End of QE2

If things go according to the Fed's current plan, QE2 will end in June. There has been a lot of market buzz over the past several months about the impact of the stimulus programs on equity markets; how much of the US equity market gain is due to fundamentals and how much is attributable to stimulus. Here is a recent article that addresses the issue:

'http://www.cnbc.com/id/42401924

The Fed could announce QE3 or extend QE2 but assuming that QE2 does end in June I have a few questions:
1) What do you expect in terms of a reaction from equity markets (i.e. the DOW),
2) How far in advance of the actual end of stimulus will the market begin reacting
3) Do you anticipate a sector rotation into PM's?

 

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1] I don't think the movement of the DJIA is predictable since the event is so widely expected.
2] The market has probably already adjusted.
3] I've been expecting a sector rotation into PMs for a long time. But when it happens, that will probably be the time to sell because PMs are unlikely to remain popular with institutional investors for very long.

 

1) I'd expect the DOW to benefit if the economy is stable enough to support higher interest rates at such time. This would indicate smoother sailing and invite increased risk appetite.
2) As soon as a commitment to end QE altogether is announced. Ending QE2 doesn't mean much if QE3 kicks in.
3) I would imagine PM's would suffer at the expense of stocks per my answer to #1.

As for how much is due to stimulus vs. fundamentals, I think the response after QE2 ends will be the indicator. At the end of the article there is a link to another article that seems to foreshadow continued QE IMO though.

 

1. I don't think there will be a drop in the DOW until QE is actually stopped. Once the fed stops blowing billions of dollars into the market, the whole tent is going to deflate very quickly. The DOW will crash severly.

2. If there was a plan to stop QE, the major players would know about it in advance and act accordingly. Markets will sell off very rapidly and people like you and I will have little chance to take advantage.

3. ABSOLUTELY! I've talked to pretty much every single person I know about gold and silver. Not a single person owns a single oz of either outside of jewelry. NOT ONE PERSON out of at least 100. Every single one of them owns stock, bonds, or dollars and it will be interesting to see the scramble when people lose faith in the paper market. I think the FED was hoping to slowly erode the value of the dollar, but they underestimate how quickly things will move once the scale really begins to tip.

PMs may enter a bubble situation at some point, but the savvy move will be to sell for other hard assets/resources (not $$$). Keep an eye on the cost of PMs in oil if you're looking for signs of a bubble. We'll be in a bubble when you can get 100 gallons of gas for 1 oz of silver. As long as oil and silver move in concert, increases in PM prices are largely due to the dollar being inflated away.

 

Well thought Buster, I agree with you 100%. My answer was in response to the hypothetical of ending QE which assumes that we are in a position to do so while remaining stable.

 

When the artificial suppression of interest rates (QE2) ends, interest rates rise to a point were equilibrium is reached with the equity markets. At that point, "smart" money will flow out of PMs and into bonds. :thumb:

 

The main purpose of QE is to keep interest rates artificially suppressed. Billions of dollars are printed and then used to purchase treasury bonds. If the Federal Reserve Corporation shut off the spigot, NO ONE would buy treasuries at their current interest rate, which would force rates to rise. Rising rates will be the end game for the current government, as they continually refinance their $14+ trillion debt and even a small increase in rates will lead to huge additional costs.

This is why QE will never end. The powers that be will use the media to try and misdirect the public for their own gain, but QE is a never ending cycle that requires increasingly larger amounts of debt to achieve the same results. There may be some break in between QE X and QE X+1, but that will only be done to scare the public as their retirement accounts come crashing down. Then it will be QE to the rescue. My hope is that by then, people will see that QE and 0% interest rates are the problem and not the answer.

NOTE: I fully believe that the future holds massive deflation for the US economy. It's the only way to go after the last 25 years of artificial growth based on cheap money and debt. Many people are under the false opinion that this will be bad for PMs because deflation typically leads to decreased demand for hard assets. The deflationary crash won't occur until the US dollar has died completely. I believe there will be a global loss of confidence in the US dollar, which will lead to true Zimbabwe style hyperinflation. Then the economy will collapse into a deflationary depression. The trigger will be when the dollar officially loses it's reserve currency status. Watch out below once that happens. There will be no better protection of wealth than PMs during this transition. Except maybe a working oil well.

Many people on this site talk about when to get out of PMs. As long as you have food and shelter, I would not recommend getting out at any price in the current financial system.

 

Hi Yakpoo, thanks for your input. When you say that interest rates will rise are you talking about the Fed funds rate or bond yields? Also can you describe a little more thouroughly the equilibrium you are speaking of?

Regards,

Bluesboy65

 

Agree with these points. :thumb:

Help me out with your deflationary scenario. Are you saying that the money supply will get completely out of control (i.e. triple, quadruple etc.) which leads to hyperinflation which leads to mass rejection of the dollar at which point the dollar completely dies (is literally worth nothing) and a new currency will be issued but in insufficient quantity thus leading to a deflationary depression?

Regards,

Bluesboy65

 

A slow rise in interest rates will cause a slow drop in PM prices. Any other senario and it's anyone's guess.

 

OK, here are a few of my thoughts on the questions I posed:

1) If QE2 really does end in June I think it will be a true no kidding acid test of the health of the recovery in equities. When the first round of stimulus concluded in late spring 2010, the DOW lost about 1000 points until QE2 was announced in August 2010. The injection of stimulus worked like an injection of steroids and here we are at a multi year high on the DOW. I think business leaders are weary of the “recovery” and the lack of hiring (the jobless recovery) is an indicator of their low level of confidence. Corporate balance sheets are flush with cash because they are not investing in the future (i.e. people & equipment). I therefore expect a pullback in US equities.

2) I expect the pullback in equity markets to be sudden and prior to the official end of QE2 in June. Institutional investors and others will want to get out of the market before it experiences a decline; with end of QE2 being the catalyst. So I think investors will want to hang around long enough to wring out all of the bullish sentiment created by stimulus but as everyone tries to get out of the market first, there will be a rush to the exit. My guess is this will happen mid to late May.

3) I do expect some of the money leaving equities will move into metals and other commodities, especially oil and gas. I think bond yields will move markedly higher as we will have way more Treasury offerings than we will have buyers (at current rates). I’m wondering if the increase in bond yields will be enough to sop up some of the money withdrawn from equities. Because of the pin action in the bond market I really expect the Fed to step back in with more stimulus (QE3) to put a lid on yields and “calm” the market.

Also, I think the dollar index could move higher IF there is no further quantitative easing. In reaction I think we could see a significant pullback in silver and gold. Having said that I think it will be short lived as we continue to have big problems in the bond market and people seek a safe haven.

Regards,

Bluesboy65

 

The equity markets are way over-bought now. Valuations are stretched to the limit and that's with 0% interest rates. There will be nobody the buy U.S. Treasuries without a QE3 because the markets cannot possibly sustain more than 0.5% rates this year and that will keep treasury yields far too low for private investors.

QE3, or whatever they call it, is a given for the 2nd half of 2011. There may be a month or two lag before it starts but it will happen. The U.S. Gov't has proven they will destroy the USD to help ***cough-cough*** the economy. We got out of a possible depression this time by simply printing trillions of dollars. The problems remain and next time we won't be so lucky. Got PMs?

 

I'm referring to the 10 year Treasury yield, since that's the vehicle currently used to finance the debt. Without intervention, interest rates would necessarily rise to reach a level of risk/return equilibrium with competing investments. I believe that rate (whatever it may be) will most certainly be greater than the current rate of 3.45%.

Since October 2010, the 10 year yield has risen from 2.38% to 3.45% even WITH FED intervention. It was estimated that the effect of the $600 Billion QE2 would be to lower the 10 year bond yield by approximately 50-75 basis points so I would expect the 10 Treasury to reach 4.25% rather quickly.

As stimulus ends and Treasury yields push higher (assuming no follow-up stimulus), all bond yields will similarly increase...not good for current bond holders, but attractive to new money. Higher bond yields will (as a necessity) attract investment capital from other investments such as equities and commodities (specifically PMs)...imho.

 

OK thanks, I break down in much the same way

Regards,

Bluesboy65

 

I have been reading all these doom and gloom threads here on CT and I must admit it is scary to think of what would or could occur, if it does happen.
The one thing that really bugs me about rising interest rates is that if rates do rise this will have a severe impact on the amount of dollars needed to pay the interest on the massive Government debt. With such a large debt held by the Fed, this would cost them HUGE money in interest payments that they do not have.
Result?? Well to print more money, right? Another result, keep interest rates low (very low) and start QE-3,4,5,6,7,8,9,....get the picture?
When will it end? When we are bust?

I am by no means a financial person as far as the USA economy is concerned, but my thoughts are that it could not be good to continue printing into oblivion. No good will arise from that. Perhaps the day of reckoning is upon our doorstep??

 

Absolutely!! :thumb:

...and the pain that would cause the very people that the "Tax & Spend" crowd "profess to represent" would be catastrophic!

Everyone seems to marginalize the TEA Party movement, but they are just a bunch of common sense folks like you and I that fear for our future...if we don't get a handle on our out-of-control spending.

I've never been to a TEA Party rally, but until we get the debt under control, they have my vote.

 

The deflationary depression is not really related to the value or amount of dollars available. The US Gov't, the Federal Reserve Corporation, and the Too Big To Fail banks have spent the last 25+ years implementing fiscal policies that were intended to spur massive growth. There are too many "businesses" operating in the world that aren't turning a true organic profit. The current economic model was based on infinite growth and we've reached the end of that phase. Once the government subsidies and cheap (free) money goes away, many business will fail. How many of the biggest banks in the world would have closed their doors if not for the bailouts in 2008?

The tricky part of the deflation is that you can't quantify it in dollars, because the Federal Reserve Corp continues to inflate them away. The Dow could go to $100 trillion, but we are still in a deflationary depression. My GUESS is that the Dow will drop to under $1,000 in 2007 dollars.

I don't consider myself a doom and gloomer. I think this change is necessary for America to get back on track and take away the massive wealth that has been accumulated by those who knew the game and rigged the rules so no one else could win. The standard of living will come down across the board and we may see the world population come down as well. You will spend less of your money on things financed by debt (houses, cars, brand names) and more of your money on the limited natural resources needed to survive (food, water, energy). This is the way it's been for thousands of years and it will be that way again some day.

 

I don't disagree with the trouble we are in and the difficulty it will likely cause. A deflationary depression is characterized by the widespread decline in prices with an inadequate supply of money. If QE programs were to come to an end with QE2, I could see your deflation scenario.

However, our governemnt is not capable of funding the debt, operational spending, and social programs and will never simply default. So I really believe we will see a string of QE programs, flooding markets with dollar denominated liquidity to create the illusion we are making good on our obilgations. Of course this is a technical default but it's less obvious. This will lead to an inflationary depression.

Regards,

Bluesboy65

 

Howdy,

1. They are talking about taking away the punchbowl and starting to raise rates to counter inflation. Sounds good. Oh, I forgot that there are no jobs, nor wage increases, oil is pushing $110, states are laying off and cutting wages and benefits, and we're engaged in how many wars? So much for the end of Quantitative Easing.
As long as they keep pumping the cheese, the equity markets will continue to do well. Wall St loves this because they get the vigorish.

2. Priced in - job security is working at the BEP printing greenbacks.

3. The pm market is starting to get interesting. I've been long since around 2002 but had been buying silver eagles even earlier. Always felt that silver under $5 was a back up the truck sort of buy. But then I sold some in '79 for really obscene multiples of what I had obtained at Face. This thing is just starting to warm up. You're going to see mining stocks that go up 10-20-more times. It'll get really nuts. And then they'll all crash back to earth and a lot of people will lose all that money they just made.

peace,

rono

 

... just curious, how can the market adjust while the fed Qe2 monies are still being used to purchase equities in after market hours ? Especially when given the magnitude of these purchases.