Reminiscing QE/QE2 and a Forecast for Tomorrow’s Fed Super Bowl

While Looking through my archives from the past 14 months I found a little piece that I wrote on July 16th, 2010 wherein I believe I may have been the first person to use the term ‘QE2’ (if someone can find an earlier reference I would love to see it in the comments section):

“In my opinion the US Federal Reserve will soon find itself once again with its back against the wall as the economy stalls out and asset prices fall farther. Consequently, it is more likely than not that the FED will be forced to embark on what I am calling QE2 (quantitative easing round 2). This will lead to another ‘sugar buzz’ for risk asset prices and will surely lead to further currency depreciation and higher gold prices. To wit, every investor should have at least 5% of their savings in gold and during certain rougher periods in the markets the gold allocation should be increased to as high as 20%. “

This snippet turned out to be rather prescient as just a few weeks later the Fed announced ‘QE lite’ and then on August 27th, 2010 Fed Chairman Bernanke delivered his Jackson Hole speech which essentially sealed the deal for QE2.

Today’s market action reminded me of the day before the March 18th, 2009 FOMC announcement which outlined the initial quantitative easing program which in turn helped to set in place the stock market bottom. The day was March 17th, 2009 and the S&P 500 closed up over 3% while the economy appeared to be in shambles and bearishness was pervasive among market participants. The following day the Federal Reserve delivered the ‘goods’ and the bulls were handsomely rewarded in the following weeks and months. Let’s take a look at some charts from today’s action and then I will offer a brief prediction for what I am terming tomorrow’s ‘Fed Super Bowl’.

The S&P 500 finally surged past the key 1338 resistance level the day before the Fed Super Bowl. Needless to say, tomorrow’s trading will be crucial in providing confirmation to today’s breakout.

Oddly enough, US Treasury bonds also staged an impressive rally today. $TLT appears to have made a short/intermediate term bottom in early April despite being one of the most hated and underweighted assets in the world.


Chart provided by Greg Harmon (@harmongreg on StockTwits)

The US Dollar Index ($DX_F) continues to come under heavy selling pressure and many technicians are pointing to a target in the mid 71′s. Tonight the $EURUSD made a new 52-week high above 1.4710 which begs the question, do the currency markets know something about tomorrow?

I am on record as stating that I believe there will be no QE3 in 2011. That being said I believe Chairman Bernanke may entertain the possibility of ‘providing further accomodation’ should the economy weaken during his press conference. This would be a clever psychological ploy by the Chairman, which would accomplish the objective of providing a ‘Fed put’ to many markets and interest rates without having to actually embark on further expansion of the Fed balance sheet. Moreover, I believe it is likely that the FOMC (Federal Open Market Committee) will either announce or present the possibility of a ‘QE2 lite’ in order to reinvest MBS/UST runoff and maintain the size of the Fed’s balance sheet at around $2.6 trillion. Finally, the FOMC statement will likely be largely unchanged and I expect the ‘extended period’ language to remain.

The prospect of negative real interest rates in the US for as far out as the eye can see seems to have turned the dollar into a currency that has fallen into a bottomless pit. Risk assets should continue to outperform in such an environment and today’s market action gave every indication of this. I will have an update tomorrow afternoon after all of the Fed festivities have ended.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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