LTRO 3 likely before any U.S. QE3Interest-Rates / Quantitative Easing Apr 10, 2012 - 09:34 AM GMT
In January we reported the following: http://caldaro.wordpress.com/2012/01/30/feds-monetary-base-update/. The FED’s monetary base did make a new high, in February at $2.753 tln, but appears to have ended well short of our $3.0 tln expectation. Since then the monetary base has contracted by nearly $100 bln. The recent high, in OEW terms, may have completed Primary wave III. This would suggest the base in now contracting in a Primary wave IV.
During the FED’s monetary expansion policy, each labeled peak has generally coincided with a stock market peak and followed by a correction. We anticipate the market will continue to follow this relationship. While QE 1 and QE 2 greatly expanded the monetary base, Operation Twist has done very little in that regard. Currently we do not see a need for a QE 3. The economy appears to be expanding again with the WLEI at 51.0%, and the PCE remains above the 3% threshold.
Europe, however, initiated LTRO 2 in December 2011. This program ended in late February, and the ECB’s balance sheet now exceeds that of the FED. Should europe’s sovereign debt problem head into crisis mode again a LTRO 3 is likely. For now it looks like the stock markets are on their own for a while as the Secular deflationary cycle continues.
After about 40 years of investing in the markets one learns that the markets are constantly changing, not only in price, but in what drives the markets. In the 1960s, the Nifty Fifty were the leaders of the stock market. In the 1970s, stock selection using Technical Analysis was important, as the market stayed with a trading range for the entire decade. In the 1980s, the market finally broke out of it doldrums, as the DOW broke through 1100 in 1982, and launched the greatest bull market on record.
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