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« Weighing the Week Ahead: Keeping Turmoil in Perspective | Main | Breaking News! QE II is not ending! »

May 29, 2011




UST rates in the 5-7 part of the curve initially rose from pre-QE2 levels, and have more recently backed off, though to levels still higher than at the start of the program. I'd submit that the absolute level of rates was low throughout the period. (Although you didn't ask, risk assets generally rose, as did oil and gold, through the period. And the dollar weakened. And more recently, the domestic economic growth rate has weakened.)

As to what UST rates would have been, this is simply unknowable.

However, I wonder if the mosaic above doesn't describe a liquidity phenomenon: a big buyer whose very activity creates credit reserves, and monetary growth; a weakening currency; dollar-denominated hard assets and paper assets rising in nominal value. If that is a plausible case, then I'm wondering what things look like when the aforementioned buyer backs away.

Looking forward to your thoughts.


scm -- I'll try to use your comments as part of my agenda, so thanks for amplifying.

To get ready, you might ask yourself the following question:

What impact did QE II have on the Treasury market? What would rates have been in the absence of this $600 B buyer?



Jeff -- If you look carefully you will see that these are not forecasts for the next week, but for the next 30 days. We run our model every day, but report the results publicly just once a week.

If you want to do a test of the forecasts, you need to check the 30-day result starting at the time of the forecast. Looking at what happened the first day of the 30-day period does not tell you very much.

I checked out the results a couple of years ago and it was providing edge. Since then the Felix forecast has caught most of the market rally. It was also bearish for much of the 2008 decline.

I should emphasize that we use Felix mostly to find the best sectors, so the overall market forecast is secondary.

I agree that we should be objective. I invite you to join me in looking at the problem using data -- testing the forecasts over a long time period and using the 30-day result, not just using a couple of weeks before the complete results are even in!

As to the proper time frame for market forecasting, this is a topic I have taken up many times. Your choice of time frame definitely should influence your decisions.

I try to distinguish between the investment and the trading perspectives in every article, and I also say when there is a lot of uncertainty. That means that I have less confidence in the prediction.

In general, I agree with your statement favoring long-term forecasts, but many successful traders look at time frames of minutes or hours.

Meanwhile, I advise you not to bet against Felix!




I'll look forward to your more in-depth reply, but my simple mind isn't quite getting things at the moment...the way I see it, a $600B has walked away from the table and isn't buying fresh UST debt. Doesn't that leave a $600B hole to fill, that will come from someone else's pockets (and that someone can't credit federal reserve balances at a keystroke, meaning it's real money being used to buy the $600B of fresh debt, coming out of money supply).

I get that this $600B is a drop in the ocean when we consider annual trading volumes as the denominator. But is that fair? By that logic, it would seem that our buying MBS in QE1 was similarly a non-event, given the size of the mortgage market. Shouldn't we be using a marginal, and not an average, analysis? And, I wonder, is/was there a market distortion when the primaries \knew\ there'd be a size buyer for the fresh paper...taken to a nefarious end, it's more back-door recapitalizing of the dealers, who were selling the USTs back to the Fed at slightly richer prices than they bought the issue. No?


When are you going to discontinue your weekly market forecast charade? Get real -- Nobody can forecast what the market will do for the next week. Try 6-month minimum forecasts and you might be more credible.
2 weeks ago -- you said bullish. market result was neutral.
last week -- you said neutral. market result was bullish.
this week -- you say bearish. market up over 1% the first day of the week.
You need to add several more factors to your model to have a more comprehensive, reliable forecasting methodology.

Please don't get defensive; try to look at this question objectively -- Weekly forecasts?????


scm -- Sorry to be slow in responding. When I am traveling and have a lot of meetings I always think I will do more than I really can. Your question is excellent, and I decided to make it the basis for an article which I did not finish last week.

I'll give a summary here, but it really requires more explanation. The actual Fed buying is less than 1% of the daily trade, so ending fresh buying will not have much effect. The Fed balance sheet will remain at the expanded level, so there is plenty of room for more bank lending. This set of conditions is not a tightening at all, but a continuation of monetary stimulation. The limiting factor is bank willingness to lend.

The actual economic effects are quite modest, but the perceived effects are very large. I am sure there will be some additional "explanations" about why the world did not end, but eventually it will all be clear.

Good question -- more later.



Hey Jeff,

Still curious as to your thinking on the cessation of QE2. I'll tread carefully, because I don't want to put words in your mouth, but I believe you've opined that QE2 was mostly a non-event...maybe a mild booster shot to a healing economy.

But now, I see many current and leading indicators turning down, some sharply, and at the same time a $600B buyer is leaving the market. Three related questions:

1) Does the end of QE2 mean tighter liquidity in financial markets?

2) If yes, does that much matter for asset prices, or for transmission effects to the real economy?

3) Where among the indicators you follow would this illiquidity start to present itself (St. Louis index)?

Of course, the recent UST market has certainly not lacked for buyers. But then I ask myself whether that's a strong selling point for buying/owning risk assets! Curious as to your perspective on any/all of the above. Thanks.


jadoube -- Heh heh -- fair enough.

You cannot watch and work. I have mentioned our method for CNBC viewing a few times, but perhaps not recently. Like most offices, we have it on "mute." We also use TIVO. When there is something relevant to one of our positions, we can scroll back to watch more carefully.

Some segments deserve more attention, but you learn to choose.

Meanwhile, we have moved far from the days when I saw CNBC on in restaurants, bars, and even parking garages!



The Mark Haines comment means you have listened to CNBC every morning for the past twenty years. That virtually disqualifies you from being a successful investor.

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