After major asset reflation the top may be in and markets are primed for sell off

Been a looong time since i posted. I recall a very well times thread in 2009 that the bottom was in and its a great time to buy stocks. Thou i dont recall if the logic was completely spell'd out it was downright nailed. Since that period when FASB 157 was changed (which allowed banks to mark to myth, not market) and several trillion dollars later and several rounds of QE have been used to prop market up to levels that coincidently show a remarkable correlation between the rising fed balance sheet and the S&P 500. Now investors are nervous and highly tuned in to see if the fed is gonna take away their punch bowl.

Both stocks and bonds are forward looking and future accomodative (interest rates and QE (fed bond buying) are at the center of focus regarding where markets will be going. (Again given the correlation between fed balance sheet and stock markets) during this reflation its no surprise. The forward looking nature of the markets is one factor i will try to go in depth with more bc this is where the fed's true intentions is conveyed thru "fed talk" and the subsequent stock /bond market direction , timing and size of movement in markets can be influenced heavily by this.

Before getting to why the fed talk wrt "tapering" is so crucial to fwd thinking markets i would like to talk about the REAL fed mandate. Yes the real mandate not just what their pr position is wrt to full employment and inflation but the fact that they are always trying to protect and maintain their power and influence. The fed has spoken at length regarding congress getting its fiscal house in order, instructing them to focus on growth in short term and moderating debt in medium and long term. Check the "fed speak" bernanke has been harping on this. Seems politicians have decided they will cut soending and hope fed qe can keep consumer confidence and spending high as the stock markets soaring instills more broad confidence about the future of our economy (wether right or wrong). The fed is not stupid and has seen that their policys have inflated asset values and that the longer they meep pumping the markets, the further "distorted they will become". Some like martin feldstein are calling for fed to taper now. The fed realizes and so does bernanke that if their is another asset boost the fed will take alot of the fallout and blame. As bernanke is out the door at end of year many speculate he and esp other fed members dont want to leave this bubble in feds lap, bc when unsustainable ( artificially high asset values collapse ) the collateral damage will be great the longer and higher the bubble builds and politically the fed doesnt want to shoulder all the blame. Which leads me to the importance of managing taper talk and depending on feds motivations how it could be managed.

As mentioned markets are forward looking. Wrt fed QE and taper talk , markets are use to the fed managing interest rates more than QE purchases. The fed is known to act to raise or cut rates in SUCCESIVE steps. The talk of "tapering" implys similiar behavior wrt to bond buying. Tapering describes a process of cutting purchases and the fed has said that given the economic trends they forsee tapering could begin as early as september and potentially stop all together by mid 2014. Markets that forsee future trends try to move as quickly as possible to sell or buy at most profitable point, esp if a current trend canbe extrapolated to a future outcome. What im getting at is markets will likely sell off (stock and gov't bonds" QUICKLY and sharply shoud this trend get underway. If the fed wants to take markets down quickly they willa allow their fed speak to be dominated by talk of tapering and potential QE ending dates. However if they DONT then they will do anything they can to shatter the assumption that the first official bond reduction (when launched/scheduled) WILL NOT BE assumed to be a green light for future cutting expectations and weaning off program. Fed could emphasize bond buying could decrease but that the buying levels will depend on economic activity and they wont hesitate to fluctuate(re-increase bond buying in subsequent months if economy slackens. If they can use fed talk to shatter the belief that a decrease in bond buying will be followed in sucessive steps.

Also im not sure fed could "manage a drop in markets" markets are
very emotional and can move potentially quicker thans fed can act

So to get idea of where fed is going pay careful attention to fed goveners speakinf to media amd fed minutes. Im not sure what fed is thinking just yet but they may well be willing to allow markets to slide via taper so that politicians may take more the blame and the fed can say we moved to reduce stimulus slowly and market tanked bc politicians didnt have pro growth policy to carry economy on its own. It should be mentioned this is a huge risk in trying to manage a stock crash if that is what is happening

Too make the message simpler.

Stock and bond markets are still priced toward Qe to infinity. (Bonds have slight taper factored in) . A strong selloff is on the table when bond buying program first is reduced bc the markets see this as beginning of the end trend. Fed can change this perspective w fed speak but they may not WANT to so that the politicians are on the hook for this mess more than fed itself.

Also i apologize for the spelling errors in this thread. I started this at midnite on my i phone and typed fast and furious. When i finished at 140am i was too tired to go back and edit the spelling and since i haven't posted in years i didn't realize there was only 4 hr window for editing. When i get to computer i will link a great chart showing fed balance sheet growth and S&P 500 growth correlation.

Another thing to look at is a sort of megaphone pattern in 3 year annualized EPS. Also referred to as a wolf wave. Basically it is a pattern of sort of cyclical corporate earnings per share outstanding of stock. Im not as overly confident in this aspect but EPS seems to have peek'd in mid 2012 and has flat lined as of last two quarters. Historically this takes a somewhat abrupt dip and coincides w stock market turmoil. Seems QE was somewhat nourished by rising earnings per share wolf wave and at some time within the next year a sharp deceleration may be in the cards. Also of note corporations have been issuing record amounts of corporate bonds at exceptionally low rates. MOST of this debt will need to be roll'd over in next couple years and interest rates are likely to be highly uncertain (or higher lol) so this is not something favorable for corporations going fwd either.

Lots of things (but PRIMARILY) sending a message of cutting QE in succession may send markets tumbling within next year.

In clear english, its a GREAT time to get DEFENSIVE wrt your asset holdings. Stocks esp domestically and globally look very low reward and high potential for loss. Gov't bonds with medium to long maturitys will likely get hit hard as well, at least initially ( large funds may rotate into gov't bonds as they exit stocks) but i dont think things look rosey for the ten year us gov't bond (ticker symbol TNX) or the thirty year.

Not sure how gold will fair and tbh i would go into 3 month t bills so long as dollar remains world reserve currency. In times of stress, the world usually flocks to the "least worst" currency and the usd could appreciate very significantly in next year if stock/bond trouble hits. And that paltry interest earn'd on 3 month t bills (defensive asset strategy) could look better as currency appreciates during any financial turmoil.

I really have to question the sincerity from which the fed goveners think they can taper QE and not cripple any recovery and weaken bond markets around the world.

Im hoping its just posturing , bc im not looking fwd to the next slide, i use to sort of take my dislike for the "unfairness" of the system and let that drive a desire to want to see it fall, but the more time that past i realize there is NOT a liklihood that things will get better "after THEIR system crashes", no it likely will get worse for the ave individual.

Words make head feel funny.
What this money?

Thorneblood i think everyone will need a good pipe to get thru 2014.

Best case scenario imo unemployment level ticks higher due to labor participation rate ticking higher an fed holds off for long time on taper, says QE will continue for forseeable future and interest rates stay low, monthly housing payments get cheaper, stocks stay high, pensions get returns, and the fed keeps stoping starting taper talk for next two years. I am in the kick the can down the road path bc its gonna be ugly as hell as/when it ends (likely) and it wont be fun and it wont usher in anything that is likely to be "good" for joe 6 pack. It is gonna be quite the ride starting perhaps as soon as next months fed meeting.

If taper is announced or imminent many think a fund that pays out inverse to long term int rates would be great play. But rates when they move will move FAST! It just has been 33 years this bond bull has ran and i am just waiting for something , anything (event) to occur that keeps it going

QE is code for printing money, so, we should call that like it is.

The fed is printing two ways: the QE system and 0 interest to banks. Which one gives? QE is the public poster, but it is the "free" money to banks that more interesting. In order to give the trillions of recently printed money the illusion of value, interests rates must rise, but they do people won't borrow the printed money. If the keep interest rates low, people borrow the printed money BUT the value of the dollar goes down. The other way to keep the value of the dollar up is to seize more assets from other countries - war.

War, QE, Zero Interest, put them in a blender. Look for September to resonate with the 08 collapse when these are mixed up. My bet is mortgage rates will be above 6 by mid September.

Always keep in mind, no country ever went to war to steal another countries fiat currency....

Markets are jittery. Unless fed holds off on tapering in sept and euro central bank decides to JOIN the Qe party, the top is very likely in, i mean its poss markets could go a bit higher but not much w/out euro central bank joinin the QE party. Thou they show no indication of doin so.


And i swear all the damn economists are talking out of the side of their mouths in public. "Ya we think it will be a smooth transition to exit QE, no disruptions to bond market. Minimal effect on stocks" the only thing that does is IF it influences the public , it helps them sell high!

This is not a stupid generic call for markets to crash that ppl have said for last xyz years.. It became obvious that market was very QE central, and corporations have had good earnings which helps the upward trend. I think EPS is starting its wave down (that have flatline'd) and w QE tapering talk it really doesnt matter, the market is losing their kool aid or they think they are, and they are getting the shakes

Many who realize just how important QE is to the markets and how the fed protects the banks are very skeptical the fed will follow thru w a taper. BC such a taper threatens so many things. It threatens falling Asset prices on stocks, bonds, consumer confidence < consumer spending, and potential derivative losses on bets gone wrong wrt to 441 TRILLION interest rate derivative

the international bank of international sentiments (central banks central bank) has a GM that gave a speech "making the best of borrowed time". Basically saying that the govt's need to pay more attention to growth strategys that have a higher productivity level of debt and they focus on cutting some debt obligations and thus make the best use of this "borrowed time" thanks to monetary policy. It was basically saying there is SOME time still to act and take advantage of the accomodative monetary policy , so i think that gives the fed (the leading central bank imo) TIME to back track on taper talk and stay accomodative w high levels of bond buying if they wish. Time will tell.

My guess is that if fed * trys* to start a taper in sep/december meetings they will see market pressures that have them untapering soon. Which would lead me to think any market slide from tapering would stabalize as fed signals they will reverse course if economic indicators slow (and they prob will) esp the stock and bond markets

reply to post by cpdaman


I know they said indefinitely but how long really can QE go on? Is it until we realise en masse we're getting shafted or is there a precipice?

Originally posted by EA006
reply to post by cpdaman

 

I know they said indefinitely but how long really can QE go on? Is it until we realise en masse we're getting shafted or is there a precipice?

Difficult to answer but basically it can go on successfully for a while!

I mean , it is not something that is "highly inflationary" as some ppl have u think, esp when banks and households are focus on repairing their balance sheets. However the longer a country is on it the higher the level of asset price distortions usually get, AND the bigger fall when it is removed, ESP if while there is QE "buying time for economy" the underlying banks dont clean up their balance sheets and instead focus on profitting from QE and govt doesnt cut the fat/ sweet heart deals of allowing higher costs for healthcare (debt suffocation on middle class and simultainiously future growth )for industry's who they are in "bed with" (then govt's may just cut pension costs/benefits). All these CURRENT trends do is make our "recovery" exceptionally dependant on QE.

Also the longer QE continues and it is global and the longer speculation continues under it, there will be a rising risk in this global interconnected world, if one country falls down, it can take all the others with it, the global coordination of QE is a difficult task . That being said QE can continue as long as central banks seem willing to grow their balance sheets and take on risk themselves and we kick the crash down the road. Some growing voices say 2014 is the crash (and im referring to NON "Doomers").

I think we have longer but im not confident that QE (which needs to stay the same or grow) will maintain the FUTURE QE expectations necessary to sustain markets already very elevated. I.e fed may try and wane patient of meds to see how economy does and this may go back and forth, so either way unless markets are told "QE" for considerable future" we maybhave top'd out

reply to post by cpdaman


Q.E is the cure and the curse then?

Originally posted by Thorneblood
Words make head feel funny.
What this money?

lol, Economics was purposely made to be confusing. What this means is that the Fed cannot stop giving its cash for free to banks or the economy will tank and it will be blamed on them. They don't want the blame so they are forewarning the end of QE so that the market tanks and they can blame the market for a tanked economy.
My parents morgage rate was dropped automatically without paperwork and without reason. This is because banks get money at no interest and so why would you charge such high interest to the customer. The Fed has been buying government bonds like 50 billion a month which means its buying debt back. This is because no one wants US debt and maybe the reason why the national debt hasn't moved in 82 days, LINK This also means they could one day reverse the usury they have created, but right now its just a start.
We might be witnessing a ghost in the economic machine, I'm so giddy.
Of course the shareholders won't have any of that so corporations will be forced to cut corners untill they become confetti. Mom and Pop stores will make a comeback and all will be quiet in the forest and thumper will be boinking away...

i'm looking for it sooner then later, factor in the affordable care act, which hasn't got a chance in hell of getting off the ground, but they will sink more money into that than meets the eye and it still will fail miserably. more part time jobs and far less full time jobs coming our way, less jobs all together, more people on welfare and disability because the unemployment ride will be running out even more then it has.

more pensions in the larger cities will be evaporating, which means less disposable income which we all know what that brings. with the current scandals being aired i see more people believing in less hopium and spending less of their credit, which also is running dry since mom n dad have been tapping the line of credit and raping the 401's just to maintain status quot.

Fukushima should bring it's share of scare and misery as well and that aint gonna make people feel like buying a new tv now is it.

nah i don't see it going too much longer, despite what the ass whole bernanke want's he aint getting it, people are getting damn tired of the DC shuffle and when we reach a threshold, which should be soon, then all bets are off. in my opinion anyway.

The fed has a history by the way wrt its future economic growth forecasts of being "too optomistic". That imo is because they are trying to instill confidence and SPENDING amd future expectations of growth fosters that. So any delusional (if its based on future growth) decision to start tapering (which will cut asset prices) should slow the consumer confidence and raise monthly mortgage rates which in and of its self will sour economic numbers should be enuf to keep fed from ending QE . Unless however they stay married to only an unemployment rate that lowers bc unemployed workers drop off workforce. In which case the fed will be showing they are passing this mess on to congress

So, i see two different options going fwd for markets.

Markets are very very QE dependent. The fed knows this. The fed knows that gdp is weak. They also know that most gains in unemployment level are not die to people finding jobs but people falling out of "the workforce" . The fed also knows walmart earnings were weak and they are a good bell weather of the economy. The fed talking taper makes little sense to me, and i really think at minimum there will be some GReAT entry points on some stocks now that are at or near 52 week lows. I think NUGT is one such buy if it gets to 7.5 or so. I have a very hard time thinking fed doesnt recommit to QE "to infinity" due to weakness in economy which they will blame on fiscal policy. I dont see them stepping away from markets currently topping out and have the hindenburg omen "every other day" if they give a date QE will taper its BOMBs away , investors will sell first and ask questions later.

If fed doesnt stop taper talk and the white house doesnt pick yellen for fed the markets will be ON EDGE and teetering! Their will be a bunch of sputtering, markets will be volatile and may sell off anyway, at least until fed reanchors "qe to forseeable future" And picks fed chief.This could lead to great opportunitys over the next month to see a slide before a quick reflation! BUY LOW! If the FED STEPS AWAY from bond buying , stocks will croak and govt bonds will initially (the euro debt crisis) could refire and bonds crap the bed and derivative bombs burst!! I just would guess the fed will "say" growth has slowed and more accomodation necessary.Margin debt is rising to levels consistent w other precrash periods as well. Without continued stable QE expectstions this market is gonna be ugly, but like i said fed knows this and i think they ride to the rescue after a slide that allows great entry points.