Adios QE24 Sept 2014

War Room

HiddenLevers War Room

Open Q + A

Macro Coaching

Archived webinars

CE Credit

Idea Generation

Presentation deck

Product UpdatesScenario Updates

Market Update

Fed Hijinks Scenarios

Past Fed Action

QE MythBusters

Adios QE

HiddenLevers

MARKET UPDATE

Market UpdateSyria Airstrikes

Manufacturing = 5y high

New Era for Chindia

sources: HiddenLevers, MarketWatch, BusinessWeek, Huff Post, Washington Post, Reuters

Gas = 3 bucks

Macro Snapshot

Jobless claims at 2006 levels

Are jobless claims signaling a peak? Commodities suffer despite industrial rebound (hint: it’s the dollar) – meanwhile S&P is middle of the pack among global indices.

FED HIJINKS SCENARIOSHiddenLevers

Review: End of QE ScenariosNot SureEasy Money,

No Hangover

GoodEconomy

Back on Track

BadDeflation

Strikes Back

WHAT REALLY HAPPENED66% priced in based on SPX at 2200. This becomes the GOOD scenario now.

Scenario priced in10y target = 3%S&P target = 1900

10y = 2.54% headed down. Commodities in deflation, Equities + GDP not so much.

GOOD: Steady as She Goes

source: HiddenLevers, WSJ, Bloomberg, NY Times

Fed raises rates in mid-2015 as stated

EU rate cut gives Fed

breathing room

US manufacturing hitting its stride

Fed has kept its word on

2014 QE taper

Low inflation means no need

for rate squeeze

Fed balance sheet still bloated

until 2020

BAD: Rate Hike Postponed

Weak economic growth might force Fed to

postpone

Equities caught between easy money and bad growth

Poor global growth +

deflation are catalysts

Fed waits until 2016 due to economic malaise

source: HiddenLevers, NELP, New Yorker, MarketWatch

Rates continue downward drift

of 2014

Yellen watching labor market like a hawk

UGLY: Fed Pops Bubble

Yellen said Fed is prepared to use

rates to pop bubbles

Low VIX and corporate bond

spreads worrisome

Worry is more about junk

bonds than equities

Failure of labor market recovery

makes this unlikely

sources: HiddenLevers, USA Today, NY Times, ThinkAdvisor, SeekingAlpha

QE withdrawal or pre-emptive rate hike backfires

Goldman thinks impact begins

when taper ends

Acknowledged that low rates led to housing

bubble

Acknowledged froth in

tech/biotech sectors

Scenario: Fed HijinksGood

Steady as She Goes

BadRate Hike

Postponed

UglyFed Pops

Bubble

If economic recovery continues, the Fed can stay the course and the present rally may continue into 2015.

If poor economic growth causes the Fed to postpone hikes, weak growth and continued easing might offset each other.

Investor sentiment might shift if the Fed acts more rapidly. Stocks, bonds, and real estate could suffer in a bubble pop.

HiddenLevers

FED ACTION

$

2014 QE Wind Down Plan

Step 1Remove last $15B of QE next month

sources: Federal Reserve Releases, Yellen Conference Transcript

Key TakeawayNo Fed governor sees rates reaching old 5% levels … ever

Step 2Rate hike mid 2015(1.27% fed funds target)

Step 3Normalize Fed Balance Sheet “by end of decade”

Past Fed Action: Reaction

UGLY scenario:

Fed Pops bubble

Period Fed Funds Change (bps)

S&P Change(%)

12/65 – 12/66 +165 -12.2%

8/67 – 9/69 +540 -0.5%

4/71 – 9/71 +185 -9.35%

3/72 – 9/73 +749 -2.75%

3/74 – 9/74 +304 -32.39%

2/77 – 5/80 +1300 +11.44%

8/80 – 7/81 +1007 +0.34%

1/82 – 3/82 +241 -7.01%

3/83 – 9/84 +294 +8.97%

2/87 – 11/87 +133 -18.97%

4/88 – 4/89 +323 +18.49%

2/94 – 3/95 +300 +7.19%

4/97 – 5/97 +19 +10.46%

7/99 – 7/00 +174 +8.23%

6/04 – 8/06 + 425 +14.66%

S&P reaction

Max Drawdown:-32.39%

Max Rise:+18.49%

Average Change: -0.22%

source: Business Insider

similarities differences

Correct Analogue = Feb – Nov 1987

sources: HiddenLevers, Federal Reserve, St. Louis Fed, Time Magazine

dramatic increase in program trading, now called HFT

market spooked by interest rate hike rumors (1984-85)

brand new fed chair in office

overvalued stock market (P/E)

Then - rates rising globally Now – nope

Then - USD decliningNow – USD rising

Then - inflation concernsNow - nope

Then - Fed Funds rate 7.3Now – 0.0P/E ratios

1987: 182014: 26

technical resistance

HiddenLevers

QE MYTHBUSTERS

QE Myth:USD is getting weaker

sources: HiddenLevers Charts

Despite a steady rise in the US money supply, the dollar is getting stronger. Falling velocity of money means new money doesn’t cause deflation or devaluation.

Reality: USD is getting stronger

QE Myth: Rates are Rising

sources: HiddenLevers

QE 1QE 2

QE 2.5 (Twist) +

QE3

Reality: Rates dropped Post-QE 1, 2 and in 2014

QE Myth: QE is Ending

sources: Wall Street Journal, Wall Street Journal

Info on ECB QE and RatesBank Deposit rates reduced to -0.1% in June 2014. Further cut to -0.2% in September

ECB new asset purchases will increase balance sheet 700 B to 2.7 trillion Euros

ECB likely to expand QE

Info on BOJ QE programFirst case of QE done by Japan to fight deflation in early 2000s.

Recent QE began April 2013 and expected to double money supply.

In addition to bonds, domestic ETFs also purchased (1 B USD) beginning Aug 2014

Reality: QE outsourced to Japan + Europa

Adios QE – Recap

S&P rising + Lower rates make an odd couple

INTEREST RATES ARE NOT RISING

1987 analogy is about rate cycle, not just stock market crash

Global factors have given Fed breathing room

HiddenLevers Use Cases

data center10y/CPI/PMI

scenarioGlobal

Deflation

Adios QE

macro themeStrong Dollar

scenarioFed Action

Product Update

I just love these guys

Dude, check out that

new look

New site coming in early October