Is The Stock Market Already Pricing In The Next Round Of QE?

Macrodata

I continue to maintain that the overall stock market has disconnected from any sort of fundamental reality quite a while ago. As the chart above suggests, a multitude of economic indicators are pointing lower, earnings and revenue guidance has been adjusted down as of late, baltic dry index is sitting at a 30-year low, etc… The question is…

Why is this divergence developing and what will the outcome be?

There are two possible scenarios. First, it is reasonable to assume that neither the economic data nor earnings will improve going forward. On the contrary. If that is the case it would be reasonable to assume that the stock market is setting some sort of a blow off top before reversing and catching up to reality.

The other possibility is, the stock market might already be pricing in the next round of QE. That’s right. As outlandish as it sounds, it would confirm my overall thesis that the US is on the verge of a massive recession and that the FED will have a very difficult time raising interest rates in this environment. This would explain the divergence.

Unfortunately, for the stock market the outcome is singular as it would have to correct in a major way. The two scenarios described above impact the timing, but not the ultimate outcome.

Is The Stock Market Already Pricing In The Next Round Of QE? Google

October 9, 2013October 9, 2013

What Everyone Ought To Know About The Future

CNN Money Writes: Fed minutes: Decision not to taper was a ‘close call’

Federal Reserve officials were torn on whether to continue their stimulus program at their last meeting in September, according to minutes released Wednesday.

At that meeting, the Fed surprised investors and economists, who were largely expecting the central bank to start reducing its $85 billion in monthly bond purchases — a gradual wind-down process that has come to be known as “tapering”.

The decision not to taper, was a ‘relatively close call’ for several members of the Fed’s policymaking committee, the minutes said.

What tipped the scale?

Read The Rest Of The Article Here

This is the most important news no one is talking about. Forget the Government shutdown. That situation will resolve itself shortly. The subject matter above is much, much, MUCH MORE important.

As I have mentioned before the only thing that is keeping the US Economy afloat is QE buying of Bonds to the tune of $85 Billion per month. That is the only thing keeping interest rates down and the economy humming along. Even thought the velocity of monthly QE impact is getting weaker and should dissipate itself soon either way, removing or tapering this stimulus will have immediate negative consequences on the US Economy and the financial markets.

Basically, the interest rates will shoot up, the economy will slow down drastically and shift into the recessionary environment. The stock market, the real estate market, car sales and the rest of the economy will decline substantially.

We are beginning to see cracks at the FED in terms of QE decision making process. That is significant because it is the first clear indication that at least some at the FED are ready to start tapering. Eventually they will. When they do all of the above will happen.

Please be aware that the stock market is a future discounting mechanism and as such will decline long before the FED announces anything. That is why looking for first cracks is so incredibly important. You have been warned.

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October 2, 2013October 3, 2013

Why Happy Fingers Bernanke Can’t Sleep At Night

BusinessWeek Writes: Slow Job Growth Suggests Fed Was Right to Delay Taper

The private sector added 166,000 jobs in September, fewer than most economists predicted, according to the ADP Research Institute’s monthly tally. ADP (ADP) also revised August’s jobs number down to 159,000 from 176,000.

The September number’s not bad—it’s right in line with the 2013 monthly average of 167,000. But it’s certainly not evidence of a labor market that’s picking up steam.

“The ADP report suggests the Fed was right to delay the tapering of its monthly asset purchases last month,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a note this morning.

Read The Rest Of The Article

Here is the bottom line. Happy fingers Bernanke will keep playing with his keyboard as he continues to print $85 Billion of QE per month. That is not even a question. I do not believe they will tapper anytime soon if at all. This is not the real issue here.

The really scary issue is that the QE is having very little impact on the overall economy. The velocity of the QE money has slowed down so much that it is almost a non issue.

Imagine a car engine that is stuck on 2000 rpm no matter how much gas or even jet fuel you supply the engine with. No matter what you add to the tank, the engine can’t go over 2000 rpm. What’s worse, after a while it start to sputter and eventually dies.

You have that picture in mind? Well, that is an accurate representation of the US Economy. EQ is no longer having an impact. As such, they can’t even consider stopping it now.

Yet, the worst is yet to come. The economy is now starting to sputter even with QE. When that accelerates the downshift and the subsequent stock market and economic declines will be severe.

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