Friday, February 11, 2011

Anticipating the End of QE2: "The Stock-Market Crash Will Come In…"

A smart piece of writing at Market Talk:
Let’s take John’s car-chase metaphor a step further. So we’ve had this particular car chase going on since August. Has it endured so long because of the driver’s skills? Because he’s got some souped-up Olds 442? Or is it the gas in the tank?

It’s the gas.

This particular grade of fuel has been refined by the Fed. It is both the actual $600 billion the Fed’s spreading around via its QE2 bond-buying program, where the Fed has literally created $600 billion out of thin air and injected it into the economy, and the implicit “Bernanke Put.” The Fed has made it clear to all involved, without necessarily saying so to the unwashed masses, mind you, that it’ll stand behind the so-called risk trade. Stocks are the prime beneficiary, but so are commodities, for that matter. High yield’s been having a nice run, too.

The only concern for the market is whether or not there’s going to be a QE3, because these days, as Barry Ritholtz more or less said, it pays to follow the Fed. Not Egypt, not Europe, not politics, not unemployment, not even corporate profits for that matter. QE.

Make no mistake, a big, big part of the stock market recovery (as reader Chance pointed out) has been the Fed’s bond-buying programs, and the efforts to push investors out into the risk trade. It is no coincidence that the Fed started buying mortgage bonds at the height of the panic in November 2008 and announced its big, $1 trillion bond-buying program in March 2009, the same month stocks put in their recession lows. It was a rocket trip from there.

That program (QE1) ran out in March 2010, but the program had one feature that actually allowed it to sort-of run past its deadline: the time lag between when the Fed agreed to a specific purchase, and when it settled that account. That time lag was a period of several weeks. So while the program “officially” ended March 30, the payments kept running through April and into early May. A lot will depend upon how the Fed spreads out its purchases toward the program’s end....MORE