I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List
Quantitative Easing is an asset swap. At the end of the day, it is nothing more fancy than that.
It is not 'money printing' in how most people think of it. What the Fed and the Treasury are doing with QE is swapping interest bearing assets (Longer term Treasuries) for non-interest bearing assets (Cash or Cash equivalents).
Why are they doing this?
Under the assumption (which I believe is erroneous) that more cash (i.e. more liquidity) will get lending and borrowing going again.
But that is not the issue at all. There is already tons of reserves at banks. There is already tons of liquidity in the system. Borrowers (you know, everyday people that have been forgotten in this whole debacle) are not borrowing. Does the Fed really think that if mortgage rate drop from 4.25% to 4.00% or even 3.00% that will prop up the housing market? No. Borrowers are already over-extended. They do not want, nor need, to take on more debt even at historically cheap rates.
This is why TPC calls QE "stocking the shelves". Let's say you go to a grocery store, and nobody is buying apples. There is already a huge display of apples and nobody is buying. The manager says "let's make it a wall of apples instead of just a display!". Does the increase in the volume of apples for sale actually sell more apples? The answer is intuitively no. If nobody was buying apples before, why would more apples for sale entice them to buy?
Same is true with borrowing. If there is little lending and borrowing activity at historically low rates, why would an increase in reserves change that?
Because it won't.
QE is not inflationary. QE is not money printing.
But! (you say), the first round of QE caused a huge stock market rally!
.... uhhhh, sort of. But not for the reasons why QE proponents say that QE II will spark a similar rally.
2008 was a deleveraging and liquidity crisis. In this case the financial system was seizing up. There were no apples for sale to use the analogy above. But the Fed established absolutely gargantuan Dollar Swap lines and liquified the system to stop the freefall.
This is why QE 'worked' (used loosely) at the beginning of 2009.
And this is precisely why it will 'not work' now. Because there is no longer a liquidity crisis. There is more liquidity than is needed, and so adding more liquidity will not change anything.
There is no borrowing or confidence on the side of Main Street. And until Main Street fixes its collective balance sheet (which will take years), there is no sustainable recovery IMO.
Move today was not really surprise. I remarked yesterday that the move down looked like a three. Move up is sharp and essentially closed the gap. However the next move should be *very* interesting, if the April move is any guide.
The Pragmatic Capitalist does a great job of watching the sentiment surveys. The AAII bulls have been very bullish for a weeks. But the Investors Intelligence bulls have been more skeptical. Well, not anymore. They are now in extreme bullish territory as well. This is good to see.
First I don't buy the triangle theory. The move up today is a very clear impulse. It is already to the top of the range, so I highly doubt it will serve to be the A leg of D of a triangle. I don't buy that at all.
I think it is far more likely that this move is part of 5 up. The question is how high?
Consider the fact that Minuette 3 based on how I count it, is appox 4.24 times Minuette 1. This is a Fib extension ratio (see Randomly Useful: Fibonacci Ratio Table) and a highly extended one at that. So does the market make another strong run after that? I think the odds point to 'not likely' IMO.
All of my 'Top 10' observations are still in effect (well, more like 8 of them) so I still think we are near a top and don't have a lot more upside with this wave.
We did not get a follow through day on Friday. No lower low and then just sideways chop for the rest of the day. This wave may not be dead (... yet) and may have just a little more upside next week. But I think we either topped, or if not then we are very near the top.
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The binve standard disclaimer:This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions. Any actions taken based on the views expressed in this blog are solely the responsibility of the user. In no event will MTaA or its owner be liable for any decision made or action taken by you based upon the information and/or opinion provided in this blog or in any associated RSS or Twitter Feeds.