Friday, October 8, 2010

Is Quantitative Easing Already Priced In?

I wanted to discuss QE before I shut things down for the day. Before I start below, let me preface the video by stating that I am vehemently against another quantitative easing by the Fed.

That being said, it's always great to hear the other side of the story.   The video below also also helps us understand why the market keeps rising despite the relentless bearish economic news.

The clip is from CNBC's Strategy Session today.  At the 6:37 mark you will hear the QEII case made by Jeff Kronthal who is principal at KLS diversified.

Jeff does a great job laying it all out:

My Take:

As you can see above, Wall St is fairly certain that they are going to get their QE from the Fed.  If they do, and the numbers above are correct,  the case for being long treasuries is easy.

The Fed plans on issuing $1.2 trillion in debt next year.  If the Fed does a small QE of $500 billion and then invests the MBS run off of $350 billion into treasuries then 75% of our treasury auctions will already be purchased by the Fed.

Now that the case has been laid out I would like to respond to this nonsense.

First, how in the hell is it a positive when we are buying up 75% of the treasury auctions?

We issue treasuries in order to raise cash in order to fund our country's operations.

Can somebody please explain to me how financing yourself can actually work?  How has it worked out in Japan after countless QE's?  Anyone see their currency today?

This is a circle jerk plain and simple.  Japan proves that this policy is a total failure.  This solves absolutely nothing in the longer term.

Secondly, how does Wall St view this as a positive?  They tell us the Fed has our back.  Yeah ok, well how long is that going to last before they go bankrupt propping up this unsustainable Ponzi bubble?

Is Wall Street filled with total idiots? 

Why don't we take the money and spend it on finding ways to create jobs.  We might as well be pissing the money at the craps table if we do another QE.

Has the market already priced in the QE Ponzi Scheme?

I am starting to wonder.  IMO, DOW 11,000 might become serious resistance until we hear from the Fed.

I didn't like how the market acted at all after finally breaking through 11k this afternoon:

I also didn't like how the 10 year sold off late in the day:

You have to ask why would treasuries reverse like that this afternoon.  The DOW was essentially at the same levels it was in the morning.   We have not seen any reversals like this in bonds for awhile.  Usually the trend in the morning holds until the end of the day. Did something spook the bond boys?

The Bottom Line

I actually took a short position on tech via QID at the close.  I didn't like this afternoon's tape today at all.  I am also a little nervous about my metal holdings, and I suspect they might roll over if the market sells off so I wanted a little more short protection against a downside move in the metals.

The way I see it:  The market could still move higher from here.  The trend is your friend and the QE momo is strong.  However, when I look at Apple about to hit $300 as the economy continues to roll over I can't help but think we are near a short term top. 

I also believe that the market will tank if the Fed doesn't pull the QE lever in November. Wall St will have a temper tantrum and sell off the market if they don't get their way.

The problem Wall St has by putting all of their eggs in the QE basket is the Fed understands that hitting the QE button has a lot of consequences.  I don't think they will press it unless the economic data is absolutely dreadful.

If/when they do hit the button I think it will give the market an initial sugar boost.  However, I don't think it will last because the dollar will likely tank on the news which will force commodities back up which then crushes the consumer.

We will hit $150 a barrel on oil in no time if the Fed heads down this path.  The already weary consumer would then be pushed over the edge. 

Remember, the consumer was in better shape when oil was at these levels last time.  Many of them have been out of work since the last commodity bubble and, as a result,  I think the economy will hit a wall much quicker this time.

The absurd insanity on Wall St is truly something to behold.  I have never seen a group of people that are so smart act so stupid from a macro point of view.  Quantitative easing is a nightmare down the road.  It does nothing but take us one step closer to insolvency.

Until next time!


Anonymous said...

whatever helps the government, hurts the people. government does not act on our behaf; and we wonder why they pass bailouts and weaken the dollar when a STRONGER dollar would help JSP. fact is, the gov is selfish; we're looking at US Gov pushing every other gov to help its people by strengthening their currencies while the US gov screws us with a weaker dollar.

of course, no government wants to help its people...

i agee it will be just like the last several times; no one holds long anymore; there will be a QE rush, then they will dump on a 10% profit and we'll be back at 10,000 or less. the DOW will be between 9,000 and 11,000 forever as they trade a living.

Jeff said...


That's pretty much how I see it too.

I thought the TD Ameritrade news on free ETF trading supports what you just said.

They announced free trading on ETF's as long as you hold onto it for 30 days. If you don't you are charged for the trade.

There is no way they give their business model away for free.

They made a calculated decision knowing that the majority of ETF trades are held for hours let alone 30 days.

I think it's a smart move because they will attract more clients.