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Adios QE 24 Sept 2014

War Room. Adios QE 24 Sept 2014. HiddenLevers War Room. CE Credit. Macro Coaching. Idea Generation. Archived webinars. Open Q + A. P resentation deck. Product Updates. Scenario Updates. Adios QE. Market Update Fed Hijinks Scenarios Past Fed Action QE MythBusters. HiddenLevers.

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Adios QE 24 Sept 2014

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  1. War Room Adios QE 24 Sept 2014

  2. HiddenLevers War Room CE Credit Macro Coaching Idea Generation Archived webinars Open Q + A Presentation deck Product Updates Scenario Updates

  3. Adios QE • Market Update • Fed Hijinks Scenarios • Past Fed Action • QE MythBusters

  4. HiddenLevers Market update

  5. Market Update Syria Airstrikes Manufacturing = 5y high Gas = 3 bucks New Era for Chindia sources: HiddenLevers, MarketWatch, BusinessWeek, Huff Post, Washington Post, Reuters

  6. Macro Snapshot Jobless claims at 2006 levels Are jobless claims signaling a peak? Commodities suffer despite industrial rebound (hint: it’s the dollar) – meanwhile S&P is middle of the pack among global indices.

  7. HiddenLevers Fed Hijinks Scenarios

  8. Review: End of QE Scenarios • Not Sure • Easy Money, No Hangover • Good • Economy Back on Track • Bad • Deflation Strikes Back WHAT REALLY HAPPENED 66% priced in based on SPX at 2200. This becomes the GOOD scenario now. Scenario priced in 10y target = 3% S&P target = 1900 10y = 2.54% headed down. Commodities in deflation, Equities + GDP not so much.

  9. GOOD: Steady as She Goes Fed raises rates in mid-2015 as stated US manufacturing hitting its stride EU rate cut gives Fed breathing room Fed balance sheet still bloated until 2020 Fed has kept its word on 2014 QE taper Low inflation means no need for rate squeeze source: HiddenLevers, WSJ, Bloomberg, NY Times

  10. BAD: Rate Hike Postponed Fed waits until 2016 due to economic malaise Weak economic growth might force Fed to postpone Equities caught between easy money and bad growth Rates continue downward drift of 2014 Poor global growth + deflation are catalysts Yellen watching labor market like a hawk source: HiddenLevers, NELP, New Yorker, MarketWatch

  11. UGLY: Fed Pops Bubble QE withdrawal or pre-emptive rate hike backfires Yellen said Fed is prepared to use rates to pop bubbles Low VIX and corporate bond spreads worrisome Acknowledged that low rates led to housing bubble Acknowledged froth in tech/biotech sectors Worry is more about junk bonds than equities Failure of labor market recovery makes this unlikely Goldman thinks impact begins when taper ends sources: HiddenLevers, USA Today, NY Times, ThinkAdvisor, SeekingAlpha

  12. Scenario: Fed Hijinks • Good • Steady as • She Goes • Bad • Rate Hike Postponed • Ugly • Fed Pops • Bubble If economic recovery continues, the Fed can stay the course and the present rally may continue into 2015. If poor economic growth causes the Fed to postpone hikes, weak growth and continued easing might offset each other. Investor sentiment might shift if the Fed acts more rapidly. Stocks, bonds, and real estate could suffer in a bubble pop.

  13. $ HiddenLevers FED action

  14. 2014 QE Wind Down Plan Step 1 Remove last $15B of QE next month Step 2 Rate hike mid 2015 (1.27% fed funds target) Step 3 Normalize Fed Balance Sheet “by end of decade” Key Takeaway No Fed governor sees rates reaching old 5% levels … ever sources: Federal Reserve Releases, Yellen Conference Transcript

  15. Past Fed Action: Reaction S&P reaction Max Drawdown: -32.39% Max Rise: +18.49% Average Change: -0.22% UGLY scenario: Fed Pops bubble source: Business Insider

  16. Correct Analogue = Feb – Nov 1987 similarities differences dramatic increase in program trading, now called HFT market spooked by interest rate hike rumors (1984-85) brand new fed chair in office overvalued stock market (P/E) Then - rates rising globally Now – nope Then - USD declining Now – USD rising Then - inflation concerns Now - nope Then - Fed Funds rate 7.3 Now – 0.0 P/E ratios 1987: 18 2014: 26 technical resistance sources: HiddenLevers, Federal Reserve, St. Louis Fed, Time Magazine

  17. HiddenLevers QE MythBusters

  18. QE Myth: USD is getting weaker Reality: USD is getting stronger Despite a steady rise in the US money supply, the dollar is getting stronger. Falling velocity of money means new money doesn’t cause deflation or devaluation. sources: HiddenLevers Charts

  19. QE Myth: Rates are Rising Reality: Rates dropped Post-QE 1, 2 and in 2014 QE 1 QE 2 QE 2.5 (Twist) + QE3 sources: HiddenLevers

  20. QE Myth: QE is Ending Reality: QE outsourced to Japan + Europa Info on ECB QE and Rates Bank Deposit rates reduced to -0.1% in June 2014. Further cut to -0.2% in September ECB new asset purchases will increase balance sheet 700 B to 2.7 trillion Euros ECB likely to expand QE Info on BOJ QE program First case of QE done by Japan to fight deflation in early 2000s. Recent QE began April 2013 and expected to double money supply. In addition to bonds, domestic ETFs also purchased (1 B USD) beginning Aug 2014 sources: Wall Street Journal, Wall Street Journal

  21. Adios QE – Recap Global factors have given Fed breathing room 1987 analogy is about rate cycle, not just stock market crash INTEREST RATES ARE NOT RISING S&P rising + Lower rates make an odd couple

  22. HiddenLevers Use Cases Adios QE macro themeStrong Dollar scenario Fed Action scenario Global Deflation data center10y/CPI/PMI

  23. Product Update Dude, check out that new look I just love these guys New site coming in early October

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