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BNP’s Paul Mortimer-Lee knocks it out of the park today with not one, not two, but pretty much all quotes in his latest note, “The Fed and QE: Hotel California?” A random sampling thereof (full note shortly).

From BNP

• History tells us that when the Fed tightens, bad stuff happens. The bond sell-off this summer on the mere announcement of QE ‘tapering’ is a case in point.
• Bonds will suffer when actual ‘tapering’ is announced. When it starts, we are likely to trade through the previous high for yields.
• Equities may look fairly immune at first, but as QE buying fades and eventually stops, take care. Any equity sell-off will have a knock-on effect on bonds and the economy.
• How large the effect on the markets will be will depend on how much the markets rally while QE is ‘on’. The bigger the rally, the worse the sell-off will be.

…

Our overall assessment is that when the Fed [ZH: again] decides to ‘taper’, there will be an adverse effect on markets. Bonds will suffer from a higher term premium and an upward revision of expectations about future levels of Fed funds. Equities are likely to suffer, too. How big the selloffs will be will depend on the circumstances – how robust the recovery looks, to what extent inflation remains quiescent and to what extent the current period of maintained QE leads to excess valuations in markets. Those markets that sold off most during the ‘taper tantrum’ tended to be those markets that had rallied most in previous months.

Clearly, this is one of the disadvantages of QE – one of its purposes is to distort markets. When QE ends, those distortions begin to unwind. Because of the disequilibria in financial markets under QE, relative valuations, as well as valuations of the risk-free asset, are distorted. Markets may go through considerable gyrations as they try to find the “right” constellation of equilibrium prices. It is possible that sufficiently vigorous reactions could adversely affect the economy.

It may be difficult to foresee all the effects of ending QE. After all, except with relatively brief breaks, the Fed has been using its balance sheet to stimulate the economy since 2009. Markets and the economy have gotten used to it. Will there be unexpected effects when QE ends? Seems like a good bet. What they will be is more difficult to say.

…

In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that “you can check out anytime you like, but you can never leave”.

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WkeqtMY30CM/story01.htm Tyler Durden

BNP’s Paul Mortimer-Lee knocks it out of the park today with not one, not two, but pretty much all quotes in his latest note, “The Fed and QE: Hotel California?” A random sampling thereof (full note shortly).

From BNP

• History tells us that when the Fed tightens, bad stuff happens. The bond sell-off this summer on the mere announcement of QE ‘tapering’ is a case in point.
• Bonds will suffer when actual ‘tapering’ is announced. When it starts, we are likely to trade through the previous high for yields.
• Equities may look fairly immune at first, but as QE buying fades and eventually stops, take care. Any equity sell-off will have a knock-on effect on bonds and the economy.
• How large the effect on the markets will be will depend on how much the markets rally while QE is ‘on’. The bigger the rally, the worse the sell-off will be.

…

Our overall assessment is that when the Fed [ZH: again] decides to ‘taper’, there will be an adverse effect on markets. Bonds will suffer from a higher term premium and an upward revision of expectations about future levels of Fed funds. Equities are likely to suffer, too. How big the selloffs will be will depend on the circumstances – how robust the recovery looks, to what extent inflation remains quiescent and to what extent the current period of maintained QE leads to excess valuations in markets. Those markets that sold off most during the ‘taper tantrum’ tended to be those markets that had rallied most in previous months.

Clearly, this is one of the disadvantages of QE – one of its purposes is to distort markets. When QE ends, those distortions begin to unwind. Because of the disequilibria in financial markets under QE, relative valuations, as well as valuations of the risk-free asset, are distorted. Markets may go through considerable gyrations as they try to find the “right” constellation of equilibrium prices. It is possible that sufficiently vigorous reactions could adversely affect the economy.

It may be difficult to foresee all the effects of ending QE. After all, except with relatively brief breaks, the Fed has been using its balance sheet to stimulate the economy since 2009. Markets and the economy have gotten used to it. Will there be unexpected effects when QE ends? Seems like a good bet. What they will be is more difficult to say.

…

In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that “you can check out anytime you like, but you can never leave”.

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WkeqtMY30CM/story01.htm Tyler Durden

US and European stock markets (and European sovereign bond markets) have been sliding since early in the European morning overnight. The blame for the weakness appears to be coming from a double-whammy in Germany. First the German government resolved to push for the financial transaction tax (despite banks rejection of the proposal – well they would wouldn’t they) and then later in the day when Germany’s emerging coalition rejected the last-best-hope for shared sacrifice (or using more of Germany’s balance sheet) – The Debt-Redemption Fund – leaving more pressure back on Draghi to save the day. Anxiety in the US is clear with VIX (and credit spreads) rising as hedgers are active – and of course, markets are broken with NASDAQ options prices ‘crossed’ acording to some sources.

 

Europe’s markets are falling rapidly…

 

And the US is unhappy…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/oqnRtxinDL0/story01.htm Tyler Durden

US and European stock markets (and European sovereign bond markets) have been sliding since early in the European morning overnight. The blame for the weakness appears to be coming from a double-whammy in Germany. First the German government resolved to push for the financial transaction tax (despite banks rejection of the proposal – well they would wouldn’t they) and then later in the day when Germany’s emerging coalition rejected the last-best-hope for shared sacrifice (or using more of Germany’s balance sheet) – The Debt-Redemption Fund – leaving more pressure back on Draghi to save the day. Anxiety in the US is clear with VIX (and credit spreads) rising as hedgers are active – and of course, markets are broken with NASDAQ options prices ‘crossed’ acording to some sources.

 

Europe’s markets are falling rapidly…

 

And the US is unhappy…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/oqnRtxinDL0/story01.htm Tyler Durden

There was a time when the Fed’s QE was, at least on paper, supposed to generate jobs (the broad inflation will come on its own, in due course). After all, the prospect of injecting $85 billion in liquidity into a market with the sole goal of pushing the stock markets that benefit the purchasing power of about 10% of the population would hardly have received broad approval even by the co-opted Congress.

So, to all those who still naively claim Fed is not the sole reason for the market’s relentless march higher, those billions in liquidity must go into the economy, and specifically into job creation, right?

As a result, we decided to back into what the average private sector job has ended up costing the US population in pure dollar terms (which in turn ultimately manifests itself in terms of unsustainable government debt and pent up inflation) via the Fed’s monetary pathway. Well, according to the ADP data released earlier, in which a paltry 130K private sector jobs were created in a month in which the Fed, as always, injected $85 billion, the bottom line came to a whopping $654K per job (since government jobs are always a net drain, we exclude those from the calculation). And taking the average job growth throughout 2013, this number, as can be seen on the chart below, is a laughter-inducing $553K!

Obviously, the above “analysis” is merely a placeholder to show just how absurd modern policy has become, and yes – we do realize that all of that money has ended up solely into capital markets boosting risk assets, as we have been saying since 2009 and as JPM, Pimco and BlackRock now admit.

However, since the next and final tool in the Fed’s arsenal is Nominal GDP targeting on the back of direct monetary injections whose purpose is to unanchor inflationary expectations, crush savers, and take the wealth effect to the next level (as we predicted would happen recently), perhaps instead of pretending QE even remotely works on the economy, Bernanke can finally make it rain, and just hand over half a million each month to every man, woman and child… and just brace for the Weimar collapse that would inevitable follow.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9GhcPepRBmU/story01.htm Tyler Durden

There was a time when the Fed’s QE was, at least on paper, supposed to generate jobs (the broad inflation will come on its own, in due course). After all, the prospect of injecting $85 billion in liquidity into a market with the sole goal of pushing the stock markets that benefit the purchasing power of about 10% of the population would hardly have received broad approval even by the co-opted Congress.

So, to all those who still naively claim Fed is not the sole reason for the market’s relentless march higher, those billions in liquidity must go into the economy, and specifically into job creation, right?

As a result, we decided to back into what the average private sector job has ended up costing the US population in pure dollar terms (which in turn ultimately manifests itself in terms of unsustainable government debt and pent up inflation) via the Fed’s monetary pathway. Well, according to the ADP data released earlier, in which a paltry 130K private sector jobs were created in a month in which the Fed, as always, injected $85 billion, the bottom line came to a whopping $654K per job (since government jobs are always a net drain, we exclude those from the calculation). And taking the average job growth throughout 2013, this number, as can be seen on the chart below, is a laughter-inducing $553K!

Obviously, the above “analysis” is merely a placeholder to show just how absurd modern policy has become, and yes – we do realize that all of that money has ended up solely into capital markets boosting risk assets, as we have been saying since 2009 and as JPM, Pimco and BlackRock now admit.

However, since the next and final tool in the Fed’s arsenal is Nominal GDP targeting on the back of direct monetary injections whose purpose is to unanchor inflationary expectations, crush savers, and take the wealth effect to the next level (as we predicted would happen recently), perhaps instead of pretending QE even remotely works on the economy, Bernanke can finally make it rain, and just hand over half a million each month to every man, woman and child… and just brace for the Weimar collapse that would inevitable follow.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9GhcPepRBmU/story01.htm Tyler Durden