Alternate title: Cross Current Between Economic Data & QE


Today marks the end of the month and quarter. Hence, it is a good time to look over the key economic and market data, and try to assess where we are in the overall cycle.

The data itself suggests several contradictory factors are driving markets. Durable goods orders — those big ticket items like autos, washers, and machinery — have plummeted, suggesting a rapid slow down in the economy may already be occurring. The most recent GDP revision at 1.3% seems to confirm this. Overall income gains have been mediocre. Unemployment remains stubbornly high, with people out of work for an extended time period also at record levels. ECRI, which has one of the best track record in forecasting recessions, is sticking with their 2012 recession call. (See this and this)

This mediocre recovery is, as Reinhart & Rogoff forecast way back in February 2008, exactly as we should expect. This is what the typical post-credit crisis recoveries look like — barely above stall speed.

At the same time, Housing has remained surprisingly robust. While metrics like Existing and New Home Sales volume and prices are still far below the 2006 peak, they have moved significantly off of their lows.

All the while, the market continues to grind higher, disbelieved by a significant percentage of market participants. For the month of September, the S&P500 looks to be up 2.69%; for Q3, the gains were 5.98%. YTD the markets are up 13.32%.

How can we reconcile these apparent contradictions?

In a word, it is the Fed.

My read is the only thing standing between you and an ordinary cyclical recession — including a 20-30% drop in the SPX — is monetary policy. The impact of QE and the FOMC mortgage backed purchases has kept the economy from a full blown recession — but only just barely. Indeed, the data we have seen this week strongly suggests that but for the juiced Housing market — artificially propped up by unprecedented low interest rates — the US would already be in a recession.

Typically, we see some sort of Fiscal stimulus in environments such as this. A misguided and AWOL Congress has managed to avoid doing that for suspect reasons. Whether its a flawed belief that austerity will be our savior or the partisan adherence to Party first, Congress is not acting the way they typically due following major recessions. The public seems to recognize this, and gives Congress its lowest approval ratings in history.

For the investor, ALL IN or ALL OUT makes little sense. Instead, they should be paying closer attention to the the signs as to which of these forces is winning the battle. This quarter, the Fed has trumped economic concerns. But with each subsequent QE generating less and less bang for the buck, a fair question to ask is “Just how long that can continue for?”.

History suggests that markets — artificially jacked up or not — tend to run for much longer than most people expect. That has already been the case since the March 2009 lows, now up over 100% in three and half years.

The danger is that “longer than expected” does not mean forever.

Category: Economy, Federal Reserve, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “How Long Can These Markets Run on QE ?”

  1. ex1 says:

    The discounted growth in US equities is the lowest its been any time during the last 100 years.

  2. [...] lifts euro, stocks – Reuters Stocks Face Turbulence in the Fourth Quarter – CNBC How Long Can These Markets Run on QE ? – The Big Picture Where stock market will be in fall of 2016 – MarketWatch Barclays [...]

  3. TLH says:

    Eventually the markets will have to go back to normal. Interest rates rise, speculative investments go down in price. What will this do for public confidence in markets? Our retirement assets? 0% rates for five years. Government overspending. The debt bubble continues.

  4. dead hobo says:

    BR opined:

    History suggests that markets — artificially jacked up or not — tend to run for much longer than most people expect. That has already been the case since the March 2009 lows, now up over 100% in three and half years.

    The danger is that “longer than expected” does not mean forever.

    The bottom line is that all markets respond to liquidity, and not much else. That’s all they have ever done and that’s all they will ever do. Remove liquidity, either by bank run, or margin call, or big scare due to something unexpected, and prices fall. It happens with equities, it happens with housing, it happens with all assets every time. Remove liquidity and prices fall. That’s all there is to it. Everything else is just window dressing and salesmanship. On the margin, earning matter for individual stocks, but for every decline, another one will go up on average.

    Up until QE3, the Fed and other central banks just added liquidity via programs that expired on announced dates. Markets rose on new liquidity and the certainty that liquidity would be there for a stipulated period of time. Markets fell when it looked like liquidity was removed. Inflation requires velocity, and velocity is lower than normal now, hence no inflation will come from QE3, unless commodities explode in price. But oil just fell about 10%. Apparently the oil idiots realized that the quick flip or ‘asset class’ mentality regarding oil was no longer valid and hot money ran away. I’m sure there were a lot of margin calls during the oil rout, and this likely causes a lot of the recent decline in equities.

    But, assuming markets fall just because they are supposed to due to a mysterious rhythm disclosed by magic charts of yore. Do they just curl up and die? Or do they lie in repose for a polite time and then rise due to the call of mysterious forces?

  5. ironman says:

    Keeping in mind that 2012-Q3 was always going to be the strongest quarter in 2012, the Fed’s QE program is boosting stock prices above the level they would otherwise be.

    As for when that changes, 2013 is looking hairy.

  6. Derektheunder says:

    It’s gone on a lot longer than I expected, though it now seems there’s at least a little further to go. I’m pared down to 35% in stocks, and I’m scared to buy or sell at this point. My guess is that means my allocation is just about right.

  7. MayorQuimby says:

    No one thinks austerity will “work” at increasing employment levels and helping grow the economy. What austerity and deleveraging do is work off the excesses, imbalances and allow a new business cycle to come.

    Austerity isn’t something we ‘do’ – it is the inevitable by product of us having lived beyond our means for DECADES.

    Barry – do you suggest the $1.3 Trillion budget is not sufficient? Perhaps we should push it to $2 Trillion.


    How are we going to pay down $18 Trillion? Suppose rates rise .5% – such a move will bankrupt us instantly at some point.

    Stop the madness.

    There is no solution to this problem other than taking our lumps, stop diluting $$$$ and pretending we can be smarter than the other many-dozens of economic systems that tried this before and failed.

  8. DarthBeta says:

    Please show your work. What facts indicate the ‘market’ appreciation is related to the fed’s controling of interest rates?

    Human and robot investors who mistakeningly think the Fed controls money supply (the Fed only controls interest rates, not money supply) think mistakeningly that there is more money (there is not) and asset prices need to inflate (they dont) and are investing more.


    BR: Please show YOUR work — what facts indicate the ‘market’ appreciation is NOT related to the fed’s ZIRP / QE activity?

  9. DSS10 says:

    Is there any precedence for an exit from a liquidity trap in that last 20 years? What are the chances that Japan will be raising rates anytime soon? They have had a natural diaster with trillions of dollars injected into their economy by the insurance industry on top of the bazillions of dollars pumped into the economy by the central bank and nothing is happening with GDP.

  10. dead hobo says:

    Personally, as long as liquidity remains in the markets, artificial or otherwise, there are no liquidity shocks in Europe, there are no flash crashes, and the oil idiots keep their manias out of the picture (likely as they all seem to have their asses handed to them when each bubble breaks … which appears to be rather frequent now and from lower tops), the invisible hand will probably go back to work. I believe we are at an economic bottom, rather than a market bottom. This is the start of an extended period where buy and hold is safe. This is not to say there won’t be corrections from time to time. Rather, they will be of the historical kind where you don’t feel bad waiting them out because you know the dips will recover in a few weeks or a couple of months.

  11. CSF says:

    Caught between slow, decelerating growth and QE, it’s easy to get whipsawed in a market like this. Thanks for the healthy perspective, BR.

  12. VennData says:

    Darth, the Fed buys bonds and sells bonds. They do that with money. They control the money supply. Ron Paul does not control the money supply. Oh ahd there is lots and lots of money out there. Rich folks and corporations have record amounts of cash, they refuse to spend it. Once the election is over, they will, because their wife will demand that they stop restricting spending just to make the economy look bad.
    There is, and has been a huge fiscal stimulus. Every year since Bush too office. With his temporary tax cuts in place, oncehis recession hit, we have even more fiscal stimulus. So Congress is stimukating a lot. A real lot. The problem is that the economy was in bad shape when Obama took office (bears repeating, since some people think it wasn’t and think it’s worse it’s not) and Bush’s tax policies which filed are so loved by the GOP they will do anything but end them.

  13. dougc says:

    Liquidity will go somewhere, it may end up on bank balance sheets and lent back to the fed . Other possibilities are equities , bonds, real estate or commodities. US equities have benefited from the EU crisis due to a strong dollar and earnings growth. It looks like earnings will be weak and if the dollar weakens, I can’t see US equities as the prefered investment.

  14. DarthBeta says:

    @VD The FED does not control the supply of money, the treasury issues M1 and frac banking creates M3. The Fed controls interest rates which can have an effect on the velocity of money, however there still needs to be supply and demand by borrowers and lenders. Please reread you monetary policy text books.

    @ BR Tu Quoque? Your point is right (w/o evidence) because my point does not have evidence?
    Interesting logic.

  15. ben22 says:

    BR, I’m not an expert on such things so I could very well need to be corrected but

    you’ve made the positive claim that the way you reconcile the contradictory economic data with the markets is the Fed.

    Doesn’t the person making the positive claim have the burden of proof? I thought that was a conclusion in the book How We Know What Isn’t So. Maybe I need to read it again! If it is the case, if someone asks you to show your work then you should be the one to do so right? Not the other way around.

    The burden of proof is placed upon the one making the positive claim as the person that disagrees with the claim can’t logically prove it to be false because of infinite possibility. If there isn’t any proof from the positive side that means the opposing side can’t logically demonstrate their position to be false, therefore the burden lays on the positive.

    Perhaps its as simple as linking to the charts you’ve put up before showing the announcement dates of past QE and then the S&P below them…..but then again, I think you are right about this:

    “History suggests that markets — artificially jacked up or not — tend to run for much longer than most people expect.”

    so do we chalk markets going up to the Fed, or because of the way people are?

    Maybe it’s too early too be thinking about this, going to have to go read that WSJ article again about when the body performs certain functions best during the day…. :-)

  16. b_thunder says:

    BR says: “The impact of QE and the FOMC mortgage backed purchases has kept the economy from a full blown recession — but only just barely”

    I don’t think that we can already conclude that it did. QE did affect the asset prices, but The Big Test will be whether or not the artificially inflated asset prices prevent the next recession. If they do not, and we do have a moderate or severe recession, that would be an indictment of the Fed, another evidence of their shortsightedness and the fact that the Fed is “out of ammo.”

    So, on the upside we can have this 1.5-2%, just “barely above stall speed” expansion fueled by trillions of new money. On the other hand, if there is a recession in the near future, than I expect the asset prices fall a lot further than “the usual 20-30%” – I expect most of the “Fed premium” evaporate if there’s a recession in the near future. So the downside risk seems to be a lot greater than the upside risk…. but don’t forget the Fed, that can raise the $40B/month QE to $400B/month… or $4T/month… I’m afraid there will be no end of this unless and until one way or the other the debt is rendered negligible (by means of debt forgiveness or inflation), both the savers and the lenders are wiped out, and borrowers rip all the benefits.

  17. rd says:


    I think the big change that has occurred is that the Fed has begun targeting asset price goals, instead fo focusing on their mandates of inflation and employment. They have conflated stock market prices with economic prosperity. in the process they have handed traders huge wads of cash so they could buy the assets (houses, equities, bonds, commodities etc.). as traders are wont to do, they buy liquid assets, such as equities, betting that they can get out of those faster than everyone else when the time comes. So we are seeing a lot of money going into the stock market and not a lot going into captial improvements because the latter need economic justifications that the business managers can’t make.

    I think we are in a stagnation-trading cycle where the roller coaster ups and down in the major asset markets continue into the system is cleansed. I think the rfeliance of the financial secotr on the Fed is probably lengthening the cleansing process by 5 years or more but dampening the magnitude of the eocnomic down-cycle. So, I think it will simply be a bad economy longer than people think but won’t get as bad as people once feared.

  18. MayorQuimby says:

    MILLIONS more people are going to be *trapped* by Ben’s pumping – signed up for decades of debt at bubble prices and without any job stability. There is a reason you need to let systems work off their excesses naturally even though it is painful.

  19. ben22 says:


    that seems as good an explanation as any, in fact, some of what you say (conflating stock prices with economic prosperity) was nearly word for word what BB said in this last announcement…I’ve long debated with people what is really driving markets. While I certainly don’t have all the answers, or maybe any answers on that topic, I don’t think its the just the fed at all degrees of trend.

  20. gordo365 says:

    Samuel Jackson says to Ben Bernanke “Wake the F__k up!” Baby boomer peak spending happened 10 years ago. As Steve Jobs might say “Those credit card bills aren’t coming back.”

  21. DarthBeta says:

    @ Mayor, public debt (it is just a spreadsheet keep in mind) has nothing to do with productivy in the future. Increases in productivty come from efficient uses of resources and a free and broad money supply is a resource!
    The Fed issues o% overnight loans to banks, which in turn can use it to speculate on food price inflation or can issue a loan to a small business.
    The issue is not the supply of money it is how the money is being used.

  22. MayorQuimby says:

    That is not true Darth. Debt interest is a burden to the tune of $400 Billion annually with the Fed doing everything it can to keep rates low. A pop in rates pushes that up quickly WHILE AT THE SAME TIME costing us more for future deficits. Productivity is a separate issue entirely. All the Fed is doing is lying to borrowers that the Fed can support infinite inflation – ie perpetuate a ponzi forever (literally). It cannot simply because the economy itself is the foundation that supports that perpetual credit growth. If you try and grow the one (credit) and the other is unable to follow (real world economic growth) you actually end up making things worse via theft of purchasing power.

    There are no free lunches. There never were.

  23. SecondLook says:

    Just a quick comment.

    The hardest thing for many is knowing when to take a profit. The other side of the coin of holding onto a losing investment too long.

    The adage about ridding your winners can be seductive – but in the end, it’s not about how nominally big your portfolio is, but about how much you have in the bank; how much spending money you have.

    As a friend of mine likes to say, in the end what is more important, your net worth, or that bottle of Chateau Margaux you share with your wife…

  24. [...] The Fed is the only thing holding us back from a recession.  (Big Picture) [...]

  25. Greg0658 says:

    ironman .. 2012-Q3 was always going to be the strongest quarter in 2012 .. made me check when USA fiscal year begins/ends .. is that today because of harvest ? why is it September – just wonder’g?
    Japan – trillions injected by insurance – really – we need them flood insurures here – or is the nuke industry coming thru – really – would never expect that either
    .. more like demand from the bottom up stuff – not the likes of FL & TX see every year
    and/or ‘ the invisible hand will _ go back to work’
    BottoM .. heh .. pig in the python .. our pc ways “a person’s a person, no matter how small” in conflict .. fewer laborers needed with energy commodities (food & fuel) in decline with an abundance of built stuff .. get real
    and I’m with BR – low interest’s drives hedonism and population growth – thus the pie grows & grows – UNTIL – the piper comes to town (in this OpSys) …. anyway

  26. DarthBeta says:

    @Mayor what do you mean by debt interest? The credits and debits (which you are mistakeningly calling debt) are record kept in $USD. You need to uderstand that a US teasury security is nothing more than a fancy name for a checking account. When the treasury needs to “pay interest” they debit one column in their computer spreadsheet and credit another. The important part to know is that is all done in USD (which is controlled by the Treasury). There is no such thing as Federal multigenerational debt burdens. Now our system is not without risks. We have the risk of currency depreciation and inflation.

  27. MayorQuimby says:

    Not true at all simply because money does not exist in a vacuum as you believe it does – money is created and backed by labor of the populace. All credit is an obligation to ‘do something’ and all money is credit of some kind.

    You can’t get a loan without collateral (cash aka existing collateral) and the loan itself is a pledge to work in the future.

    Money is bound to the real world – aka you and I getting up everyday and ‘doing stuff’.

    Money is most certainly NOT a game of Centrally Planned Omnipotent Fed-opoly. In fact – longer term, the Fed’s “muscle” would lose in an arm-wrestling match to George Jetson’s.

    The minute we start clicking zeros in a computer arbitrarily is the minute the whole system collapses and you will know that because prices of everything will spike and crash in insanely violent and manic ways.

    I give Ben credit for maintaining the integrity of the system (to this point) even if many such as yourself believe it to be something it is not.

  28. MayorQuimby says:

    ADD: Essentially – if the system worked as you say it does Darth, the dollar would literally have no value. The dollar DOES have value because of iPads and Google and IBM and Exxon and Chipotle and Home Depot and Lockheed Martin and 200 million people getting up everyday and innovating and generally kicking ass like no other people can. Hence reserve status – the potential for our monetary system to maintain its ponzi=growth with integrity made it the easy choice. Really – the rest of the world pegs the value of their labor output to ours.

    The minute we start paying off our debt by clicking keys on a keyboard, the $DXY goes to the teens. It simply ‘aint gonna happen. “Austerity” and an economic depression will come first. Those preserve the system. Hyperinflation will cause a revolution and upheaval.

  29. DarthBeta says:

    @ You are entitled to your personal beliefs. I merely providing the accounting facts about the system.
    Would you feel more comfortable on a gold standard knowing Russia has the largest gold mineral resources in the world?

  30. MayorQuimby says:

    Those are not facts. The Treasury has the same spending constraints you or I do.

    Re: gold – of course not. Gold is a relic and favors those people (and nations) with it. It is as much of an illusion as anything else. The Depression occurred under a gold standard btw as I’m sure you are aware.

    What I favor is a Fed that does not cater to the gvmt and permit them to spend us into bankruptcy in 30 short years by funding their profligate ways with cheaper and cheaper money. The Fed is supposed to be independent but the track record of the FOMC since Greenspan is nothing short of horrific and while we will (imo) avoid a weimar-style event, what Green-anke has done will rank up there in the history books with the great monetary missteps in history. The coming swoon whenever it happens will be huge.

    I hope I’m wrong…

  31. MidlifeNocrisis says:

    Thanks for trying, Darth. Some beliefs just can’t be altered with facts. Kind of like the QOTD. It takes a funeral for science (truth) to advance.

  32. There’s a simple reason for the S&P surge. When is the last time any retail or institutional investor or trader heard the “double-dip” rhetoric? The term has been extinguished from on-air rhetoric by the leftist media to protect “the chosen one” during his campaign run…

    This despite the fact the TRI has been projecting since Memorial Day that Q3 would be the worst quarter since the Great Recession. Four months later, TRI has never been lower. Yet not a word even on cable news. There is confirmation of the GDP growth collapse in the horde of revenue misses and slashed guidance. Today TRI gauges Q3 GDP to be -0.1% and stretches the earnings warning into January. Congress will hit the Debt Limit on Jan 8th … but only Egan-Jones has slashed the USA’s credit rating for its irresponsible slothfulness.

    Don’t worry. Be happy…

    TRI chart: TRI charts:

  33. MayorQuimby says:


    $40 and it’s yours – a true bargain if you think Bernanke is going to print more $20 bills for ya – essentially the game is free!

  34. Greg0658 says:

    Mayor – maybe your both right – maybe Darth has one of those uranium-platinum cards – you stick it in an ATM and it spits cash
    balance – we don’t have no stinking balance

    still think it can’t work that way (well – I guess it could for a few) or for ALL

  35. RedBaker says:

    QE is a substitute for actual, genuine business and economic growth. QE-Infinity is designed to prop up our insane federal government’s debt, to held Obummer get re-elected, and to continue the stream of money to rebuild banks’ balance sheets. We restore growth by cutting back on government and leaving more money in the private economy. European-sized government does not work, it is a fatal economic disease.

  36. [...] in payrolls (I’ve used private payrolls, excluding government). BR laid out a similar warning on decaying economic conditions yesterday, offset only by the strength of monetary [...]

  37. george lomost says:

    “A misguided and AWOL Congress”?

    Please, Barry. Wall St has applauded Washington “gridlock” as far back as I can remember. Wall St. has voted with its own money to support the very gridlock that you supposedly decry.


    BR: Your argument is gridlock is whats been driving the equity markets? That’s hilarious!

  38. ConscienceofaConservative says:

    I think the stock market right now is behaving like a zero coupon treasury bond(I’m borrowing this analogy). The fed keeps lowering rates and premiums which have us paying more for a dollar’s worth of future return now, but nobody should be willing to pay more for a dollar today than one is getting tomorrow which is why the stock market is increasing today at the expense of future returns and why investor’s should be wary.

    Bernanke has declared war on capitalism, or the market price of money and the use of interest rates to help allocate capital. With that kind of government meddling going on we should be very wary of investing in the capital markets.


    BR: I wouldn’t say “war on capitalism” but he is (even if incidental) choosing winners and losers . . .

  39. willia451 says:

    I don’t think what the Fed is doing should be a shock to anyone. Bernanke and Obama have always clearly stated that their objective was to “engineer” a soft landing for the United States economy; vice a hard crash correction.

    How did everyone think that was going to get accomplished? If not through wave after wave of QE, fiscal stimulus, asset price management, and tax cuts? Sure. That’s blowing up the national debt. But, so what? The world is still throwing money at us like there is no tomorrow. Our borrowing costs are at or near historic lows. And there seems to be no end to that dynamic in sight.

    Its true. That can’t go on forever. And it won’t. After the Presidential elections are over, during the lame duck, Congress and the newly re-elected President Obama will sit down, and cut a deal to avoid sequestration. What comes out of that will probably look similar, at least on some level, to Bowles-Simpson. Since President Obama is a virtual lock to be re-elected at this point, I’d be surprised if they weren’t already talking about what the “deal” will look like; behind closed doors.