Results 1 to 2 of 2

Thread: Which Assets Perform Best During Quantitative Easing ???

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Which Assets Perform Best During Quantitative Easing ???

    Some EXCLUSIVE analysis from our friends at MINYANVILLE


    (snip)"The Fed has done it again. Over the last four years the government has embarked on a variety of different stimulus programs. The Fed’s main programs have been Quantitative Easing (QE), Zero Interest Rate Policy (ZIRP) and Operation Twist. ZIRP isn’t anything more than a glorified jawbone, so we won’t spend any more time analyzing it. Some people have lumped the Operation Twists and QEs into one big bond-buying stimulus category. But this is a mistake as the effects of these two operations are quite different and should be analyzed separately. This article will look at a variety of assets to see how they responded to the QEs and Twists.

    Before we get started we must first define the programs' starting dates. There are a couple of different interpretations. November 25, 2008 is when the Fed announced QE1. The Fed started buying bonds the following week. The November 25 date is by far the most commonly listed as the start of QE. QE1 ended in March 2010. The Fed gave an extremely strong hint for QE2 in Ben Bernanke’s infamous Jackson Hole speech on August 27, 2010 but the Fed didn’t officially start buying bonds until early November. We’ll use the August 27 date. QE2 ended June 2011. The Twists started on September 21, 2011.

    Now that we have gotten the formalities out of the way, let’s get right to the data:






    The above numbers are annualized. Overall refers to the start of QE1 (November 25, 200 to the night before QE3 (i.e. Wednesday September 12, 2012). Note commodities act very differently during QE than Twist.

    Let’s start off by seeing how effective QE was with respect to what the Fed was trying to accomplish. The Fed has a dual mandate of price stability and keeping unemployment low. The inflation rate during the QEs was 2.7%. That’s too high.

    The unemployment rate went up by 15.3% annualized during the QEs. That is also not good.

    What else is the Fed trying to accomplish? Well the Fed has been buying bonds directly in an effort to stop the housing crash. Arguably one can rank lowering bond yields and raising housing prices as the No. 3 and No. 4 most important goals for the Fed. Using iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) as a proxy for bonds prices would suggest the Fed fails once again. Despite spending trillions on bonds, bond prices went down 9.4% on an annualized basis during quantitative easings. Why? Inflation concerns.

    Quantitative easing didn’t stop the real estate crash either. During QEs real estate was down 5.5% on an annualized basis.

    So far the Fed is 0 for 4. What’s next on their list? Probably stocks. Here the Fed finally gets on base with a 30% annualized return.

    Are there any other goals the Fed is trying to accomplish? The Fed wants oil and commodities to stay low. While one can argue that this is part of the Fed’s inflation mandate, the Fed wants housing to go up, which is the biggest component of inflation by far. In any event, oil went up 41.8% annualized during the QEs and commodities in general increased by 25% annualized. Not good.

    It is clear that quantitative easing has been a near complete failure for the Fed. What to do? Stocks went up 30% annualized while commodities went up 25%. Within the asset class of equities, the more speculative Nasdaq and small cap Russell indices fared even better than the S&P 500. As for individual commodities, cotton was the big QE winner with silver also faring very well.

    I have written quite a few articles since late March which have shown that when bond yields collapse (like they did), stocks always go up, commodities usually go up, and bonds always go down. The QE study offers similar conclusions. About the only difference is when bond yields drop, commodities go up about 75% of the time and during QE they have gone up 100% of the time. As for the short side, bonds continue to be the No. 1 play. However, shorting anything other than bonds and the dollar looks risky."(snip)


    ... as always do your own 'due diligence', but with the FED now starting QE3 this analysis might provide some useful future investment guidance.

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Which Assets Perform Best During Quantitative Easing ???

    some related commentary from Charles Hughes Smith at



    (snip)"Why QE May Not Boost Stocks After All (September 26, 2012)


    What if the Fed throws a QE equity-ramp party and the fireworks fizzle?
    If there is one dominant consensus in the financial sphere, it is that the Federal Reserve's $85 billion/month bond-and-mortgage-buying "quantitative easing" will inevitably send stocks higher. The general idea is that the Fed buys the mortgage-backed securities (MBS) and Treasury bonds from the banks, which turn around and dump the cash into "risk on" assets like equities (stocks).

    This consensus can be summarized in the time-worn phrase, "Don't fight the Fed."

    This near-universal confidence in a QE-goosed stock market is reflected in the low level of volatility (the VIX) and other signs of complacency such as relatively few buyers of put options, which are viewed as "insurance" against a decline in stocks. The usual sentiment readings are bullish as well.

    But what if QE fails to send stocks higher? Is such a thing even possible? Yes, it does seem "impossible" in a market as rigged and centrally managed as this one, but there are a handful of reasons why QE might not unleash a flood of cash into "risk on" assets every month from now until Doomsday (i.e. December2015--the Mayans made one teeny addition error in Column 13).

    1. Bullish sentiment. Though Mr. Market has been chained and whipped by central planning, he still harbors a mighty resistance to rewarding the majority in any trade, and with most traders firmly on the bullish side of the boat, Mr. Market might break free of the Fed's chains long enough to capsize the boat.

    As the saying goes, complacency leads to volatility, and stability leads to instability. Not all cycles can be voided by central planning, until Central Planners own 95% of every market (which seems to be the direction we're going here).

    2. The technical case for QE yielding diminishing return. The Keystone Speculator (among several analysts pursuing the same line of inquiry) made a compelling case for a Fibonacci sequence playing out as each QE is launched:


    Starting with the time, QE1 was a 13-month pump, so note the beauty in the Fibonacci sequence occurring; 13, 8, 5, 3. Thus, the current 3-month rally would already have achieved its target based on this metric. For the point moves and percentages, continuing along in the sequence would target about a 20% rally for the current QE3 pump, with about a 250-point move off the 1270-ish bottom which places price in the 1520's target area. "Don't fight the Fed" is the mantra, but the current rally appears far along already.
    In other words, the length and rise of each QE-goosed rally diminishes with each QE. If this pans out, the QE3 rally is within a few weeks of topping out and reversing.

    3. The Fed has trained traders to front-run its decisions. The Fed has played a masterful PR game of describing its next round of intervention for months, keeping markets aloft in anticipation of the "free money" flood.

    In one of the unintended consequences that central planning excels in producing, the Fed has trained traders in Pavlovian fashion to front-run "risk on" assets, i.e. buy stocks before the Fed actually announces its latest market manipulation. As a result, stocks have already run up strongly so the "announcement" bounce is modest; everybody tempted to be bullish is already all-in, and disbelievers are wary of jumping in on the downside of "buy the rumor, sell the news."

    4. The Fed has no surprises left. The market loves surprises, especially lavish gifts of free money from central banks, and now, 3.5 long years after the March 2009 lows in global equities, there are no more surprises left--unless the outright purchase of stocks by the Fed counts as a surprise. Interest rates are already near-zero, the Fed already owns a significant percentage of all long-term Treasury bonds (see The Fed Now Owns 27% Of All Duration, Rising At Over 10% Per Year, Zero Hedge), and it already bought $1.1 trillion in MBS and will keep buying more dodgy mortgages.

    So what's left to wrap up and deliver to a market addicted to free-money surprises every few months? Nothing.

    5. Correspondent David P. explained the real mechanism at work in QE3--the enabling of fiscal "nearly free money" spending. The Fed creates money electronically and uses the cash to buy $45 billion of Treasuries every month. Since the Treasury now holds a preponderance of short-term bonds to keep interest rates down (as explained by Zero Hedge), it must issue an insane amount of bonds every month to roll over existing short-duration bonds and fund the Federal government's $1.2 trillion deficit.

    The only way the Treasury can get away with issuing trillions of dollars in bonds every year is if somebody buys and holds a big chunk of them, i.e the Fed. Here is David's explanation:


    While Fed money printing doesn't make it to the marketplace, Federal government spending does, and Fed monetizing makes it so that Treasury borrowing doesn't negatively impact treasury markets and so Treasury rates don't increase.
    Fed directly enables the Treasury to spend its 8% GDP of borrowed money each year. That money goes right into the economy, no ifs, ands, or buts. And we know Bernanke is forever talking about how effective "fiscal policy" is - and he's enabling it directly through his monetization.

    The Federal government gets to borrow half a trillion effectively for free in perpetuity as the Fed effectively says, "Don't worry about $500 Billion of that 'fiscal cliff.'"

    In other words, the pathway of the freshly printed money goes from the Fed to Treasuries and through deficit fiscal spending into the real economy. The amount of "new free money" flowing into equities may be a lot less than the consensus believes, as $500 billion of it has already been committed to enabling Federal deficit spending on a monumental and seemingly permanent level."(snip)

Similar Threads

  1. Quantitative Easing Explained
    By person in forum Dollar Den
    Replies: 2
    Last Post: 11-15-2010, 02:10 PM
  2. Replies: 5
    Last Post: 11-04-2010, 03:05 AM
  3. parody lyrics 'Quantitative Easing'
    By Melonie in forum Dollar Den
    Replies: 0
    Last Post: 11-01-2010, 09:50 PM
  4. Us FED's next move ... 'Quantitative Easing'
    By Melonie in forum Member Boards
    Replies: 0
    Last Post: 12-24-2008, 08:04 AM
  5. quantitative or qualitative?
    By Fawn in forum The Lounge
    Replies: 3
    Last Post: 03-04-2008, 06:24 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •