War Room
Adios QE
24 Sept 2014
HiddenLevers War Room
Macro Coaching
CE Credit
Archived webinars
Idea Generation
Presentation deck
Open Q + A
Scenario Updates
Product Updates
Adios QE
Market Update
Fed Hijinks Scenarios
Past Fed Action
QE MythBusters
HiddenLevers
MARKET UPDATE
Market Update
Syria Airstrikes
Manufacturing = 5y high
Gas = 3 bucks
sources: HiddenLevers, MarketWatch, BusinessWeek, Huff Post, Washington Post, Reuters
New Era for Chindia
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.
HiddenLevers
FED HIJINKS SCENARIOS
Review: End of QE Scenarios
Not Sure
Easy Money,
No Hangover
Good
Economy
Back on Track
Bad
Deflation
Strikes Back
WHAT REALLY
HAPPENED
66% priced in based
on SPX at 2200. This
becomes the GOOD
scenario now.
Scenario priced in
10y target = 3%
S&P target = 1900
10y = 2.54% headed
down. Commodities
in deflation, Equities
+ GDP not so much.
GOOD: Steady as She Goes
Fed raises rates in mid-2015 as stated
US
manufacturing
hitting its stride
EU rate cut
gives Fed
breathing room
Fed balance
sheet still
bloated
until 2020
Fed has kept its
word on
2014 QE taper
Low inflation
means no need
for rate squeeze
source: HiddenLevers, WSJ, Bloomberg, NY Times
BAD: Rate Hike Postponed
Fed waits until 2016 due to economic malaise
Weak economic
growth might
force Fed to
postpone
Equities caught
between easy
money and bad
growth
Rates continue
downward drift
of 2014
Poor global
growth +
deflation are
catalysts
Yellen watching
labor market
like a hawk
source: HiddenLevers, NELP, New Yorker, MarketWatch
UGLY: Fed Pops Bubble
QE withdrawal or pre-emptive rate hike backfires
Yellen said Fed is
prepared to use
rates to pop
bubbles
Low VIX and
corporate bond
spreads
worrisome
Acknowledged
that low rates
led to housing
bubble
Acknowledged
froth in
tech/biotech
sectors
sources: HiddenLevers, USA Today, NY Times, ThinkAdvisor, SeekingAlpha
Worry is
more about junk
bonds than
equities
Failure of labor
market recovery
makes this
unlikely
Goldman thinks
impact begins
when taper ends
Scenario: Fed Hijinks
Good
Steady as
She Goes
Bad
Rate Hike
Postponed
Ugly
Fed 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 1
Remove last $15B of QE
next month
Step 2
Rate hike mid 2015
(1.27% fed funds target)
Step 3
Normalize Fed Balance
Sheet “by end of decade”
sources: Federal Reserve Releases, Yellen Conference Transcript
Key Takeaway
No Fed governor sees
rates reaching old 5%
levels … ever
Past Fed Action: Reaction
Period
Fed Funds Change
(bps)
S&P Change
(%)
S&P reaction
12/65 – 12/66
+165
-12.2%
8/67 – 9/69
+540
-0.5%
Max Drawdown:
-32.39%
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%
source: Business Insider
Max Rise:
+18.49%
Average Change: -0.22%
UGLY scenario:
Fed Pops bubble
Correct Analogue = Feb – Nov 1987
similarities
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)
P/E ratios
differences
Then - rates rising globally
Now – nope
Then - USD declining
Now – USD rising
Then - inflation concerns
Now - nope
Then - Fed Funds rate 7.3
Now – 0.0
technical resistance
1987: 18
2014: 26
sources: HiddenLevers, Federal Reserve, St. Louis Fed, Time Magazine
HiddenLevers
QE MYTHBUSTERS
QE Myth:USD is getting weaker
Reality: USD is getting stronger
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.
sources:
HiddenLevers
Charts
QE Myth: Rates are Rising
Reality: Rates dropped Post-QE 1, 2 and in 2014
QE 2.5
(Twist) +
QE3
QE 1
sources: HiddenLevers
QE
2
QE Myth: QE is Ending
Reality: QE outsourced to Japan + Europa
Info on ECB QE and Rates
Bank 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
sources: Wall Street Journal, Wall Street Journal
Info on BOJ QE program
First 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
Adios QE – Recap
Global factors have given
Fed breathing room
1987 analogy is about rate cycle, not
just stock market crash
S&P rising + Lower rates
make an odd couple
INTEREST RATES ARE NOT RISING
HiddenLevers Use Cases
Adios QE
macro theme
Strong Dollar
scenario
Fed Action
scenario
Global
Deflation
data center
10y/CPI/PMI
Product Update
Dude,
check out that
new look
I just love
these guys
New site coming in early October