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The Trillion Dollar Question: What Happens When Quantitative Easing Ends? PDF Print E-mail
Written by Cris Sheridan - Financial Sense   
Thursday, 31 July 2014 09:11

One of the great questions being debated right now is how will the market react once QE3 ends this October. Those who believe asset prices (namely stocks, bonds, and real estate) are being supported by the Fed, and not by underlying economic growth, expect a correction or worse once the Fed withdraws its support.

Richard Duncan summed up this view quite well in a recent Financial Sense Newshour interview, Prepare for a Correction Once QE3 Ends:

"[T]his is going to be a very interesting experiment because it will show us whether the economy is actually strong enough to grow by itself without government life support...and, unfortunately, I don't think it is. For an economy to grow one or more of the following three things has to happen: either the workforce has to grow in size, wages have to go up, or credit has to expand. And, right now, none of those things are happening on a large enough scale to drive the economy... So when you remove the one thing that has been stimulating the economy and creating effective demand by pushing up asset prices and creating a wealth effect, when you remove quantitative easing, then where's the new source of growth going to come from? I just don't see it."

Without sufficient credit growth in the economy, Duncan says that we’ll move back toward recession, which will then force the Fed to engage in a fourth round of quantitative easing:

"Once liquidity starts to dry up at the end of this year it looks very likely that the yield on 10-year government bonds will go up. That will cause mortgage rates to go up…the property market to come down, a significant correction in the stock market, a negative wealth effect, less consumption and, I think, then the US will start moving back towards recession. In other words, we'll hit another economic soft patch and before that goes too far I think the Fed will once again have to jump in with another round of quantitative easing, QE4, to follow QE3 and QE2 and QE1. It will be the same pattern."

This pattern of Fed launches QE – economy and stocks go up, Fed withdraws QE – economy and stocks go down is by now very well-known and expected by most market participants. In one sense, we might say it is the most obvious and predictable outcome. Will this pattern play out again or, as the inner contrarian in me always wonders, will the market do what we least expect?

This is where global investment strategist James Kostohryz comes in.

As we discussed in his recent interview, Stocks Likely Moving Into Bubble Phase Over Next Year or Two, what would happen if the economy and stock market fail to see, once again, the long awaited and much anticipated correction, even after QE3 ends?

If that happens—that is, we actually start to see sustainable economic growth and fears of a recession remain at bay—James believes the more likely outcome is that the stock market will enter a bubble as investor confidence really starts to take hold (note: to be fair, he actually makes a number of arguments why a bubble-like scenario in the stock market might unfold).

So, the big question is who’s right? Is the economy strong enough to finally wean itself from QE life-support or will we see the same pattern play out as before?

One of the best ways to answer this question is by comparing the strength of the U.S. economy today to when the Fed ended QE1 in 2010 and QE2 in 2011. Is the economy much stronger or more self-sustaining now than it was during those two prior periods? When we asked Ken Goldstein at the Conference Board this question, this is what he had to say:

“The answer is absolutely…the cycle is starting to move a little bit faster right now and indeed that's what the leading indicators told us would be happening and now it's telling us not only is it going to continue, but it might even start to pick up.”

In addition to the Conference Board, a number of other leading economic indicators have so far all come in positive for the month of July.

Here’s a table showing May, June, and available July data, which Jim Puplava covered in his most recent Big Picture broadcast.


Outside of the last two or three months, what is the direction of the larger economic trend? For that, here’s a chart of the Conference Board’s Leading Economic Index going back to the year 2000 (courtesy of Doug Short), which shows the economy has climbed steadily since 2009 and is not yet in danger of topping out and moving into a recession.


Below the Conference Board LEI is a chart of the S&P 500 over the same time period. Although some believe the market is a poor reflection of the underlying economy (and this may be true over the short-term), over the long-term there is actually a very close correlation, especially when it comes to major turning points.

Looking at the prior two cycles, you can see just how well bull market peaks coincide with a trend reversal in the Conference Board LEI. Typically, you want to start getting concerned about a major market peak once this and other LEIs breakdown.

At this point, however, the overall economic trend is still positive and does appear to be stronger than when the Fed ended QE1 and QE2. The end of QE3 could still cause market disruption, but, one thing is for certain, current and incoming economic data for the U.S. isn't raising any red flags.

10 Canadian Stock Going Ex-Dividend PDF Print E-mail
Written by Canada Stock Channel   
Wednesday, 30 July 2014 11:17

1) Ex-Div Reminder for MTY Food Group (TSE:MTY.CAtriggered: 07/30/2014

MTY Food Group is a franchisor engaged in the quick service food industry. Co.'s activities consist of franchising and operating quick service restaurants under the following banners: Tiki Ming, Sukiyaki, La Cremiere, Caferama, Au Vieux Duluth Express, Carrefour Oriental, Panini Pizza Pasta, Chick 'N' Chick, Franx Supreme, Croissant Plus, Villa Madina, Cultures, Thai Express, Mrs. Vanelli's, Kim Chi, "TCBY", Yogen Fruz, Sushi Shop, Koya Japan, Vie & Nam, Tandori, O'Burger, Tutti Frutti, Taco Time, Country Style, Bunsmaster and Valentine. As of Nov 30 2010, Co. had 1,727 stores in operation, of which 1,701 stores were franchised and 26 stores were operated by Co. - Slide 2 HERE

Read full article in a new window: Ex-Div Reminder for MTY Food Group (TSE:MTY.CA)


Fed Delivers Warning To Investors PDF Print E-mail
Written by Chris Ciovacco - Ciovacco Capital Management   
Wednesday, 30 July 2014 05:34

34672 aThe Federal Reserve is an interesting study in public relations. The Fed has twelve districts that release statements and publish studies. The Federal Reserve Board is comprised of seven members who often make public statements about monetary policy. The chair of the Federal Reserve Board also testifies and conducts Q&A sessions with the media. Often, statements coming from the various sources within the Fed seem to be highly contradictory and confusing, something that serves a purpose in the realm of monetary policy.

Fed Cares About Inflation Expectations

Experienced investors know central bankers care about their legacy, as most professionals do. While casual investors may believe all the Fed cares about is higher stock prices, the Fed is genuinely concerned about allowing inflation to get ahead of them. If inflation expectations begin to pick up, it can change habits, which ultimately can lead to real world inflation.

Fisher's Shot Across The Bow

On Sunday night, The Wall Street Journal published an opinion piece by Richard Fisher, president of the Federal Reserve Bank of Dallas. The text serves as a warning to complacent investors that the Fed cannot keep interest rates near zero indefinitely. The op-ed opens with a single sentence paragraph:

"I have grown increasingly concerned about the risks posed by current monetary policy."

That is a pretty strong opening statement meant to get the attention of investors and businesses impacted by interest rates.

Making The Same Mistakes?

If you were investing during the dot-com bubble, you remember the Fed failed to tighten margin requirements, which allowed speculation to run rampant. The Fed is often criticized for "keeping rates too low for too long" between 2003 and 2005. For example, the Federal Funds Rate was at 2.25% in January 2005. In the July 27, 2014 Wall Street Journal (WSJ) opinion piece, Fisher states:

"I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose, too long."

34672 bIncentives To Take On Risk

Fisher noted that Janet Yellen was also aware of the potential risks of maintaining the Fed's current stance. From Fisher's WSJ piece:

"In her recent lecture at the International Monetary Fund, Fed Chair Janet Yellen said, 'I am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns.' She added that '[a]ccordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability.' I believe that time is fast approaching."

Investment Implications - Good To Be Aware Of

Should we sprint for the equity exits after reading Fisher's comments? No. However, it is good to be aware of the Fed's willingness to raise rates sooner than many market participants believe. The risk is not related exclusively to a rate increase. It is the timing of the rate increase that could catch some investors off guard.

How do we use all this? Fed policy is one of many inputs impacting the battle between bullish economic conviction and bearish economic conviction. As noted on July 28, the market will guide us if we are willing to listen. Not much has changed this week. Therefore, the 80% confident 20% concerned analysis in this week's video still applies. Therefore, we continue to hold a mix of stocks (SPY), leading sectors (XLK), and a relatively small stake in bonds (TLT).

34672 c

The possible market-spooking outcome this week or in the weeks ahead is if the Fed signals an interest rate hike may be coming sooner rather than later. Again, it is not the act of raising rates that matters, but the timing.


About Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC.

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