Back in the good old days, 2003 to 2007, about $600 million in Fed balance sheet expansion would buy a 1 point increase in the S&P 500. Since 2010 the cost of one SPX point has been about $1.75 billion.
The Fed has printed so much cash that it must deal with the reduced purchasing power of its printed money. It now costs the Fed 3 times as much to move the market as it did in the 2003-07 bull market. That’s partly because the Fed must also absorb the massive increase in Treasury supply that has taken place since 2008. It has also seen its clients, the Primary Dealers, divert some of the cash which it has deposited to their accounts into commodity speculation. It has tried to manage that in this cycle with jawboning and threats, in particular threats to end QE early. That has worked to a degree, but eventually the “cry wolf” syndrome will set in and traders won’t buy the Fed’s fear mongering anymore. Instead they will keep buying gold and crude and grains as a substitute for holding steadily depreciating money.
The Fed’s QE policy will thus only lead to more distortion, misallocation of resources, and other unintended consequences that will inevitably lead to another financial and economic catastrophe. Only the timing is in question. That’s what I attempt to tackle in my day to day tracking of the monetary data and market technical indicators. I’m beginning to see that outlines of an approaching endgame in that.
A couple of observations from today’s Professional Edition Fed Report:
The composite liquidity indicator rose last week as the Fed bought Treasuries and settled MBS purchases. The uptrend in market liquidity had been accelerating but it moderated last week as other components pulled back. This should be temporary as last week’s round of Fed purchase settlements sends cash coursing through the financial system and financial markets. That should show up in the data next week. Most of the lesser weighted components have had and should continue to have sympathetic upmoves as Fed cash flows through the system. Stocks should continue to oscillate along this upward wave.
Since mid November, just before the Fed began to settle its QE3 MBS purchases, SOMA has grown by $170 billion. The S&P 500 has risen by 152 points since those settlements began and the Fed started to cash out the Primary Dealers in earnest. This ain’t rocket science, but most mainstream analysts are confused most of the time because they’re looking at all kinds of irrelevant extraneous data—or being deliberately disingenuous.
The bogus news of fourth quarter GDP shrinkage gives the Fed the perfect excuse to keep printing. The idea that GDP shrank in Q4 just is not credible. The economy added a million new jobs, unemployment claims downtrended throughout the quarter, and government tax revenues were up sharply. The GDP number is flat out wrong, and should be revised up sharply over the next two months. But this data comes at a perfect time for an excuse for the Fed to continue QE. Gold traders have recognized that today, and gold is surging. Crude is pulling back, so I guess the oil traders haven’t figured out the game yet.
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