Is QE3 Already Here?
We continue to watch the low volume levitation run as we head towards a denouement of the end of quarter window dressing, Friday’s NFP and the end of QE2 on June 30th. Earnings are good, analyst consensus for 2012 is very strong (too strong?). The hope is that the market might be able to “grow” into a reasonable valuation.
The sell off post Japan was shallow, and the snapback rally has moved up smartly. But as we mentioned yesterday, the volume has been abysmal, and the February highs were not taken out — yet — and they are a stone’s throw away.
Will Friday’s NFP report be a sell the good news situation? The gathering economic strength makes it more likely than not that the liquidity gusher will be turned off at the end of QE2. What might that do to traders thoughts?
And what of the wild card: QE3.
Here’s where things get tricky: It might not matter, because QE3 may already be here.
Keep in mind, Quantitative Easing is a term that was invented in Japan in the 1990s. While many believe that QE3 is dead in the US, from a global perspective, the Bank of Japan’s massive liquidity stimulus and intervention into the bond market is the equivalent of a US QE3.
Relative to the size of their economy, the BoJ spewed the equivalent of their own QE2 — in just 3 days.
How does that liquidity affect how you trade?
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March 30th, 2011 at 10:58 am
Dumb questions: Why did Yen spike up before it’s decline? What is re-patriation and how long does it last? What is this Japanese “QE” going to to mean for the dollar and yen in the moderate and long term?
I honestly can’t wrap my brain around it.
March 30th, 2011 at 10:58 am
I don’t know, but recently you posted you might be buying QID. IF this post is saying what i think it is, should you decide to change course and pick some up as a hedge, Steve Barry may have some to sell to you very cheaply (I kid, sort of…)
On a more serious note, if Japan decides to unload some of their foreign reserves in the future, that would have to be bearish for us wouldn’t it? Or at least maybe drag the upward ascent?
~~~
BR: WE had the QID and sold it a few weeks ago. The most recent mention was in the context of “what do you own when it starts to break down?”
March 30th, 2011 at 11:00 am
In the same way all liquidity injection does. Don’t fight it, but protect yourself for negative effects in case of withdrawal. Positive exposure to equities via OTM calls. Rolling them over when they enter moneyness to maintain my gamma and speed exposure. Some front month OTM PUT selling on large cap names that seem unfairly beat up like INTC, PG and DELL.
whatever the strategy, though, remember one thing. liquidity is cheap right now, so try not to sell yours!
and my favorite trade of the year: long calendars and diagonals to ’13. I favor buying ’13 straddles and selling front month strangles. been a really solid trade all year and follows my principle: when liquidity is cheap, don’t sell or commit yours!
March 30th, 2011 at 11:24 am
I just assume the banks ability to pass delinquent loans onto Fannie and Freddie the equivalent of QE3.
March 30th, 2011 at 11:25 am
the idea is right
the actual going away of US Q2 is 3 mo from now, bond mkts esp cannot completely prediscount
I am using the all nikkei lift now from the massive japanese liquidity blast to get short at better levels more of the Jap stocks likely to be most hit.
there are “good” companies that may still see most of their production lost for 2-4 months, and some longer market edge issues.
March 30th, 2011 at 11:29 am
I think we are turning Japanese, I really think so….(1)
1) I have dated my self, and my apologies to the Vapors.
March 30th, 2011 at 11:33 am
your later chernobyl type Cesium report for that middle of japan– also earthquake hit– is horrifying.
TEPCO and officials have just been lying about venting and where those tons of sea water went.
much of the high tech fine tolerance optical stuff for example is up north, will be near impossible to come back quick.
March 30th, 2011 at 11:37 am
I actually don’t really understand what the causal chain is how it is supposed to work with the “liquidity” pumped into the banking system by the Fed. How does it lift the stock market? The Fed buys treasuries from the banks during QE, and the banks add the cash they have got for the treasuries, to their reserves with the Fed. And then?
I can see an indirect effect. Since short term interest rates are kept lower than they would have been otherwise, it encourages speculation in the market by trading on margin. But what other causal chain is there?
Could someone explain, please? Anyone?
March 30th, 2011 at 11:49 am
BR: yup… I guess i was referring to if we grind higher, especially in a decent volatility environment which will soak QID even worse.
Mostly it was a chance to wonder what happened to Steve, but i will save that for an open thread (joking aside I respected so much of his thought process)
And on the downside, the japanese spending has some effects, but I do think it matters where they get that money from, if you look at their overall debt, their interest rate environment, and political pressures. Not all sources should be treated the same from a market perspective.
What I find especially bedeviling about this market is equities are in part supported by these absurdly low interest rates. With a HUGE (and growing) number of baby boomers starting to need yield as they reach the spending phase of their life.
Right now the yield is pitiful for the risks, depending on how you feel about munis.
Any upward pressure on rates could see a flood of money go into safe havens again, meaning out of equities. Japan unloading Treasury holdings might just do that.
Half baked? Perhaps. Am i looking at too many deriviatives? Certainly. And am I long in spite of this worry? Yes. Still, this thought has stuck in my brain for the last 2+ weeks.
March 30th, 2011 at 11:55 am
What I don’t get about the arguments about QE and the stock market is this: The BOE has been doing QE for a long time with not much to show for it – they still suffer from deflation and their stock market is still moribund (by that I mean about 50% below where it was in 2000 let alone 1990). Why then would QE be so effective here and now?
Anyone?
March 30th, 2011 at 12:05 pm
Unlike QE2, I doubt a Japanese QE3 will be spent buying US government debt… more likely infrastructure reconstruction, non-nuclear electricity generation… bullish for energy and materials.
March 30th, 2011 at 12:20 pm
@markp:
I don’t know where you get your data. -50% since 2000?? It’s only 12% down, and if you include dividends it’s roughly 30% up. A better performance than the SPX in fact.
Also, since beginning of March09 (roughly when QE started in both sides of the Atlantic), UKX has outperformed SPX in total return and same currency terms by about 3%.
March 30th, 2011 at 12:22 pm
@Mark:
The Japanese have had 0% GDP growth for years.
They have also had, and continue to have, full employment, a generous social welfare program, reasonably priced health care, and most importantly, a trade surplus with China.
If those are the consequences of “zero growth,” I know a lot of Americans who would happily trade their situation for ours.
March 30th, 2011 at 12:29 pm
Somewhere in the distance, there IS a waterfall. But, nothing has changed in the last ~21 months. All this liquidity puts us beyond a fighting-the-Fed issue. With the spigot turned on full blast for so long, money is finding its way to people who (even more so than is typical) don’t know what to do with it. Pent-up greed is not all that different from pent-up demand. Nobody is really that committed to selling this market.
March 30th, 2011 at 12:44 pm
@markp
I got the data here:
http://finance.yahoo.com/q/bc?s=^N225&t=my&l=on&z=l&q=l&c=
select max time and it says the Nikkei was about 20,000 in 2000 and was about 10,000 just prior to the earthquake etc). Sorry if “BOE” confused you, obviously I meant BOJ.
@franklin411
Agreed (but that’s a result of Japanese culture not QE, IMHO). But most formulations of the “success” or just plain “effect” of QE2 refer to the US stock market so I’m still confused.
March 30th, 2011 at 1:18 pm
No one ever talks about the Chinese stimulus as a factor, but it’s been huge.
Chinese banks extreme lending on pointless projects at the direction of the central government is the equivalent of money printing. Demand for machinery and goods has helped prop up Western balance sheets, e.g. Caterpillar, BHP and western oil companies through higher prices across the board. It has also produced subsidiary bubbles in Australia and Vancouver with the wealth effects propagating across borders. I think there’s a great underestimation of the effects around the world when this goes away.
March 30th, 2011 at 1:20 pm
both the Jap QE and then the end of US QE are US dollar positive.
im a medium term bear, but both these run the other way
March 30th, 2011 at 1:26 pm
Your argument doesn’t make sense. Japan’s QE will be offset around the world by the hit in growth Japan and the world take from the Earthquake/Tsunami. Besides, debt can’t replace growth, it has to be paid back.
March 30th, 2011 at 1:50 pm
That is a very interesting perspective and could be valid. There was a good article you posted how liquidities from QE’s arbitrage their way through the (global) financial system.
March 30th, 2011 at 1:55 pm
Guillermo Says: March 30th, 2011 at 11:00 am
In the same way all liquidity injection does. Don’t fight it, but protect yourself for negative effects in case of withdrawal. Positive exposure to equities via OTM calls. Rolling them over when they enter moneyness to maintain my gamma and speed exposure. Some front month OTM PUT selling on large cap names that seem unfairly beat up like INTC, PG and DELL.
whatever the strategy, though, remember one thing. liquidity is cheap right now, so try not to sell yours!
and my favorite trade of the year: long calendars and diagonals to ’13. I favor buying ’13 straddles and selling front month strangles. been a really solid trade all year and follows my principle: when liquidity is cheap, don’t sell or commit yours!
~~
has to be one of the more intelligent Ideas I’ve seen posted, in some time..
peep should, if they don’t know, wonder WTF it means..
March 30th, 2011 at 1:59 pm
BR requested:
How does that liquidity affect how you trade?
reply:
—————-
Cha-Ching!!! Thank you, Jesus. Hubba Hubba Hubba. Wooo Wooo Wooo! Chugga Chugga Chugga. This might be worth another 10% or more above prior expectations.
or, as translated into pundit-speak: Strong fundamentals, a strong employment report, improving sentiment, strong earnings, a market that won’t stay down, as evidenced by a blazing end of quarter. Commodities signal a growing economy. New highs are close at hand. Great time to move cash off the sidelines. (wall street translation: 2011 bonus fully funded … let’s start cranking out the junk credit.)
March 30th, 2011 at 2:18 pm
Tony61 Says:
March 30th, 2011 at 10:58 am
Dumb questions: Why did Yen spike up before it’s decline? What is re-patriation and how long does it last? What is this Japanese “QE” going to to mean for the dollar and yen in the moderate and long term?
I honestly can’t wrap my brain around it.
reply:
———-
In all seriousness – Japanese high finance and Japanese economics are inscrutable. Ignore Japan proper, as far as their economy goes. Enjoy the byproducts of Japanese macro policy. With future Fed QE initiatives in doubt, it looks like Japan will step up to fill the void.
March 30th, 2011 at 2:33 pm
The belief in QE represents a “new paradigm”, which puts us in the mania phase when the public piles in, and before the blow off phase with a return to the mean. Only question is how long the belief in the “new paradigm” lasts.
March 30th, 2011 at 2:55 pm
If QE3 is really here then this rally in OIL which is completely unhinged from fundamentals, continues??
People were talking about efficient market, in case of OIL it is proving to be incompetent market. The “efficiency” of the market should get things right in matter of years, at least, one would hope!!!!
March 30th, 2011 at 4:29 pm
doesn’t matter. they’re already in the market. japan + middle east = global central banks supporting risk. + its open-ended.
+ if they’re gonna stop the market from clearing in 08……they are not going to stop until banks can loan themselves out of negative equity. otherwise, what’s the point?
March 30th, 2011 at 11:19 pm
When people talk about the Japanese QE fulfilling the role of the Fed’s QE3, does this mean they expect the Japanese to be buying the LARGE portion of US Treasury debt that has been attributed to QE2? I’m referring here to the PIMCO pie chart showing that the Fed is buying 70% of the US Treasury debt?
http://www.PIMCO.com/Pages/Two-Bits-Four-Bits-Six-Bits-a-Dollar.aspx
If not, then I fail to see how any amount of BoJ liquidity is going to prevent rates rising on this side of the Pacific, and rising rates will punch an iceberg-sized hole in our Titanic stock market/ economy.
I continue to believe that if the Fed does end QE2 on schedule, QE3 will commence within 30 days …
One wonders just how much liquidity the global economy can handle, before equity markets around the globe pop, domino-style.
March 30th, 2011 at 11:25 pm
This whole discussion strikes me as traders in a mania looking for the pony in a ginormous pile of manure …
No disrespect, jus’ sayin …
March 31st, 2011 at 11:10 am
Sure the value of BOJ printing may be equivalent to a “QE3″ – but I did not see teh BOJ hand this money directly to the big banks to continue pumping the US stock market. So in that light – I see them as entirely different.
April 3rd, 2011 at 4:53 pm
[...] and declining $USD, I suspect the anticipated liquidity injections needed to rebuild Japan (see Ritholz post for more) is interpreted by the market as a de-facto [...]
April 7th, 2011 at 6:13 am
[...] to Y10,000bn in the immediate aftermath of the March 11 quake. As Barry Ritholtz at BigPicture observed, with those actions, the BoJ “spewed the equivalent of their own QE2 – in just 3 [...]