We can debate hours about the good the bad and the ugly of the monetary policies implemented by the ECB, the BOJ and the FED the last few years. Anyway, what we need to keep in mind is that any action…. provocate some reaction at some point in time.
The QE experiment has shown that there has been a clear correlation between the POMO days and the SPX index return but as we all know.. correlation works until one day… they break down. Acually the last few years have been very interesting in breaking down correlations and market behaviors which could help us determine some course of action we could take and i can say that on my side I have misread several signals a few times (hopefully more missing opportunities rather than losing hard).
Anyway… what I observe and find interesting about QE is that it seems that we are reaching also a turning point. I would say that the BOJ action with its massive money printing has shown us a little bit about the unintended consequences of non traditional monenatry policies. The long term yield anchoring mechanism that central banks try to master… do not really work and what is actually happening with the large increase in US treasury yields… is exactly, to my sense, what is happening.
The FED QE has tried to buy us time and “organize ” an “orderly” deleveraging over time so… slowly and surely… the recoverying sectors could “naturally” take over the economic growth cycle.
Unfortunately, we have reached such global level of leverage that cutting the debt burden without cutting debt… and save Wall-Street without haircut… is to me almost “mission impossible”.
Coming back to the FED’s dream policies to anchor long term interest rates… the market is showing signs that such dream….. is just a dream. The unintended consequences of losing control over long term yields are many and probably will not impact positively many risk takers investors but the question here is! Can in such conditions the FED keep going and or even increase its QE program?
Well…. the FED is accumulating quite rapidly a large chunk of the stock of treasurie and when and if you are perceived as the only player in the field to play the game… you are alone. The FED was initially able to reach success due to the fact that many players were playing its game and frontrunning. Now… the smart money and frontrunners have probably unloaded a good part of their holdings back the the FED with no intention of coming back since the whole scheme… is only an artificial scheme which can cost quite a bit as the bond market selloff has shown in may -june 2013.
From “in QE we trust” to “In QE we trusted”… the market will decide what course it will take. Maybe…”Cash is King” might become the best game in town since investors might have to chase the best place where to park it.
IN the meantime.. and since everything is a process… the next phase will become probably “sell on strength” instead of BTFD (buy the f…. dip) and… do not be the last one 😉
enjoy the ride and remember… all is a process