Chart of the Day: QE equals long stocks


by Chris Becker

There’s been one investment trend post-GFC that has been blindingly obvious for all (even including those who just buy and hold) its long US stocks. The broadest index, the S&P500 has tripled since March 2009 in an almost straight line, particularly in the last two years.

At the same time, the US Federal Reserve has embarked on one of the biggest monetary experiments of all time, with a series of quantitative easing (QE) monetary expansions. Although no new money is “printed” the liquidity provides boosts the transactions in stocks and hence market torque sends stocks (and bonds too) higher:

Here’s the chart from the Chart Store showing an extremely high correlation between the total assets in the Fed and the S&P500:


Given the lack of QE on the horizon, with the Fed seemingly positioning itself to possibly raise rates later this year, and the huge sentiment around US stocks, this does not add up to a similar year on year performance.
Morgan Stanley is dour:

US equity market Sentiment Indicator now shows an extreme reading of 100, suggesting on a tactical basis S&P 500 will decline during the next month.

Strategically, we expect 3% GDP growth will drive 5% earnings growth in 2015 and upside exists if crude prices remain low. Rising profits will lift the market to a new high around mid-year but after the Fed hikes in 3Q the P/E multiple will slip to 16x at year-end.

We forecast the S&P 500 will close the year at 2100 and deliver a total return of 4% vs. -1% for a constant maturity 10-year Treasury.



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  1. Macro Enthusiast

    Fed style QE is an asset swap. Banks/primary dealers get non-fungible reserves in exchange for Treasuries. No publicly usable money is created, because banks don’t lend reserves (loans create deposits, and reserves are always provided by the central bank afterwards to maintain the target Fed funds rate). Publicly usable money is created through loans and government deficits.

    So underlying the correlation in the first half of the chart is US fiscal spend. The debt ceiling “crisis” upset the apple cart for a little while, because austerity came into vogue. But QE continued to work in boosting equities because bond yields were falling in a benign credit environment.

    The issue is whether ECB QE will be effective money creation. Arguably not if it is only the asset swap with the banks. Arguably not if ABS and covered bonds are not widely held. Arguably yes if the ECB takes its mandate to the nth degree and buys equities.

    ECB needs to bypass fiscal austerity here – and so far, it is failing the test. Bond market is rightly pricing in deflation. This time, bonds rallying is a risk-off event for equities.

    • migtronixMEMBER

      For the billionth time if no new public money is created, why engage in the asset swap at all?

      • GunnamattaMEMBER

        Because it allows the 1%ers a juicy inside trade on the public teat.

        Until the point (and I dont think the ECB will go within a bulls roar of doing it) where they slap dough into the hands of the mug punter on the streets QE is doing sweet FA apart from euthenasing once productive economies and replacing them with zombies. Though one supposes it is helping to prevent economic corpses stinking up the streets of societies heavily in debt or otherwise receptive to the idea their elites act with some form of general societal welfare in mind….

      • Gunna – they will need to rain down the cash on average Joe, particularly in Europe. It will have to happen.

        Then, as Tony Montana used to say…

        Fist you ge da money…
        Den you ge da powa…
        Den you get inflacion…


      • migtronixMEMBER

        juicy inside trade on the public teat

        So it is creating money?

        I refuse to believe in asset swap story just as much as the fully hedged one. I left London in November 08 when everyone in the City was getting fired. I mean everyone, it was a bloodbath. For two months coming into work you’d just see a stream of people leaving Fleet for Blackfriars who didn’t appear the next day. Then by March 09 I was getting told to come back as real money was going to be made. Where did this money come from?

      • Just smoke and mirrors to protect bank balance sheets mig. The global banking system was technically insolvent.

        That way nobody had to look in the mirror in the morning.

      • migtronixMEMBER

        That’s what I mean aj, the whole thing was insolvent, then bankers started getting record bonuses. From where?

      • Bonus money from massive reliable usury cashflow as usual. Just don’t look at those asset values 😉

    • General Disarray

      Can someone explain why it all has to be about equities? If they want to fight deflation wouldn’t it be best to put money right into the hands of consumers?

      • migtronixMEMBER

        I think Enthusiasts point is CB’s can’t do it, the easiest way for them to try is to boost equities.

      • To do what you suggest GD would be to invalidate the entire last 35ish years of Austro – Chicago economic pontification and hard work.

        “put money right into the hands of consumers”

        Skippy… its intrinsic to the cults personal cognitive anchor points… gads… to even consider alternatives… would probably induce some sort of psychotic episode…

  2. Macro Enthusiast

    If the ECB buys bonds from the banks, or even non-banks, it is removing collateral from the system. It is depriving the private sector of interest-earning assets, and also destroying “shadow” money. For this reason, repo rates in Europe are now negative – one pays to borrow a quality bond rather than cash!

    There is no point in the central bank destroying shadow money stock and private sector interest earnings, as this would reduce publicly usable money, and entrench deflation.

    The central bank needs to get past the “offside trap”, lift inflation expectations, and encourage more private sector loan demand in order to stabilize the ship. To lift inflation expectations, it needs to create publicly usable money. To create publicly usable money in the absence of loan creation and fiscal spend, it needs to helicopter drop money into people’s bank accounts, without affecting shadow money stock.

    The easiest way to do this is to buy equities. Equities are not widely used as shadow banking collateral (as the haircut is massive). Equities are widely owned by the public, and not just the banks.

    There is the normative issue of whether financial repression is a good or bad thing distribution-wise etc – but central banks don’t have the mandate now to start social resets, so I’m speaking purely from the perspective of what they can do to keep the money/wealth illusion going.

    • migtronixMEMBER

      Equities are widely owned by the public, and not just the banks.

      In which country? Ever heard of the 1%?

      Public money indeed!

      • Macro Enthusiast

        In Australia for starters via superannuation. But I get the point about distribution of holdings across income and wealth segments.

        The issue is that investors need to only see a plausible way for central banks to inject money into the system, in order to re-price inflation expectations. A rise in inflation expectations, would steepen the global real yield curve, generating a growth signal supportive of asset prices more generally. This is what happened when Draghi said he would/could do “whatever it takes”, even though he had not real blue-print for fixing the euro-zone’s problems (and still doesn’t).

        Not saying that the effect will last, nor that it is a good thing for longer-term sustainability. but it is all that central banks have left to offer.

      • In order to maintain the SNB’s Euro peg some funds were directed to buying stocks.

        Still im not convinced that it does much other than fluff the retirement accounts of oldies and insiders. Might be a reasonable suggestion if companies were actually borrowing to invest in cap ex but most are spending up big on stock buybacks instead. Guess it has to do with the short term bonus structure awarded to the board.

      • The Traveling Wilbur


        Spot on. +many. You have hit the quantitative nail on the head exactly. Which, as such a nail’s position in space and time cannot be observed without altering it, was one hell of a trick.

    • GunnamattaMEMBER

      My post coffee self 100% agrees….

      There is the normative issue of whether financial repression is a good or bad thing distribution-wise etc – but central banks don’t have the mandate now to start social resets, so I’m speaking purely from the perspective of what they can do to keep the money/wealth illusion going.

      Hence the sight of major global central bankers looking wistful at the idea of governments prepared to show some fiscal nads (or governments looking wistful at the ability to do so)

      • What the world desperately needs is government spending into projects that will add value in the future and can be sold off to the private sector so that any debt can be repaid, but as you say we don’t have politicians with the nads for that, especially here in Australia.

        Sadly it’s even worse in the USA and we have the strange situation of seeing China, a communist country, handing capitalist countries a lesson in management.

      • “fiscal nads” are a political appendage, massively atrophied due to ideological rigidity aside, their handlers have bet the house on that square marked out with stakes driven so far into the ground, that possibly the ground itself would be destroyed to remove them.

      • Roflol Peter,

        China was never communist, that was one of the goals [means to an end] of a path to non government society [metaphysical dreamtime tm].

        What we saw was totalitarian State Capitalism, in a mad rush to industrialize its self, whilst trying to parlay with its old nemeses in both the west and east [hangovers from ethnic antiquity].

        Skippy…. at the end of the day both Russia and China, no matter what shingle one hangs over the governments, is more about preserving ethnic spheres of influence than dogmatic metaphysics.

        PS. Voting time Peter… its gonna be a abattoir affair methinks… question begging is does either mob have a clue…

      • migtronixMEMBER

        Wow. Skippy you are the only person in the universe who thinks China is government free.

      • nice slaughterhouse pun skippy.

        Neither party has a clue. An election will be a choice between two roads leading nowhere fast. It will be a leadership free contest unless there is some serious head rolling before we get to that point.

        We need some serious backstabbing and we need it fast.

        Et tu Brutis

        • GunnamattaMEMBER

          I actually agree with Peter on this.

          Australian politics reminds me of two people sitting at a table precariously balanced in the precise middle of an iceberg, such that just moving an arm (for a fork or knife, or plate or glass) risks upsetting the table and the iceberg and throwing them both into the sea – so they are both limiting themselves to the very slightest of movements.

          Their fundamental problem is that they are drifting into warmer waters and the berg is melting…..and the menu has run down…..and the fins in the water.

          When action happens, it will be well worth watching, and quite likely every man (or woman) for themselves in a political sense….

      • migtronixMEMBER

        that was one of the goals [means to an end] of a path to non government society

        How else does one comprehend that remark?

      • migtronixMEMBER

        and quite likely every man (or woman) for themselves in a political sense

        Sadly Gunna, and as much I’d love to see it, I think the duopoly will protect itself — probably by doing something like building up Jaquie L. to Messiah status, then tearing her a new one…

        EDIT: Yes skippy I got it was future tense, but how far? Its been going for 60 years, how long before we reach your “non-government society” in China hypothesis?

      • Mate I have no idea how you conflated my comment to your conclusion e.g. never stated the out come was ongoing or relevant i.e. my summation should have covered that –

        “at the end of the day both Russia and China, no matter what shingle one hangs over the governments, is more about preserving ethnic spheres of influence than dogmatic metaphysics.”

        Skippy… ideological bias preferences triggering a Pavlovian response maybe????

      • migtronixMEMBER

        ideological bias preferences triggering a Pavlovian response maybe????

        No, well possibly I suppose but I doubt it, Pavlovian responses are conditioned and by and large I am unconditioned.

        I think it was peering through the fog of your contextualization of your ever present foe “non-government society” into what appears to be a unrelated comment on the broad ambitions of Sino/Russo tribes, the latter remark, though masked in the unnecessary contortion of “dogmatic metaphysics”, is broadly well stated, in my opinion…

      • “Pavlovian responses are conditioned and by and large I am unconditioned.” – mig-i

        Thanks mig-i that is a truly epic absurdly delicious juxtaposition…. halp I can’t get off the floor….

    • So boot the can further down the road by ramping equities?

      For what end? QE is manipulation of interest rates – European rates are so stupidly low now because the banks all thought the could front run Draghi.

      Another decade of soft landings like Japan?

      Have a recession and clean the places out – that is the only fix – the rest is just more band-aids

      How many of these ‘Austerity’ budgets actually generated a surplus? Ie the government took money from GDP. People will invest their capital when the returns look attractive ZIRP and lack of reform is not creating that environment. Why do people think that an imaginary GDP number from the past that was made as a result of huge credit expansion should be the target GDP level no matter how stupid the means of getting back there?

      Imagine the bigger bubble in equities that would ensue from something so crazy – it would lead to more misallocation of capital and an enormous crash once gravity took hold. I cannot believe anyone in their right minds could see that ending well. Imagine in explaining the parlous state of public finances to your grand kids that the government manipulated bonds to ZIRP creating an equities bubble and then started buying the equities with fresh money which eventually collapsed in value and not one extra job was created because people just geared up to buy GE common stocks instead of starting a business.

      At least in QE buying bonds they expect to be made whole at maturity. Imagine if the RBA was sitting on a bunch of BHP or worse FMG equities now? What would the positive effect have been?

    • The Traveling Wilbur

      “The easiest way to do this is to buy equities.”

      No. It isn’t. The ‘easiest’ way to do it is to give it to tax payers via their bank accounts. Directly. A modicum more effort in the implementation, but in terms of ‘ease’ to ‘effectiveness’ ratio, by far the ‘easiest’ (and best) option. If Krudd managed it, why can’t DrahgOnTheEconomy? Or YellenFromTheMountainTop for that matter? God forbid that publicly constituted debt actually be applied to the direct benefit of that public without some ticket-clipping ill-suited toadying little banker taking their massive slice along the way… And for all those worried about inter-generational debt-burdens created by such a strategy – don’t worry, the Krudd version of QE is no worse in that respect than any other. And at least with the Krudd version the current batch of tax-payers will be able to buy TVs big enough to have the whole extended family around to watch (which is a good thing as the grandkids probably won’t be able to afford one once they are old enough to start signing on for benefits).

      • I helped my late 82 year old grandfather buy a 60 inch TV with his Ruddbucks

        Samsung was the only other winner and some online retailer and delivery guy I’m sure generated less than $900 in real economic activity for the country

        Pure idiocy

      • Macro Enthusiast

        I agree that the most direct solution is to give the money to tax payers – but this is a fiscal operation. The central bank cannot do this on its own. If the central bank wanted to bypass the government, it would have to buy something from the general public.

      • The Traveling Wilbur

        @ME, fair-doos – I’ll agree with that. Yes. Given the constraint that the Central Bank has to initiate the spend, it’s not something they can do independently so it can’t happen that way, with them, and therefore it isn’t an option for consideration under the topic of your discussion. That aside, I couldn’t give a pair of atrophied politician’s monkey-nuts who manages the process. Admittedly we are in an evironment where the only people who show any inclanation to make those sort of major economic moves are central bankers, but that doesn’t mean they are the only body who could, or even should, take such actions. That no one else is, is in fact, part of the problem. My point is that Kruddomics (AKA QE for JB Hi-Fi) is the most direct (and easiest) form of QE. I don’t care that it’s not initaited by a central bank. Not all QE has to be… and to forestall any further drivel (from others) fortchoming on the relative benefits of QE for JB Hi-Fi… I think it’s a stupid idea too. But so is what’s happening now, and the tax-payer is getting their ticket clipped to boot with that version. What should happen is what Peter Fraser posted much earlier this morning (which all the major super funds have been begging govt for for years now). So what’s the point? Only that there are far better ways to acheive the stated desired results of those GOVERNMENTS responsible for EU QE programs than what is being done now. ‘Better’ in terms of benefiting those people (and their descendants) that those GOVERNMENTS represent. Shame they are being held to ransom by a financial mafia of self-interested narcissists.

  3. Macro Enthusiast

    Has it occurred to anyone that ECB QE might be a pre-cursor to euro break-up? If enough peripheral European bonds are transferred to the ECB before peripheral nations get kicked out of the euro-zone, then the banks will not wear a currency adjustment afterwards. The ECB might – but perhaps the “undercapitalization” of the bank could be dealt with in other ways.

    An interesting way to circumvent contagion – but potentially flawed if QE does not happen quickly enough (ie bonds are not bought before people start to notice the next candidate for exit). After all, it was not so long ago, that the ECB stood resolutely by the united Europe mandate. Cyprus was supposed to be a one-off, even though it really was a de-facto exit from the monetary union (they use two currencies now, and run a closed capital account).

    • It could be part of a longer term plan to “quarantine” the losses on the peripheral bonds, then let them return to the lira, drachma and peso et al.

      And perhaps all this time dragging the chain from say 2010 has been part of that plan? I’m not so sure – in fact I’m definitely sure the Germans DO NOT want the Mark back, which is what a Euro without the PIGS would look like.