The Waning Effect of QE?

Here’s an interesting point via SocGen that I haven’t seen many people discuss.  Notice in the chart below how commodities have stopped responding to the QE effect while equities have not:

“The effect of QE on commodities (if any) vanished earlier than for equity markets. During each of the first
two quantitative easing phases carried out by the Fed, commodities appreciated by over 25%. However, following the announcement of QE3 in Sept. 2012, commodity prices declined (-7% for the CRB index), a reminder that they remain largely driven by economic cycles rather than central bank actions (Gold being the notable exception). In fact, equity markets now seem to be the only asset which benefits from abundant central bank liquidity.

Conclusion: The all-time high reached by US equity markets last week can be attributed to the fact that the only major asset class which benefits from the current “risk-on” mood of investors is equities in developed market.”

It all makes you wonder – is there a real fundamental driver behind QE or is it mostly psychological as I’ve been saying for a long time now?  How could such a dramatic disconnect exist if there is so much more money in the system chasing fewer and fewer asset classes?  Could it simply be that there are other real fundamental drivers of stock prices at present (like corporate profits being driven in part by huge government deficits?) and that the QE “wealth effect” is all in our heads?

(Chart via Societe Generale)


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Rademaker

    Three things:
    – commodities reflect worldwide conditions, S&P still *mostly* US conditions (yes, a huge portion of S&P profits is from abroad, but the other huge portion still doesn’t)

    – to me that graph makes the S&P look bubbly

    – I’d say the market mostly rises under influence of the fact that interest payments on private sector debt are coming down. it’s not mainly QE so much as ZIRP that sends assets higher over time.

  • Steve W

    I wonder too if the QE “wealth effect” is in our heads. Many of my clients just don’t see enough strength in the economy to justify new highs on the DJIA or near new highs on the S&P. Of course, these clients are “regular folks” looking at more personal metrics like their businesses, employers, local construction activity, residential real estate sales, and whatever news they catch in the local paper or on TV.

    Can the Fed maintain ZIRP without continuing QE? What do you think would happen to the economy if the Fed cut way back, or perhaps even stopped QE? The federal government isn’t dependent on QE to continue its deficit spending, right?

  • doug fleischut

    Given that QE2 exhibited a marked handoff from equities to UST and Gold at around the 2.5 month mark, and with this foreboding sense that the Eurozone is fraying, long GLD, long TLT really seems to be the continuing play here, with a dash of short SPY. Expecting a few days or weeks of chop between 1525 and 1575 for the big guys (with their brand-new 1675 year end targets) to finish unloading inventory.

  • krb

    If the economy was fundamentally recovering, then so would commodities….like copper, et al. Your possible thesis…..”Could it simply be that there are other real fundamental drivers of stock prices at present (like corporate profits being driven in part by huge government deficits?) and that the QE “wealth effect” is all in our heads?”… reasonable, but for it to be disconnected from commodities this way would seem to indicate said corporate profits are also fictional and solely a function of intervention……they would NOT be byproducts of “real fundamental drivers of stock prices” as you suggest……unless artificial support is now considered part of the realm of “fundamental”……what a world we’ve evolved into!

    Realistically though, I think we’re all delusional to be drawing any conclusions about the real economy from any “market” price…..there isn’t a single price in the world right now that reflects true economic fundamentals… design, and acknowledged by central banks around the world. Price discovery, risk pricing, etc are quaint ideas from an earlier world.

  • Johnny Evers

    There are probably hundreds of factors that go into commodity prices. QE could very well drive up commodity prices … but, commodity prices could still fall because of the other factors.
    The problem with charting two trends is that you start to believe there is causation, or, when it doesn’t match your preconcieved notion, you come to another conclusion — i.e., it’s all in our heads.
    You can’t draw ANY conclusions on the basis of this chart but you can give yourself false confidence that you can.

  • AB

    Maybe it is impressive enough that commodity prices are as high as they are. There has been a lot of investment, exploration and technological improvement in the space. There is also a growing realization that China’s future is not going to look like an extrapolation of the past 10 years.

    I wish someone could tell us where margins are going.

  • Bruce in New Orleans

    Hi krb,
    I disagree with the supposition that commodities should be rising if the economy is really improving, especially copper. There is still a lot of commodities that are being held in Collateral Management Agreements (CMA) in warehouses and horded in China. The pendulum of market price manipulation swings both ways as anyone in the oil business can attest to.

    Also, over the longer view, commodities have been flat to negative for many decades while the economy has continued to grow substantially.

  • Andrew P

    Lower commodities prices can mean lower input costs and hence higher corporate profits.

    I’ve also seen that the total amount of stock available (both #shares and # publicly traded companies) has been steadily decreasing since 2000. Companies are being taken private and buying back stock with cheap debt. So if the same amount of money is chasing fewer shares, stock prices have to rise.

  • krb

    I actually agree with you….if/when I express my real view….that commodities are predominantly influenced by liquidity, speculation and other trader activity, and only to a lesser extent by economic fundamentals…. I’d be accused of wearing a tin hat, fostering conspiracy theories, etc. The fundamental recovery cheerleaders can’t have it both ways though……when commodities were skyrocketing they argued it was for fundamental reasons and NOT speculation funded by QE collateral….now when commodities are depressed it is from other non-fundamental reasons of suppression. Which is it… can’t have it both ways…..its why our econ and political classes have so little credibility.

    Like I said in my concluding paragraph…..I personally think its been years since ANY price….whether equity or commodity….had anything to do with actual fundamental fact. Traders…including those doing the fed’s bidding…..are going to do what they wish, and “fundamentals” or “speculation” will be used for explanation when each is convenient. The rest of us….and I’m a trader…..just need to know we’re participating in their large game of musical chairs and need to be careful we’re not caught without a chair when the music stops.

  • But What Do I Know?

    QE and actually results in less money in the real economy, IMHO. The reason? Lower interest payments–and in the case of the Fed buying Treasuries, no interest flowing into the economy at all.

    Before QE, a private actor would borrow money into existence to buy the new Treasuries, which would result in two payments of interest–from the buyer to the loan maker, and from the Treasury to the buyer. When the Fed buys Treasuries, it eliminates both payments.

  • Explorer

    ZIRP is driving PE re-rating as a result of the search for yield. More investors capitulate to the fear of missing out every day that rates stay low and the market goes up.

    And it is a double edged sword. Rising interest rates will reduce bond prices and cause a lowering of PE’s.

    And if austerity is used then the private sector surplus likely falls, reducing corporate profits, so even if ZIRP continues and economic activity is managed by reduced government spending then private surplus is reduced and company profits fall.

    Either way the boom bust cycle is not dead. It is just a matter of time.

  • flow5

    You presume that the markets function (are “driven” by QE3) according to “Friedman’s k-percent rule”. Not, so. And contrary to Friedmanites, monetary flows are not modeled with “long & variable” lags.

    See: Friedman, Milton, “The Lag in the Effect of Monetary Policy,” Journal of
    Political Economy, Vol. 69 (1961), pp. 447-466.

    Rates-of-change (roc’s) in MVt (the proxies for real-output & inflation), have been mathematical constants for the last 100 years (as bankrupt you Bernanke, et al, has yet to discover).

    Roc’s in the proxy for inflation (24 month roc in RRs) peaked in Feb (so too should have commodity prices). And we will see whether roc’s in the proxy for real-output (10 month roc in RRs) peaked in March in a couple of hours.

  • MH

    The initial conditions are clearly different – the Chinese economy was far stronger during the previous esposides.

  • honestann

    The predators-that-be (government and central bank) give the QE money to their fellow banksters with “marching orders”. Those “marching orders” tell them what “investing” behavior they expect in exchange for the “free money”.

    The predators-that-be are now telling JPM and other banks they want to KILL the appetite for gold, silver, platinum and other real, physical goods that might function as an alternate “money”.

    For one thing, they have JPM buy huge, huge boatloads of gold and silver short positions — and when they lose money, the federal reserve covers their losses.

    Also, making the top 0.1% super-rich become super-duper-rich does not stimulate economic activity — those predators just have more zero digits in their bank and trading accounts (paper wealth). The demand for physical goods is more attached to the real economy, which SUCKS.

  • krb


    In light of the many articles in the last day or two talking about copper and its use as an indicator of underlying economic health, I wanted to revisit our discussion….

    My overall view hasn’t changed….I think price discovery and the ability to learn anything about economic health, value, risk, etc. is gone…..thank you Ben! But there have been multiple writers about copper weakness who took the position I understood you to be taking….it can no longer be used to judge underlying economic health. But the reasons they then chose to defend that view did just the opposite…in my view. They cite growing inventories of copper and demand for it that is too slack to deplete those inventories…….that description shows a weak economy! Backstopped entities can run up equities speculatively, Ben and his band of media cheerleaders can talk up the economy and bank safety in their attempts to change consumer behavior, but the people who have to use their real cash to bet on the economy….capex, new projects, new production….the things that would consume that copper….doesn’t appear to be happening. Contrary to the weak-copper apologists, that IS showing a weak underlying economy. On a side note, if accumulating copper inventories was actually being “horded in China” as you say, and if the hording was in the face of actual demand, it would lead prices to RISE not drop.

    I still believe there are few market products…equity or commodity….that now reflect the economy…’s now nothing but a tool for wall street and Washington to try and influence behavior. But the arguments used to claim copper does NOT reflect the economy aren’t sensible…..come up with something better. krb