QEII first looked like the Love Boat, but may turn out to be the Titanic - Art Cashin at UBS.
You would have thought that with three months warning and boatloads of commentary, the Fed's QE2 announcement would have settled in by now. The Dollar took a dive, not a surprise, but bonds fell too (rates rose), which was a surprise, as QE was supposed to lower rates on longer term bonds. The 30-year yields jumped 20 bp to go back over 4% as the market was surprised that the long bond was not targeted by QE this time around. Last time around, during QE1, rates also rose.
PIMCO, the big bond fund, is worried that QE2 will backfire.
"Doubts grow over wisdom of Bernanke's 'super-put' " intoned the headline by Ambrose Evans-Pritchard at the UK Telegraph:
It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.
Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.
Tinkering with markets risks losing control. Is Bernanke already in trouble? Markets are getting disorderly, worldwide. The impact of QE seems to be exporting US inflationary pressure to overseas markets. India hiked rates to quell inflation, as China also did recently. The chorus of criticism from around the world is increasing. China, Brazil and Germany in particular have complained that QE without other measures to turn the US economy will do no more good than literally throwing Dollars out of helicopters.
Global inflation is clearest in commodities. Besides all the metals, oil rose. The Saudi's expanded their budget, expecting to reap windfall profits. Many inputs in products besides petroleum have risen dramatically since August. Cotton is a striking example, showing the signature of a parabolic bubble that will end very badly:
Bernanke is trying to create a general monetary inflation in prices in the US. The inflation indicators (GDP Deflator and CPI) are showing only modest levels of 1-2%. His challenge is daunting in that banks create money in the US and they are not increasing lending in any serious way while the shadow banking system is still deleveraging. Another surprise today is that M2 actually dipped ahead of QE, not what should be happening for his inflation pump to work. Instead of inflation, Bernanke is risking margin compression: the inputs rise, but prices of end products remain about the same, squeezing margins.
He is also trying to drive the Dollar down in an ill-guided attempt to increase US exports. Exports of commodities respond quickly to changes in relative currency rates, but end-products are much stickier. The impact of a lower Dollar will be higher inputs (imports) and less return on about the same exports until the expectations of cheaper end-products causes sales and pre-existing contracts to adjust. This means the "net export" component of GDP is likely to be hammered as imports rise (in price) and exports fall (in value).
The Dollar Index broke a critical trendline today, plunging below a support level that had held for three years. As you can see from this chart, a day before the QE announcement the Dollar Index was sitting on the line:
Breaking it is bad news for the buck. What usually happens with a break is a retest from below. If the Dollar can recover back above, it was a False Break, largely driven by getting caught in the turbulence of the QE announcement as central banks adjust. If the retest fails, we may see the Dollar kiss that trendline goodbye for a while. You can read more analysis at Slope of Hope.
The macro forex environment will now become even more turbulent. Many Asian countries rely on pegs to the Dollar to keep their currencies cheap, and they will now have to intervene. This puts them in an awful trap, as intervention risks importing inflation, but letting their currencies rise risks slowdown of their export-driven industries.
In all of this, stocks rose today. Perhaps it was but a momentary spike, as Neely opined in a special bulletin. If so, we shall find out shortly, as stocks should reverse down. Yet it might instead be a Bernanke Put (see next chart). There has been some suggestion that he is purposely targeting stocks, perhaps in the hope of generating a wealth effect to pull more spending into the economy. This is quite a change for a one-time monetarist, watching stocks and not the money supply or surrounding indications of inflation, such as commodity bubbles.
good article Yelnick! since no "guru" bears left out there, it's a good time to sell. I have an expanding triangle with reverse alternation starting on June 10th (SP500). 3-4 trading sessions left for wave e to finish. also the price broke ae/bd parallel channel, its a good sign that the end of e is close.
Posted by: mz | Friday, November 05, 2010 at 04:54 AM
stocks up around 100% in just a year and a half
is that the best year and a half ever?
Posted by: hopi tribe warrior | Friday, November 05, 2010 at 05:30 AM
SPX now at 1226.
Maybe some day, Yelnick can highlight someone that really trades the markets and who has been RIGHT calling them over the past 18 months with real "skin" in the game.
How many more moves have to be "missed" before people will completely dismiss the likes of such pundits as Prechter, Hochberg, Neely, etc.
Posted by: Reality Check | Friday, November 05, 2010 at 07:47 AM
1576-667*61.8%....1229 on the S&P is the last line for the bears long term. That is, if you are into Fib ratio's.
Posted by: MHD | Friday, November 05, 2010 at 07:55 AM
@MHD -
"1229 on the S&P is the last line for the bears long term."
Don't worry, even if 1229 is broken, EWI will redefine things to the S&P priced in gold or oil or some other measure so that they can continue to defend their pseudo-science.
Posted by: Chris | Friday, November 05, 2010 at 08:57 AM
This piece keeps the bears' SPX 333 dream alive UNTIL the next round of short covering.
Posted by: Edwin | Friday, November 05, 2010 at 09:26 AM
Chris....if you want the bull market to continue, EWI had better come up with a new bearish count:)
Posted by: MHD | Friday, November 05, 2010 at 11:12 AM
Inflation should kick the earnings up full speed soon :D
Posted by: hedge fund compliance | Wednesday, November 17, 2010 at 09:28 PM