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The Fed's Hands Are Tied Unless the Market Crashes

The markets have a major problem.

That problem, simply put, is that QE ends this month.

 

QE has been the driving force for the stock market since 2008. This factor, more than anything else in the world, is responsible for stocks rallying to new all-time highs surpassing even the 2007 peak.

 

To be clear QE 1 and QE 2 were widely accepted in the business community because of their context: QE 1 was a reaction to the 2008 meltdown, with QE 2 considered to be needed because QE 1 didn’t quite “get the job done.”

 

However, QE 3 and QE 4 were both game changers. The first two QE programs had fixed deadlines which emphasized notion that eventually the Fed would end its QE efforts and risk would be permitted to move back to more market-based levels.

 

However, this all changed in the period from September 2012- December 2012 when the Fed announced QE 3 and QE 4: two “open-ended” programs without fixed deadlines.

 

The message was now clear: risk would be mispriced ad infinitum until something breaks.

 

It is not coincidental that the market staged its largest, most bubblish move during these programs.

 

 

Which brings us to today. QE 3 and QE 4 are ending in a little over a week. And the Fed has made it clear than a stock market correction will not goad it into engaging another QE program anytime soon.

 

Indeed, in many ways the Fed’s hands are tied. Politically it is becoming more and more evident that the Fed will be blamed for the US economy (note the recent emphasis on income inequality in Fed speeches). Having just engaged in QE for TWO SOLID YEARS STRAIGHT the Fed would totally destroy any and all credibility in its monetary policies to engage in QE anytime within the next three to six months.

 

Which means… the markets are losing their most critical prop: the Fed’s money pumps. Sure, verbal interventions will trigger short-covering rallies like the one we’ve seen in the last week… but the money won’t be coming…

 

Prepare now, the next round of the crisis beckons.

 

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Best Regards

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