It cost $50 billion a month but the Federal Reserve kept prices up and hope alive.
My one prediction for the year was that this year would be a carbon copy of last year. Up until today we had followed the script almost perfectly.
Remember last year after QE1 ended? The SPX and Nasdaq had a significant correction and EVERYONE just KNEW we had to crash as the A-Team came back from vacation. THE CRASH WOULD HAVE HAPPENED LAST YEAR if not for QE2! But Bernanke promised the free money and it was enough to keep the balls juggling and the prices levitated.
As QE2 ended, most market participants were confident that there would be another free money stimulus. But few bet on the most fractious government in our lifetime. Now, a month after QE2 ended, the market has given up on the hope for more free money and everyone is running for the doors. “Investors” all ran into the marketplace acting like puppets on a string, doing exactly what the Fed needed them to do. There was no respite. There was nothing but dip buying and not even earthquakes, nuclear fallout or revolution could dissuade them–until the free money ran out.
So now they all follow the Pied Piper over the cliff. Technicals are only a guidepost in the most informal manner. You must let the fools and knaves out of the market as they all must leave simultaneously. We are nearly down 20% in a few weeks, a modern day crash.
Look, the Quantitative Easing rescue plan might have worked, but its architect neglected to perform the necessary prelude and first step toward the successful implementation of the stimulus: Reorganizing the bad debt. Until that is attempted in some meaningful way, our economy will go nowhere.
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terrific post
This commentary won’t make people money. Rather it puts what is important into perspective. It is a compilation of events that bring us to where we are now.
But incurring this kind of liability without the proper foundation has been a waste. It will go down in the history books when we eventually selectively default.
This has been the greatest squandering of capital in history. And for what?
Lemme play Devil’s Advocate for a bit. They bought a year (I view it as three years from 2009-2011) during which the cities didn’t burn. Three years during which the economy could have recovered, even though it didn’t.
Even though the probability of a meaningful recovery (in economic activity, not merely the QE1/QE2-inflated prices of stocks) was low, that was still a decent gamble to take given the freeze in the credit markets in 2008: if truckers and cargo shippers can’t trust their paychecks or letters of credit, fuel doesn’t make it to gas stations, truckers can’t haul food, whatever food exists rots on the loading dock, and the cities burn.
Even though the markets are down 20% from their highs and we’re seeing default/counterparty risk beginning to show up in the major banks, things still aren’t as bad as 2008, at least not yet. So we’re Japan: a declining economic power with a shrinking workforce and a greying population. A lost decade still beats the alternative. And even if we do end up flushed down the Zerohedgers’ collective toilet bowl, we go down knowing that we put it off for three years longer than they thought we could.
Having said that, brilliant call, congratulations, and I echo hindoo_hero’s question: How’d you manage to hold to your conviction during the QE2-induced gonzo rally of late 2010? I started off not believing in it, but I was a believer by January of 2011, much to my regret.
During the peak QE3 months when the only way was up, did u ever doubt your thesis in the face of the relentless ridicule of commentators on your blog who believed 1240 was a new generational low? Psychologically how do u stop urself joining the herd of lemmings? I know i couldnt do it.
1240? how about 1295?
The QE induced rally went on longer than I thought it would. How long could they continue to melt up in an ever-narrowing and low volume manner? This is why this meltdown is so violent. There is no short covering on the way down because shorts had been vanquished.
Mind Power…
i would add a congratulations to you as well for the patience, your very different style makes IBC a more interesting place.
I would also offer that QE2 didn’t cost the government any dollars, but rather saved them some tens of bilions. Because they paid interest on those bonds to themselves and not to the world around them. And therein lies the irony, QE2 actually took money out of the economy. I think I read that TARP was profitable for the gov’t aside from freddie and fannie…
What we need is real fiscal stimulus and european debt monetization, which can be done without risk of inflation in this manner: the ECB simply starts buying debt in the marketplace announcing target interest rates, then charges those rates to the countrties. It is not revenue constrained in doing this, it doesn’t need to raise the funds to do it, and it wouldn’t have to buy all that many bonds. If a central bank announces a target interest rate, I think the marmkets would listen.
Then the balance sheet of the ECB is wound down as greece, ireland, et al pay down their debts at 3 or 4% or something, and the world can get on. In the end no net new euros are created and it should bring the crisis to an end fairly cleanly.
That action prevents the need for a bank bailout, prevents an end of days scenario, and gets everything back on its feet.
scott agree and great analysis
I still havent seen the great capitualtion yet. spoke with some money managers who are still holding the line and have had very few requests for liquidation.
More blood to come