stuff you’d think I’d be on time to the party. Can’t wait to see that beard. Wonder how long it takes to get it just right.
BTW Cullen how did you lose the big hali? Too much drag pressure? Anyway you know where some of the biggest halis that I have seen? in about 4-5 feet of water just lightly outside of the break (20-40 ft from the shore)…crazy huh…? I lost one about 30-something inches that bent the hook on my hard bait..
Hey Michael,
The line was caught on the kelp and when it got to the surface the pressure was just too much. Either the kelp or the line was going to break and the kelp wasn’t budging. We were a foot from having it in the net. Heart breaking to lose a fish that big!
I’ve heard about hali’s in the short water. I saw a guy pull a 30 incher out of 5 feet of water right next to where I am docked. Crazy. I’m still learning, but it’s quickly becoming my favorite sport. If “sport” counts.
How do you catch them there? Just drifting?
bass crankbaits. The two best are the megabass and the lucky craft baits. They cost about 15-20 bucks apiece so it hate losing them. Just look for “fishie” looking water…One of these days I will try to get to a spot where halibuts actually jumped out of the water chasing baits. crazy stuff..There is a place close to santa barbara that I have seen guys caught 30+ (quantity and quality) halibuts in a single session (3-5 hours of fishing). Just casting and retrieving..good fun. Actually those baits I mentioned worked well in mission bay for catching the corvinas too.
Sounds we have some hobbies we’d enjoy together.
here is a link to halibuts fishing in the surf. Those guys used live smelt but you can catch them on the hard baits too.
http://philfriedmanoutdoors.typepad.com/philip-friedman-outdoors/2012/05/long-beach-surf-fishermen-go-fishing-for-the-halibut-and-catch-9-legals-.html
they will extend twist for another 3 months and signal willingness to do moer (=pure QE3).
thats my conclusion after eading Hilsenraths wsj piece a couple of weeks ago and watching recent action in the markets (stocks up while treasuries are barely moving).
The diminishing returns of monetary easing programs are also outstanding.
Emperor has no cloths and that’s the endgame for them. Unless they do something big which translates to “middle class” finances, a real transmission channel. Maybe something that has to do with mortgages and principals… But Ben needs a further decline both in commodity market and equities (secondary, as he doesn’t mind bubble in this asset class, Greenspan must be proud) to justify it.
Oil below 70 looks like a good target.
The PPT will be in there today. No E3 but minimal decline……
The PPT will be in there today. No QE3 but minimal decline……
QE3 cannot be activated now. Later is sure: 1) war to iran is coming; barack is already attached for being to shy. He knows that the republicans will go to war, so he will do it before. US people DO ALWAYS re-elect the commander in chief. 2) china is slooooowing 3) indian rupee is imploding, someone is at least trying to think about the conseguences of 1,3 billion people in freefall ? 4) … and this never endig story of the euro-farce.
but don’t buy puts, may be you’ll never be able to cash them.
No one knows. Only the Beard trully knows. Not Hatzius, Hilsenrath or Lance. Pure conjecture and if one is worried about being wrong then preparing for various outcomes and doing nothing is wise.
If your a Bear this is merely a retracement rally and the news is matching what is a normal move back up before heading lower. 990-1050
If your a bull then this is the market moving ahead of some big news today that will launch the market higher into the Winter.1510-1530
If your flexible- you’ll probably get something you want today and the market moves sideways before topping out into late July between 1410-1440
We’ve set our selves up for 3 outcomes and if we get enough clarity today we’ll implement one of them.
Two of the three are easier. We shouldn’t have to do much for a couple of months. The other one keeps us on the Monetary Mens and Lagardes leash for some time.
We had some calls to add on to stuff…but all WE did was close out stuff. In the end we’ve kept it neutral up until today.
We have no Clue. I understand all 3 outcomes and I’ll look for things that confirm one of the 3. Then I’ll watch it to give some room to shake off weak holders putting on my lines in the sand to make sure I don’t get married to one of the 3. I’m not a fan of the Fed but I’m a lover not a fighter of the Fed.
Ooops-
Theres a fourth posibility I forget to mention. That’s the one I don’t see coming- You know…the one where Bernanke shows up cleanly shaven with toilet paper on his cuts….hasn’t slept in days and says he’s done enough. Or North Korea decides to open itself up, Chanos finds out that those apartment buildings are actually occupied by Chinease vampires(which is why the lights never go on at night), Cuba becomes hawaii of the east coast and MLB expands with a new team there, someone takes out Merkel and a white guy beats Bolt in the 100m in London. So I’ll leverage everything I have to figure out how to navigate through that one. It’s probably the one we’ll experience.
Does anybody believe that QE3 will fundamentally help the economy?
…
I doubt it and suspect this is all just speculative fever in an irrational market.
“Does anybody believe that QE3 will fundamentally help the economy?”
Reading this site? No.
Jonny-
Can only speak for myself- NO!
I think the whole thing is silly. We need the monetary programs because the market is selling off because of the monetary program you just did dign’t work. And while it didn’t work the way you designed it to we noticed stocks went up and soo….well if nothing is going to get done and this takes time can you please please mr. b get my stock account to look good.
it’s like procter and gamble creating a spray to protect your head from UV rays and then finding out it helps your hair grow. now a bunch of bald guys just want the FDA to approve the hair growth.
You are a crack up VII. Love the hair analogy and like your views. The technical setup is clear. We bounced off 200 mda just like last year. Have retraced almost 61%. Now in or near major sell zone. Next move down will pierce 200 mba and keep going to 1074