QE2 Report Card

A plethora of reports on QE2 are coming in with low grades. It launched to a bumpy start, and many observers thought it wouldn't have much of an impact in the real world (vs the worlds of speculation and expectations).

Global Bond Rout

Most noteworthy is that rates have gone up rather than down, and up quite a bit - 60 bp in the ten-year - enough so it has pummeled the bond market and led to descriptions of a Global Bond Rout. PragCap shows how dramatic the reversal has been, albeit we are still below yields earlier in the year:

 

Doug Short piles on, showing how since the actual QE2 announcement in November, the rate increases have been dramatic:

Econbrowser did a careful, somewhat scholarly review, and generally concluded that whatever impact it was supposed to have had is being swamped but other events. Their primary criticism is that the Fed has executed QE2 in the mid-range of Treasuries, rather than the ten-year (or longer) bonds. 

Banks Lending Again?

Another purpose of QE was to right the banks, encouraging them to lend again. Banks make money borrowing short and lending long, so a rise in long rates should encourage capital formaton.

John Mauldin adds a long, careful assessment of QE2 in his weekly newsletter, reprinted here. He sees unintended consequences to QE2: a global sell-off in sovereign debt. Why?

virtually every country in the world is grappling right now with how fast we get out of our fiscal stimulus and much do we worry about this longer term problem of debt

This may explain why rates spiked after the Obama tax deal was announced - it reflects more of the stimulus mentality, piling on more debt, than a change of approach to grapple with excess debt. The bond vigilantes disapprove. 

John went on to ask whether QE2 had begin to fix the core problem of capital formation - in other words, are the banks ending again? The answer is a resounding no. Credit continues to contract, and now with the long bond over 4%, mortgages have gone up, further hammering the housing recovery. Indeed, housing has started a double-dip. 

Inflation Increasing?

A third goal was to reflate the Dollar, with the view that rising prices would also encourage capital formation. I have always found this goal an odd one, perhaps a post hoc, ergo propter hoc fallacy looking back at the Great Depression. When FDR broke with gold, the USD fell and we had inflation. Did the recovery come for other reasons, brining inflation, or did inflation drive the recovery? In any event, in coming the financial blogs I have seen sophisticated arguments for increased inflation expectations, but no signs of inflation (other than asset speculation). Indeed, the inflation-adjusted Treasuries, TIPS, have not signaled higher inflation, rising with the ten-year not ahead of it. Instead, bonds are weak because of QE, not inflationary expectations:

The market sees the deflationary forces mixed with the inflationary signs and trades it to a draw. The market is shooting bonds because it is afraid and confused about the distortions that QE is causing. 

Comments

[bobm]

I'm no big Jon Stewart fan, but he got this one right... http://www.michaelcovel.com/2010/12/08/now-i-see/

[Wave Rust]

why is everybody jonesing on P3? :)

Can't we just be happy with P1 up first, before getting all hyper about when P3 up begins?

I believe there is usually a P2 down before a P3 up in EW, isn't that right?

P3 can't be more than a couple years away. Just be patient. Dow 30,000 will be here before you know it, OK?

Sounds like a bunch of kids asking, "Are we there yet?"

wave rust

[Account Deleted]

Bidu gives a sell from its DIAMOND PATTERN

http://niftychartsandpatterns.blogspot.com/2010/12/baidu-chart-analysis.html

[yelnick]

wave, I am going to post on the longer term picture this weekend. If the 2007-2009 drop is P1, we are in P2. If P2 breaks as an ABC, one can say the A ended in April and we are in (or now out of) the B. The C could go for another year. Do the math:
- A went from mar 2009 to apr 2010 or 14 months (from start in early Mar to end in late Apr)
- B went from May 2010 to July 2010 or a mere 2 months -- pretty fast
- if C started in July 2010, 14 months puts it out to Aug 2011 - auspicious
- if C goes 1.6x of A, this extends to 21 months or into Apr/May 2012

It could be that wave 2 is still on, breaking as an irregular flat (B higher than the start of A) with a C wave to go back down to the 1011 level or perhaps only to 1040 (truncated) before C starts. Would match a normal pattern of a January peak, a February correction, and then back on the bull run again.

[JT]

"Can't we just be happy with P1 up first, before getting all hyper about when P3 up begins?

I believe there is usually a P2 down before a P3 up in EW, isn't that right?" - Wave Rust

You certainly are "rusty" when it comes to Elliott Wave Theory, especially in regards to what is interpreted by Prechter.

LOL!

[Virgil]

Yelnick, how about price? You've stated in the past that you don't put much stock in retracements past .618. P2 is at about 64% now. It seems by your analysis that it has a lot of time to run but not much more space.

[Mamma Boom Boom]

For those that don't know, .786 is just as common as .618.

Neo-Mamma

[yelnick]

Virgil, good question. In theory, wave 2's can go back 99%. In practice, if they break 78.6% they almost never are wave 2's. If they break 61.8% they usually are not wave 2's. Zoran found wave 2's broke 61.8% only 7.5% of the time. His line int he sand was not 78% but 70.7%, a repetition ratio number (half of the square root of 2).

The other issue here is the length of wave 2. Neely found that waves 2 should be longer than wave 1 in an impulse. This means the whole P2 should be slower than P1, which went (depending on whose count) from Oct07 to Mar09 or 16 months (started late Oct, ended early Mar). The Hope Rally has currently gone more than 16 months, which satisfies this rule. 

If it goes higher than now, perhaps it is not a P2? One alternative is the 2000-2009 pattern was a large flat, and this is an X wave before the next disaster unfolds. It could also be one of those rare wave 2's that goes above 61.8% but stays below 78%.

If you eyeball the Mar09 to Dec10 charts, the A wave is much longer than the C wave, which so far has gone July to Dec or under six months, while the A wave went 14 months. If this is a zigzag P2, this becomes an unusually short C wave; and the B wave was unusually short.  (Neely expects B waves in zigzags to go linger than the A wave.)  Hence first issue is the EWI count may simply be off; the A wave lacks the characteristics of an impulse anyway. But even if this is the C of an impulse, we would expect it to go at least 62% of A, which targets 1350.  In time, it should also go about the time of A (or B+C should = A), which gives targets of 14 months after July = Aug2011 or 14 months after April = June 2011. 

[Virgil]

Thanks. I've been reading your blog for awile and only recently had the notion to comment. Good stuff.
I've read your reports on Zoran, but I haven't had time to review much of his actual work. I wonder about that 70.7% retracement. I understand the logic of fibonacci ratios being a part of the market fabric but I wonder where the square root of 2 fits in. Is that a Gann/Pythagorean thing?

[yelnick]

Virgil, the repetition numbers are probably from Gann. You can derive them using a "box" method around a move. Neely used to talk about this. Normally a move goes up the diagonal ending within 25% of the upper right corner (if bullish). A correction normally never gets beyond 50% of the box. The repetition series are 50%, 70.7%, 100% and 141%, and conversely, 29.3%, which is usually the minimum retrace of a correction. If you ponder the box of 1x1, the diagonal is 1.414 and the halfway point is 70.7.

[Wave Rust]

yel
In your review, don't forget to at least toss a greazy ball cap toward my view that March 2009 low was the end of a C from the 2000 (or '98 orthodox) high.

and if Zoran's line in the sand was 707 then he missed a lot of 2's.

the problem with EW is nobody agrees about anything. :))

heck, the dow could get to 15,000 and somebody will still be looking for the P3 down.

the other problem with EW is everybody acts like there are only 2 indices, SPX and the Dow. The most bullish broad indices are the VLE,RUT&NDX then, the compx and nyse ,,,, imho.

but then I'm a dumbull who has only seen this movie a few times, back yonder in '74, '82, '87, '91, '03, '10. I missed the '49 liftoff because I was busy learning to say please and thank you. :)

wave rust

[Wave Rust]

jt

"You certainly are "rusty" when it comes to Elliott Wave Theory, especially in regards to what is interpreted by Prechter."

dont mock rust. mockers rust faster than anything else.

i would also remind you and your uncle bobby prechterized that EW was, is and may always be a principle, not a theory, as RN hisself said. and he wrote about EW when they were still using quill pens and ink wells and blotter paper to hand draw charts. :)

the times they are having changed a bunch (except for my 8 track tape deck).

as technology came to be used for markets and charts and trading,,,, time was compressed and price was expanded, as to what the both of them can and will do. neely missed that time thing. He bravely tried to make rules, but we know how one soul here has taken his rules to a different place, sic Mr. DG. but then he wrote the book before the tech/PC took over the markets.

and gann was the ultimate dodger. he purposefully misspelled tunnel. he knew it was actually an expanding funnel (not tunnel) in shape and in power.

now there's some BS to ponder while driving to Yucca Flats for no good reason!

wave rust

[Retro Air Jordans]

Our feet are standing in your gates, O Jerusalem

[Wave Rust]

a downer comin, begins tomorrow, imho

long ago and far far away, I have said it before: buy dec 31. long on a short day.

if the first move gets beyond spx 1180 then yel's 1050 to 1040 is on deck.

wave rust

trading is easy once you figure out the hard stuff.

[Virgil]

Euro and precious metals are slipping thru key support. Hard to see the markets ascents lasting with a strengthening dollar.

[Mamma Boom Boom]

----------- PONDER ----------

What are the odds of getting a blue-chip rally over the next 2 weeks? The final blow-off for the indexes.

Neo_Mamma

[yelnick]

wave, by C I assume you mean an ABC (A to 02, B to 07, C to 09) - a classic irregular flat.