The confused nature of media reaction to the market’s move higher on last Wednesday’s Fed announcement on the taper of Quantitative Easing (QE), indicates they are totally lost. They can’t figure out why the market responded as it did, up nearly 300 points on the Dow. In my world it makes total sense. Here is how I see it:
QE was not a conduit for $85 billion per month making its way into the stock market!
Half the money did, in large part, fund much of treasury debt issuance over the period. The balance of the dollars made their way into agency mortgage-backed securities (AMBS). The AMBS purchases were designed to keep downward pressure on mortgage rates. In terms of average trading volume in both longer-dated treasuries and AMBS, QE on a daily basis represented less than a 1.5% daily over bid from what would have been normal trading (sifma trading data). Less than 1.5% on a daily basis may have kept some pressure on rates, but the effect should not have been extreme. QE was not a heavy IV drip of money into the equity market; but, QE did suppress rates, which did make equities a more attractive investment alternative.
A sub-1.5% rate on the 10-year Treasury was not all about QE. It was FEAR!
Remember in the fear-ravaged summer of 2012 the 10-year yield bottomed at 1.43% (July 25th). It was Greece, the Eurozone in shambles and the United States in the middle of its presidential brawl. Remember the political rhetoric… according to Mort Zuckerman we were in the “worst economic environment since the Great Depression.” China was reining in its economy and many feared a hard landing was in the making. The media was saying that things were going from bad to worse, as second quarter 2012 GDP came in at a meager +1.2% (vs. a +3.7% print in the 1st quarter). These front page news items caused the flight to safety that marked the low in the 10-year treasury…. not QE!
What was the impact of QE?
If fear played a part in the low rates and the actual volume impact on Treasury and AMBS securities was somewhat de minimis, one can only conclude that, other than providing liquidity to the banking system, Quantitative Easing was a psychological bolster to the market…an offset to the considerable barrage of bad news and negative sentiment.
What amazes me now
It would seem that most reasonable people would agree that we are not only well past the crisis in our economy, but well past our crisis of confidence. Ergo, the need for QE is over and its withdrawal is normal and necessary. I am amazed at the reaction of surprise by most in the media at the market’s very positive reaction.
In this entire episode, a very simple principal has been forgotten. The Market is a discounting mechanism. It has been working on discounting ‘the taper’ for months. You would think so-called “professionals” reporting on these matters would have some calculus for this in their work. Obviously they don’t. For the past five years, The Market has been telling us things are much better than the media and pundits have been leading us to believe. When we rallied off the 2008/2009 lows it was telling us the ‘end of the world’ was not nigh. For the past three years, it has been indicating the economy was better, company balance sheets were healing and earnings improving. I guess I should not be surprised that the same voices are now baffled by the market’s ebullient reaction to the Fed decision to begin tapering Quantitative Easing. It was worry “Numero Uno” until 2 PM EST Wednesday(12/18), then it was not.
“Apres Taper,” what’s the next big thing?
What do you think?
P.S. The beat goes on. The attached clip from CNBC (Monday 12/23/13) not only provides a good laugh, but a reminder of just how irrelevant they can be. Rick Santelli does not disappoint. His message, ‘the market has got it all wrong’ and it has been getting it wrong for the last 173% on the upside . If Santelli ever turns positive, SELL EVERYTHING and move immediately to your bomb shelter!!!
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