THE FINAL IMPETUS FOR QE3 – A MARKET SELL-OFF?
It’s no secret by now that the Fed believes the “wealth effect” via asset prices helps drive the economy. So, with rumors of QE3 growing louder by the day, we now just need a final excuse for the Fed to act. I think inflation is going to creep lower into the end of Q2 so that will give the Fed some flexibility here. I also still think the likely implementation of the program is the June meeting. But what would be the final impetus to ignite the response? SocGen says it will be a market sell-off (via Business Insider):
“QE3 has been delayed by the recent bout of good news from the US economy: SG is now in line with the consensus, expecting the launch in Q2 (24-25 April FOMC meeting).
As the $400bn Operation Twist program is still boosting demand for long-dated US Treasuries, we believe the Fed will be concentrating its expected $600bn QE3 on buying mortgage products to provide support to the underlying property market.
While policy loosening can but be good for all financial assets, the market impact should be less strong than during QE1 or QE2, as the surprise effect has disappeared.
QE1 and QE2 were launched at a time when the US Economic Surprise Indicator (ESI) was
very low. This time, the ESI has moved back up to an all-time high, indicating that the consensus on the economy may have become too optimistic and thus possibly putting risk assets in danger in the near future.”
Makes sense to me….
I sure wish we had a high savings rate like Japan because it seems Ben is destined to go down that path. At least SS, Medicare/Medicade and many other pension funds will be there to hold UST’s with real negative rates. At some point some grown up in Government or Economics has to put 2 and 2 together that a market reliant on FED intervention is never going to be a healthy market.
Ahhh…The Wealth Effect. Stock Market goes up, people get richer, go out and spend/invest….too bad that isnt true for most Americans.
http://jerrykhachoyan.com/the-majority-of-america-does-not-care-about-stocks/
Exaclty right. Reliance on the wealth effect is just more trickle down economic dogma. “The rich guy sees his stocks rise and buys a yacht, which employs people” sort of nonsense. They really believe a relative handful of wealthy people represent enough spending power to drive our economy forward, while incomes of the middle class and poor continue to decline.
And if we’re talking about the retired wealthy, cash flow is a much more important factor, IMHO. Retirees with assets do not want to see the nominal value of their accounts go down, and ideally would be investing for cash flow here. I think they have a pretty good sense that right now they are liquidating assets to meet cash flow needs as the market rises, but all the rising asset prices are able to do is maintain their desired cash flow–oh, and because BB has lowered interest rates, they need to liquidate more assets to do so.
The Fed can raise asset prices, but only by reducing cash flow from investments, thereby undermining their attempts. For all his talk, BB does not have a helicopter.
Can someone clarify what the term “sell-off” means? What is that? Is it a new term? I am not familiar with it. Do you really think we can get one this year?
It reminds me of a another term, “profit taking”. What ever happened to that term?
These terms no longer apply, do they?
It is the magic of HFT… they skim profits every day and the market never needs to sell off or go down for profit taking, they just skim all automatic deposits from 401(k). That is why the “market” is essentially at the same level it was 10 years ago- We’ve already had a “lost decade”!
The wealth effect is transitory as people don’t know when to sell stocks.
So a lot of people are thinking that if the market would just go down, it will be promptly boosted up again? It does make sense, but it would also make the sellers reluctant to sell.
How does the market go down if everyone anticipates it then going up?
@ anon –
that was good!
this game never gets easier does it…. anticipating the anticipators moves is really hard at the moment
There are limits.
Someone better remind the Quantative Analyst from M.I.T rule #1. Don’t make it look so obvious. You have to feed the bear once in awhile to keep them around. With out the bears the bulls will start eating each other.
PRECISELY!
PRECISELY!
That’s right George – and even professionals more often than not don’t know where to sell. The reason is continuous liquidity injections distort valuations by inflating multiples (P/E), driving them at higher levels than otherwise warranted by the real economic background.
http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm
Bernanke knows the effects of his quantitative easing on the worlds capital flows. The reality is that the world is running short of safe assets and he is part of the problem. The banking system does not function properly without safe assets. Europe falls into deeper depression and lending freezes up here in the states. Because of the decline of safe assets the world is rushing even more so towards US assets pushing yields to record low levels and equity prices to higher multiples. Quantitative easing is the last thing Europe needs as it will take away more of the worlds safe assets.
http://delong.typepad.com/sdj/2011/12/show-me-the-collateral-blogging-one-of-the-three-major-market-failures-underlying-our-current-difficulties.html
http://www.imf.org/external/pubs/ft/wp/2011/wp11190.pdf
http://ftalphaville.ft.com/blog/2011/12/05/778301/the-decline-of-safe-assets/
http://www.americanfuture.net/category/financial-institutions/credit-suisse/
Bill Gross has loaded up not necessarily because of another round of QE, but because of supply and demand.
http://www.minyanville.com/businessmarkets/articles/european-debt-crisis-european-central-bank/2/13/2012/id/39358
10%-15% is impossible here. There is zero chance of that happening and yes, I realize how hubristic that comment is. 4%-5% at most. Bull market, unequivocally.
‘Capitulation’-
That’s it for the sell-off…..The DOW plunged over 70 points at one time today….
You have to give the PPT credit. They do not even let the market go down 100 points in a day anymore….
I am beginning to wonder how much of this is just Apple. Apple can’t maintain this trajectory. And when it breaks the market will break. I wonder how much the mini bubble in AAPL represents the risks in the market currently….
I am inclined to agree with you….
Have you seen any analysis on this latest move up in the market and how much of it can be attributed to the very high priced stocks like Apple, MasterCard, IBM, CMG, AMZN etc? It seems like ‘big guys’ are aggressively buying these stocks…
It seems like the many of the lower priced stocks have not moved up at all……
do you really think APPL’s a bubble, 100bil cash plenty of product in the pipeline come on….!!